~~================================================================================~~

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

FORM 10-Q (Mark

(Mark One) |X|

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 ~~For the quarterly period ended September 30, 2002~~

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003

OR |_|

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _________ Commission Registrant, State of Incorporation, I.R.S. Employer File Number Address, and Telephone Number Identification No. - -------------------------------------------------------------------------------- 001-09120 PUBLIC SERVICE ENTERPRISE 22-2625848 GROUP INCORPORATED (A New Jersey Corporation) 80 Park Plaza P.O. Box 1171 Newark, New Jersey 07101-1171 973-430-7000

FOR THE TRANSITION PERIOD FROM TO

Commission File Number		Registrants, State of Incorporation, Address, and Telephone Number	I.R.S. Employer Identification No.
	001-09120	Public Service Enterprise Group Incorporated (A New Jersey Corporation) 80 Park Plaza, P.O. Box 1171 Newark, New Jersey 07101-1171 (973) 430-7000 http://www.pseg.com		22-2625848
	001-00973	Public Service Electric and Gas Company (A New Jersey Corporation) 80 Park Plaza, P.O. Box 570 Newark, New Jersey 07101-0570 (973) 430-7000 http://www.pseg.com		22-1212800
	000-49614	PSEG Power LLC (A Delaware Limited Liability Company) 80 Park Plaza—T25 Newark, New Jersey 07102-4194 (973) 430-7000 http://www.pseg.com		22-3663480
	000-32503	PSEG Energy Holdings LLC (A New Jersey Limited Liability Company) 80 Park Plaza—T22 Newark, New Jersey 07102-4194 (973) 456-3581 http://www.pseg.com		22-2983750

Indicate by check mark whether the ~~registrant~~registrants (1) ~~has~~have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the ~~registrant was~~registrants were required to file such reports), and (2) ~~has~~have been subject to such filing requirements for the past 90 days. Yes ~~|X|~~[X] No ~~|_|~~[ ]

As of ~~September~~April 30, ~~2002,~~2003, Public Service Enterprise Group Incorporated had outstanding ~~207,313,548~~225,887,080 shares of its sole class of Common Stock, without par value. ~~================================================================================~~ TABLE OF CONTENTS PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements 1 Item 2. Management's Discussion and Analysis

As of Financial Condition and Results of Operations 34 Item 3. Qualitative and Quantitative Disclosures About Market Risk 54 Item 4. Controls and Procedures 56 PART II. OTHER INFORMATION Item 1. Legal Proceedings 56 Item 5. Other Information 58 Item 6. Exhibits and Reports on Form 8-K 60 Signature 61 i PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED CONSOLIDATED STATEMENTS OF OPERATIONS (Millions, except for Share Data) (Unaudited)
For the Three Months Ended For the Nine Months Ended September 30, September 30, -------------------------- ------------------------- 2002 2001 2002 2001 ----------- ----------- ---------- ----------- OPERATING REVENUES $ 2,327 $ 1,616 $ 5,690 $ 5,317 OPERATING EXPENSES Energy Costs 1,154 564 2,345 2,066 Operation and Maintenance 448 450 1,365 1,352 Write-off of Argentine Investments -- -- 506 -- Depreciation and Amortization 167 152 434 373 Taxes Other Than Income Taxes 31 23 97 92 --------- --------- --------- --------- Total Operating Expenses 1,800 1,189 4,747 3,883 --------- --------- --------- --------- OPERATING INCOME 527 427 943 1,434 Foreign Currency Transaction Loss (2) -- (71) -- Other Income 21 12 38 42 Other Deductions -- (5) (1) (9) Interest Expense (201) (192) (588) (530) Preferred Securities Dividend Requirements (14) (18) (42) (62) --------- --------- --------- --------- INCOME BEFORE INCOME TAXES, DISCONTINUED OPERATIONS AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 331 224 279 875 Income Taxes (124) (49) (118) (291) --------- --------- --------- --------- INCOME BEFORE DISCONTINUED OPERATIONS AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 207 175 161 584 DISCONTINUED OPERATIONS Loss from Discontinued Operations, net of tax (including Loss on Disposal net of tax) (3) (3) (41) (17) --------- --------- --------- --------- INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 204 172 120 567 Cumulative Effect of a Change in Accounting Principle, net of tax -- -- (120) 9 --------- --------- --------- --------- NET INCOME $ 204 $ 172 $ -- $ 576 ========= ========= ========= ========= WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (000's) 206,782 208,496 206,552 208,564 ========= ========= ========= ========= EARNINGS PER SHARE (BASIC AND DILUTED): INCOME BEFORE DISCONTINUED OPERATIONS AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE $ 1.00 $ 0.84 $ 0.78 $ 2.80 Loss from Discontinued Operations, net of tax (including Loss on Disposal, net of tax) (0.01) (0.02) (0.20) (0.08) Cumulative Effect of a Change in Accounting Principle, net of tax -- -- (0.58) 0.04 --------- --------- --------- --------- NET INCOME $ 0.99 $ 0.82 $ -- $ 2.76 ========= ========= ========= ========= DIVIDENDS PAID PER SHARE OF COMMON STOCK $ 0.54 $ 0.54 $ 1.62 $ 1.62 ========= ========= ========= =========
~~See Notes to Consolidated Financial Statements. 1~~ PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED CONSOLIDATED BALANCE SHEETS ASSETS (Millions) (Unaudited) SeptemberApril 30, December 31, 2002 2001 ------------- ------------ CURRENT ASSETS Cash and Cash Equivalents $ 147 $ 167 Accounts Receivable: Customer Accounts Receivable 631 686 Other Accounts Receivable 421 324 Allowance for Doubtful Accounts (31) (43) Unbilled2003, Public Service Electric and Gas ~~Revenues 160 291 Fuel 471 494 Materials~~Company had issued and Supplies, net of valuation reserves - 2002, $2; 2001, $11 202 186 Prepayments 143 74 Energy Trading Contracts 717 419 Restricted Cash 14 12 Assets Held for Sale 22 422 Notes Receivable 108 -- Current Assets of Discontinued Operations 358 483 Other 48 25 -------- -------- Total Current Assets 3,411 3,540 -------- -------- PROPERTY, PLANT AND EQUIPMENT Generation 5,646 4,690 Transmission and Distribution 9,409 9,500 Other 647 466 -------- -------- Total 15,702 14,656 Accumulated Depreciation and Amortization (5,107) (4,789) -------- -------- Net Property, Plant and Equipment 10,595 9,867 -------- -------- NONCURRENT ASSETS Regulatory Assets 5,049 5,247 Long-Term Investments, net of accumulated amortization and Valuation allowances -- 2002, $19; 2001, $30 4,926 4,811 Nuclear Decommissioning Trust Fund 768 817 Other Special Funds 403 222 Goodwill 464 569 Energy Trading Contracts 46 46 Other 292 311 -------- -------- Total Noncurrent Assets 11,948 12,023 -------- -------- TOTAL ASSETS $ 25,954 $ 25,430 ======== ======== See Notes to Consolidated Financial Statements. 2 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED CONSOLIDATED BALANCE SHEETS LIABILITIES AND CAPITALIZATION (Millions) (Unaudited) September 30, December 31, 2002 2001 ------------- ------------ CURRENT LIABILITIES Long-Term Debt Due Within One Year $ 742 $ 1,185 Commercial Paper and Loans 1,657 1,338 Accounts Payable 731 691 Energy Trading Contracts 665 561 Accrued Taxes 92 243 Current Liabilities of Discontinued Operations 280 251 Other 727 535 -------- -------- Total Current Liabilities 4,894 4,804 -------- -------- NONCURRENT LIABILITIES Deferred Income Taxes and Investment Tax Credit (ITC) 3,089 3,205 Nuclear Decommissioning 768 817 Other Postemployment Benefit (OPEB) Costs 493 476 Regulatory Liabilities 363 373 Cost of Removal 142 146 Environmental 140 140 Energy Trading Contracts 42 54 Other 489 327 -------- -------- Total Noncurrent Liabilities 5,526 5,538 -------- -------- COMMITMENTS AND CONTINGENT LIABILITIES (See Note 6) CAPITALIZATION Long-Term Debt 6,902 6,437 Securitization Debt 2,259 2,351 Project Level, Non-Recourse Debt 1,481 1,403 -------- -------- Total Long-Term Debt 10,642 10,191 -------- -------- SUBSIDIARIES' PREFERRED SECURITIES Preferred Stock Without Mandatory Redemption 80 80 Participating Equity Preference Securities 460 -- Guaranteed Preferred Beneficial Interest in Subordinated Debentures 680 680 -------- -------- Total Subsidiaries' Preferred Securities 1,220 760 -------- -------- COMMON STOCKHOLDERS' EQUITY Common Stock, issued: 2002-233,432,138outstanding 132,450,344 shares 2001-231,957,608 Shares; authorized: 2002 and 2001-500,000,000; outstanding: 3,590 3,599 2002-207,313,548, 2001-205,839,018 Treasury Stock, at cost: 2002 and 2001-26,118,590 shares (981) (981) Retained Earnings 1,477 1,809 Accumulated Other Comprehensive Loss (414) (290) -------- -------- Total Common Stockholders' Equity 3,672 4,137 -------- -------- Total Capitalization 15,534 15,088 -------- -------- TOTAL LIABILITIES AND CAPITALIZATION $ 25,954 $ 25,430 ======== ======== See Notes to Consolidated Financial Statements. 3 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (Millions) (Unaudited) For the Nine Months Ended September 30, ------------------------- 2002 2001 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ -- $ 576 Adjustments to reconcile net income to net cash flows from operating activities: Write-off of Argentine Investments 506 -- Loss on Disposal of Discontinued Operations, net of tax 34 -- Cumulative Effect of a Change in Accounting Principle, net of tax 120 (9) Depreciation and Amortization 434 373 Amortization of Nuclear Fuel 68 76 Provision for Deferred Income Taxes (Other than Leases) and ITC (197) (43) Non-Cash Benefit Plan Charges 143 139 Leveraged Lease Income, Adjusted for Rents Received 72 56 Undistributed Earnings from Affiliates (43) (60) Foreign Currency Transaction Loss (Gain) 71 -- Unrealized (Gains) Losses on Energy Contracts and Other Derivatives (65) 5 Over Recovery of Electric Energy Costs (BGS and NTC) and MTC 64 47 Under Recovery of Gas Costs (66) (145) Other Non-Cash Charges (Credits) 46 (13) Net Change in Certain Current Assets and Liabilities (6) (62) Benefit Plan Funding and Related Payments (296) (155) Proceeds from the Withdrawal of Partnership Interests and Investment Distributions 52 142 Other (79) 23 -------- -------- Net Cash Provided By Operating Activities 858 950 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to Property, Plant and Equipment (1,310) (1,678) Investments in Joint Ventures, Partnerships and Capital Leases (272) (567) Proceeds from the Sale of Investments and Return of Capital from Partnerships 123 4 Contributions to Nuclear Decommissioning Trust Fund (25) (22) Acquisitions, Net of Cash Provided (16) (532) Other 44 (94) -------- -------- Net Cash Used in Investing Activities (1,456) (2,889) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Net Change in Short-Term Debt 310 (2,021) Issuance of Long-Term Debt 1,228 6,161 Issuance of Participating Units 460 -- Issuance of Common Stock, ~~57 -- Deferred Issuance Costs (21) (240) Redemptions~~without nominal or par value, all of ~~Long-Term Debt (1,124) (913) Redemption~~which were privately held, beneficially and of Preferred Securities -- (448) Cash Dividends Paid on Common Stock (334) (337) Other 4 7 -------- -------- Net Cash Provided By Financing Activities 580 2,209 -------- -------- Effectrecord by Public Service Enterprise Group Incorporated.

PSEG Power LLC and PSEG Energy Holdings LLC are wholly-owned subsidiaries of Exchange Rate on Cash (2) (1) -------- -------- Net Change in Cash and Cash Equivalents (20) 269 Cash and Cash Equivalents at Beginning of Period 167 102 -------- -------- Cash and Cash Equivalents at End of Period $ 147 $ 371 ======== ======== Income Taxes Paid $ 188 $ 131 Interest Paid $ 499 $ 556 Non-Cash Investing and Financing Activities Fair Value of Property, Plant and Equipment Acquired $ 34 $ 628 Debt Assumed from Companies Acquired $ -- $ 221 Reduction in Equity and Increase in Debt from Issuance of Participating Units $ 54 $ -- See Notes to Consolidated Financial Statements. 4 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1. Organization and Basis of Presentation Organization Unless the context otherwise indicates, all references to "PSEG," "we," "us" or "our" herein means Public Service Enterprise Group Incorporated and ~~its consolidated subsidiaries. We~~meet the conditions set forth in General Instruction H(1) (a) and (b) of Form 10-Q and are ~~a New Jersey corporation that~~filing their respective Quarterly Reports on Form 10-Q with the reduced disclosure format authorized by General Instruction H.

Indicate by check mark whether each registrant is an ~~exempt public utility holding company which has four principal direct wholly-owned subsidiaries:~~accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]

		Page
Part I. Financial Information
Item 1.	Consolidated Financial Statements
	Public Service Enterprise Group Incorporated		1
	Public Service Electric and Gas Company		5
	PSEG Power LLC		9
	PSEG Energy Holdings LLC		12
	Notes to Consolidated Financial Statements		16
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		42
	Overview		42
	Results of Operations		44
	Liquidity and Capital Resources		51
	Capital Requirements		56
	Accounting Issues		57
	Forward-Looking Statements		58
Item 3.	Qualitative and Quantitative Disclosures About Market Risk		60
Item 4.	Controls and Procedures		62
Part II. Other Information
Item 1.	Legal Proceedings		63
Item 4.	Submission of Matters to a Vote of Security Holders		63
Item 5.	Other Information		64
Item 6.	Exhibits and Reports on Form 8-K		67
Signatures			69

PART I
FINANCIAL INFORMATION

Item 1. Financial Statements

PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS

	For the Quarters Ended March 31,
	2003			2002
	(Millions, except share data) (Unaudited)
Operating Revenues	$	3,364		$	1,883
Operating Expenses
Energy Costs		2,022			740
Operation and Maintenance		520			463
Depreciation and Amortization		100			131
Taxes Other Than Income Taxes		44			38

Total Operating Expenses		2,686			1,372

Income from Equity Method Investments		17			30

Operating Income		695			541
Other Income		60			11
Other Deductions		(45	)		(52	)
Interest Expense		(187	)		(191	)
Preferred Securities Dividends		(18	)		(14	)

Income from Continuing Operations Before Income Taxes		505			295
Income Taxes		(184	)		(114	)

Income from Continuing Operations		321			181
Loss from Discontinued Operations, net of tax benefit (expense) of $3 and ($1) in 2003 and 2002, respectively, including $9 Loss on Disposal, net of tax benefit of $2 in 2003		(15	)		(1	)

Income Before Cumulative Effect of a Change in Accounting Principle		306			180
Cumulative Effect of a Change in Accounting Principle, net of tax (expense) benefit of ($255) and $66 in 2003 and 2002, respectively		370			(120	)

Net Income	$	676		$	60

Weighted Average Common Shares Outstanding (000s)		225,714			206,340

Earnings Per Share (Basic and Diluted):
Income from Continuing Operations	$	1.42		$	0.88
Loss from Discontinued Operations, net of tax		(0.06	)		(0.01	)
Cumulative Effect of a Change in Accounting Principle, net of tax		1.64			(0.58	)

Net Income	$	3.00		$	0.29

Dividends Paid Per Share of Common Stock	$	0.54		$	0.54

See Notes to Consolidated Financial Statements.

PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED BALANCE SHEETS

	March 31, 2003			December 31, 2002
	(Millions) (Unaudited)
ASSETS
Current Assets
Cash and Cash Equivalents	$	218		$	165
Accounts Receivable, Net of Allowances of $83 and $34 in 2003 and 2002, respectively		1,863			1,370
Unbilled Electric and Gas Revenues		210			275
Fuel		209			412
Materials and Supplies		221			208
Energy Trading Contracts		180			157
Restricted Cash		26			32
Assets Held for Sale		83			83
Current Assets of Discontinued Operations		44			107
Other		123			135

Total Current Assets		3,177			2,944

Property, Plant and Equipment		16,950			16,562
Less: Accumulated Depreciation and Amortization		(5,258	)		(5,113	)

Net Property, Plant and Equipment		11,692			11,449

Noncurrent Assets
Regulatory Assets		4,955			5,002
Long-Term Investments		4,613			4,581
Nuclear Decommissioning Trust (NDT) Funds		772			766
Other Special Funds		88			72
Goodwill		433			452
Other Intangibles		207			206
Energy Trading Contracts		19			21
Other		207			226

Total Noncurrent Assets		11,294			11,326

Total Assets	$	26,163		$	25,719

See Notes to Consolidated Financial Statements.

PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED BALANCE SHEETS

	March 31, 2003			December 31, 2002
	(Millions) (Unaudited)
LIABILITIES AND CAPITALIZATION
Current Liabilities
Long-Term Debt Due Within One Year	$	859		$	749
Commercial Paper and Loans		640			762
Accounts Payable		1,313			1,115
Energy Trading Contracts		119			101
Accrued Taxes		184			229
Current Liabilities of Discontinued Operations		44			83
Other		776			755

Total Current Liabilities		3,935			3,794

Noncurrent Liabilities
Deferred Income Taxes and Investment Tax Credits (ITC)		3,364			2,924
Regulatory Liabilities		198			252
Nuclear Decommissioning Liabilities		267			766
Other Postemployment Benefit (OPEB) Costs		512			501
Accrued Pension Costs		373			336
Cost of Removal		—			131
Other		655			637

Total Noncurrent Liabilities		5,369			5,547

Commitments and Contingent Liabilities (See Note 5)
Capitalization
Long-Term Debt
Long-Term Debt		6,989			7,116
Securitization Debt		2,190			2,222
Project Level, Non-Recourse Debt		1,695			1,653

Total Long-Term Debt		10,874			10,991

Subsidiaries' Preferred Securities
Preferred Stock Without Mandatory Redemption		80			80
Preferred Stock With Mandatory Redemption		460			460
Guaranteed Preferred Beneficial Interest in Subordinated Debentures		860			860

Total Subsidiaries' Preferred Securities		1,400			1,400

Common Stockholders' Equity
Common Stock, issued; 2003—251,956,396 shares 2002—251,385,937 shares		4,078			4,056
Treasury Stock, at cost; 2003 and 2002—26,118,590 shares		(981	)		(981	)
Retained Earnings		2,158			1,601
Accumulated Other Comprehensive Loss		(670	)		(689	)

Total Common Stockholders' Equity		4,585			3,987

Total Capitalization		16,859			16,378

Total Liabilities and Capitalization	$	26,163		$	25,719

See Notes to Consolidated Financial Statements.

PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Quarters Ended March 31,
	2003			2002
	(Millions) (Unaudited)
Cash Flows From Operating Activities
Net Income	$	676		$	60
Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities:
Cumulative Effect of a Change in Accounting Principle, net of tax		(370	)		120
Depreciation and Amortization		100			131
Provision for Deferred Income Taxes (Other Than Leases) and ITC		10			16
Non-Cash Employee Benefit Plan Costs		44			49
Income from NDT Funds		(14	)		—
Leveraged Lease Income, Adjusted for Rents Received		(2	)		15
Foreign Currency Transaction (Gain) Loss		(3	)		52
Unrealized Losses (Gains) on Energy Contracts and Other Derivatives		2			(40	)
Underrecovery of Electric Energy Costs (BGS and NTC) and Gas Costs		(16	)		(61	)
Overrecovery of SBC		45			22
Other Non-Cash Charges		19			29
Net Change in Certain Current Assets and Liabilities		116			41
Employee Benefit Plan Funding and Related Payments		(16	)		(86	)
Proceeds from the Withdrawal of Partnership Interests and Other Distributions		46			3
Other		34			(3	)

Net Cash Provided by Operating Activities		671			348

Cash Flows from Investing Activities
Additions to Property, Plant and Equipment		(341	)		(391	)
Investments in Joint Ventures, Partnerships and Capital Leases		(16	)		(95	)
Proceeds from the Sale of Assets and Return of Capital from Partnerships		9			89
Other		(12	)		(64	)

Net Cash Used In Investing Activities		(360	)		(461	)

Cash Flows From Financing Activities
Net Change in Short-Term Debt		(40	)		166
Issuance of Long-Term Debt		392			73
Issuance of Common Stock		21			16
Redemptions of Long-Term Debt		(501	)		(25	)
Cash Dividends Paid on Common Stock		(122	)		(111	)
Other		(8	)		4

Net Cash (Used In) Provided By Financing Activities		(258	)		123

Effect of Exchange Rate Change		—			(4	)

Net Change In Cash and Cash Equivalents		53			6
Cash and Cash Equivalents at Beginning of Period		165			167

Cash and Cash Equivalents at End of Period	$	218		$	173

Supplemental Disclosure of Cash Flow Information:
Income Taxes Paid	$	147		$	119
Interest Paid, Net of Amounts Capitalized	$	180		$	188

See Notes to Consolidated Financial Statements.

PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS

	For the Quarters Ended March 31,
	2003			2002
	(Millions) (Unaudited)
Operating Revenues	$	2,148		$	1,659
Operating Expenses
Energy Costs		1,507			1,059
Operation and Maintenance		286			254
Depreciation and Amortization		66			95
Taxes Other Than Income Taxes		44			38

Total Operating Expenses		1,903			1,446

Operating Income		245			213
Other Income		10			—
Other Deductions		(1	)		—
Interest Expense		(94	)		(100	)
Preferred Securities Dividends		(3	)		(3	)

Income from Continuing Operations Before Income Taxes		157			110
Income Taxes		(56	)		(42	)

Net Income		101			68
Preferred Stock Dividends		(1	)		(1	)

Earnings Available to Public Service Enterprise Group Incorporated	$	100		$	67

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

PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONSOLIDATED BALANCE SHEETS

	March 31, 2003			December 31, 2002
	(Millions) (Unaudited)
ASSETS
Current Assets
Cash and Cash Equivalents	$	117		$	35
Accounts Receivable, Net of Allowances of $43 and $32 in 2003 and 2002, respectively		1,031			755
Unbilled Revenues		210			275
Materials and Supplies		51			45
Prepayments		11			25
Restricted Cash		14			14
Other		22			16

Total Current Assets		1,456			1,165

Property, Plant and Equipment		9,663			9,581
Less: Accumulated Depreciation and Amortization		(3,675	)		(3,604	)

Net Property, Plant and Equipment		5,988			5,977

Noncurrent Assets
Regulatory Assets		4,955			5,002
Long-Term Investments		125			123
Other Special Funds		44			44
Intangibles		60			60
Other		56			58

Total Noncurrent Assets		5,240			5,287

Total Assets	$	12,684		$	12,429

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

PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONSOLIDATED BALANCE SHEETS

	March 31, 2003			December 31, 2002
	(Millions) (Unaudited)
LIABILITIES AND CAPITALIZATION
Current Liabilities
Long-Term Debt Due Within One Year	$	281		$	429
Commercial Paper and Loans		166			224
Accounts Payable		738			724
Other		399			315

Total Current Liabilities		1,584			1,692

Noncurrent Liabilities
Deferred Income Taxes and Investment Tax Credit (ITC)		2,441			2,436
Regulatory Liabilities		198			252
Other Postemployment Benefit (OPEB) Costs		494			486
Accrued Pension Costs		195			175
Other		207			209

Total Noncurrent Liabilities		3,535			3,558

Commitments and Contingent Liabilities (See Note 5)
Capitalization Long-Term Debt
Long-Term Debt		2,777			2,627
Securitization Debt		2,190			2,222

Total Long-Term Debt		4,967			4,849

Preferred Securities
Preferred Stock Without Mandatory Redemption		80			80
Subsidiaries' Preferred Securities with Mandatory Redemption		155			155

Total Preferred Securities		235			235

Common Stockholder's Equity
Common Stock; 150,000,000 Shares Authorized, 132,450,344 Shares Issued and Outstanding		892			892
Contributed Capital		170			—
Basis Adjustment		986			986
Retained Earnings		488			389
Accumulated Other Comprehensive Loss		(173	)		(172	)

Total Common Stockholder's Equity		2,363			2,095

Total Capitalization		7,565			7,179

Total Liabilities and Capitalization	$	12,684		$	12,429

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

PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Quarters Ended March 31,
	2003			2002
	(Millions) (Unaudited)
Cash Flows from Operating Activities
Net Income	$	101		$	68
Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities:
Depreciation and Amortization		66			95
Provision for Deferred Income Taxes and ITC		(17	)		(8	)
Non-Cash Employee Benefit Plan Costs		25			37
Non-Cash Interest Expense		5			4
Underrecovery of Electric Energy Costs (BGS and NTC)		(50	)		(11	)
Over (Under) Recovery of Gas Costs		34			(50	)
Overrecovery of SBC		45			22
Gain on the Sale of Property, Plant and Equipment		(8	)		—
Net Changes in Certain Current Assets and Liabilities:
Accounts Receivable and Unbilled Revenues		(211	)		(70	)
Natural Gas		—			248
Prepayments		14			6
Accrued Taxes		46			29
Accounts Payable		14			(108	)
Other Current Assets and Liabilities		38			49
Employee Benefit Plan Funding and Related Payments		(12	)		(75	)
Other		—			8

Net Cash Provided by Operating Activities		90			244

Cash Flows from Investing Activities
Additions to Property, Plant and Equipment		(97	)		(76	)
Proceeds from the Sale of Property, Plant and Equipment		8			—

Net Cash Used in Investing Activities		(89	)		(76	)

Cash Flows From Financing Activities
Net Change in Short-Term Debt		(58	)		—
Issuance of Long-Term Debt		150			—
Redemption of Securitization Debt		(30	)		(25	)
Maturity of Long-Term Debt		(150	)		—
Contributed Capital		170			—
Dividends on Common Stock		—			(150	)
Preferred Stock Dividends		(1	)		(1	)

Net Cash Provided by (Used In) Financing Activities		81			(176	)

Net Change in Cash and Cash Equivalents		82			(8	)
Cash and Cash Equivalents at Beginning of Period		35			102

Cash and Cash Equivalents at End of Period	$	117		$	94

Supplemental Disclosure of Cash Flow Information:
Income Taxes Paid	$	53		$	81
Interest Paid, Net of Amounts Capitalized	$	102		$	112

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

PSEG POWER LLC
CONSOLIDATED STATEMENTS OF OPERATIONS

	For the Quarters Ended March 31,
	2003			2002
	(Millions) (Unaudited)
Operating Revenues	$	1,887		$	576
Operating Expenses
Energy Costs		1,348			139
Operation and Maintenance		202			186
Depreciation and Amortization		23			23

Total Operating Expenses		1,573			348

Operating Income		314			228
Other Income		47			—
Other Deductions		(33	)		—
Interest Expense		(28	)		(28	)

Income from Continuing Operations Before Income Taxes		300			200
Income Taxes		(123	)		(80	)

Income from Continuing Operations		177			120
Cumulative Effect of a Change in Accounting Principle, net of tax of $255		370			—

Earnings Available to Public Service Enterprise Group Incorporated	$	547		$	120

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

PSEG POWER LLC
CONSOLIDATED BALANCE SHEETS

	March 31, 2003			December 31, 2002
	(Millions) (Unaudited)
ASSETS
Current Assets
Cash and Cash Equivalents	$	37		$	26
Accounts Receivable, Net of Allowances of $31 in 2003		699			499
Short-Term Loan to Affiliate		204			—
Fuel		203			406
Materials and Supplies		155			148
Energy Trading Contracts		180			157
Other		43			44

Total Current Assets		1,521			1,280

Property, Plant and Equipment		5,570			5,347
Less: Accumulated Depreciation and Amortization		(1,368	)		(1,302	)

Net Property, Plant and Equipment		4,202			4,045

Noncurrent Assets
Deferred Income Taxes and Investment Tax Credits (ITC)		234			545
Nuclear Decommissioning Trust Funds		772			766
Intangibles		142			141
Other		124			164

Total Noncurrent Assets		1,272			1,616

Total Assets	$	6,995		$	6,941

LIABILITIES AND MEMBER'S EQUITY
Current Liabilities
Accounts Payable	$	746		$	432
Short-Term Loan from Affiliate		—			239
Energy Trading Contracts		119			101
Other		262			283

Total Current Liabilities		1,127			1,055

Noncurrent Liabilities
Nuclear Decommissioning		267			766
Cost of Removal		—			131
Accrued Pension Costs		112			101
Other		148			130

Total Noncurrent Liabilities		527			1,128

Commitments and Contingent Liabilities (See Note 5)
Long-Term Debt
Project Level, Non-Recourse Debt		800			800
Long-Term Debt		2,516			2,516

Total Long-Term Debt		3,316			3,316

Member's Equity
Contributed Capital		1,550			1,550
Basis Adjustment		(986	)		(986	)
Retained Earnings		1,513			966
Accumulated Other Comprehensive Loss		(52	)		(88	)

Total Member's Equity		2,025			1,442

Total Liabilities and Member's Equity	$	6,995		$	6,941

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

PSEG POWER LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Quarters Ended March 31,
	2003			2002
	(Millions) (Unaudited)
Cash Flows from Operating Activities
Net Income	$	547		$	120
Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities:
Cumulative Effect Adjustment, net of tax		(370	)		—
Depreciation and Amortization		23			23
Amortization of Nuclear Fuel		23			21
Interest Accretion on NDT Liability		6			—
Provision for Deferred Income Taxes		30			12
Unrealized Gains on Energy Trading Contracts		(4	)		(30	)
Income from NDT Funds		(14	)		—
Non-Cash Employee Benefit Plan Costs		13			8
Net Changes in Certain Current Assets and Liabilities:
Inventory, Materials and Supplies		196			4
Accounts Receivable		(200	)		148
Accounts Payable		314			(163	)
Other Current Assets and Liabilities		9			28
Other		42			(11	)

Net Cash Provided by Operating Activities		615			160

Cash Flows from Investing Activities
Additions to Property, Plant and Equipment		(153	)		(278	)
Proceeds from the Sale of Property, Plant and Equipment		—			47
Short Term Loan—Affiliate		(204	)		—
Other		(8	)		(8	)

Net Cash Used in Investing Activities		(365	)		(239	)

Cash Flows from Financing Activities
Issuance of Long-Term Debt		—			30
(Repayment) Issuance of Note Payable—Affiliated Company		(239	)		51

Net Cash Provided by (Used In) Financing Activities		(239	)		81

Net Change in Cash and Cash Equivalents		11			2
Cash and Cash Equivalents at Beginning of Period		26			9

Cash and Cash Equivalents at End of Period	$	37		$	11

Supplemental Disclosure of Cash Flow Information:
Income Taxes Paid	$	3		$	(5	)
Interest Paid, Net of Amounts Capitalized	$	39		$	39

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

PSEG ENERGY HOLDINGS LLC
CONSOLIDATED STATEMENTS OF OPERATIONS

	For The Quarters Ended March 31,
	2003			2002
	(Millions) (Unaudited)
Operating Revenues
Electric Generation and Distribution Revenues	$	113		$	71
Income From Capital and Operating Leases		56			57
Gain On Withdrawal From/Sale of Partnerships		45			7
Net Investment Losses		(11	)		(5	)
Other		6			6

Total Operating Revenues		209			136

Operating Expenses
Energy Costs		47			30
Operation and Maintenance		35			27
Depreciation and Amortization		10			8

Total Operating Expenses		92			65

Income From Equity Method Investments		17			30

Operating Income		134			101
Other Income		3			10
Other Deductions		(6	)		(52	)
Interest Expense		(50	)		(54	)

Income From Continuing Operations Before Income Taxes		81			5
Income Taxes		(17	)		—
Minority Interests in (Earnings) Losses of Subsidiaries		(5	)		1

Income From Continuing Operations		59			6
Loss From Discontinued Operations, net of tax benefit (expense) of $3 and ($1)		(6	)		(1	)
Loss on Disposal of Discontinued Operations, net of tax benefit of $2		(9	)		—

Income Before Cumulative Effect of a Change in Accounting Principle		44			5
Cumulative Effect of a Change in Accounting Principle, net of tax of $66		—			(120	)

Net Income (Loss)		44			(115	)
Preference Units Distributions/Preferred Stock Dividends		(6	)		(6	)

Earnings (Loss) Available to Public Service Enterprise Group Incorporated	$	38		$	(121	)

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

PSEG ENERGY HOLDINGS LLC
CONSOLIDATED BALANCE SHEETS

	March 31, 2003			December 31, 2002
	(Millions) (Unaudited)
ASSETS
Current Assets
Cash and Cash Equivalents	$	63		$	104
Accounts Receivable:
Trade—Net of Allowances of $9 and $0 in 2003 and 2002, respectively		99			91
Other Accounts Receivable		155			24
Assets Held for Sale		83			83
Notes Receivable		10			73
Inventory		21			22
Prepayments		3			4
Restricted Cash		12			18
Current Assets of Discontinued Operations		44			107

Total Current Assets		490			526

Property, Plant and Equipment		1,620			1,534
Less: Accumulated Depreciation and Amortization		(146	)		(139	)

Net Property, Plant and Equipment		1,474			1,395

Investments
Capital Leases—net		2,886			2,844
Corporate Joint Ventures		1,017			1,004
Partnership Interests		486			484
Other Investments		35			38

Total Investments		4,424			4,370

Goodwill		417			436
Other Assets		116			111

Total Assets	$	6,921		$	6,838

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

PSEG ENERGY HOLDINGS LLC
CONSOLIDATED BALANCE SHEETS

	March 31, 2003			December 31, 2002
	(Millions) (Unaudited)
LIABILITIES AND MEMBER'S EQUITY
Current Liabilities
Long-Term Debt Due Within One Year	$	579		$	320
Accounts Payable		213			257
Notes Payable		96			137
Borrowings Under Lines of Credit		47			—
Current Liabilities of Discontinued Operations		44			95

Total Current Liabilities		979			809

Noncurrent Liabilities
Deferred Income Taxes and Investment and Energy Tax Credits		1,164			1,042
Other Noncurrent Liabilities		196			179

Total Noncurrent Liabilities		1,360			1,221

Commitments and Contingent Liabilities (See Note 5)
Minority Interests		98			106

Long-Term Debt
Project Level, Non-Recourse Debt		895			853
Senior Notes		1,446			1,725

Total Long-Term Debt		2,341			2,578

Member's Equity
Ordinary Unit		1,888			1,888
Preference Units		509			509
Retained Earnings		145			107
Accumulated Other Comprehensive Loss		(399	)		(380	)

Total Member's Equity		2,143			2,124

Total Liabilities and Member's Equity	$	6,921		$	6,838

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

PSEG ENERGY HOLDINGS LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS

	For The Quarters Ended March 31,
	2003			2002
	(Millions) (Unaudited)
Cash Flows From Operating Activities
Net Income (Loss)	$	44		$	(115	)
Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities:
Depreciation and Amortization		13			14
Deferred Income Taxes (Other Than Leases)		(5	)		13
Leveraged Lease Income, Adjusted for Rents Received		(2	)		15
Investment Distributions		1			3
Change in Fair Value of Derivative Financial Instruments		6			(10	)
Undistributed Earnings from Affiliates		(5	)		(14	)
Net Gains on Sale of Investments		(33	)		(2	)
Loss on Disposal of Discontinued Operations, net of tax		9			—
Foreign Currency Transaction (Gain) Loss		(3	)		52
Proceeds on Withdrawal from Partnership		45			7
Cumulative Effect of a Change in Accounting Principle, net of tax		—			120
Net Changes in Certain Current Assets and Liabilities:
Accounts Receivable		(16	)		(76	)
Accounts Payable		(54	)		(63	)
Other Current Assets and Liabilities		(1	)		31
Other		1			7

Net Cash Used in Operating Activities		—			(18	)

Cash Flows from Investing Activities
Additions to Property, Plant and Equipment		(90	)		(77	)
Investments in Joint Ventures and Partnerships		(16	)		(95	)
Return of Capital from Partnerships		—			89
Collection of Note Receivable—Affiliated Company		62			—
Other		1			(60	)

Net Cash Used in Investing Activities		(43	)		(143	)

Cash Flows from Financing Activities
Proceeds from Capital Contributions		—			200
Net Increase (Decrease) in Short-Term Debt		90			(28	)
Cash Dividends Paid		(6	)		(6	)
Restricted Cash Decrease		7			—
Net Decrease in Short-Term Affiliate Borrowings		—			(35	)
Proceeds from Project-Level Non-Recourse Debt		242			43
Repayment of Medium-Term and Project-Level Non-Recourse Debt		(321	)		—
Other		(10	)		3

Net Cash Provided by Financing Activities		2			177

Effect of Exchange Rate Changes		—			(4	)

Net Change in Cash and Cash Equivalents		(41	)		12
Cash and Cash Equivalents at Beginning of Period		104			54

Cash and Cash Equivalents at End of Period	$	63		$	66

Supplemental Disclosure of Cash Flow Information
Income Taxes Paid	$	74		$	48
Interest Paid, Net of Amount Capitalized	$	31		$	33

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

Note 1. Organization and Basis of Presentation

Organization

PSEG

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

PSE&G

PSE&G is an operating public utility providing electric and gas service in certain areas within the State of New Jersey. ~~Following the transfer of its generation-related assets~~PSE&G's gas supply business was transferred to Power in ~~August 2000~~May 2002. PSE&G owns PSE&G Transition Funding LLC, a bankruptcy remote entity established for the purpose of purchasing intangible transition property and ~~its gas supply portfolio in May 2002, PSE&G continues to own and operate its transmission and distribution business.~~issuing transition bonds.

Power

Power is ~~an independent~~a multi-regional wholesale energy supply ~~company~~business that utilizes energy trading to optimize the value of its portfolio of electric generating and gas capacity and its supply obligations. Power has three principal direct wholly-owned subsidiaries: PSEG Nuclear LLC (Nuclear) ~~which owns and operates nuclear generating stations,~~, PSEG Fossil LLC (Fossil)~~, which develops, owns and operates domestic fossil generating stations~~ and PSEG Energy Resources & Trade LLC (ER&T). WePower also ~~have~~has a finance company subsidiary, PSEG Power Capital Investment Co. ~~(Power Capital)~~, which provides certain financing for ~~its~~Power's subsidiaries.

Energy Holdings

Energy Holdings ~~has three principal direct wholly-owned subsidiaries;~~is the parent of PSEG Global ~~Inc.~~LLC (Global), ~~a developer~~which invests and ~~operator~~participates in the development and operation of international and domestic ~~and international electric~~projects in the generation ~~stations~~ and distribution ~~companies,~~of energy, which include cogeneration and independent power production facilities and electric distribution companies; PSEG Resources ~~Inc.~~LLC (Resources), which makes ~~passive~~ investments primarily in ~~energy industry~~energy-related leveraged ~~leases and~~leases; PSEG Energy Technologies Inc. (Energy Technologies)~~. See Note 4. Discontinued Operations for a discussion of Energy Technologies. Energy Holdings also has a finance subsidiary, PSEG Capital Corporation (PSEG Capital)~~, which provides energy-related services and ~~is also the parent of~~construction to industrial and commercial customers; Enterprise Group Development Corporation (EGDC), a commercial real estate property management ~~business from~~business; PSEG Capital Corporation (PSEG Capital), which serves as a financing vehicle for Energy ~~Holdings~~Holdings' subsidiaries; and Enterprise Capital Funding Corporation, which is currently inactive. EGDC has been conducting a controlled ~~exit. For~~exit from the real estate business since 1993. The businesses of Energy Technologies are presented as discontinued operations.

Global, a ~~discussion~~New Jersey limited liability company, is the successor to PSEG Global Inc. pursuant to a merger which was consummated in March 2003. The merger was consummated to change the form of the ~~formation of PSEG Energy Holdings L.L.C. and PSEG Resources L.L.C. as~~business from a corporation to a limited liability company in accordance with the successors to Energy Holdings and Resources, respectively, see Note 13. Subsequent Events. Services provides management and administrative services to us and our subsidiaries. These include accounting, legal, communications, human resources, information technology, treasury and financial, investor relations, stockholder services, real estate, insurance, risk management, tax, library and information services, security, corporate secretarial and certain planning, budgeting and forecasting services. Services charges us and our subsidiaries for work performed and services provided by it. New Jersey Limited Liability Company Act.

Basis of Presentation

The financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for Form 10-Q. 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 herein 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 and update and supplement matters discussed in ~~our 2001~~the 2002 Annual Report on Form 10-K and our Amended Quarterly Report on Form 10-Q/A for the quarter ended March 31, 2002 and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2002. 5 ~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- Continued~~10-K.

The unaudited financial information furnished herein reflects all adjustments which are, in the opinion of management, necessary to fairly state the results for the interim periods presented. All such adjustments are of a normal recurring nature. The year-end consolidated balance sheets were derived from the audited consolidated financial statements included in ~~our 2001~~the 2002 Annual Report on Form 10-K. Certain reclassifications of prior period data have been made to conform with the current presentation. Several factors impacting us in the quarter ended September 30, 2002 also impact the presentation of our financial statements presented herein. In the third quarter, we adopted Emerging Issues Task Force Issue No. 02-3, which requires that we report energy trading revenues and energy trading costs on a net basis. See

Note 2. RecentNew Accounting Pronouncements. In addition, as a result of these and other changes in our business, we also reevaluated our segment presentation and have determined that Power operates in one integrated business segment. See Note 9. Financial Information By Business Segment. Under the Basic Generation Service (BGS) contract, which terminated on July 31, 2002, Power sold energy directly to PSE&G which in turn sold this energy to its customers. These revenues were properly recognized on each company's stand-alone financial statements and were eliminated when preparing our consolidated financial statements. For the new BGS contract period beginning August 1, 2002, Power sells energy to third party suppliers and other load serving entities (LSEs) and PSE&G purchases the energy for its customers' needs from third party suppliers. Due to this change in the BGS model, these revenues and expenses are no longer intercompany revenues and expenses and are no longer eliminated in consolidation. Note 2. Recent Accounting Pronouncements Standards

Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill''Goodwill and Other Intangible Assets"Assets'' (SFAS 142)

PSEG, PSE&G, Power and Energy Holdings

On January 1, 2002, wePSEG, PSE&G, Power and Energy Holdings adopted SFAS 142. Under this standard, wePSEG, PSE&G, Power and Energy Holdings were required to complete an impairment analysis of goodwill ~~during~~before June 30, 2002 and record any required impairment retroactive to ~~the first quarter.~~January 1, 2002. Under SFAS 142, goodwill is considered a nonamortizable asset and is subject to an annual review for impairment and an interim review when certain events or changes in circumstances occur. At the time of adoption, PSE&G had no goodwill. The effect of no longer amortizing goodwill on an annual basis was not material to ~~our~~PSEG's or Power's financial position and results of operations upon adoption. ~~Under SFAS 142, we had a transitional period of six months from the date of adoption to complete our goodwill impairment testing, which was completed as of June 30, 2002. We~~

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

In addition to goodwill, PSEG's total intangible assets, all of which are not subject to amortization, were $207 million, including $113 million, $54 million and $40 million related to defined benefit plans, emissions allowances and various access rights, respectively, as of March 31, 2003.

PSE&G

As ~~a result, in the second quarter~~ of ~~2002 we recorded after-tax charges~~March 31, 2003, PSE&G has intangible assets relating to ~~reflect the~~defined benefit pension plans totaling $60 million. These intangible assets are not subject to amortization.

Power

In addition to goodwill, ~~impairment~~as of ~~$120~~March 31, 2003, Power's intangible assets were $142 million, ~~retroactive~~of which $32 million, $54 million, $40 million and $16 million relate to ~~January 1, 2002,~~defined benefit pension plans, emissions allowances, various access rights at its Albany Station, and such amount has been recognized as a Cumulative Effect of a Change in Accounting Principle in accordance with the new standard. See Goodwill Impairment Analysis in Note 3. Asset Impairments for further details. In future periods, any goodwill, ~~impairments will be recorded as a component of income from continuing operations. SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144)~~respectively.

Energy Holdings

On January 1, 2002, we adopted SFAS 144. On adoption, SFAS 144 did not have an effect on our financial position or results of operations. Under SFAS 144, long-lived assets to be disposed of are measured at the lower of carrying amount or fair value less costs to sell, whether reported in continued operations or in discontinued operations. Also under SFAS 144, discontinued operations are no longer measured at net realizable value or include amounts for operating losses that have not yet occurred. Under SFAS 144, discontinued operations are measured at fair value, less costs to sell. For additional information see Note 3. Asset Impairments and Note 4. Discontinued Operations. 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- Continued SFAS No. 143, "Accounting for Asset Retirement Obligations" (SFAS 143) In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS 143. Under SFAS 143, the fair value of a liability for an asset retirement obligation (ARO) is required to be recorded in the period in which it is incurred with an offsetting amount recorded as an asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss. SFAS 143 is effective for fiscal years beginning after June 15, 2002. In August 2002, PSE&G filed a petition requesting clarification from the New Jersey Board of Public Utilities (BPU) regarding the future cost responsibility for nuclear decommissioning and whether, as a matter of law and policy: (a) PSE&G's customers will continue to pay for such costs through the Societal Benefits Clause (SBC); or (b) such customer responsibility will terminate at the end of the four-year transition period on July 31, 2003. The outcome of this petition will affect the treatment of the liability recorded for Power's nuclear decommissioning obligation. We cannot predict the outcome of this matter. Upon adoption of the standard, we will be required to adjust our Nuclear Decommissioning Liability ($768 million, pre-tax as of September 30, 2002) to reflect the present value of our expected asset retirement obligation which we believe is substantially lower than the recorded amount of our liability. If the BPU determines that PSE&G's customers continue to pay for these costs, then the difference between the recorded amount of the liability and the liability calculated under the new ARO standard will be deferred on the balance sheet. If the BPU determines that such customer responsibility terminates at the end of the transition period, then the difference between the recorded amount of our liability and the liability calculated under the new ARO standard will be recorded as a one-time benefit as a Cumulative Effect of a Change in Accounting Principle. The impact of adopting SFAS 143 is still being determined, and is likely to be a material benefit to our results of operations and our financial position by reducing our liability and increasing shareholders' equity. In conjunction with the implementation of SFAS 143, we may change our method of accounting for Cost of Removal for our Fossil Stations, which would substantially reduce the Cost of Removal Liability that we have recorded for our Fossil stations, $142 million, pre-tax as of September 30, 2002. We currently believe that we will have no material legal retirement obligation under the new standard for our Fossil stations, therefore the amount of that liability at the time we adopt SFAS 143 will reverse into income. Although the impact of this standard on future expenses is still being determined, our present analyses indicate that ongoing depreciation and operating expense (to accrete from the ARO liability, which is recorded at its present value, to the ultimate liability) will approximate our current expected expense levels over our five year planning horizon, and therefore would have a minimal impact on earnings. However, under current GAAP we could experience significant volatility in earnings since the Nuclear Decommissioning Trust Fund's assets would be required to be marked to market with unrealized gains and losses recognized in Other Comprehensive Income (OCI) and realized gains and losses recognized through earnings. Previously, these gains and losses were offset by changes in the Nuclear Decommissioning Liability with no effect on earnings. We are currently considering various methods to mitigate this volatility, including multiple financial products, although no assurances can be given. SFAS No. 145, "Rescission of FASB Statements Nos. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" (SFAS 145) During the third quarter of 2002, we adopted SFAS 145. This Statement rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishments of Debt," (SFAS 4) and an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking Fund Requirements" (SFAS 64). SFAS 4 required that gains and losses from extinguishments of debt that were included in the determination of net income be aggregated, and if material, classified as an extraordinary item. Since the issuance of SFAS 4, the use of debt extinguishments has become part of the risk management strategy of many companies, representing a type of debt extinguishment that does not meet the criteria for classification as an extraordinary item. Based on this trend, the FASB issued this rescission of SFAS 4 and SFAS 64. Accordingly, under SFAS 145, we now record these gains and losses in Other Income and Other Deductions, respectively. We recorded pre-tax gains of $4 million ($3 million after-tax) from the early retirement of debt as a component of Other Income for the quarter and nine months ended September 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- Continued 30, 2002. Also, we reclassified a pre-tax loss of $3 million ($2 million after-tax) from the early retirement of debt to a component of Other Deductions for the nine months ended September 30, 2001 in accordance with SFAS 145. SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS 146) In June 2002, the FASB issued SFAS 146 which addresses the financial accounting and reporting for costs associated with exit or disposal activities. SFAS 146 states that a liability for a cost associated with an exit or disposal activity shall be recognized and measured initially at its fair value in the period when the liability is incurred. A liability is established only when present obligations to others are determined. SFAS 146 does not apply to costs associated with the retirement of long-lived assets covered in SFAS 143. It applies to costs associated with an exit activity that does not involve an entity newly acquired in a business combination or with a disposal activity covered by SFAS 144. We will apply SFAS 146 for exit or disposal activities initiated after December 31, 2002 in accordance with the effective date of the standard. Emerging Issues Task Force (EITF) Issue No. 02-3, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities" (EITF 02-3) In June 2002, the EITF addressed certain issues related to energy trading activities, including gross versus net presentation in the statement of operations and additional disclosure requirements for energy trading activities. The EITF determined that gains and losses on energy trading contracts should be shown net in the statement of operations. This change is applicable to financial statements for periods ending after July 15, 2002 and requires that prior periods be restated for comparability. Pursuant to EITF Issue No. 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent" (EITF 99-19), we had been recording our trading revenues and trading related costs on a gross basis for physical energy and capacity sales and purchases. In accordance with EITF 02-3, beginning in the third quarter of 2002, we started reporting energy trading revenues and energy trading costs on a net basis and have reclassified prior periods to conform with this net presentation. As a result, both trading revenues and trading costs were reduced by approximately $748 million and $636 million for the quarters ended September 30, 2002 and 2001, respectively and $1.5 billion and $1.7 billion for the nine month periods ended September 30, 2002 and 2001, respectively. This change in presentation did not have an effect on trading margins, net income or cash flows. In October 2002, the EITF reached a final consensus regarding the accounting for contracts involved in energy trading and risk management activities. Management does not yet know the impact of adopting this consensus on January 1, 2003. Note 3. Asset Impairments As of December 31, 2001, Energy Holdings' aggregate investment exposure in Argentina was $632 million, including certain loss contingencies. These investments included a 90% owned distribution company, Empresa Distribuidora de Electricidad de Entre Rios S.A. (EDEERSA); minority interests in three distribution companies, Empresa Distribuidora de Energia Norte S.A. (EDEN), Empresa Distribuidora de Energia Sur S.A. (EDES), and Empresa Distribuidora La Plata S.A. (EDELAP); and two generating companies, Central Termica San Nicolas (CTSN), and Parana which are under contract for sale to certain subsidiaries of The AES Corporation (AES). In June 2002, Energy Holdings determined that the carrying value of its Argentine investments was impaired. The combination of the year-to-date operating losses, goodwill impairment at EDEERSA, write-down of $506 million for all Argentine assets, and certain loss contingencies resulted in a pre-tax charge to earnings of $632 million ($410 million after-tax) for the nine months ended September 30, 2002. In connection with the write-down of Energy Holding's Argentine assets, we recorded a deferred tax asset of $222 million. We believe that we will have sufficient future capital gains to realize 8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- Continued this deferred tax asset. For a discussion of certain contingencies related to our Argentine investments, see Note 6. Commitments and Contingent Liabilities. The tables below provide pre-tax and after-tax impacts of the various impairment charges, results of operations and accruals of loss contingencies recorded with respect to Energy Holdings' investments in Argentina for the three and nine month periods ended September 30, 2002 and September 30, 2001. Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 2002 2001 2002 2001 ------- ------- ------- ------- (Millions) (Pre-Tax) (Losses) Earnings Before Local Taxes-EDEERSA ................ $ -- $ 6 $ (59) $ 11 Write-down of EDEERSA ................ -- -- (94) -- Write-down of Assets Held for Sale to AES ........................ -- -- (412) -- Loss Contingencies and Other ......... -- -- (11) -- Goodwill Impairment-EDEERSA .......... -- -- (56) -- ---- ----- ----- ----- Total ........................... $ -- $ 6 $(632) $ 11 ---- ----- ----- ----- Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 2002 2001 2002 2001 ------- ------- ------- ------- (Millions) (After-Tax) (Losses) Earnings-EDEERSA ............ $ -- $ 3 $ (40) $ 6 Write-down of EDEERSA ................ -- -- (61) -- Write-down of Assets Held for Sale to AES .................... -- -- (268) -- Loss Contingencies and Other ......... -- -- (5) -- Goodwill Impairment-EDEERSA .......... -- -- (36) -- ---- ----- ----- ------ Total ........................... $ -- $ 3 $(410) $ 6 ---- ----- ----- ------ EDEERSA Given the year-to-date and projected operating losses at EDEERSA and the continued economic uncertainty in Argentina, Energy Holdings determined that it was necessary to test these assets for impairment. Such impairment analysis was completed as of June 30, 2002. As a result of this analysis, Energy Holdings determined that these assets were completely impaired under SFAS 144. Energy Holdings recorded ~~total charges and losses of $213 million, pre-tax, related to this investment for~~ the nine months ended September 30, 2002. These pre-tax charges consisted of goodwill impairment charges of $56 million, nine month operating losses of $59 million, of which $45 million was recorded in the first quarter of 2002, a complete asset impairment of $94 million pursuant to our SFAS 144 impairment analysis and loss contingencies and other items of $4 million. The total after-tax charges and losses related to this investment were $139 million for the nine months ended September 30, 2002. In addition, Energy Holdings has developed an exit strategy to dispose of its equity interest in EDEERSA. This exit is expected to be complete by June 30, 2003 and Energy Holdings intends to operate EDEERSA while carrying out its exit plans. However, due to uncertainties related to the timing and method of disposal of the investment in EDEERSA, the impairment charges and results of EDEERSA's operations will not be reported as a discontinued operation until EDEERSA has been disposed of or a sale is probable. Global is currently in discussions with potential acquirers of EDEERSA. During the second quarter of 2002, EDEERSA defaulted on its ~~debt, which is nonrecourse to Global, Energy Holdings and us. 9~~ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- Continued As of January 1, 2002, goodwill related to Energy Holdings' investment in EDEERSA was approximately $56 million and was included in Energy Holdings' previously disclosed investment exposure. As part of the adoption of SFAS 142, Energy Holdings has determined that this goodwill was impaired and all of the goodwill has been written-down as a cumulative effect of a change in accounting principle as of January 1, 2002 and is reflected in our Consolidated Statement of Operations for the nine months ended September 30, 2002. See below, Goodwill Impairment Analysis, for a further discussion of our goodwill analysis. Energy Holdings' share of the (Losses) Earnings for EDEERSA are included in our Consolidated Statement of Operations as indicated in the following table: Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 2002 2001 2002 2001* -------------------------------------- (Millions) Operating Revenues ..................... $ 10 $ 23 $ 29 $ 28 Operating Expenses ..................... 8 21 22 21 ---- ---- ---- ---- Operating Income ....................... 2 2 7 7 Other Losses - Foreign Currency Transaction Loss -- -- (68) -- Minority Interest and Other ............ (2) 4 2 4 ---- ---- ---- ---- (Loss) Earnings before Taxes ......... $ -- $ 6 $(59) $ 11 ==== ==== ==== ==== * Operating results for EDEERSA included $5 million of revenues recorded in accordance with the equity method of accounting for the six months ended June 30, 2001. Stock Purchase Agreement On August 24, 2001, Global entered into a Stock Purchase Agreement with AES to sell its minority interests in EDEN, EDES, EDELAP, CTSN and Parana, to certain subsidiaries of AES. In connection with the terms of the Stock Purchase Agreement, Global has accrued interest and other receivables of $17 million through February 6, 2002, which are direct obligations of AES and represent the total remaining exposure associated with these investments on our Consolidated Balance Sheets. On February 6, 2002, AES notified Global that it was terminating the Stock Purchase Agreement. In the Notice of Termination, AES alleged that a Political Risk Event, within the meaning of the Stock Purchase Agreement, had occurred by virtue of certain decrees of the Government of Argentina, thereby giving AES the right to terminate the Stock Purchase Agreement. Global filed suit in New York State Supreme Court for New York County against AES to enforce its rights under the Stock Purchase Agreement. A settlement was reached in October 2002 between the parties under which Global will transfer its shares of EDEN, EDES, EDELAP, Parana and CTSN to AES. AES has paid Global $15 million, plus interest under the settlement and has issued notes that would yield an additional $15 million when the notes mature on various dates ending July 2003. The litigation is stayed pending AES performance of settlement obligations. Since AES disputed its obligation to close and Global could not predict the outcome of the litigation, Global determined it was necessary to test these assets for impairment. As a result of this analysis, it was determined that these assets were fully impaired and we recorded a write-down in the amount of $412 million (pre-tax) ($268 million after-tax) and loss contingencies and other items of $7 million (pre-tax) ($4 million after-tax) for the nine months ended September 30, 2002. 10 ~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- Continued Goodwill Impairment Analysis In the second quarter of 2002, we finalized our~~ evaluation of the effect of SFAS ~~142 on the recorded amount of goodwill.~~142. The total amount of goodwill impairments iswas $120 million, net of tax of $66 million and was comprised of $36 million (after-tax) at ~~EDEERSA,~~Empresa Distribuidora de Electricidad de Entre Rios S.A. (EDEERSA), an Argentine distribution company, $34 million (after-tax) at Rio Grande Energia (RGE), a Brazilian distribution company of which Global owns 32%, $32 million (after-tax) at Energy Technologies and $18 million (after-tax) at Tanir Bavi, ~~Power Company Private Ltd. (Tanir Bavi),~~ a generating facility in India, which was 74%

owned by ~~Global.~~Global until sold in the fourth quarter of 2002. All of the goodwill related to these companies, other than RGE, was fully impaired. As noted above, this impairment charge has been recorded as of January 1, 2002 as a Cumulative Effect of a Change in Accounting Principle and is reflected in Consolidated Statement of Operations for the nine months ended September 30, 2002. The $53 million of goodwill at Energy Technologies and the $27 million of goodwill at Tanir Bavi, as of December 31, 2001 have been reclassified into Current Assets of Discontinued Operations on our Consolidated Balance Sheets. For further detail regarding the goodwill impairments at Energy Technologies and Tanir Bavi, see Note 4. Discontinued Operations.

As of ~~September 30, 2002,~~March 31, 2003, the remaining carrying value of Energy Holdings' goodwill was ~~$464~~$417 million, ~~of which $434 million was recorded~~as displayed in connection with Global's acquisitions of Sociedad Austral de Electricidad S.A. (SAESA) and Empresa de Electricidad de los Andes S.A. (Electroandes) in Chile and Peru in August and December of 2001, respectively. For the ~~year ended December 31, 2001, the amortization expense related to goodwill was $3 million.~~table below.

As of ~~September 30, 2002, our~~March 31, 2003, Energy Holdings' pro-rata share of the remaining goodwill included inon the balance sheets of its equity method investees totaled ~~$271~~$283 million. In accordance with generally accepted accounting principles, such goodwill is not consolidated on ~~our~~the balance sheet. ~~Our share of the amortization expense~~

In addition to goodwill, Energy Holdings has an intangible asset related to ~~such goodwill was $8~~defined benefit pension plans, which is not subject to amortization. This intangible asset totaled $4 million ~~for the year-ended December~~as of March 31, ~~2001.~~2003.

Power and Energy Holdings

As of ~~September 30, 2002~~March 31, 2003 and December 31, ~~2001, our~~2002, Power and Energy Holdings' goodwill and pro-rata share of goodwill in consolidated equity method projects was as follows: As

	As of
	March 31, 2003		December 31, 2002
	(Millions)
Consolidated Investments
Energy Holdings—Global
Sociedad Austral de Electricidad S.A. (SAESA) (A)	$	278	$	290
Empresa de Electricidad de los Andes S.A. (Electroandes)(B)		133		140
Elektrocieplownia Chorzow Sp. Z o.o. (ELCHO)		6		6

Total Energy Holdings—Global		417		436
Power—Albany Steam Station		16		16

Total PSEG Consolidated Goodwill		433		452

Pro-Rata Share of Equity Method Investments
Energy Holdings—Global
RGE (A)		61		60
Chilquinta Energia S.A. (Chilquinta)		163		163
Luz del Sur S.A.A		34		34
Kalaeloa		25		25

Pro-Rata Share of Equity Investment Goodwill		283		282

Total PSEG Goodwill	$	716	$	734

(A)		Changes in goodwill relate to changes in foreign exchange rates
(B)		Changes in goodwill at Electroandes relate to purchase price allocation adjustments.

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

PSEG, PSE&G, Power and Energy Holdings

Effective January 1, 2003, PSEG, PSE&G, Power and Energy Holdings adopted SFAS 143. SFAS 143 addresses accounting and reporting for legal obligations associated with the retirement of ~~September 30,~~tangible long-lived assets and the associated asset retirement costs. A legal obligation is a liability that a party is required to settle as a result of an existing or enacted law, statute, ordinance or contract.

Under SFAS 143, a company must initially recognize the fair value of a liability for an asset retirement obligation in the period in which it is incurred and concurrently capitalize an asset retirement cost by increasing the carrying amount of the related long-lived asset by the same amount as the liability. A company shall subsequently allocate that asset retirement cost to expense over its useful life. In periods subsequent to initial measurement, an entity shall recognize changes in the liability resulting from the passage of time (accretion) or due to revisions to either the timing or the amount of the originally estimated cash flows. Changes in the liability due to accretion will be charged to the Consolidated Statements of Operations, whereas changes due to the timing or amount of cash flows shall be an adjustment to the carrying amount of the related asset. See Note 3. Adoption of SFAS 143 for additional information.

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

PSEG and Power

EITF 02-3 requires all gains and losses on energy trading derivatives to be reported on a net basis. Also, energy trading contracts that are not derivatives will no longer be marked to market. Instead, settlement accounting will be used. EITF 02-3 was effective October 25, 2002. Substantially all of Power's energy contracts qualify as derivatives under SFAS No. 133, ''Accounting for Derivative Instruments and Hedging Activities'' (SFAS 133) and will therefore continue to be marked to market. The impact of implementing these rules was not material to PSEG's or Power's results of operations.

Financial Interpretation (FIN) No. 46, ''Consolidation of Variable Interest Entities (VIE)'' (FIN 46)

PSEG, PSE&G, Power and Energy Holdings

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

Other

PSEG, PSE&G, Power and Energy Holdings

At the January 2003 EITF meeting, the Financial Accounting Standards Board (FASB) was requested to reconsider an interpretation of SFAS 133. The interpretation, which is contained in the Derivatives Implementation Group's C-11 guidance, relates to contracts that include broad market indices (e.g., CPI). That interpretation sets forth the guidelines under which the contract could qualify as a normal purchase or sale under SFAS 133. PSE&G, Power and Energy Holdings reevaluated their respective contracts and determined that there were no contracts impacted by this interpretation and accordingly there was no effect on the Consolidated Financial Statements. The FASB has agreed to reconsider the guidance under C-11. Although the ultimate outcome is uncertain, this potential change in guidance is not expected to have a material impact on PSEG, PSE&G, Power and Energy Holdings' respective financial statements.

Note 3. Adoption of SFAS 143

PSEG, PSE&G and Power

PSEG, PSE&G and Power have performed a review of their potential obligations under SFAS 143 and believe that these obligations are primarily related to the decommissioning of Power's nuclear power plants. Power's liability at December 31, 2002 2001 --------------------------- Global (Millions) SAESA(1) ........................................ $ 289 $ 315 EDEERSA(2) ...................................... -- 63 Electroandes(3) ................................. 145 164 Elektrocieplownia Chorzow Sp Z o.o. (ELCHO) ................................ 6 6 Skawina CHP Plant (Skawina) ..................... 3 -- ----- ----- Total Global .............................. 443 548was approximately $766 million, which equaled the balance of its Nuclear Decommissioning Trust (NDT) Fund, as discussed below. As of January 1, 2003, the liability as calculated under SFAS 143 is approximately $261 million. This liability was calculated using a probability-weighted average of multiple scenarios. The scenarios were each based on estimated cash flows which were discounted using Power's risk-adjusted interest rate at the required effective date of the standard and considering the expected time period of the cash outflows. The scenarios included estimates for inflation, contingencies, and assumptions related to the timing of decommissioning costs, using the current license lives for each unit as well as early shutdown and license extensions scenarios. Management believes that these assumptions, which had a material impact on the calculation of the liability, and therefore the cumulative effect adjustment resulting from the adoption of this new accounting standard, were reasonable and appropriate.

In addition to the $261 million nuclear decommissioning liability, Power - Albany Steam Station ....................... 21 21 ----- ----- Total Consolidated Goodwill ............... 464 569 ----- ----- Global RGE (4) ......................................... 56 142 Chilquinta Energia Finance Co. L.L.C (Chilquinta) (5) .............................. 156 174 Luz del Sur S.A.A ............................... 34 34 Kalaeloa ........................................ 25 25 ----- ----- Pro-Rata Shareidentified certain other legal obligations that meet certain of Equity Investment Goodwill ......................... 271 375 ----- ----- Total Goodwill ............................ $ 735 $ 944 ===== ===== (1) The decreasethe criteria of SFAS 143, which at ~~SAESA~~this time are not quantifiable but could be material in the future. These obligations relate to certain industrial establishments subject to the Industrial Site Recovery Act, underground storage tanks subject to closure requirements, permits and authorizations, the restoration of an area to be occupied by a reservoir at the end of its useful life, an obligation to retire certain plants prior to the start up of a new plant and the demolition and restoration of certain other plants sites once they are no longer in service.

Power also had $131 million of cost of removal liabilities related to its fossil units, as of December 31, 2002, which did not meet the requirements of an asset retirement obligation (ARO) and were therefore reversed and included in the Cumulative Effect of a Change in Accounting Principle.

In addition, an ARO asset of $50 million was created in accordance with SFAS 143.

As a result of reducing the existing nuclear decommissioning and cost of removal liabilities to their fair value and creating an ARO asset, PSEG and Power recorded a Cumulative Effect of a Change in Accounting Principle of $370 million after-tax. Of this amount, $292 million (after-tax) relates to ~~final purchase price adjustments that resulted in higher value allocated to deferred tax assets. (2) The decrease at EDEERSA~~Nuclear, of which approximately $244 million (after-tax) relates to ~~an impairment~~interests in certain nuclear units Power acquired from PSE&G which are subject to the New Jersey Board of ~~$56~~Public Utilities (BPU) issue discussed below, approximately $48 million ~~under SFAS 142 and to purchase price adjustments of $7 million made subsequent to December 31, 2001. 11~~ ~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- Continued (3) The decrease at Electroandes~~(after-tax) relates to ~~purchase price adjustments made subsequent~~interests in certain nuclear units Power purchased from Atlantic City Electric Company (ACE) and Delmarva Power and Light Company (DP&L) which are not subject to ~~December 31, 2001 which resulted~~BPU approval. Also included in ~~higher value allocated to Property, Plant and Equipment. (4) The decrease at RGE relates to an impairment under SFAS 142 totaling $50~~the $370 million ~~and the devaluation of the Brazilian Real amounting to $36 million. (5) The decrease at Chilquinta~~was $78 million (after-tax) that relates to the ~~devaluation~~cost of removal liabilities for the fossil units being reversed.

In August 2002, PSE&G filed a petition requesting clarification from the BPU regarding the future cost responsibility for nuclear decommissioning and whether: (a) PSE&G's customers will continue to pay for such costs; or (b) such customer responsibility will terminate at the end of the ~~Chilean Peso.~~ four-year transition period on July 31, 2003 and become the sole responsibility of Power. The outcome of this petition could affect the treatment of a material portion of the liability recorded for Power's nuclear decommissioning obligation. If the BPU determines that PSE&G's customers will continue to pay and have responsibility for these costs, $244 million will be reversed and deferred on PSEG's and Power's Consolidated Balance Sheet as a liability. Also, the Ratepayer Advocate has filed testimony in this petition recommending a return of funds to ratepayers due to the fact that they believe the NDT Fund is overfunded. An adverse resolution to this matter could have a material adverse effect on PSEG's and Power's results of operations, financial position and cash flows. A decision is expected prior to August 2003 and the outcome of this petition cannot be predicted. The $48 million related to the nuclear units purchased from ACE and DP&L and the $78 million related to the cost of removal liabilities for the fossil units would be unaffected by such a ruling.

The following table reflects pro forma results which include accretion and depreciation expense as if SFAS 143 had always been in effect.

	Quarters Ended March 31,				Years Ended December 31,
	2003		2002		2002		2001		2000
	(Millions, except share data)
PSEG
Net Income—as reported	$	676	$	60	$	245	$	770	$	764
Pro Forma Net Income Assuming Accounting Change Applied Retroactively:	$	306	$	57	$	231	$	758	$	755
Earnings per share:
Basic and Diluted—as reported	$	3.00	$	0.29	$	1.17	$	3.70	$	3.55
Basic and Diluted—pro forma	$	1.36	$	0.27	$	1.10	$	3.64	$	3.51
Power
Net Income—as reported	$	547	$	120	$	468	$	394	$	313
Pro Forma Net Income Assuming Accounting Change Applied Retroactively:	$	177	$	117	$	454	$	382	$	304

The pro forma amount of the liability for Power's asset retirement obligations for the periods ended December 31, 2002, and 2001, as well as the actual amount of the liability recorded on Power's Consolidated Balance Sheets as of March 31, 2003 are highlighted in the following table. These amounts were calculated using current information, current assumptions and current interest rates.

			As of December 31,
	As of March 31, 2003		2002		2001
	(Millions)
PSEG and Power
Beginning of Period ARO Liability	$	261	$	239	$	220
Accretion Expense		6		22		19

End of Period ARO Liability	$	267	$	261	$	239

PSE&G

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

As of January 1, 2003, PSE&G had no quantifiable legal liabilities, as contemplated under SFAS 143, recorded on its Consolidated Balance Sheets and therefore the effect of adoption did not result in an adjustment to the Consolidated Statements of Operations. PSE&G does, however, have cost of removal liabilities embedded within Accumulated Depreciation pursuant to SFAS No. 71, ''Accounting for the Effects of Certain Types of Regulation'' (SFAS 71). Since PSE&G is a regulated enterprise, these amounts, which total approximately $372 million, continue to be recorded and presented in Accumulated Depreciation.

Energy Holdings

Energy Holdings has identified certain legal obligations that meet the criteria of SFAS 143, which are not material to its financial position, results of operations or net cash flows.

Effect on the NDT Fund

Power

Prior to the adoption of SFAS 143, amounts collected from PSE&G customers that have been deposited into the NDT Fund and realized and unrealized gains and losses in the trust were all recorded as changes in the NDT Fund with an offsetting charge to the nuclear decommissioning liability. Because management believes that it is no longer probable that PSE&G's customers will continue to fund the NDT Fund, beginning in the first quarter of 2003, deferral accounting is no longer appropriate. Therefore, beginning January 1, 2003, realized gains and losses were recorded in earnings and unrealized gains and losses were recorded as a component of Other Comprehensive Income (OCI), as appropriate under SFAS No. 115, ''Accounting for Certain Investments in Debt and Equity Securities'' (SFAS 115). Additionally, because deferral accounting is no longer appropriate, as of January 1, 2003, Power had determined that approximately $40 million, of the $68 million of pre-tax unrealized losses on securities in the NDT Fund were Other than Temporarily impaired, discussed below, and recorded this amount against earnings in the Cumulative Effect of a Change in an Accounting Principle.

As of March 31, 2003, Power had $772 million of invested assets recorded at fair market value on its Consolidated Balance Sheets in the NDT Fund. Power accounts for its investments in the NDT Fund as Available for Sale securities. Unrealized losses that are deemed to be Other than Temporary, as defined under SFAS 115 and related interpretive guidance, will be charged against earnings rather than OCI. Power considers several factors when determining if unrealized losses should be recorded against earnings as Other than Temporary impairments. These factors, such as the length of time and extent to which the fair value is below carrying value, the potential for impairments of securities when the issuer or industry is experiencing significant financial difficulties and Power's intent and ability to continue to hold securities, are used as indicators of the prospects of the securities to recover their value.

Note 4. Discontinued Operations

Energy Holdings

Energy Technologies' Investments

Energy Technologies is comprised primarily of 11its remaining heating, ventilating and air conditioning (HVAC) and mechanical operating companies and an asset management group which includes various Demand Side Management (DSM) investments. DSM investments in long-term contracts represent expenditures made by Energy Technologies to share DSM customers' costs associated with the installation of energy efficient equipment. DSM revenues are earned principally from monthly payments received from utilities, which represent shared electricity savings from the installation of the energy efficient equipment. During the second quarter of 2002, Energy Holdings completed its impairment testing of all recorded goodwill in accordance with guidance set forth in SFAS 142 including the goodwill associated with the 11 HVAC/mechanical operating companies acquired by Energy Technologies. Such analysis indicated that the entire $53 million of goodwill associated with the HVAC/mechanical companies was impaired, which resulted in a $32 million (after-tax) charge (net of $21 million in taxes). In accordance with SFAS 142, this charge was recorded as of January 1, 2002 as a Cumulative Effect of a Change in Accounting Principle and reflected in our results of operations for the nine months ended September 30, 2002.companies. In June 2002, Energy Holdings adopted a plan to sell its interests in the HVAC/mechanical operating companies. The sale of these companies is expected to be completed by June 30, 2003. ~~We have~~Energy Holdings has retained the services of an investment-banking firm to market these companies to interested parties. The HVAC/mechanical operating companies meet the criteria for classification as components of discontinued operations and all prior periods have been reclassified to conform to the current year's presentation. ~~In the second quarter of 2002,~~

Due to current market conditions, Energy Holdings initiated a process for the sale of Energy Technologies' DSM investments, which we had expected to sell by June 30, 2003. Based on our assessments, we believe the fair market value of these assets approximates their carrying value as of September 30, 2002 and no reduction in the carrying amount is indicated. For the period ended June 30, 2002, Energy Technologies' DSM investments were classified as a component of discontinued operations. In the third quarter of 2002, Energy Holdings decided to continue to own the DSM investments. For the period ended September 30, 2002, all DSM investments were reclassified from discontinued operations to continuing operations and the consolidated statements for all periods presented have been restated to reflect this reclassification. In addition to the goodwill impairment, Energy Holdings has further reducedre-evaluated the carrying value of ~~the investments in the 11 HVAC/mechanical operating companies~~Energy Technologies and has determined that an additional write-down to ~~their~~ fair value less ~~costs~~cost to sell ~~and~~was required. In the first quarter of 2003, Energy Holdings recorded aan additional loss on disposal ~~for the six months ended June 30, 2002~~ of ~~$20~~Energy Technologies of $9 million, net of ~~$11~~a $2 million in taxes. As of September 30, 2002, the carrying value of the HVAC/mechanical operating companies approximates the fair value and accordingly no additional reduction in the carrying value was required for the three months ended September 30, 2002.tax benefit. Energy Holdings' remaining investment position in Energy Technologies is approximately ~~$110~~$40 million, of which approximately ~~$32~~$35 million relates to ~~deferred~~ tax assets, associated with losses from ~~discontinued operations, for which no valuation allowance is deemed necessary. Excluding~~ the ~~deferred tax assets from discontinued operations, approximately $40 million~~sale of ~~our~~HVAC companies, with the remaining ~~investment~~ balance ~~relates~~relating to other net assets. Of the ~~asset management group. Although we believe that we will be able to sell the HVAC/mechanical~~11 HVAC companies ~~we can give no assurances that we will be able to realize their total carrying values. 12~~ ~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- Continued Operating results~~owned at year end, four were sold as of ~~Energy Technologies' HVAC/mechanical operating~~March 31, 2003. In April 2003, an additional four companies ~~less certain allocated costs from Energy Holdings, have been reclassified into discontinued operations in our Consolidated Statements of Operations.~~were sold.

The revenues and results of operations ~~of these discontinued operations for the quarter and nine months ended September 30, 2002, yielded additional losses of $3 million (after-tax) and $12 million (after-tax), respectively, and~~ are ~~disclosed~~displayed below: Quarter Ended Nine Months Ended September 30, September 30, --------------- ------------------- 2002 2001 2002 2001 ------ ------ ------ ------ (Millions) Operating Revenues .......... $ 107 $ 127 $ 292 $ 328 Pre-Tax Operating Loss ...... (5) (5) (18) (25) Loss Before Income Taxes .... (5) (6) (19) (29)

	Quarters Ended March 31,
	2003			2002
	(Millions)
Operating Revenues	$	49		$	95
Pre-Tax Operating Loss	$	(9	)	$	(6	)
Net Loss	$	(6	)	$	(4	)

The carrying amounts of the assets and liabilities of ~~Energy Technologies'~~the HVAC/mechanical operating companies, as of ~~September 30, 2002~~March 31, 2003 and December 31, ~~2001, have been reclassified into Current Assets of Discontinued Operations and Current Liabilities of Discontinued Operations, respectively, on our Consolidated Balance Sheets and~~2002 are summarized in the following table: ~~September 30, December 31,~~

	As of
	March 31, 2003		December 31, 2002
	(Millions)
Current Assets	$	21	$	82
Noncurrent Assets		23		25

Total Assets	$	44	$	107

Current Liabilities	$	27	$	85
Noncurrent Liabilities		5		5
Long-Term Debt		12		5

Total Liabilities	$	44	$	95

Tanir Bavi

In 2002, 2001 ------------- ------------ (Millions) Current Assets ..................................... $ 94 $ 152 Net Property, Plant and Equipment .................. 16 8 Noncurrent Assets .................................. 14 70 ----- ----- Total Assets ..................................... $ 124 $ 230 ===== ===== Current Liabilities ................................ $ 84 $ 76 Noncurrent Liabilities ............................. 3 2 Long-Term Debt ..................................... 5 1 ----- ----- Total Liabilities ................................ $ 92 $ 79 ===== =====the Tanir Bavi ~~At September 30, 2002, Global owned a 74% interest in Tanir Bavi Power Company Private Ltd. (Tanir Bavi), which owns and operates a 220 MW barge mounted, combined-cycle~~ generating facility in India. A plan to exit Tanir Bavi was adopted in June 2002. Global signed an agreement in August 2002 under which an affiliate of its partner in this venture, GMR Vasavi Group, a local Indian company, purchased Global's majority interest in Tanir Bavi. The sale was completed in October 2002. Tanir Bavi meetsIndia, met the criteria for classification as a component of discontinued operations and all prior periods ~~have been~~were reclassified to conform to the current year's presentation. ~~In the second quarter of 2002, we reduced the carrying value of Tanir Bavi to the contracted sales price of $45 million and recorded a loss on disposal of $14 million (after-tax).~~ The operating results of Tanir Bavi are summarized below. In the fourth quarter of 2002, Global sold its 74% interest in Tanir Bavi for approximately $45 million.

	Quarter Ended March 31, 2002
	(Millions)
Operating Revenues		$29
Pre-Tax Operating Income		$ 6
Net Income		$ 3

Note 5. Commitments and Contingent Liabilities

Old Dominion Electric Cooperative (ODEC)

PSE&G and Power

In 1995, PSE&G entered into a ten-year wholesale power contract with ODEC. The contract was transferred to Power in conjunction with the generation asset transfer in 2000. The contract provides for Power to supply ODEC with capacity and energy for a bundled rate that includes a component to recover multiple transmission charges (referred to as ''pancaked transmission rates'').

In November 1997, Federal Energy Regulatory Commission (FERC) issued the Pennsylvania-New Jersey-Maryland Power Pool (PJM) Restructuring Order, which required PSE&G to modify its contract with ODEC to remove pancaked transmission rates. While PSE&G sought rehearing of this order, it was nonetheless required to reduce its rate to ODEC by approximately $6 million per year, effective April 1, 1998. On December 19, 2002, based on a court ruling, FERC reversed its November 1997 order

thereby reinstating the original contract terms. This allows Power to collect amounts for April 1998 through December 2002 pursuant to the original contract. The difference in revenues between the contracted rate and the FERC-ordered reduced rate is approximately $30 million, inclusive of back interest. Power billed ODEC for this amount in January 2003 and will record this gain when realized. Power has been billing, recording and receiving payment on the higher rate beginning in January 2003. ODEC is paying these amounts but has protested both the past due and current amounts at the higher rates in a complaint at FERC. This matter is currently pending.

Guaranteed Obligations

Power

Power has guaranteed certain commodity related transactions for its subsidiary, ER&T, which is involved in energy marketing activities. These guarantees were provided to counterparties in order to facilitate physical and financial agreements in gas, pipeline capacity, transportation, oil, electricity and related commodities and services. These Power guarantees support the current exposure, interest and other costs on sums due and payable by ER&T under these agreements. Guarantees offered for trading and marketing cover the granting of lines of credit between entities and are often reciprocal in nature. The exposure between counterparties can go either direction. The face value of the guarantees outstanding on March 31, 2003 was $1.2 billion. In order for Power to experience a liability of $1.2 billion, ER&T would have to fully utilize the credit granted to it by every counterparty to whom Power has provided a guarantee and all of ER&T's contracts would have to be ''out-of-the-money'', (if the contracts are terminated Power would owe money to the counterparties). The probability of all contracts at ER&T being simultaneously ''out-of-the-money'' given the nature of ER&T's asset backed transactions is highly unlikely. For this reason, the current exposure at any point in time is a more meaningful representation of the liability under these guarantees. The current exposure from such liabilities was $506 million as of March 31, 2003. The current exposure consists of the net of accounts receivable and accounts payable (AR/AP), where netting is permitted, and the forward value on open positions. The net AR/AP for these transactions is included in the Consolidated Balance Sheets and for the ~~six months ended June 30, 2002 yielded income~~transactions that receive mark-to-market or cash flow hedge accounting treatment, that portion of $5 million (after-tax). For information regarding goodwill impairment associated with Tanir Bavi, see Note 2. Recent Accounting Pronouncements and Note 3. Asset Impairments. 13 ~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- Continued The carrying amounts of~~current exposure is also included in the assets and liabilities of Tanir Bavi, as of September 30, 2002 and December 31, 2001, have been reclassified into Current Assets of Discontinued Operations and Current Liabilities of Discontinued Operations, respectively, in our Consolidated Balance Sheets. The ~~carrying amounts~~majority of the ~~major classes~~current exposure under such guarantees is attributable to the BGS contracts that will expire on July 31, 2002 and the overlap of ~~assets~~the mark-to-market exposure of these contracts and ~~liabilities~~the contracts recently signed through the auction for the period beginning August 1, 2003. The BGS contracts are accounted for on a settlement basis. As energy is delivered under all of ~~Tanir Bavi,~~these contracts, Power's exposure under such guarantees will decrease. Also, beginning August 1, 2003 the realized portion of the exposure on the new BGS contracts will offset the forward value exposure on the open positions for the contracts that are included in the $506 million current exposure.

In addition, all Master Agreements and other supply contracts contain margin and/or other collateral requirements that, as of ~~September 30, 2002~~March 31, 2003, could require Power to post additional collateral of approximately $652 million if Power were to lose its investment grade credit rating and December 31, 2001, are summarized in the following tables: September 30, December 31, 2002 2001 ------------- ------------ (Millions) Current Assets ..................................... $ 34 $ 36 Net Property, Plantall counterparties, where Power is ''out-of-the money'' under such contracts, were entitled to and Equipment .................. 183 190 Noncurrent Assets .................................. 17 27 ----- ----- TOTAL ASSETS ................................... $ 234 $ 253 ===== ===== Current Liabilities ................................ 52 45 Noncurrent Liabilities ............................. 19 19 Long-Term Debt ..................................... 117 108 ----- ----- TOTAL LIABILITIES .............................. $ 188 $ 172 ===== ===== Note 5. Regulatory Assets and Liabilities At September 30, 2002 and December 31, 2001, respectively, PSE&G had deferred the following regulatory assets and liabilities on the Consolidated Balance Sheets: ---------------------------- September 30, December 31, 2002 2001 ------------- ------------ (Millions) Regulatory Assets Stranded Costs To Be Recovered .................... $ 3,936 $ 4,105 SFAS 109 Income Taxes ............................. 318 302 Other Postretirement Benefit Plan (OPEB) Costs ............................... 198 212 Societal Benefits Charges (SBC) ................... -- 4 Manufactured Gas Plant Remediation Costs ............................... 87 87 Unamortized Loss on Reacquired Debt and Debt Expense ........................... 88 92 Under Recovered Gas Costs ......................... 182 120 Unrealized Losses on Gas Contracts ................ -- 137 Unrealized Losses on Interest Rate Swap ........... 65 18 Repair Allowance Taxes ............................ 93 84 Decontamination and Decommissioning Costs ......... 25 25 Plant and Regulatory Study Costs .................. 27 31 Regulatory Restructuring Costs .................... 27 27 Other ............................................. 3 3 ------- ------- Total Regulatory Assets ..................... $ 5,049 $ 5,247 ======= ======= Regulatory Liabilities Excess Depreciation Reserve ....................... $ 208 $ 319 Over Recovered Electric Energy Costs (BGS and NTC) ............................. 96 48 SBC ............................................... 47 -- Other ............................................. 12 6 ------- ------- Total Regulatory Liabilities ................ $ 363 $ 373 ======= ======= 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- Continued Note 6. Commitments and Contingent Liabilities We, our consolidated subsidiaries and our equity method investees are involved in various legal actions arising in the normal course of business. We do not expect that there will be a material adverse effect on our financial condition, results of operations and net cash flows as a result of these proceedings, although no assurances can be given. Guaranteed Obligations Power Power has guaranteed payment of obligations incurred under energy trading contracts of its subsidiary, ER&T, with various counterparties up to established dollar limits. The established dollar limits of those guarantees on behalf of counterparties totaled approximately $1 billion at September 30, 2002.called for collateral.

In addition, Power has ~~guaranteed payment~~issued an approximate $40 million guarantee on behalf of ~~all amounts owed to PJM by ER&T without~~ a ~~stated dollar limit. The outstanding amount of exposure~~third party's performance under ~~those guarantees totaled $166 million as of September 30, 2002 representing~~a Basic Generation Service (BGS) contract expiring in July 2003. Because Power supplies the ~~amount payable~~third party with the energy needed for performance under ~~these contracts and~~ the ~~net amount by which open contracts are below market.~~guarantee, it is highly unlikely Power would incur any liabilities in connection with the guarantee. As of ~~September 30, 2002,~~March 31, 2003, there were no claims against the guarantee.

As of March 31, 2003, letters of credit issued by Power were outstanding in the amount of approximately ~~$73~~$74 million in support of various contractual obligations, environmental liabilities, and to satisfy trading collateral obligations.

Power has also provided credit support for equity contributions relating to its subsidiaries relating to the construction of its ~~subsidiaries. In addition, certain International Swap Dealer Agreements (ISDA)~~Lawrenceburg and ~~other supply contracts contain margin requirements that, as of September 30, 2002, could require~~Waterford facilities. Should Power lose its investment grade credit rating, it would be required to post ~~collateral~~$151 million in letters of ~~approximately $270 million if our~~ credit ~~ratings are downgraded below investment grade.~~ for those projects. The amount of credit support is expected to decrease as Power completes the projects.

Energy Holdings

Energy Holdings and/or Global have guaranteed certain obligations of ~~Global's~~their subsidiaries or affiliates, including the successful completion, performance or other obligations related to certain

projects in an aggregate amount of approximately ~~$244~~$306 million as of ~~September 30, 2002.~~March 31, 2003. The guarantees ~~consist of~~include a $61 million equity commitment for ~~ELCHO~~Elektrocieplownia Chorzow Sp. z.o.o. (ELCHO) in Poland, ~~$55~~a $49 million ~~of support~~standby equity commitment for Skawina in Poland, ~~$56~~$41 million of various guarantees for Dhofar Power Company in Oman, $31 million in guarantees related to financing at Electroandes in Peru and a $25 million contingent guarantee related to ~~bond payment~~debt service obligations of Chilquinta Energia Finance ~~Co.~~ LLC in connection with electric distribution companies in Chile and ~~Peru~~Peru. Additional guarantees consist of a $36 million leasing agreement guarantee for Prisma in Italy and various other guarantees comprising the remaining ~~$47~~$63 million. ~~A substantial portion~~Approximately $85 million of such guarantees iswill be cancelled upon ~~successful completion, performance and/or refinancing~~satisfaction of ~~construction debt with non-recourse project debt. Any downward revision~~Global's equity commitments, which are included in ~~the current ratings of~~ Energy Holdings' ~~Senior Notes would require~~anticipated capital expenditures for the ~~issuance~~remainder of ~~letters of credit to replace the existing guarantee of $61 million for ELCHO and $25 million for Chilquinta.~~2003.

In the normal course of business, Energy Technologies secures construction obligations with performance bonds issued by insurance companies. In the event that Energy Technologies' tangible equity falls below $100 million, Energy Holdings would be required to provide additional support for the performance bonds. Tangible equity is defined as net equity less goodwill. As of September 30, 2002, Energy Technologies' tangible equity was $105 million. Energy Holdings is in the process of negotiating alternate support arrangements with bond issuers, including an indemnification agreement, which is likely to be executed in the near future. As of September 30, 2002,March 31, 2003, Energy Technologies had ~~$220~~$234 million of such bonds outstanding, of which ~~$46~~$41 million was at risk in ongoing construction projects. ~~Energy Holdings expects to reduce this amount over time as part of its exit from this business.~~ The performance bonds are not included in the ~~$244~~$306 million of guaranteed obligations discussed above. ~~No assurances can be given that~~In January 2003, Energy Holdings will be successful in extinguishing these obligations. SAESA has guaranteed its share of a $35 million debt obligation for a 50% owned affiliate in Argentina, Edersa. This obligation was recorded on our Consolidated Balance Sheets as it was considered in the valuation of SAESA at the date of purchase in August 2001. Global may be required to make a $35 million equity contribution to SAESA to repay the obligation. Since this obligation has been previously recorded, there will be no impact to our Consolidated Statement of Operations if the transaction is funded. For further discussion of this loan, see Energy Holdings - Global - Chile. 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- Continued Defaults in non-recourse project finance debt agreements do not cross-default to any of our or Energy Holdings' other credit agreements. In June 2002, the Administrative Agent for the EDELAP project loan notified Global that the loan was in defaultprovided an indemnification agreement and ~~Global paid $2 million in sponsor guarantees that were due. This amount is included in the $632~~$31 million of ~~Argentine investment exposure that was impaired~~letters of credit in support of Energy Technologies' obligations. These amounts are expected to decrease over time as Energy Technologies completes the work in process or transfers ownership to other companies.

Environmental Matters

PSE&G and recorded in the Consolidated Statement of Operations. The Parana project loan is in default. Although a waiver has been negotiated, it expired in May 2002 and lenders have taken no further action. See Note 3. Asset Impairments. Environmental Power

Hazardous Waste

The New Jersey Department of Environmental Protection (NJDEP) regulations concerning site investigation and remediation require an ecological evaluation of potential injuries to natural resources in connection with a remedial investigation of contaminated sites. The NJDEP is presently working with the energy industry to develop procedures for implementing these regulations. These regulations may substantially increase the costs of remedial investigations and remediations, where necessary, particularly at sites situated on surface water bodies. PSE&G, Power and predecessor companies own or owned and/or operate or operated certain facilities situated on surface water bodies, certain of which are currently the subject of remedial activities. The financial impact of these regulations on these projects is not currently estimable. WePSE&G and Power do not anticipate that the compliance with these regulations will have a material adverse effect on ~~our~~their respective financial ~~position,~~positions, results of operations or net cash flows.

PSE&G

PSE&G Manufactured Gas Plant (MGP) Remediation Program

PSE&G is currently working with the NJDEP under a program (Remediation Program) to assess, investigate and, if necessary, remediate environmental conditions at PSE&G's former ~~manufactured gas plant (MGP)~~MGP sites. To date, 38 sites have been identified. The Remediation Program is periodically reviewed and revised by PSE&G based on regulatory requirements, experience with the Remediation Program and available remediation technologies. The long-term costs of the Remediation Program cannot be reasonably estimated, but experience to date indicates that at least $20 million per year could be incurred over a period of about 30 years since inception of the program in 1988 and that the overall cost could be material. The costs for this remediation effort are recovered through ~~the SBC. At September 30, 2002 and December~~charges to utility customers.

As of March 31, ~~2001,~~2003, PSE&G's estimated net liability for remediation costs through ~~2004~~2005 aggregated ~~$87~~$115 million. Expenditures beyond ~~2004~~2005 cannot be reasonably ~~estimated.~~ estimated and are therefore not accrued.

Passaic River Site

The United States Environmental Protection Agency (EPA) has determined that a nine mile stretch of the Passaic River in the area of Newark, New Jersey is a ~~"facility"~~''facility'' within the meaning of that term under the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 and that, to date, at least thirteen corporations, including ~~us,~~PSE&G, may be potentially liable for performing required remedial actions to address potential environmental pollution in the Passaic River ~~"facility." In a separate matter, we~~''facility.''

PSE&G and certain of ~~our~~its predecessors conducted industrial operations at properties within the Passaic River facility. The operations included one operating electric generating station, one former generating station and four former MGPs. ~~Our~~PSE&G's costs to clean up former MGPs are recoverable from utility customers ~~under~~through the SBC. ~~We have contracted to sell~~PSE&G has sold the site of the former generating ~~site, contingent upon approval by state regulatory agencies, to a third party that would release~~station and ~~indemnify us~~obtained releases and indemnities for ~~claims~~liabilities arising out of the ~~site. We~~site in connection with the sale. The operating generating station was transferred to Power pursuant to the Final Order. PSE&G cannot predict what action, if any, the EPA or any third party may take against usPSE&G with respect to this matter, or in such an event, what costs we may ~~incur~~be incurred to address any such claims. However, such costs may be material. 16 ~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- Continued~~

Power

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

The EPA and the NJDEP issued a demand in March 2000 under the Federal Clean Air Act (CAA) requiring information to assess whether projects completed since 1978 at the Hudson and Mercer coal burning units were implemented in accordance with applicable PSD/NSR regulations. Power completed its response to the information request in November 2000. In January 2002, Power reached an agreement with ~~the state~~New Jersey and the federal ~~government~~governments to resolve allegations of noncompliance with federal and ~~state~~ State of New Jersey PSD/NSR regulations. Under that agreement, over the course of 10 years, Power ~~will~~must install advanced air pollution controls ~~over 12 years~~ that are ~~expected~~designed to ~~significantly~~ reduce emissions of ~~nitrogen oxides~~Nitrogen Oxide (NOx), ~~sulfur dioxide (SO2)~~Sulfur Dioxide (SO₂), particulate matter and ~~mercury from its Hudson and Mercer coal burning units.~~mercury. The estimated cost of the program at the time of the settlement was $337 million to be incurred through 2011. Power also paid a $1.4 million civil penalty and has agreed to spend up to $6 million on supplemental environmental projects. The agreement resolving the NSR allegations concerning the Hudson and Mercer coal-fired units also resolved the dispute over Bergen 2 regarding the applicability of PSD requirements, and allowed construction of the unit to be completed and operation to commence.

Power has recently notified the EPA and the NJDEP that it is ~~$355 million~~evaluating the continued operation of the Hudson coal unit beyond 2006, in light of changes in the energy and ~~such~~capacity markets and increases in the cost of pollution control equipment and other necessary modifications. A decision is expected to be made in 2003 as to the Hudson unit's continued operation. The related costs ~~when incurred, will be capitalized as plant additions. Power~~ associated with these modifications have not been included in Power's capital expenditure projections.

New Generation and Development

Power has revised its schedules for completion of several of its projects under development to provide better sequencing of its construction program with anticipated market demand. This delay will allow Power to conserve capital in 2003 and allow it to take advantage of the expected recovery of the electric markets and their need for capacity in 2005. PSEG Power New York Inc.,

Through an indirect, wholly-owned subsidiary, of Power is developing the Bethlehem Energy Center, a 763 MW combined-cycle power plant that will replace the ~~380~~376 MW Albany, NY Steam Station. Total costs for this project are expected to be approximately ~~$465~~$483 million with expenditures to date of approximately ~~$114~~$212 million. Construction began in 2002 with the expected completion date in ~~2005, at which time the existing station will be retired.~~2005.

Power is constructing a 1,218 MW ~~combined cycle~~combined-cycle generation plant at Linden, New ~~Jersey with~~Jersey. Total costs are estimated at approximately ~~$694~~$711 million ~~and~~with expenditures to date of approximately ~~$520~~$575 million. Completion is expected in ~~2005, at which time 451 MW of existing generating capacity will be retired.~~2005.

Power is constructing, through indirect, wholly-owned subsidiaries, two natural gas-fired ~~combined cycle~~combined-cycle electric generation plants in Waterford, Ohio (821 MW) and Lawrenceburg, Indiana (1,096 MW) at an estimated aggregate total cost of $1.2 billion. Total expenditures to date on these projects have been approximately ~~$1.1~~$1 billion. The required estimated equity investment in these projects is approximately $400 million, with the remainder being financed with non-recourse bank financing. As of ~~September 30, 2002,~~March 31, 2003, approximately ~~$247~~$294 million of equity has been invested in these projects. In connection with these projects, ER&T has entered into a five-year tolling agreement pursuant to which it is obligated to purchase the output of these facilities. ~~The~~Based on current prices, the purchase price under this contract is currently above market. ER&T may terminate the agreement ~~may expire if~~upon repayment of the current financing ~~is repaid within five years.~~scheduled for August 2005. Additional equity ~~contributions~~investments may be required ~~by Power to the project company~~ if the ~~purchase price of electricity~~proceeds received from ER&T under this ~~contract, which will be determined prior~~tolling agreement are not sufficient to ~~commercial operations, results in revenues that are less than~~cover the required payments under the bank financing. ~~Based on current market prices, it is anticipated that additional equity contributions will be required.~~ The Waterford facility is currently scheduled to achieve commercial operation in June 2003. The Lawrenceburg facility is currently scheduled to achieve commercial operation in December 2003. Power has entered into an agreement to purchase Wisvest-Connecticut LLC, which holds two electric generating stations in Connecticut, at a cost of $220 million. The agreement also calls for purchase price adjustments of up to $20 million for various expenditures made prior to closing, as well as closing adjustments for fuel and inventory. The coal, oil, and gas-fired plants have a total capacity of 1,019 MW. The transaction is subject to various Federal approvals. The transfer of the two stations triggered the Connecticut Transfer Act, which requires the commencement of any necessary remedial activities within three years of the transfer of the property. While the cost to comply with the Transfer Act to clean up former petroleum coke operations at one of the stations is still unknown, estimated costs are between $10 million and $20 million. No assurances can be given as to the ultimate remediation costs at these facilities, however they could be material. Power expects to close on this acquisition in the fourth quarter of ~~2002, subsequent to Federal Energy Regulatory Commission (FERC) approval and Power's performance based testing of the units. 17~~ ~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- Continued~~2003.

Power also has contracts with outside parties to purchase upgraded turbines for the Salem Nuclear Generating Station Units 1 and 2 and to purchase upgraded turbines and ~~to purchase~~complete a power uprate for Hope Creek Generating Station to increase its generating capacity. The contracts for Hope Creek are subject to ~~nuclear regulatory~~Nuclear Regulatory Commission (NRC) approval and the projects are currently scheduled to be completed by 2004 for Salem Unit 1 and Hope Creek and 2006 for Salem Unit 2. Power's aggregate estimated costs for these projects are $210 million, with expenditures to date of approximately $47 million.

Completion of the above projects within the estimated time frames and cost estimates cannot be assured. Construction delays, cost increases and various other factors could result in changes in the operational dates or ultimate costs to complete.

Power has commitments to purchase gas turbines and/or other services to meet its current plans to develop additional generating capacity. The aggregate amount due under these commitments is approximately $480 million, approximately $370 million of which is included in estimated costs for the projects discussed above. The approximate $110 million remaining relates to obligations to purchase hardware and services that have not been designated to any specific projects. If Power does not contract to satisfy its commitment relating to the $110 million in obligations by July 2003, it ~~will~~may be subject to penalties of up to $24 million.

Energy Holdings

California

GWF Energy LLC (GWF Energy), a joint venture between Global and Harbinger GWF LLC (Harbinger), owns and operates two peaker plants in California and is currently constructing the Tracy Peaker Plant, a 167 MW facility which is scheduled for completion in the second quarter of 2003. As of March 31, 2003, Global's investment in GWF Energy was $204 million and its ownership interest in GWF Energy was 76%. The commercial operations date deadline of the Tracy Peaker Plant is July 1, 2003 under GWF Energy's power purchase agreement with the California Department of Water Resources. Global's permanent equity investment in GWF Energy, including contingencies, is expected to be reduced to a maximum of $100 million upon successful completion of permanent project financing, which has been delayed as a result of the litigation between Global and Harbinger discussed below. The duration of the delay in permanent project financing that may result from the litigation cannot be determined at this time. In the event permanent project financing does not occur and Harbinger does not buy back any of its ownership interest in GWF Energy from Global or make any additional investment in GWF Energy, Global's permanent investment in GWF Energy could increase to approximately $280 million. For a description of working capital loans from Global to GWF Energy pending completion of project financing, see Note 12. Related-Party Transactions.

On February 19, 2003, Harbinger filed an action with the Circuit Court of Shelby Co., Alabama alleging that Global wrongfully diluted Harbinger's membership interest percentage in GWF Energy. Harbinger is seeking an injunction preventing Global from converting or maintaining the conversion of optional loans made to GWF Energy by Global into capital contributions and thus diluting Harbinger's membership interest percentage, along with other injunctive or equitable relief, including a reallocation of equity in GWF Energy for appropriate funding from Harbinger. On March 26, 2003, Global filed with the American Arbitration Association (AAA) requesting a determination and declaration in accordance with GWF Energy's Operating Agreement. On March 27, 2003, Global filed a ''Motion to Dismiss the Complaint or Stay Litigation and to Compel Arbitration'' (Motion) with the Circuit Court. A Circuit Court hearing is scheduled for May 7, 2003 relative to Global's Motion.

Peru

In December 2001, Global acquired an interest in Electroandes, a 183 MW hydroelectric generation company in Peru that sells its output to non-regulated purchasers (primarily mining companies) under power purchase agreements. Part of the purchase price was financed with a $100 million one-year bridge loan with an original maturity date in December 2002 that was subsequently extended to June 2003. On March 26, 2003, Electroandes refinanced the $100 million bridge loan with a $70 million seven-year amortizing facility and two $15 million one-year facilities (each guaranteed by Energy Holdings). Additionally, on March 25, 2003, Electroandes filed a request for approval of a $100 million bond program. Bonds issued under this program following the expected approval will be used for general corporate purposes, including servicing the seven-year and one-year loan facilities.

Poland

In 2002, Global acquired a 50% interest in the 590 MW (electric) and 618 MW (thermal) coal-fired Skawina CHP Plant (Skawina), located in Poland. The transaction includes Global's obligation to increase its equity interest in Skawina to approximately 65% and the obligation to offer to purchase an additional 10% from Skawina's employees, increasing Global's potential ownership interest to 75%. Global's total equity investment is expected to be approximately $105 million, including contingencies and equity commitment guarantees. Through March 31, 2003, Global had invested approximately $36 million at Skawina.

Minimum Fuel Purchase Requirements

Power

Power uses coal for its fossil electric generation stations. Power purchases coal through various contracts and in the spot market for its generation plants. The total minimum purchase requirements included in these contracts amount to approximately $137 million through 2006.

Power has several long-term purchase contracts with uranium suppliers, converters, enrichers and fabricators to meet the currently projected fuel requirements for Salem and Hope ~~Creek. Power's remaining minimum purchase requirement for 2002 under these contracts is approximately $20 million.~~Creek nuclear power plants. On average, Power has various multi-year requirements-based purchase commitments that total approximately ~~$100~~$88 million per year to meet ~~Salem-Hope Creek~~Salem's and Hope Creek's fuel needs. Power has been advised by Exelon Generation LLC (Exelon), the co-owner and operator of Peach Bottom, that it has similar purchase contracts to satisfy the fuel requirements offor Peach Bottom. Power uses coal for its fossil fueled electric generation stations. Power purchases coal through various contracts and in the spot market. The total minimum purchase requirements included in these contracts amount to approximately $72 million through 2003.

Nuclear Fuel Disposal

Power

Under the Nuclear Waste Policy Act of 1982 (NWPA), as amended, the Federal government has entered into contracts with the operators of nuclear power plants for transportation and ultimate

disposal of ~~the~~ spent nuclear fuel. To pay for this service, ~~the~~ nuclear plant owners ~~were~~are required to contribute to a Nuclear Waste Fund at a rate of one mil ($0.001) per ~~kWh~~Kilowatt-hour (kWh) of nuclear generation, subject to such escalation as may be required to assure full cost recovery by the Federal government. ~~These costs were being recovered through~~Under the ~~BGS contract through July 2002. Payments made to~~NWPA, the ~~United States~~ Department of Energy (DOE) ~~for disposal costs are based on nuclear generation and are included in Energy Costs in the Consolidated Statements of Operations. Under the NWPA, the DOE~~ was required to begin taking possession of the spent nuclear fuel by no later than 1998. The DOE has announced that it does not expect a facility to be available earlier than 2010.

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

Exelon has advised Power that it had signed an agreement with the DOE applicable to Peach Bottom under which Exelon would be reimbursed for costs incurred resulting from the DOE's delay in accepting spent nuclear fuel. The agreement allows Exelon to reduce the charges paid to the Nuclear Waste Fund to reflect costs reasonably incurred due to the DOE's delay. Past and future expenditures associated with Peach Bottom's recently completed on-site dry storage facility would be eligible for this reduction in future DOE fees. Under this agreement, ~~our~~Power's portion of Peach Bottom's Nuclear Waste Fund fees have been reduced by approximately $18 million through August 31, 2002, at which point the credits were fully utilized and covered the cost of Exelon's storage facility. ~~For additional information, see Note 2. Recent Accounting Pronouncements.~~

In 2000, a ~~group of eight utilities~~petition was filed ~~a petition~~ against the DOE in the ~~U.S.~~US Court of ~~Appeals~~Appeal for the Eleventh Circuit, seeking to set aside the receipt of credits by ~~Exelon out of the Nuclear Waste Fund as stipulated in the Peach Bottom agreement.~~Exelon. On September 24, 2002, the ~~U.S.~~ Court ~~of Appeals for the Eleventh Circuit,~~ issued an opinion upholding the challenge by the ~~petitioners regarding the settlement agreement's compensation provisions.~~petitioners. Under the terms of 18 ~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- Continued~~ the agreement, DOE and Exelon ~~Generation~~ are required to meet and discuss alternative funding sources for the settlement credits. The ~~agreement provides~~Eleventh Circuit's opinion suggests that ifthe federal judgment fund should be available as an alternate source. If such negotiations are unsuccessful, ~~the agreement will be null and void. Any~~any payments required by Power resulting from a disallowance of the previously reduced fees would be included in Energy Costs in the Consolidated Statements of Operations.

In ~~February 2002, President Bush announced that Yucca Mountain~~September 2001, Nuclear filed a complaint in ~~Nevada would be~~ the ~~permanent disposal facility for~~US Court of Federal Claims seeking damages caused by the DOE not taking possession of spent nuclear wastes. On April 8, 2002, the Governor of Nevada submitted his veto to the sitting decision. On July 9, 2002, Congress affirmed the President's decision. The DOE must still license and construct the facility.fuel in 1998. No assurances can be given as to any damage recovery or the ~~final outcome~~ultimate availability of ~~this matter.~~ a disposal facility.

In October 2001, Power filed a complaint in the US Court of Federal Claims, along with a number of other plaintiffs, seeking $28 million in relief from past overcharges by the DOE for enrichment services. No assurances can be given as to any damage recovery.

Other

Energy Holdings ~~Global~~

Argentina Global has certain obligations that are likely to occur if certain projects in Argentina continue to default on their debt and performance obligations. The estimated amount to cover this exposure is $7 million and has been recorded as a component of general and administrative operating expenses.

Under certain circumstances, Global could be obligated to settle its share (approximately $26 million) of a project loan for ~~EDELAP~~Empresa Distribuidora La Plata S.A. (EDELAP), a distribution company in Argentina, should it or the majority owner of the project (The AES Corporation (AES)), take certain actions including forcing or permitting certain loan parties to declare bankruptcy. In addition, the guarantee can be triggered by transferring the shares of certain loan parties without lender consent. Breach of this transfer covenant can be cured by delivering certain pledge agreements relating to the ownership of loan parties to the lenders. Global could also be liable for any incremental direct damages arising from the breach of these covenants. Given the likely cure of any breach by the project sponsors, such a contingent obligation ~~has a low probability of being triggered,~~is remote and, therefore, no provision has been made in ~~our~~ Energy Holdings'

Consolidated Financial Statements. ~~California In May 2001, GWF Energy LLC (GWF Energy), a joint venture between Global and Harbinger GWF LLC entered into a 10-year power purchase agreement (PPA) with~~Under the California Department of Water Resources (CDWR) to provide approximately 340 MW of electric capacity to California from three new natural gas-fired peaking plants, the Hanford, Henrietta and Tracy Peaker Plants. On August 22, 2002, negotiations between GWF Energy and the Public Utilities Commissionterms of the ~~State~~settlement of ~~California (CPUC) and the State of California Electricity Oversight Board (collectively the California Parties) relating~~Global's litigation with AES, AES is required to ~~complaints filed with FERC under Section 206 of the Federal Power Act resulted in the execution of (i) an amended and restated PPA~~deliver pledge agreements that has been affirmed by the CPUC as "just and reasonable" and (ii) a settlement agreement with the California Parties, the Governor of the State of California and the People of California by and through the Attorney General. In addition, the California Parties withdrew with prejudice their FERC complaints against GWF Energy. The Hanford and Henrietta Peaker Plants were completed in August 2001 and in June 2002, respectively, and the Tracy Peaker Plant, a 166 MW facility, is now under construction. The commercial operations date deadline of the Tracy Peaker Plant has been extended to July 1, 2003are required under the ~~amended and restated PPA discussed above. Total project cost for these plants is estimated at 19~~ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- Continued approximately $345 million. Global's permanent equity investment in these plants, including contingencies, is not expected to exceed $150 million after completion of project financing, which is currently expected to occur in the first quarter of 2003. In the event financing does not occur, our ownership interest in these plants could increase to approximately 85% of the total project costs, noted above. Our current ownership interest in this project was 74% as of September 30, 2002. For a description of turbine loans and working capital loans fromloan documents.

India

Global to GWF Energy pending completion of project financing, see Note 12. Related-Party Transactions. Chile Global owns SAESA, a group of companies that consists of four distribution companies and one transmission company that provide electric service to customers in southern Chile. SAESA has a $150 million loan facility in place that had an original maturity date of October 18, 2002 and is recorded as a component of Commercial Paper and Loans on our Consolidated Balance Sheets as of September 30, 2002. The principal payment was not made as scheduled and the lending group has agreed not to declare any payment defaults or exercise any remedies with regard to that loan before November 8, 2002. A term sheet for an extension of the loan to April 2003 has been agreed to and is expected to be finalized by November 8, 2002. We expect to refinance this loan facility during this extended period. No assurances can be given that the extension will be granted and that other refinancing options will be available in a timely manner. Peru In December 2001, Global acquired an interest in Electroandes, a 183 MW hydroelectric facility in Peru. Part of the purchase price was financed with a $100 million one year bridge loan maturing in December 2002. The loan facility provides that the maturity date may be extended for six months if certain conditions are met. No assurances can be given that the loan will be extended. India Energy Holdings has a 20% interest in a 330 MW ~~Naphtha/natural gas fired~~ plant, PPN Power Generating Company Limited (PPN) in the Indian ~~state~~State of Tamil Nadu. Energy Holdings' investment exposure (investment less non-recourse debt) in this facility is approximately ~~$44~~$40 million. Power from the facility is sold under a long-term ~~power purchase agreement~~Power Purchase Agreement (PPA) with the Tamil Nadu Electricity Board (TNEB) which sells the power to retail ~~end user~~end-user customers. ~~The~~ TNEB has not been able to make full payment to ~~the plant~~PPN for the purchase of energy under contract due to its overall poor liquidity situation. The ~~current~~ past due receivable at ~~the project company~~PPN as of March 31, 2003 is approximately ~~$55~~$84 million, ~~our~~Energy Holdings' share of which is approximately ~~$11 million. Poland In June 2002, Global completed its acquisition~~$17 million, net of a ~~35% interest~~$7 million reserve. Energy Holdings' exposure to the open receivables is included in the ~~590 MW (electric)~~$40 million investment exposure discussed above.

On April 1, 2003, PPN did not receive an expected partial payment from TNEB, which resulted in PPN defaulting on a debt payment to its project lenders of $10 million. Consequently, PPN advised lenders of its inability to make the scheduled debt payment. Also, PPN has not paid working capital interest, amounts due under letters of credit covering fuel supplies, gas supply invoices and ~~618 MW (thermal) coal-fired Skawina CHP Plant (Skawina), located~~fuel supply letters of credit due in ~~Poland~~April 2003.

PPN is developing a contingency plan and ~~in June 2002 increased its ownership interest~~has closed the plant as of April 10, 2003. The TNEB has been notified of the plant closing resulting from PPN's inability to ~~approximately 50%. The transaction includes the obligation~~procure fuel and fund operating expenses due to ~~purchase additional shares in 2004 that will bring Global's aggregate interest in Skawina to approximately 75%. Skawina supplies electricity to three local distribution companies~~non-payment by TNEB. In late April 2003, a partial payment of $8 million was received and ~~heat mainly~~negotiations are continuing toward full resolution of this matter. No changes to the ~~city~~long-term forecasts of ~~Krakow, under annual one-year contracts. The sale is part of~~cash flows were deemed appropriate for PPN. Global will continue to monitor the Polish Government's energy privatization program. Global has expended $31 million during 2002 for its approximately 50% ownership interest and the total equity investment is expected to be approximately $44 million. situation in India closely.

Tunisia

Global owns a 60% interest in Carthage Power Company (CPC), a 471 MW gas-fired combined-cycle electric generation facility located in Rades, Tunisia. CPC has entered into a 20-year power purchase contract for the sale of 100% of the 20 ~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- Continued~~ output to Societe Tunisienne de l' Electricite et du Gaz (STEG). The contract called for the plant to be operational by November 24, 2001, however, due to delays in construction, this deadline was not met. STEG has declared that it is entitled to liquidated damages at the rate of $67 thousand a day since November 24, 2001 in accordance with the terms of the power purchase contract. CPC is contesting STEG's claim and the two parties are currently ~~under negotiation~~in negotiations to settle this dispute. The facility was built by Alstom Centrales Energetiques ~~SA,~~S.A., (Alstom) an independent contractor, who was ~~also~~ obligated to complete construction by September 3, 2001. The facility commenced operation on May 14, 2002. CPC believes it is entitled to liquidated damages from Alstom in amounts greater than the claims by STEG. CPC and Alstom are in negotiations to settle the liquidated damages claims. Such liquidated damages are secured by letters of credit totaling $30 million. 21 ~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- Continued~~ In April an agreement in principle was reached between CPC, Alstom and STEG. If the agreement becomes final, all related matters will be settled without an adverse material effect on CPC.

Note 7. Financial Instruments, Energy Trading and6. Risk Management Our

PSEG, PSE&G, Power and Energy Holdings

The operations of PSEG, PSE&G, Power and Energy Holdings are exposed to market risks from changes in commodity prices, foreign currency exchange rates, interest rates and equity prices that could affect ~~our~~the results of operations and financial ~~condition. We~~conditions. PSEG, PSE&G, Power and Energy Holdings manage ~~our~~ exposure to these market risks through ~~our~~their regular operating and financing activities and, when deemed appropriate, hedge these risks through the use of derivative financial instruments. WePSEG, PSE&G, Power and Energy Holdings use the term ~~hedge~~''hedge'' to mean a strategy designed to manage

risks of volatility in prices or rate movements on certain assets, liabilities or anticipated transactions and by creating a relationship in which gains or losses on derivative instruments are expected to counterbalance the losses or gains on the assets, liabilities or anticipated transactions exposed to such market risks. WeEach of PSEG, PSE&G, Power and Energy Holdings use derivative instruments as risk management tools consistent with ~~our~~their respective business plans and prudent business ~~practices~~practices.

Derivative Instruments and for energy trading purposes. Hedging Activities

Energy Trading Contracts

Power

Power actively trades energy and energy-related products, including electricity, natural gas, electric capacity, fixed transmission rights, coal and emission allowances, in the spot, forward and futures markets, primarily in PJM, and also in the Super Region, which extends from Maine to the Carolinas and the Atlantic Coast to Indiana and natural gas in the producing region, the Henry Hub Basin, as well as the Super Region.

Power maintains a strategy of entering into trading positions to optimize the value of its portfolio of generation assets, gas supply contracts and its electric and gas supply obligations. Power does not engage in the practice of simultaneous trading for the purpose of increasing trading volume or revenue. Power engages in physical and financial transactions in the electricity wholesale markets and executes an overall risk management strategy to mitigate the effects of adverse movements in the fuel and electricity markets. Power actively trades energy and energy-related products, including electricity, natural gas, electric capacity, fixed transmission rights, coal and emission allowances, in the spot, forward and futures markets, primarily in Pennsylvania-New Jersey-Maryland Power Pool (PJM), and electricity in the Super Region, which extends from Maine to the Carolinas and the Atlantic Coast to Indiana and natural gas in the producing region, the Henry Hub Basin, as well as the Super Region. These contracts also involve financial transactions including swaps, options and futures. ~~These~~

Power marks to market its energy trading contracts ~~are recorded under Emerging Issues Task Force (EITF) 98-10, "Accounting for Contracts Involved~~ in ~~Energy Trading and Risk Management Activities" (EITF 98-10) which requires these contracts to be marked-to-market~~accordance with the resulting realized and unrealized gains and losses included in current earnings. In prior periods Power disclosed gains and losses related to certain activities within its trading segment. Commencing with Power's change in segment reporting discussed in Note 9. Financial Information by Business Segments, we have excluded certain transactions, such as firm transmission rights and Basic Gas Supply Service (BGSS) results, from this table and solely report those gains and losses on transactions accounted for pursuant to EITF 98-10. There was no change in Power's margins, net income or cash flows as a result of this change in presentation. Prior periods have been reclassified to conform to this presentation. For the three months and nine months ended September 30, 2002, Power recorded net margins of $9 million and $36 million, respectively, as shown below: Three Months Ended Nine Months Ended September 30, September 30, ------------------- ------------------- 2002 2001 2002 2001 -------- -------- -------- -------- (Millions) Realized Gains ................ $ 17 $ 38 $ 16 $ 109 Unrealized Gains .............. (5) (4) 27 10 ----- ----- ----- ----- Gross Margin ................ 12 34 43 119 ----- ----- ----- ----- Broker Fees and Other Trading-Related Expense ..... (3) (2) (7) (4) ----- ----- ----- ----- Net Margin .................. $ 9 $ 32 $ 36 $ 115 ===== ===== ===== ===== 22 ~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- Continued~~SFAS 133. As of ~~September 30, 2002~~March 31, 2003 and December 31, ~~2001,~~2002, substantially all of these contracts had terms of two years or ~~less and were valued through market exchanges and, where necessary, broker quotes. The~~less. Wherever possible, fair values for these contracts were obtained from quoted market sources. For contracts where no quoted market exists, modeling techniques were employed using assumptions reflective of current market rates, yield curves and forward prices as applicable to interpolate certain prices or price options. The effect of using such modeling techniques is not material to Power's financial results.

For the ~~financial instruments~~quarters ended March 31, 2003 and 2002, Power recorded net margins as shown below:

	Quarters Ended March 31,
	2003		2002
	(Millions)
Realized Gains (Losses)	$	22	$	(2	)
Unrealized Gains		4		30

Gross Margin		26		28
Broker Fees and Other Trading-Related Expenses		2		2

Net Margin	$	24	$	26

As of March 31, 2003 and December 31, 2002, the cumulative unrealized gains for all periods related to these energy trading contracts ~~are summarized in the following table:~~
September 30, 2002 December 31, 2001 -------------------------- ---------------------------- Notional Notional Fair Notional Notional Fair (mWh) (MMBTU) Value (mWh) (MMBTU) Value -------- -------- ----- -------- -------- ----- (Millions) Listed Futures and Options .. -- 12 $ 2 -- 14 $ (1) Physical forwards ........... 48 -- 4 35 -- (3) Options-- OTC ............... 14 286 5 7 713 (19) Swaps ....................... 5 2,152 9 6 970 19 Emission Allowances ......... -- -- 15 -- -- 8 -- ----- ---- -- ----- ---- Totals ................. 67 2,450 $ 35 48 1,697 $ 4 == ===== ==== == ===== ====
were approximately $28 million and $24 million, respectively.

Power routinely enters into exchange-traded futures and options transactions for electricity and natural gas as part of its operations. Generally, exchange-traded futures contracts require a deposit of margin cash, the amount of which is subject to change based on market movement and in accordance with exchange rules. The amount of ~~the~~Power's margin deposits as of ~~September 30, 2002~~March 31, 2003 was approximately $9$12 million. ~~Derivative Instruments and Hedging Activities~~

Commodity Contracts

Power

The availability and price of energy commodities are subject to fluctuations from factors such as weather, environmental policies, changes in supply and demand, state and federal regulatory policies and other events. ~~To reduce~~Power manages its risk of fluctuations of energy price ~~risk caused by market fluctuations,~~and availability through derivative instruments, such as forward purchase contracts, swaps, options, futures, etc.

Cash Flow Hedges

In order to hedge a portion of Power's forecasted energy purchases to meet its electric supply requirements, Power enters into ~~forwards,~~forward purchase contracts, futures, ~~swaps~~options and ~~options with approved counterparties to hedge its anticipated demand.~~swaps. These contracts, in conjunction with owned electric generation capacity, are designed to cover estimated wholesale electric customer commitments. ~~In February 2002, New Jersey conducted an auction to identify energy suppliers for the BGS of the State's regulated distribution utilities for the one-year period beginning on August 1, 2002.~~ Power did not participate directly in the auction but agreed to supply power to several of the direct bidders. Subsequently, a portion of the contracts with those bidders was reassigned to Power. Therefore, for a limited portion of the New Jersey retail load, Power will be a direct supplier to one non-affiliated utility. In order to hedge a portion of Power's forecasted energy purchases to meet its electric supply requirements, Power entered into forward purchase contracts, futures, options and swaps. Power has also ~~forecasted~~forecasts the energy delivery from its generating stations based on the forward price curve movement of energy and, as a result, ~~entered~~Power enters into swaps, options and futures transactions to hedge the price of ~~gas~~fuel to meet its ~~gas purchases~~fuel purchase requirements for generation. These derivative transactions ~~qualified for hedge accounting treatment~~are designated and effective as cash flow hedges under SFAS ~~No. 133 "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133).~~133. As of ~~September 30, 2002,~~March 31, 2003, the fair value of these hedges ~~were $17~~was $20 million. Unrealized gains and losses associated with these hedges of $(12) million, net of tax, was recorded to OCI for the quarter ended March 31, 2003. As defined in SFAS 133, there was no ineffectiveness associated with ~~offsetting charges to Other Comprehensive Income (OCI)~~these hedges. Under SFAS 133, ineffectiveness can occur when the terms of ~~$10 million (after-tax).~~an instrument do not perfectly match the transaction or risk the instrument is hedging. These hedges will mature through 2003. Also, prior to May 2002, PSE&G had entered into gas forwards, futures, options and swaps to hedge its forecasted requirements for natural gas, which was required under an agreement with the BPU in 2001.2004.

Effective with the transfer of PSE&G's gas contracts to Power on May 1, 2002, Power ~~also~~ acquired all of the derivatives entered into by PSE&G. ~~Power accounts for these derivative instruments pertaining~~The derivatives used to ~~residential customers in a similar manner to PSE&G.~~hedge the forecasted purchase of natural gas are designated and effective as cash flow hedges. Gains or losses from ~~these~~the derivatives ~~will be~~entered to hedge residential customer requirements are deferred and recovered from PSE&G's customers as part of the monthly billing to PSE&G. ~~Derivatives relating to commercial and industrial customers will be accounted for in accordance with SFAS 133 where appropriate.~~ Gains or losses on ~~these~~the derivatives entered to hedge commercial and industrial customer requirements are ~~deferred and reported as a component of~~recorded to OCI. There ~~were~~was no ~~ineffective~~ineffectiveness realized on these hedges. ~~The accumulated OCI will be reclassified to earnings in the period in which the hedged transaction affects earnings.~~ As of ~~September 30, 2002, Power had approximately 328 MMBTU of gas forwards, futures, options and swaps to hedge forecasted requirements with a~~March 31, 2003, the fair value of ~~approximately $7 million. As of December 31, 2001, PSE&G had approximately 330 MMBTU of gas forwards, futures, options and swaps to~~ hedge ~~forecasted~~instruments associated with hedging residential customer requirements ~~with a fair value of approximately $(137)~~was $33 million. The maximum term of these contracts is approximately ~~one year. 23~~ ~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- Continued~~two years.

Other Derivatives

Power also enters into certain other contracts which are derivatives, but do not qualify for hedge accounting under SFAS ~~133, nor are they classified as energy trading contracts under EITF 98-10.~~133. Most of these contracts are option contracts ~~on gas~~for fuel purchases for generation ~~requirements that do not qualify for hedge accounting.~~requirements. Therefore, the changes in fair market value of these derivative contracts are recorded in Energy Costs on the ~~income statement~~Consolidated Statement of Operations at the end of each reporting period. For the ~~three~~quarters ended March 31, 2003 and ~~nine months ended September 30,~~ 2002, Power recorded ~~gains (losses) on these contracts of $(6) million and $24 million, respectively,~~gross margins as shown below:
For the Three Months Ended For the Nine Months Ended September 30, September 30, -------------------------- ------------------------- 2002 2001 2002 2001 -------- -------- -------- -------- (Millions) Realized (Losses) Gains ................... $ (7) $ 17 $ 1 $ 17 Unrealized (Losses) Gains ................. 1 (6) 23 (14) ---- ---- ---- ---- Gross Margin ............................ $ (6) $ 11 $ 24 $ 3 ==== ==== ==== ====

	Quarters Ended March 31,
	2003			2002
	(Millions)
Realized Losses	$	(14	)	$	(12	)
Unrealized (Losses) Gains		(7	)		20

Gross Margin	$	(21	)	$	8

As of ~~September 30, 2002~~March 31, 2003 and December 31, ~~2001, substantially~~2002, the cumulative unrealized gains and losses for all periods related to these contracts were approximately $13 million and $20 million, respectively. The contracts related to the majority of these ~~contracts~~gains and losses had terms of less than two years ~~or less~~ and were valued through market exchanges and, where necessary, broker quotes. ~~The fair values of the financial instruments related to these contracts are summarized in the following table:~~
September 30, 2002 December 31, 2001 --------------------------------- -------------------------------- Notional Notional Fair Notional Notional Fair (mWh) (MMBTU) Value (mWh) (MMBTU) Value -------- -------- ----- -------- -------- ----- (Millions) Listed Futures and Options ............ -- 32 $ 2 -- -- -- Options-- OTC ......................... -- 63 -- 1 148 $ (6) Swaps ................................. -- 41 $ 14 -- 11 1 --- --- ---- --- --- ---- Totals ................................ -- 136 $ 16 1 159 $ (5) === === ==== === === ====

Interest Rates We

PSEG, PSE&G, Power and Energy Holdings

PSEG, PSE&G, Power and Energy Holdings are subject to the risk of fluctuating interest rates in the normal course of business. ~~Our~~PSEG's policy is to manage interest rate risk through the use of fixed rate debt, floating rate debt and interest rate derivatives. As

Fair Value Hedges

PSEG

PSEG uses interest rate swaps to convert a portion of ~~September 30, 2002, a hypothetical 10% change~~fixed-rate debt into variable-rate debt. The interest swaps are designated and effective as fair value hedges. The fair value changes of these interest rate swaps are fully offset by the fair value changes in ~~market interest rates would result~~the underlying debt. For the quarter ended March 31, 2003, the fair value of these hedges was $4 million. There was no ineffectiveness related to these hedges.

Energy Holdings

In April 2003, Energy Holdings, in a ~~consolidated change~~private placement, issued $350 million of ~~$12 million~~7.75% Senior Notes due in ~~annual~~2007. Energy Holdings is using an interest ~~costs related~~rate swap to ~~short-term~~convert a portion of this fixed-rate debt into variable-rate debt. The interest swaps are designated and ~~floating~~effective as fair value hedges. The fair value changes of these interest rate ~~debt consisting of $2 million, $3 million, $3 million~~swaps are fully offset by the fair value changes in the underlying debt.

Cash Flow Hedges

PSEG, PSE&G, Power and ~~$4 million at~~Energy Holdings

PSEG, PSE&G, Power and Energy Holdings respectively. We construct a hypothetical swap to mirror all the critical terms of the underlying debt and utilize regression analysis to assess the effectiveness of the actual swap at inception and on an ongoing basis. The assessment will be done periodically to ensure the swaps continue to be effective. PSEG determines the fair value of interest rate swaps through counterparty valuations, internal valuations and the Bloomberg swap valuation function. There have been no material changes in the techniques or models used in the valuation of interest rate swaps during the periods presented. There is minimal impact of counterparty credit risk on the fair value of the hedges since our policies require that our counterparties have investment grade credit ratings. We have entered into interest rate swaps to lock in fixed interest rates on certain of our construction loans to hedge forecasted future interest payments. We have elected to use ~~the Hypothetical Derivative Method to measure ineffectiveness of the hedges as described under Derivative Implementation Group (DIG) Issue No. G7. 24~~ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- Continued Ineffectiveness may occur if the actual draw down of the debt and the notional amount of the swap during the construction phase are different. The amount of ineffectiveness, if any, is recorded in earnings at the end of the reporting period. The impact of ineffectiveness on net income should be minimal because the interest rate swaps and ~~the underlying debt are indexed~~other interest rate derivatives to manage their exposures to the ~~same benchmark interest rate. Therefore,~~variability of cash flows, primarily related to the variable rate debt instruments. The interest rate fluctuations should be offset. The amount of ineffectiveness, if any, is recorded in earnings at the end of the reporting period. The following table shows details of the interest rate swaps at PSEG, PSE&G, Power and Energy Holdings and their associated values that were open at September 30, 2002:
Accumulated Total Other Project Notional Fair Comprehensive Ownership Amount Pay Receive Market Loss Maturity Underlying Securities Percent (A) Rate Rate Value (B) Date - ----------------------------------------------------------------------------------------------------------------------- (Millions of dollars, where applicable) PSEG: Enterprise Capital Trust II 100% $150.0 5.98% 3-month $(20.4) $12.1 2008 Securities LIBOR PSE&G: Transition Funding Bonds (Class 100% 497.0 6.29% 3-month (64.8) *** 2011 A-4) LIBOR Power: Construction Loan - Waterford 100% 177.5 4.16% 3-month (8.6) 5.1 2005 LIBOR Energy Holdings: Construction Loan - Tunisia 60% 53.0 6.96% 6-month (7.0) 3.0 2009 (US$) LIBOR Construction Loan - Tunisia 60% 67.0 5.19% 6-month (3.0) 2.0 2009 (EURO) EURIBOR* Construction Loan - Poland 55% 141.0 8.40% 6-month (56.0) 19.0 2010 (US$) LIBOR Construction Loan - Poland 55% 62.0 13.23% 6-month (34.0) 11.0 2010 (PLN) WIBOR** Construction Loan - Oman 81% 121.0 6.27% 6-month (29.0) 15.0 2018 LIBOR --------- ------- ----- Total Energy Holdings 444.0 (129.0) 50.0 --------- ------- ----- Total PSEG $1,268.50 $(222.8) $67.2 ========= ======= =====
* EURIBOR - EURO Area Inter-Bank Offered Rate ** WIBOR - Warsaw Inter-Bank Offered Rate *** Offsetting charges were recorded to Regulatory Asset/Liability. (A) Represents 100% of Derivative Instrument. (B) Net of Tax and Minority Interest. - -------------------------------------------------------------------------------- Global holds investments in various generation facilities in the United States thatderivatives are accounted for under the equity method of accounting and, therefore, are not consolidated in Global's financial statements. Global holds a 50% indirect ownership in two investments located in Texas and a 50% direct ownership in one investment in Hawaii (collectively the investees), which hold US Dollar denominated debt with variable interest payments tied to LIBOR rates. In order to lock in fixed interest rates on such debt, the investees each entered into interest rate swaps to hedge the value of the cash flows of their future interest payments. As of September 30, 2002, the aggregate notional balance of these swaps was $307 million (Global's share was $154 million), the weighted average fixed interest rate paid was 6.9%, and Global's share of the loss position of these swaps was $15 million and is recorded as a reduction to Long-Term Investments. These swaps were designated as hedges for accounting purposes and, as a result, changes in the fair value of the hedge were recorded in OCI. The fair value of interest rate swaps, designated and effective as cash flow ~~hedges,~~hedges. The fair value changes of these derivatives are initially recorded in OCI. Reclassification of unrealized gains or losses on these cash flow hedges ~~of variable-rate debt instruments~~ from OCI into earnings occurs as interest payments are accrued on the debt instrument and generally offsets the change in the interest accrued on the underlying variable 25 ~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- Continued~~ rate debt. ~~We estimate reclassifying $18 million~~As of ~~losses from~~March 31, 2003, the fair value of these cash flow hedges was $(236) million, including ~~our pro-rata share~~$(65) million of loss that is deferred and recovered from ~~our equity method investees, from~~PSE&G's customers. $(19) million of unrealized losses (net of gains) on interest rate derivatives accumulated in OCI is expected to ~~our Consolidated Statements of Operations over~~be reclassified as earnings during the next 12 months.

Foreign Currencies

Energy Holdings

Global is exposed to foreign currency risk and other foreign operations risk that arise from investments in foreign subsidiaries and affiliates. A key component of this risk is that some of its foreign subsidiaries and affiliates utilize currencies other than the consolidated reporting currency, the US Dollar. Additionally, certain of Global's foreign subsidiaries and affiliates have entered into monetary obligations and maintain receipts/receivables in US Dollars or currencies other than their own functional currencies. Global, a US Dollar functional currency entity, is primarily exposed to changes in the US Dollar against the Brazilian Real, the Euro, the Polish Zloty and the Chilean Peso. With respect to the foreign currency risk associated with the Brazilian Real and the Chilean Peso, there has already been significant devaluation since the initial acquisition of these investments, which has resulted in reduced US Dollar earnings and cash flows relative to initial projections. Whenever possible, these

subsidiaries and affiliates have attempted to limit potential foreign exchange exposure by entering into revenue contracts that adjust for changes in foreign exchange rates. Global also uses foreign currency forward, swap and option agreements, wherever possible, to manage risk related to certain foreign currency fluctuations.

As of September 30, 2002, there was a $67 million balance remaining in the Accumulated Other Comprehensive Loss account, as indicated in the table above. For the quarter and nine months ended September 30, 2002, losses of $3 million and $9 million, respectively, were reclassified from OCI to our Consolidated Statements of Operations. The ineffective portion of these interest rate swaps is recorded in our Consolidated Statements of Operations. During the quarter and nine months ended September 30, 2002, we recorded losses of less than $1 million, respectively, after taxes and minority interests, due to the ineffectiveness of such interest rate swaps. Equity Securities During the nine month period ended September 30, 2002, Resources recognized a loss for investment where there is not a liquid market of approximately $26 million pre-tax, which is included in Operating Revenues. As of September 30, 2002, Resources had investments in leveraged buyout funds of approximately $91 million, of which $21 million was comprised of public securities with available market prices and $70 million was comprised of non-publicly traded securities. Comparably, as of DecemberMarch 31, 2001, Resources had investments in leveraged buyout funds of approximately $130 million, of which $35 million was comprised of public securities with available market prices and $95 million was comprised of non-publicly traded securities. Foreign Currencies As of September 30, 2002,2003, net foreign currency devaluations have reduced the ~~reported~~total amount of ~~our~~Energy Holdings' total ~~Stockholder's~~Member's Equity by ~~$324~~$333 million, of which ~~$212~~$192 million and ~~$105~~$138 million were caused by the devaluation of the Brazilian Real and the Chilean Peso, respectively. ~~For~~

Cash Flow Hedges

Affiliates of Energy Holdings purchase forward-exchange contracts as hedges of anticipated payments to contractors for projects under construction. These contracts are designed to hedge against the ~~net~~risk that the future cash payments will be adversely affected by changes in foreign currency ~~devaluations for the quarter and nine months ended September 30, 2002 and 2001, see Note 10. Comprehensive Income. In May 2002,~~rates. As of March 31, 2003, Energy Holdings ~~purchased foreign currency call options in order to hedge~~recorded its ~~average 2002 earnings denominated in Brazilian Reais and in Peruvian Nuevo Sols for~~pro-rata share of the ~~remainder of 2002. As of September 30, 2002, there were three call options outstanding~~fair value on the ~~Brazilian Real, one expiring~~forward exchange contracts as an increase of $2 million in ~~each month through December 2002. The aggregate notional and fair values~~OCI. There was no ineffectiveness associated with these hedges.

Additionally, an affiliate of these contracts were approximately $4 million and $1 million, respectively, as of September 30, 2002. In addition, there were three call options outstanding on the Peruvian Nuevo Sol, one expiring in each month through December 2002. The aggregate notional value of these contracts was approximately $7 million as of September 30, 2002. The fair value of those options as of September 30, 2002 was immaterial. These options are not considered hedges for accounting purposes under SFAS 133 and,Energy Holdings entered into a PPA that contains an embedded derivative. This embedded derivative is designated as a result, changes in their fair value are recorded directly to earnings. Global recorded a gain of $1 million related to Brazilian and Peruvian option contracts that expired during the third quarter of 2002. The fair valuecash flow hedge of foreign currency ~~derivatives, designated and~~debt exposure. To the extent that the derivative is effective ~~as cash flow hedges, are initially~~in offsetting foreign currency exposure, the amount is recorded in OCI. ~~Reclassification of unrealized gains or losses on cash flow hedges~~Amounts will be reclassified from OCI ~~into~~to earnings ~~generally occurs when~~over the ~~hedged transaction~~life of the debt. To the extent that the derivative is provided to hedge an equity return in US Dollars, the offsetting amount is recorded in earnings and generally offsets the change in the value of the hedged item. We estimate reclassifying $1 million of foreign exchange gains from foreign currency cash flow hedges, including our pro-rata share from our equity method investees, from OCI to our Consolidated Statements of Operations over the next 12 months. For the quarter and nine months ended September 30, 2002, losses transferred from OCI to our Consolidated Statements of Operations were less than $1 million. 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- Continued Fair Value of Financial Instruments The estimated fair values were determined using the market quotations or values of instruments with similar terms, credit ratings, remaining maturities and redemptions at September 30, 2002 and December 31, 2001, respectively.
September 30, 2002 December 31, 2001 ------------------- ---------------------- Carrying Fair Carrying Fair Amount Value Amount Value -------- ----- -------- ----- (Millions) Long-Term Debt: PSEG ....................................................... $ -- $ -- $ 275 $ 275 Energy Holdings ............................................ 2,756 2,415 2,773 2,835 PSE&G ...................................................... 2,926 3,242 3,172 3,290 Transition Funding ......................................... 2,387 2,579 2,472 2,575 Power ...................................................... 3,315 3,387 2,685 2,836 Preferred Securities Subject to Mandatory Redemption: Participating Equity Preference Securities ................. 460 441 -- -- Monthly Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures ......................... 60 61 60 60 Quarterly Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures ......................... 95 97 95 96 Quarterly Guaranteed Preferred Beneficial Interest in PSEG's Subordinated Debentures .......................... 525 515 525 520
earnings. As of ~~October 30, 2002,~~March 31, 2003, the fair value of the ~~long-term debt for Power~~derivative was $19 million. The ineffectiveness associated with this hedge was immaterial to earnings.

For the quarter March 31, 2003, the maximum term of these cash flow hedges is related to the embedded derivative, which will expire in 2022.

Hedges of Net Investments in Foreign Operations

Energy Holdings has numerous investments in foreign subsidiaries. The net assets of these subsidiaries are exposed to volatility in currency exchange rates and Energy Holdings ~~had declined~~uses both derivative and nonderivative financial instruments to hedge a part of this exposure.

An affiliate of Energy Holdings entered into a foreign currency option contract to hedge its exposure to changes in ~~value~~the US Dollar to ~~an estimated~~the Korean Won exchange rate. As of March 31, 2003, Energy Holdings pro-rata share of the fair value of ~~$3.1 billion~~the foreign currency option was immaterial.

Equity Securities

Energy Holdings

During the first quarter of 2003 Resources recognized a $10 million other than temporary impairments of non-publicly traded equity securities within certain leveraged buyout funds and $2.1 billion, respectively. The capital markets have experienced a period of unusual volitility, especially for the energy sector. While we cannot predict when the markets will stabilize, we believe the current volatility yielding discounted trading values for our debt will subside. Participating Equity Units In September 2002, we issued 9.2 million Participating Units with a stated amount of $50 per unit. These securities are reflected as subsidiaries' preferred securities on our Consolidated Balance Sheets. Each unit consists of a 6.25% trust preferred security due 2007 having a liquidation value of $50, and a stock purchase contract obligating the purchasers to purchase shares of our common stockother investments, which is included in an amount equal to $50 on November 16, 2005. In exchange for the obligations under the purchase contract, the purchasers will receive quarterly contract adjustment payments at the annual rate of 4.00% until such date. The number of new shares issued will depend upon the average closing price per share of our common stock for the 20 consecutive trading days ending the third trading day immediately preceding November 16, 2005. Based on the formula describedOperating Revenues in the ~~purchase contract, at that time we will issue between 11,429,139~~Consolidated Statements of Operations. As of March 31, 2003, Resources had investments in leveraged buyout funds of approximately $82 million, of which $24 million was comprised of public securities with available market prices and ~~13,714,967 shares~~$58 million was comprised of ~~our common stock. Prior to such conversion, the~~non-publicly traded securities. As of December 31, 2002, Resources had investments in leveraged buyout funds of approximately $93 million, of which $24 million was comprised of public securities ~~will be accounted for under the Treasury Stock method for purposes~~with available market prices and $69 million was comprised of ~~calculating fully diluted earnings per share. These securities will be dilutive to earnings per share to the extent that the market price~~non-publicly traded securities.

Note 7. Comprehensive Income

Comprehensive Income, Net of our common stock exceeds $40.248. The net proceeds from the sale of the Participating Units were $446.2 million. 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- Continued Tax:

	PSE&G			Power		Energy Holdings			Other (A)			Consolidated Total
	(Millions)
For the Quarter Ended March 31, 2003:
Net Income	$	101		$	547	$	44		$	(16	)	$	676
Other Comprehensive Income		(1	)		36		(19	)		3			19

Comprehensive Income (Loss)	$	100		$	583	$	25		$	(13	)	$	695

For the Quarter Ended March 31, 2002:
Net Income	$	68		$	120	$	(115	)	$	(13	)	$	60
Other Comprehensive Income		(1	)		7		(72	)		1			(65	)

Comprehensive Income (Loss)	$	67		$	127		(187	)	$	(12	)	$	(5	)

(A)

Other primarily consists of activity at PSEG (parent company), Services and intercompany eliminations.

Note 8. Other Income and Deductions

Other Income:

	PSE&G		Power		Energy Holdings		Other (A)		Consolidated Total
	(Millions)
For the Quarter Ended March 31, 2003:
Interest Income	$	2	$	4	$	—	$	—	$	6
Gain on Disposition of Property		8		—		—		—		8
Foreign Currency Transaction Gain		—		—		3		—		3
NDT Fund Realized Gains		—		41		—		—		41
Other		—		2		—		—		2

Total Other Income	$	10	$	47	$	3	$	—	$	60

For the Quarter Ended March 31, 2002:
Change in Derivative Fair Value	$	—	$	—	$	10	$	—	$	10
Minority Interest		—		—		—		1		1

Total Other Income	$	—	$	—	$	10	$	1	$	11

Other Deductions:

	PSE&G		Power		Energy Holdings		Other (A)		Consolidated Total
	(Millions)
For the Quarter Ended March 31, 2003:
Donations	$	1	$	—	$	—	$	—	$	1
NDT Fund Realized Losses		—		33		—		—		33
Minority Interest		—		—		—		5		5
Change in Derivative Fair Value		—		—		6		—		6

Total Other Deductions	$	1	$	33	$	6	$	5	$	45

For the Quarter Ended March 31, 2002:
Foreign Currency Losses	$	—	$	—	$	52	$	—	$	52

Total Other Deductions	$	—	$	—	$	52	$	—	$	52

(A)

Other consists of reclassifications for minority interests in PSEG's consolidated results of operations.

Note 9. Income Taxes A tax expense has been recorded for the results of continuing operations.

An analysis of ~~that~~the tax provision expense is as follows:

	PSE&G			Power			Energy Holdings			Other(A)			Consolidated Total
	(Millions)
For the Quarter Ended March 31, 2003:
Income from Continuing Operations before Cumulative Effect of a Change in Accounting Principle	$	157		$	300		$	81		$	(33	)	$	505
Tax computed at the statutory rate		55			105			28			(12	)		176
Increase (decrease) attributable to flow through of certain tax adjustments:
State Income Taxes after Federal Benefit		11			18			—			(2	)		27
Rate Differential of Foreign Operations		—			—			(12	)		—			(12	)
Plant Related Items		(12	)		—			—			—			(12	)
Other		2			—			1			2			5

Total Income Tax Expense	$	56		$	123		$	17		$	(12	)	$	184

Effective income tax rate		35.7	%		41.0	%		21.0	%		36.4	%		36.4	%

For the Quarter Ended March 31, 2002:
Income from Continuing Operations before Cumulative Effect of a Change in Accounting Principle	$	110		$	200		$	5		$	(20	)	$	295
Tax computed at the statutory rate		39			70			2			(7	)		104
Increase (decrease) attributable to flow through of certain tax adjustments:
State Income Taxes after Federal Benefit		9			10			1			(1	)		19
Rate Differential of Foreign Operations		—			—			(3	)		—			(3	)
Plant Related Items		(2	)		—			—			—			(2	)
Other		(4	)		—			—			—			(4	)

Total Income Tax Expense	$	42		$	80		$	—		$	(8	)	$	114

Effective income tax rate		38.2	%		40.0	%		(10.2	)%		40.0	%		38.6	%

Three Months Ended Nine Months Ended September 30, September 30, ---------------------- -------------------- 2002 2001 2002 2001 ------ ------ ------- ------ (Millions) Pre-Tax Income ................................................. $ 331 $ 224 $ 279 $ 875 Tax Computed at the Federal Statutory Rate at 35% .............. 116 78 98 306 Increases (decreases) from Federal statutory rate attributable to: State Income Taxes after Federal Benefit ................... 19 15 48 55 Rate Differential of Foreign Operations .................... (7) (5) (14) (26) Plant Related Items ........................................ (3) (31) (11) (41) Other ...................................................... (1) (8) (3) (3) ------------------------------------------------ Total Income Tax Expense ....................................... $ 124 $ 49 $ 118 $ 291 ------------------------------------------------ Effective Income Tax Rate ................................ 37.5% 21.9% 42.3% 33.3%
(A)		PSEG's other activities include amounts applicable to PSEG (parent corporation) that primarily relate to financing and certain administrative and general costs.

The increase in the effective tax rate, for the quarter and nine months ended September 30, 2002, as compared to the same periods for 2001, is primarily due to 2001 adjustments as a result the 1994-1996 IRS audit upon filing our actual tax return for the year 2000.

Note 9.10. Financial Information by Business Segment Power's business has evolved during 2002. With the transfer of the BGSS (i.e., natural gas supply requirements contact) contract to Power and the commencement of the new BGS Contracts with wholesale electric suppliers, Power's business has become a fully integrated wholesale energy supply business. As a result of that evolution of Power's business, trading activities changed from a stand-alone operation to a function that has become fully integrated with the wholesale energy supply business, and primarily serves to optimize the value of that business. Therefore, upon review and in accordance with SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information" (SFAS 131), we have determined that Power's generation and trading components no longer meet the definition of separate operating segments for financial reporting purposes and, effective with this filing, we have reported Power's financial position and results of operations as one segment. All prior periods have been reclassified to conform to the current presentation. 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- Continued

Information related to the segments of ~~our business~~PSEG's and its subsidiaries is detailed below:

					Energy Holdings
	PSE&G		Power		Resources		Global			Other(A)			Other(B)			Consolidated Total
	(Millions)
For the Quarter Ended March 31, 2003:
Total Operating Revenues	$	2,148	$	1,887	$	51	$	157		$	1		$	(880	)	$	3,364
Income from Continuing Operations		100		177		12		42			(1	)		(9	)		321
Segment Earnings (Loss)		100		547		12		42			(16	)		(9	)		676
Gross Additions to Long-Lived Assets		97		153		—		105			1			6			362
As of March 31, 2003:
Total Assets	$	12,684	$	6,995	$	3,143	$	3,850		$	(72	)	$	(437	)	$	26,163
Investments in Equity Method Subsidiaries	$	—	$	—	$	105	$	1,327		$	20		$	—		$	1,452
For the Quarter Ended March 31, 2002:
Total Operating Revenues	$	1,659	$	576	$	58	$	78		$	—		$	(488	)	$	1,883
Income from Continuing Operations		67		120		15		(13	)		(2	)		(6	)		181
Segment Earnings (Loss)		67		120		15		(98	)		(38	)		(6	)		60
Gross Additions to Long-Lived Assets		76		278		5		229			(2	)		(39	)		547
As of December 31, 2002:
Total Assets	$	12,429	$	6,941	$	3,086	$	3,802		$	(50	)	$	(489	)	$	25,719
Investments in Equity Method Subsidiaries	$	—	$	—	$	118	$	1,306		$	20		$	—		$	1,444


(A)		Energy Holdings' other activities include amounts applicable to Energy Holdings (parent company), the HVAC/operating companies of Energy Technologies, which were reclassified into discontinued operations in 2002, and EGDC. The net losses primarily relate to financing and certain administrative and general costs at the Energy Holdings parent corporation. For a discussion of the charges relating to Discontinued Operations at Energy Technologies, see Note 4. Discontinued Operations.
(B)		PSEG's other activities include amounts applicable to PSEG (parent corporation), and intercompany eliminations, primarily relating to intercompany transactions between Power and PSE&G. No gains or losses are recorded on any intercompany transactions, rather, all intercompany transactions are at cost or, in the case of the BGS and Basic Gas Supply Service (BGSS) contracts between Power and PSE&G, ~~Global Resources Technologies Other Consolidated (A) (B) (C)~~at rates prescribed by the BPU. For a further discussion of the Three Months Ended -------------------------------------------------------------------------------------- September 30, 2002: (Millions) Operating Revenues $ 1,092 $ 1,405 $ 145 $ 57 $ 10 $ (382) $ 2,327 Income Before Discontinued Operations 121 55 20 17 2 (8) 207 Loss From Discontinued Operations -- -- -- -- (3) -- (3) Segment (Loss) Earnings $ 121 $ 55 $ 20 $ 17 $ (1) $ (8) $ 204 Forintercompany transactions between Power and PSE&G, see Note 12. Related-Party Transactions. The net losses primarily relate to financing and certain administrative and general costs at the Three Months Ended September 30, 2001: Operating Revenues $ 685 $ 1,395 $ 101 $ 50 $ 8 $ (623) $ 1,616 Income Before Discontinued Operations 87 65 16 9 2 (4) 175 Income (Loss) From Discontinued Operations -- -- 2 -- (5) -- (3) Segment Earnings (Loss) $ 87 $ 65 $ 18 $ 9 $ (3) $ (4) $ 172 For the Nine Months Ended September 30, 2002: Operating Revenues $ 2,341 $ 4,294 $ 387 $ 135 $ 22 $ (1,489) $ 5,690 Income Before Discontinued Operations and Cumulative Effect of a Change in Accounting Principle 325 128 (302) 26 2 (18) 161 Loss From Discontinued Operations -- -- (9) -- (32) -- (41) Cumulative Effect of a Change in Accounting Principle -- -- (88) -- (32) -- (120) Segment (Loss) Earnings $ 325 $ 128 $ (399) $ 26 $ (62) $ (18) $ -- For the Nine Months Ended September 30, 2001: Operating Revenues $ 1,919 $ 4,658 $ 226 $ 134 $ 20 $ (1,640) $ 5,317 Income Before Discontinued Operations and Cumulative Effect of a Change in Accounting Principle 292 204 66 27 4 (9) 584 Income (Loss) From Discontinued Operations -- -- 2 -- (19) -- (17) Cumulative Effect of a Change in Accounting Principle -- -- 9 -- -- -- 9 Segment Earnings (Loss) $ 292 $ 204 $ 77 $ 27 $ (15) $ (9) $ 576 As of September 30, 2002: Total Assets $ 6,977 $ 12,405 $ 3,893 $ 3,174 $ 206 $ (701) $ 25,954 As of December 31, 2001: Total Assets $ 5,503 $ 12,963 $ 4,074 $ 3,026 $ 290 $ (426) $ 25,430 PSEG parent corporation.

~~(A) For a discussion~~

Note 11. Stock-Based Compensation

PSEG applies Accounting Principles Board (APB) Opinion No. 25, ''Accounting for Stock Issued to Employees,'' and related interpretations in accounting for stock-based compensation plans. Accordingly, no compensation cost has been recognized for fixed stock option grants since the exercise price of the ~~charge relating to Argentina, see Note 3. Asset Impairments. (B) For a discussion~~stock options equaled the market price of the ~~charges relating~~underlying stock on the date of grant. Had compensation costs for stock option grants been determined based on the fair value at the grant dates for awards under these plans in accordance with SFAS No. 123 ''Accounting for Stock-Based Compensation,'' there would have been a charge to ~~Discontinued Operations at Energy Technologies, see Note 3. Asset Impairments and Note 4. Discontinued Operations. 29~~ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- Continued (C) Our other activities include amounts applicable to PSEG (parent corporation), Energy Holdings (parent corporation), Enterprise Group Development Company (EGDC), and intercompany eliminations, including transactions between Power and PSE&G relating to BGS, Market Transition Charge (MTC) and BGSS which amounted tonet income of approximately ~~$380~~$2 million and ~~$625~~$3 million for the quarters ended ~~September 30,~~March 31, 2003 and 2002, respectively, with a $(0.01) and ~~2001, respectively and approximately $1.5 billion and $1.6 billion~~$(0.01) impact on earnings per share for the ~~nine months~~quarters ended ~~September 30,~~March 31, 2003 and 2002, respectively.

The following table illustrates the effect on net income and ~~2001, respectively. The net losses primarily relate~~earnings per share if PSEG had applied the fair value recognition provisions of SFAS No. 123 to ~~financing~~stock-based employee compensation:

	Quarters Ended March 31,
	2003			2002
	(Millions)
Net Income, as reported	$	676		$	60
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(2	)		(3	)

Pro forma Net Income	$	674		$	57

Earnings per share:
Basic and Diluted—as reported	$	3.00		$	0.29
Basic and Diluted—pro forma	$	2.99		$	0.28

Note 12. Related-Party Transactions

BGSS and certain administrativeBGS Contracts

PSE&G and ~~general costs at~~Power

Effective May 1, 2002, PSE&G transferred its gas supply contracts and gas inventory requirements to Power. On the ~~parent corporations. Our geographic information is disclosed below. The foreign assets and operations noted below are solely~~same date, PSE&G entered into a requirements contract with Power under which Power provides the gas supply services needed to meet PSE&G's BGSS requirements.

From January 1, 2003 through
~~----------------- Quarter Ended September 30, ------------------------ 2002 -------~~ ~~United States ................ $ 2,171 Foreign Countries ............ 156 ------- Total ................... $ 2,327 =======~~
Identifiable assets in foreign countries include: Chile......................................... Netherlands................................... Argentina..................................... Peru ......................................... Tunisia ...................................... India (3)..................................... Poland........................................ Brazil........................................ Other......................................... Total..................................... (1) Revenues are attributedthe March 31, 2003, Power billed PSE&G approximately $832 million for BGSS. As of March 31, 2003, PSE&G's payable to Power related to Energy Holdings. Revenues (1) ---------------------------------------- Nine Months Ended Identifiable Assets (2) September 30, ------------------------------ ----------------------- September 30, December 31, 2001 2002 2001 2002 2001 ------- ------- ------- ------- ------- (Millions) $ 1,517 $ 5,296 $ 5,119 $ 21,473 $ 20,666 99 394 198 4,481 4,764 ------- ------- ------- -------- -------- $ 1,616 $ 5,690 $ 5,317 $ 25,954 $ 25,430 ======= ======= ======= ======== ======== $ 878 $ 880 961 911 -- 737 566 520 337 245 306 288 329 166 204 282 900 735 ------- ------- $ 4,481 $ 4,764 ======= ======= BGSS contract was approximately $256 million.

Power charged PSE&G for the energy and capacity provided to ~~countries based on~~meet its BGS requirements through July 31, 2002. Power also charges PSE&G for the ~~locations of~~Market Transition Charge (MTC) though July 31, 2003. For the ~~investments. (2) Assets are comprised of investment in corporate joint ventures~~quarters ended March 31, 2003 and partnerships that are accounted for under the equity method and companies in which we have a controlling interest for which the assets are consolidated on our financial statements. Amount is net of tax and foreign currency translation adjustment of $3602002, Power charged PSE&G approximately $48 million and ~~$283~~$460 million, asrespectively, for the MTC and BGS. As of ~~September 30, 2002~~March 31, 2003 and December 31, ~~2001, respectively. (3) Approximately $234~~2002, PSE&G's payable to Power relating to these costs was approximately $19 million and ~~$253~~$2 million, ~~relates~~respectively.

For the quarter ended March 31, 2002, PSE&G sold energy and capacity to ~~Tanir Bavi,~~Power at the market price of approximately $28 million, which ~~was discontinued as~~PSE&G purchased under various Non-Utility Generation (NUG) contracts at costs above market prices.

Affiliate Loans

These transactions were properly recognized on each company's stand-alone financial statements and were eliminated when preparing PSEG's consolidated financial statements.

PSEG and Power

As of ~~September 30, 2002 and was sold in October 2002. 30~~ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- Continued The table below reflects our investment exposure in Latin American countries, through Global: Investment Exposure Equity Exposure ---------------------------- ----------------------------- September 30, DecemberMarch 31, ~~September 30,~~2003, Power had a receivable from PSEG of approximately $204 million for short-term funding needs. As of December 31, 2002, ~~2001~~Power had a payable to PSEG of approximately $239 million for short-term funding needs. There was no interest expense related to these borrowings for the quarter ended March 31, 2003, as compared to $1 million for the quarter ended March 31, 2002.

PSEG and Energy Holdings

As of March 31, 2003, Energy Holdings had no outstanding affiliate loan balances with PSEG. As of December 31, 2002, 2001 ------------- ------------ ------------- ------------ (Millions) Argentina....... $ -- $ 632 $ -- $ 632 Brazil.......... 433 467 221 298 Chile........... 562 542 466 465 Peru............ 443 387 435 388 Venezuela....... 52 53 52 53Energy Holdings had a receivable due from PSEG of $62 million for short-term funding needs. Interest Income related to this borrowing was immaterial.

Energy Holdings

Affiliate Payables due to PSEG from Energy Technologies

As of December 31, 2002, Energy Technologies had recorded an affiliate payable due to PSEG of $12 million. The ~~investment exposure consists~~amount was recorded as a component of ~~our invested equity plus equity commitment guarantees. Equity exposure is equal to our investment exposure net~~Current Liabilities of ~~foreign currency translation adjustments, reflected in other comprehensive income. Note 10. Comprehensive Income (Loss) Comprehensive Income, Net~~Discontinued Operations on the Consolidated Balanced Sheets. Energy Technologies repaid this balance during the first quarter of Tax: Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 2002 2001 2002 2001 ------ ------ ------- ------ (Millions) Net income ......................... $ 204 $ 172 $ -- $ 576 Foreign currency translation ....... (49) (37) (135) (75) Reclassification adjustment for foreign currency ............. -- -- 69 -- Cumulative effect of a change in accounting principle .......... -- -- -- (15) Net unrealized losses on cash flow hedges ................. (27) (8) (63) (26) Reclassification adjustments into earnings .................... 3 -- 9 -- Other .............................. (1) -- (4) -- ----- ----- ----- ----- Comprehensive income (Loss) ........ $ 130 $ 127 $(124) $ 460 ===== ===== ===== ===== For further discussion of Other Comprehensive Income (Loss), See Note 7. Financial Instruments, Energy Trading and Risk Management. 31 ~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- Continued Note 11. Other Income~~
Three Months Ended Nine Months Ended September 30, September 30, ------------------- ------------------- 2002 2001 2002 2001 ------ ------- ------ ------ (Millions) Other Income Interest Income................................. $ 4 $ 9 $ 13 $ 37 Gain on Disposition of Property................. -- 1 1 4 Change in Derivative Fair Value................. 13 -- 15 -- Income from Minority Interests.................. -- -- 2 -- Gain (Loss) on Early Retirement of Debt......... 4 -- 4 -- Other........................................... -- 2 3 1 ---- --- ---- ---- Total Other Income.................................. $ 21 $ 12 $ 38 $ 42 ==== ==== ==== ====
~~Note 12. Related Party Transactions~~ 2003.

Loans to TIE

Global and its partner, Panda Energy International, Inc. (Panda), own and operate two electric generation facilities in Texas through Texas Independent Energy, L.P. (TIE), a 50/50 joint ~~venture, owns and operates two electric generation facilities~~venture. In January 2003, Panda indirectly transferred 50% of its interest in ~~Texas.~~TIE to Teco Power Services (Teco). As of ~~September 30, 2002 and December~~March 31, ~~2001,~~2003, Global's ~~investments~~investment in ~~the~~ TIE ~~partnership include $74~~was approximately $246 million, ~~and $165~~including $73 million ~~respectively,~~ of loans that earn interest at an annual rate of 12% and that are scheduled to be repaid in quarterly installments over the next 10 years. The quarterly loan installments due to Global are expected to be repaid over the next 10 years. Cash payments are currently being received from the projects for the full amount of interest on such loans to TIE. However, only 50% of the interest income is recognized in earnings, representative of the portionout of the project cash flows or additional contributions from project partners in the event of insufficient project cash flows. For the quarter ended March 31, 2003, Global recorded approximately $2 million of interest income related to this loan.

In March 2003, Global funded $14 million of convertible preferred equity to the two TIE projects as part of its negotiations with project lenders to amend the projects' credit agreements. The convertible preferred equity has a 15% coupon and is convertible at Global's option into an approximate 13% equity interest in TIE if not ~~owned~~repaid in full by ~~Global.~~ June 2004.

Loans to GWF Energy ~~GWF Energy, a joint venture between~~

As of March 31, 2003, Global and Harbinger GWF LLC is constructing three new peaking plants. Global's permanent equity investment in GWF Energy's plants, including contingencies, is not expected to exceed $150 million after completion of project financing, which is currently expected to occur in the first quarter of 2003. Pending completion of project financing, Globalhas provided GWF Energy ~~approximately $98~~$4 million of secured loans to finance the purchase of turbines. The turbine loans bear interest at rates ranging from 12% to 15% per annum and are payable in installments beginning May 31, 2002, with final maturity no later than December 31, 2002. As of September 30, 2002, the secured loans to finance the purchase of turbines was $87 million. Global has also provided GWF Energy up to $74 million of working capital loans to fund construction costs pending completion of project financing. ~~Such loans earn~~The loan earns interest at 20% per annum and ~~are~~is not convertible into ~~equity at Global's option. During the third quarter of 2002, Global converted $55 million of such working capital loans to equity, which increased~~equity. Global's ownership of GWF Energy to 74%, and reduced the working capital loan balance to $19 million as of September 30, 2002. Since the partnership agreement stipulates that the condition for control is ownership of 75% of the voting stock, our investmentinterest in GWF Energy ~~is recorded in accordance with the equity method.~~was 76% as of March 31, 2003. Harbinger GWF LLC has the right to buy back from Global up to one-half of the reduction of its equity ownership in GWF Energy from the 50% ownership level. Such right terminates at the earlier of project financing or ~~June~~September 30, 2003. ~~The loan structures were put in place to provide Global with a preferential cash and earnings distribution from the project similar to our subordinated loans for our Texas facility.~~ For a discussion of the ~~commercial dates of operation and issues of the construction process matters~~dispute with ~~respect to these three plants,~~Harbinger, see Note 6.5. Commitments and Contingent Liabilities. 32

Changes in Capitalization

PSE&G

On January 21, 2003, PSEG contributed $170 million of equity to PSE&G.

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- Concluded~~

PSEG, PSE&G, Power and Energy Holdings

Services provides and bills administrative services to PSEG, PSE&G, Power and Energy Holdings as follows:

	Services Billings for the Quarters Ended March 31,				Payable to Services as of
	2003		2002		March 31, 2003		December 31, 2002
	(Millions)
PSEG	$	—	$	4	$	—	$	1
PSE&G		46		52		16		16
Power		27		35		9		2
Energy Holdings		4		5		1		3

These transactions were properly recognized on each company's stand-alone financial statements and were eliminated when preparing PSEG's consolidated financial statements. PSEG, PSE&G, Power and Energy Holdings believe that the costs of services provided by Services approximates market value for such services.

Note 13. Subsequent Events PSEG Energy Holdings L.L.C. PSEG Energy Holdings L.L.C., a New Jersey limited liability company,Guarantees of Debt

Power

In April 2001, Power issued $500 million of 6.875% Senior Notes due 2006, $800 million of 7.75% Senior Notes due 2011 and $500 million of 8.625% Senior Notes due 2031. Additionally, in June 2002, Power issued $600 million of 6.95% Senior Notes due 2012. Each series of the Senior Notes is fully and unconditionally and jointly and severally guaranteed by Fossil, Nuclear and ER&T. The following table presents condensed financial information for the ~~successor~~guarantor subsidiaries, as well as Power's non-guarantor subsidiaries, for the quarters then ended.



		Power			Guarantor Subsidiaries			Other Subsidiaries			Consolidating Adjustments			Total

								(millions)
For the Quarter Ended March 31, 2003:
Revenues	$	—		$	2,058		$	127		$	(298	)	$	1,887
Operating Expenses		—			1,744			126			(297	)		1,573

Operating Income (Loss)		—			314			1			(1	)		314
Other Income and Deductions		571			14			—			(571	)		14
Interest Expense		(41	)		(18	)		31			—			(28	)
Income Taxes		17			(129	)		(12	)		1			(123	)
Cumulative Change in Accounting Principle		—			370			—			—			370

Net Income (Loss)	$	547		$	551		$	20		$	(571	)	$	547

For the Quarter Ended March 31, 2003:
Net Cash Provided By (Used In) Operating Activities	$	386		$	657		$	(262	)	$	(166	)	$	615
Net Cash Provided By (Used In) Investing Activities	$	(205	)	$	(586	)	$	291		$	135		$	(365	)
Net Cash Provided By (Used In) Financing Activities	$	(181	)	$	(50	)	$	(27	)	$	19		$	(239	)
For the Quarter Ended March 31, 2002:
Revenues	$	—		$	574		$	2		$	—		$	576
Operating Expenses		20			324			4			—			348

Operating Income (Loss)		(20	)		250			(2	)		—			228
Other Income and Deductions		156			(1	)		—			(155	)		—
Interest Expense		(41	)		(16	)		29			—			(28	)
Income Taxes		25			(96	)		(9	)		—			(80	)

Net Income (Loss)	$	120		$	137		$	18		$	(155	)	$	120

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(table continued from previous page)

Power
Guarantor
Subsidiaries
Other
Subsidiaries
Consolidating
Adjustments
Total






(Millions)

For the Quarter Ended March 31, 2002:
      Net Cash Provided By (Used In) Operating Activities      $ 148      $ 90      $ 81      $ (159 )      $ 160
      Net Cash Provided By (Used In) Investing Activities      $ (205 )      $ (140 )      $ (138 )      $ 244      $ (239 )
      Net Cash Provided By (Used In) Financing Activities      $ 58      $ 51      $ 57      $ (85 )      $ 81
As of March 31, 2003:
      Current Assets      $ 1,250      $ 2,033      $ 101      $ (1,863 )      $ 1,521
      Property, Plant and Equipment, Net      41      2,516      1,645      —      4,202
      Noncurrent Assets      4,056      1,436      1,410      (5,630 )      1,272






      Total Assets      $ 5,347      $ 5,985      $ 3,156      $ (7,493 )      $ 6,995






      Current Liabilities      $ 141      $ 2,363      $ 603      $ (1,980 )      $ 1,127
      Noncurrent Liabilities      128      375      24      —      527
      Note Payable—Affiliated Company      155      1,150      —      (1,305 )      —
      Long-Term Debt      2,516      —      800      —      3,316
      Member's Equity      2,407      2,097      1,729      (4,208 )      2,025






      Total Liabilities and Member's Equity      $ 5,347      $ 5,985      $ 3,156      $ (7,493 )      $ 6,995






As of December 31, 2002:
      Current Assets      $ 1,307      $ 1,609      $ 89      $ (1,725 )      $ 1,280
      Property, Plant and Equipment, Net      42      2,430      1,573      —      4,045
      Noncurrent Assets      3,196      1,783      1,355      (4,718 )      1,616






      Total Assets      $ 4,545      $ 5,822      $ 3,017      $ (6,443 )      $ 6,941






      Current Liabilities      $ 367      $ 1,897      $ 504      $ (1,713 )      $ 1,055
      Noncurrent Liabilities      125      990      28      (15 )      1,128
      Note Payable—Affiliated Company      97      1,150      —      (1,247 )      —
      Long-Term Debt      2,516      —      800      —      3,316
      Member's Equity      1,440      1,785      1,685      (3,468 )      1,442






      Total Liabilities and Member's Equity      $ 4,545      $ 5,822      $ 3,017      $ (6,443 )      $ 6,941

There are no restrictions on the ability of Power's subsidiaries to ~~PSEG Energy Holdings Inc. pursuant to a merger which was consummated~~transfer funds in ~~October 2002. The merger was consummated to change~~ the form of dividends, loans or advances to Power for the ~~business from a corporation to a limited liability company. PSEG Energy Holdings L.L.C. succeeded to all the assets~~periods noted above.

Item 2. Management's Discussion and liabilitiesAnalysis of PSEG Energy Holdings Inc. in accordance with the New Jersey Limited Liability Company Act. PSEG Energy Holdings L.L.C. has succeeded to PSEG Energy Holdings' Inc. reporting obligations under the Securities Exchange ActFinancial Condition and
Results of 1934, as amended. In connection with the PSEG Energy Holdings L.L.C. reorganization, PSEG Resources Inc. became a wholly owned subsidiary of PSEG Resources L.L.C., a newly formed New Jersey limited liability company. PSEG Resources L.L.C. is wholly owned by PSEG Energy Holdings L.L.C. This reorganization is expected to have a positive impact on earnings in future periods. Private Placement In October 2002, we closed on a $245 million private placement debt transaction with a five-year average life, with the proceeds being used to reduce short-term debt. 33 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSOperations (MD&A)

Following are the significant changes in or additions to information reported in ~~our~~the 2002 Annual Report on Form 10-K ~~for~~affecting the year ended December 31, 2001. Amended Quarterly Report on Form 10-Q/A for the quarter ended March 31, 2002 and Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 affecting our consolidated financial condition and the results of operations. This discussion refers to ~~our~~the Consolidated Financial Statements (Statements) and the related Notes to Consolidated Financial Statements (Notes) and should be read in conjunction with such Statements and Notes. ~~Corporate Structure Unless the context otherwise indicates, all references to "PSEG," "we," "us" or "our" herein means~~

This combined MD&A is separately filed by Public Service Enterprise Group Incorporated ~~and its consolidated subsidiaries. We are a New Jersey corporation that is an exempt public utility holding company which has four principal direct wholly-owned subsidiaries:~~(PSEG), Public Service Electric and Gas Company (PSE&G), PSEG Power LLC (Power), and PSEG Energy Holdings LLC (Energy Holdings) ~~and PSEG Services Corporation (Services)~~. Information contained herein relating to any individual company is filed by such company on its own behalf. PSE&G, ~~is an operating public utility providing electric~~Power and gas service in certain areas within the State of New Jersey. Following the transfer of its generation-related assets to Power in August 2000 and its gas supply portfolio in May 2002, PSE&G continues to own and operate its transmission and distribution business. Power is an independent, wholesale energy supply company that has three principal direct wholly-owned subsidiaries: PSEG Nuclear LLC (Nuclear), PSEG Fossil LLC (Fossil) and PSEG Energy Resources & Trade LLC (ER&T). Power also has a finance company subsidiary, PSEG Power Capital Investment Co. (Power Capital), which provides certain financing for Power's subsidiaries. Energy Holdings ~~has three principal direct wholly-owned subsidiaries;~~each make representations only as to itself and make no other representations as to any other company.

Overview

PSEG

PSEG's business consists of four reportable segments, which are Power, PSE&G, PSEG Global ~~Inc.~~LLC (Global), and PSEG Resources LLC (Resources) ~~and PSEG Energy Technologies Inc. (Energy Technologies)~~. ~~See Note 4. Discontinued Operations for a discussion of Energy Technologies. Energy Holdings also has a finance subsidiary, PSEG Capital Corporation (PSEG Capital) and~~The following is ~~also the parent of Enterprise Group Development Corporation (EGDC) a commercial real estate property management business, and is conducting a controlled exit from this business. For~~ a discussion of the ~~formation~~major quarter-to-quarter financial statement variances and follows the financial statement presentation as it relates to each of its segments.

PSEG's results of operations are primarily comprised of the results of operations of its operating subsidiaries, PSE&G, Power and Energy Holdings. For a more detailed discussion of the changes referenced for PSEG, ~~Energy Holdings L.L.C. and PSEG Resources L.L.C. as~~see the successors to Energy Holdings and Resources, respectively, see Note 13. Subsequent Events. Services provides management and administrative services to us and our subsidiaries. These include accounting, legal, communications, human resources, information technology, treasury and financial, investor relations, stockholder services, real estate, insurance, risk management, tax, library and information services, security, corporate secretarial and certain planning, budgeting and forecasting services. Services charges us and our subsidiariesapplicable results of operations discussion for ~~work performed and services provided by it. Overview Net income~~each respective subsidiary registrant.

Income from Continuing Operations for the ~~three months~~quarters ended ~~September 30,~~March 31, 2003 and 2002 was ~~$204~~$321 million and $181 million or ~~$0.99~~$1.42 and $0.88 per share, respectively. For the full year of 2003, PSEG expects Income from Continuing Operations to range from $3.70 to $3.90 per share. Net Income for the quarters ended March 31, 2003 and 2002 was $676 million and $60 million or $3.00 and $0.29 per share of common stock, based on 207 million average shares outstanding. Net income was less than $1 million for the nine months ended September 30, 2002. These results include after-tax charges of $3 million or $0.01 per share and $535 million or $2.59 per share for the three and nine month periods ended September 30, 2002, respectively, related to the asset impairment of investments in Argentina and losses from operations of those impaired assets, discontinued operations of Energy Technologies and a generating facility in India and goodwill impairment charges.respectively.

The ~~after-tax charges relating to the items discussed above are summarized in the following table: 34~~
Three Months Ended Nine Months Ended September 30, 2002 September 30, 2002 -------------------- -------------------- (Millions) EPS (Millions) EPS -------------------- -------------------- Global Argentina - EDEERSA and Assets Held for Sale to AES Write-down of Investment .. $ -- $ -- $ 374 $ 1.81 Goodwill impairment ....... -- -- 36 0.18 ------ ------ ------ ------ Total Argentina .................... -- -- 410 1.99 ------ ------ ------ ------ India - Tanir Bavi Discontinued Operations ... -- -- 9 0.04 Goodwill impairment ....... -- -- 18 0.09 ------ ------ ------ ------ Total Tanir Bavi ................... -- -- 27 0.13 ------ ------ ------ ------ Brazil - RGE Goodwill impairment ....... -- -- 34 0.16 ------ ------ ------ ----- Subtotal for Global .................. -- -- 471 2.28 ------ ------ ------ ------ Energy Technologies Discontinued Operations ... 3 0.01 32 0.16 Goodwill impairment ....... -- -- 32 0.15 ------ ------ ------ ------ Subtotal Energy Technologies ......... 3 0.01 64 0.31 ------ ------ ------ ------ Total .............................. $ 3 $ 0.01 $ 535 $ 2.59 ====== ====== ====== ======
For the three and nine month periods ended September 30, 2002, excluding these charges, earnings were $207 million or $1.00 per share and $535 million or $2.59 per share, respectively. Comparable earnings for the three and nine month periods ended September 30, 2001 were $175 million or $0.84 per share and $584 million or $2.80 per share, respectively. Thesignificant quarter-to-quarter increase in earnings, excluding the charges discussed above, for the three month period ended September 30, 2002 as compared to the same period in the prior year is primarily due to higher BGS margins at Power due to its successful participation as an indirect supplier of energy to New Jersey's utilities, including PSE&G, involved in New Jersey's recent basic generation service (BGS) auction. The BGS auction had a meaningful effect on our earnings, particularly since August 1, 2002, when the new BGS contracts went into effect. Also contributing to the increase were lower Operations and Maintenance expenses at PSE&G, increased earnings from Global, primarily due to the acquisitions late in 2001, increased earnings at RGE, a Brazilian electric distribution company, as well as the commencement of operations at the generation facility in Rades, Tunisia (Rades) and higher Net Investment Gains (Losses) in Resources' leveraged buyout funds. 35 The decrease in earnings, excluding the charges discussed above, for the nine-month period ended September 30, 2002 as compared to the same period in 2001 resulted primarily from lower margins at PSE&G and higher Operation and Maintenance expense at Power. These decreases were partially offset by higher BGS margins at Power. Earnings (Losses) --------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 2002 2001 2002 2001 ------ ------ ------ ------ (Millions) Power .............................. $ 121 $ 87 $ 325 $ 292 PSE&G .............................. 55 65 128 204 Resources .......................... 17 9 26 27 Global (A) ......................... 20 16 (302) 66 Energy Technologies ................ 2 2 2 4 Other (B) .......................... (8) (4) (18) (9) ----- ----- ----- ----- Income from Continuing Operations ....................... 207 175 161 584 Loss from Discontinued Operations, including Loss on Disposal ................. (3) (3) (41) (17) Cumulative Effect of a Change in Accounting Principle (C) ....... -- -- (120) 9 ----- ----- ----- ----- Total PSEG ......................... 204 172 -- 576 ----- ----- ----- ----- Total PSEG Excluding Charges (D) ... $ 207 $ 175 $ 535 $ 584 ===== ===== ===== ===== Contribution to Earnings Per Share (Basic and Diluted) --------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 2002 2001 2002 2001 ------ ------ ------ ------ Power .............................. $ 0.59 $ 0.42 $ 1.57 $ 1.40 PSE&G .............................. 0.26 0.31 0.62 0.98 Resources .......................... 0.08 0.04 0.12 0.13 Global (A) ......................... 0.09 0.08 (1.46) 0.32 Energy Technologies ................ 0.01 0.01 0.01 0.02 Other (B) .......................... (0.03) (0.02) (0.08) (0.05) ------ ------ ------ ------ Income from Continuing Operations ....................... 1.00 0.84 0.78 2.80 Loss from Discontinued Operations, including Loss on Disposal ...................... (0.01) (0.02) (0.20) (0.08) Cumulative Effect of a Change in Accounting Principle (C) .................... -- -- (0.58) 0.04 ------ ------ ------ ------ Total PSEG ......................... 0.99 0.82 -- 2.76 ------ ------ ------ ------ Total PSEG Excluding Charges (D) ...................... $ 1.00 $ 0.84 $ 2.59 $ 2.80 ====== ====== ====== ====== (A) Includes after-tax impairments and losses on operations of impaired assets of $374 million or $1.81 per share for the ~~nine months~~quarter ended ~~September 30, 2002, respectively. (B) Other activities include amounts applicable~~March 31, 2003 is due primarily to ~~PSEG (parent corporation),~~higher margins at Power resulting from the effective management of its electric and natural gas portfolio, improved earnings at PSE&G due to favorable weather effects, and improvements at Energy Holdings largely due to the timing of an annual payment under Global's Eagle Point cogeneration contract and ~~EGDC. Losses primarily result from~~due to the absence of the currency-related charges in Argentina recorded in 2002.

Additionally, during the first quarter ended 2003, PSEG recorded an after-tax ~~effect~~benefit in the amount of ~~interest on certain financing transactions and certain other administrative and general expenses at parent companies. (C) Relates~~$370 million related to the adoption of Statement of Financial Accounting ~~Standards~~Standard (SFAS) No. 143, ''Accounting for Asset Retirement Obligations'' (SFAS 143). This benefit was due mainly to the required remeasurement of Power's nuclear decommissioning obligations. Similarly for the quarter ended March 31, 2002, PSEG adopted SFAS No. 142, ~~"Goodwill~~''Goodwill and Other Intangible ~~Assets"~~Assets'' (SFAS 142) ~~in 2002 36~~ and ~~the adoption~~incurred an after-tax charge of ~~SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133) in 2001. (D) Excludes after-tax charges previously presented the summary table of $3~~$120 million ~~or $0.01 per share and $535 million or $2.59 per share for the three and nine month periods ended September 30, 2002, respectively. Future Outlook We expect~~related to ~~meet our revised earnings-per-share targets for 2002 of $3.70~~goodwill impairments at Energy Holdings.

Earnings (Losses)
Contribution to Earnings
Per Share
(Basic and Diluted)
Quarters Ended
March 31,
Quarters Ended
March 31,
2003
2002
2003
2002
(Millions)
Power      $ 177      $ 120      $ 0.78      $ 0.58
PSE&G      100      67      0.44      0.32
Energy Holdings:
      Resources      12      15      0.05      0.07
      Global      42      (13 )      0.19      (0.06 )
      Other (A)      (1 )      (2 )      —      (0.01 )
Other (B)      (9 )      (6 )      (0.04 )      (0.02 )





Income from Continuing Operations      $ 321      $ 181      $ 1.42      $ 0.88
Loss from Discontinued Operations, including Loss on Disposal      (15 )      (1 )      (0.06 )      (0.01 )
Cumulative Effect of a Change in Accounting Principle (C)      370      (120 )      1.64      (0.58 )





PSEG Net Income      $ 676      $ 60      $ 3.00      $ 0.29

(A)		Other activities include non-segment amounts of Energy Holdings, PSEG Energy Technologies Inc. (Energy Technologies), Enterprise Group Development Corporation (EGDC) and intercompany eliminations. Specific amounts include interest on certain financing transactions and certain other administrative and general expenses at Energy Holdings.
(B)		Other activities include non-segment amounts of PSEG (parent company) and intercompany eliminations. Specific amounts include interest on certain financing transactions and certain other administrative and general expenses at PSEG (parent company).
(C)		Relates to the adoption of SFAS 143 in 2003 and the adoption of SFAS 142 in 2002. See Note 2. New Accounting Standards and Note 3. Adoption of SFAS 143 of the Notes.

PSE&G

Earnings Available to ~~$3.90, excluding the charges described above. For 2002, Power is expected to earn $460~~PSEG from PSE&G increased $33 million to ~~$500~~$100 million PSE&G is expected to earn $175 million to $185 million and Energy Holdings is expected to earn $145 million to $155 million, excluding the previously discussed charges. Power's successful participation as an indirect supplier of energy to New Jersey's utilities, including PSE&G, in New Jersey's recent BGS auction is expected to have a meaningful effect on our earnings for the remainder of the year and should help to partially offset the lack of earnings contributions from Energy Holdings' investments in Argentina. The fourth quarter is expected to be strong, as Power benefits from its fixed price BGS contracts while it is able to source energy at economically attractive prices during this period of low demand. While Global realized substantial growth in 2001, significant challenges which began developing during the ~~fourth~~first quarter of 2001 have continued into 2002. These challenges include the Argentine economic, political and social crisis, the soft power market in Texas, recent developments in India and the worldwide economic downturn. The financial effects of several of these challenges were recorded in the second quarter of 2002. Also, we have recently reached a settlement with AES related to our investments held for sale in Argentina, receiving $15 million in October 2002 and receiving $15 million in notes which mature on various dates ending in July 2003. Similarly, we have completed the sale of our investment in Tanir Bavi at its reduced carrying value, receiving proceeds of approximately $45 million in October 2002. Going forward, Global will limit its spending to contractual commitments and refocuse its strategy from one of accelerated growth to one that places emphasis on increasing the efficiency and returns of its existing assets. We have taken significant steps to address the pressures in the volatile financial marketplace. We issued $460 million of participating equity preference units, a mandatorily convertible preferred security, in September 2002 and we continue to issue approximately $80 million of equity on an annual basis through our dividend reinvestment program. In addition to these equity issuances, we have further trimmed our capital expenditure program by recently revising the timeline for the completion of three generating station construction projects, which is in addition to previous reductions at Global and Resources. After this year, which is an end of a peak period of capital expenditures, our internal cash generation will significantly exceed our capital and dividend requirements. In addition, we would also consider an additional equity issuance to accelerate the further strengthening of our balance sheet. Looking ahead, our business fundamentals remain strong and we continue to produce solid cash flows. However, several of the assumptions in ourended March 31, 2003 planning process have changed in this evolving economic environment. Specifically, two factors, increased pension expense due to the erosion of the value of the investments in our pension plans, and the need to improve capital structures in this volatile marketplace, are currently being considered as we develop our 2003 business plan. As a result of these factors, we will likely reduce our previous 2003 earnings target of $4.00 to $4.20. However, even if we issued equity, we expect our 2003 earnings per share to be comparable to this year's results due to our strong business fundamentals. Other assumptions in our 2003 business plan are that: Power will continue to benefit from its performance as a wholesale BGS provider with the new one year BGS contract that began August 1, 2002 and a reasonable outcome to next year's contract beginning August 1, 2003; PSE&G will have a successful outcome to its recently filed electric rate case seeking an approximately $250 million increase in electric rates beginning in August 2003, and benefit from more normal weather; Global, with its major risks in Argentina and India behind it, significant cost-cutting measures in place and limited spending planned over the five year planning horizon, expects improvements in earnings through its focus on increasing the return on its existing assets; and Resources, with recent investments and less exposure to its investment in the KKR leveraged buyout funds, expects to continue to be a steady contributor to earnings and cash flows. Factors Affecting Future Outlook As a result of more than 70% of our earnings, excluding the changes discussed above, coming from unregulated businesses, the continued changes in political, legislative, regulatory and economic conditions in the many countries in which we do business, the inherent price volatility of the commodities in our businesses, and many other factors, it is much more difficult to accurately forecast our future earnings. Some of the key sensitivities and risks of our businesses are discussed below. Power's success as a BGS provider will depend, in part, on its ability to meet its obligations under its full requirements contracts with the BGS suppliers in a profitable manner. Power expects to accomplish this by producing energy from its own generation and/or energy purchases in the market. Power also enters into trading positions related to its generation assets and supply obligations. To the extent it does not hedge its obligations, whether long or short, Power will be subject to the risk of price fluctuations that could affect its future results, such as increases in the price of energy purchased to meet its supply obligations, the cost of fuel to generate electricity, 37 the cost of congestion credits that Power needs to transmit electricity and other factors. In addition, Power is subject to the risk of subpar operating performance of its fossil and nuclear generating units. To the extent there are unexpected outages at Power's generating facilities, changes in environmental or nuclear regulations or other factors which impact the production by such units or the ability to generate and transmit electricity in a cost-effective manner, it may cost us more to produce electricity or we may be required to purchase higher cost energy to replace the energy we anticipated producing. These risks can be exacerbated by, among other things, changes in demand in electricity usage, such as those due to extreme weather and economic conditions. Power's future revenue stream is also uncertain. Due to the timing of the New Jersey BGS auction process, the majority of Power's revenues for August 1, 2003 and thereafter cannot be accurately predicted. Also, certain of Power's new projects, such as our investments in the Lawrenceburg and Waterford projects in the Midwest, the plants we are acquiring from Wisvest in Connecticut, and our development of the Bethlehem Energy Center in New York are also subject to the risk of changes in future energy prices as Power has not entered into forward sale contracts for the majority of their expected generation capacity. Also, since the majority of our generation facilities are concentrated in the Northeast region, changes in future energy supply and demand and energy-related prices in this region could materially affect our results. Also, changes in the rules and regulation of these markets by FERC, particularly changes in the ability to maintain market based rates, could have an adverse impact on our results. As a result of these variables and risks, we cannot predict the impact of these potential future changes on our forecasted results of operations, financial position, or net cash flows, however such impact could be material. In addition, our earnings projections assume that we will continue to optimize the value of our portfolio of generating assets and supply obligations through our energy trading operations. This will depend, in part, on our, as well as our counterparties', ability to maintain sufficient creditworthiness and to display a willingness to participate in energy trading activities at anticipated volumes. Potential changes in the mechanisms of conducting trading activity, such as the continued availability of energy trading exchanges, could positively or negatively affect trading volumes and liquidity in these energy trading markets compared to the assumptions of these factors embedded in our business plans. As a result of these variables, we cannot predict the impact of these potential future changes on our forecasted results of operations, financial position, or net cash flows, however such impact could be material. PSE&G's success will be dependent, in part, on its ability to obtain a reasonable outcome, which cannot be assured, to its recently filed electric rate case as well as its ability to continue to recover the regulatory assets it has deferred and the investments it plans to make in its electric and gas transmission and distribution systems. Mitigating this rate increase to customers are overrecoveries of the SBC and NTC and the potential securitization of the expected BGS underrecovery. As of September 30, 2002, PSE&G has implemented BPU mandated rate reductions totaling 13.9% since August 1, 1999, including a 4.9% rate reduction effective August 1, 2002, which will be in effect until July 31, 2003. This rate reduction reduces the Market Transition Charge (MTC) rate paid to Power and therefore reduces Power's revenues. Energy Holdings' success will be dependent, in part, on its ability to mitigate risks presented by its international strategy. The economic and political conditions in certain countries where Global has investments present risks that may be different than those found in the United States including: renegotiation or nullification of existing contracts, changes in law or tax policy, interruption of business, risks of nationalization, expropriation, war, and other factors. Operations in foreign countries also present risks associated with currency exchange and convertibility, inflation and repatriation of earnings. In some countries in which Global has interests, economic and monetary conditions and other factors could affect Global's ability to convert its cash distributions to US Dollars or other freely convertible currencies and move funds. Furthermore, the central bank of any such country may have the authority to suspend, restrict or otherwise impose conditions on foreign exchange transactions or to approve distributions to foreign investors. Although Global generally seeks to structure power purchase contracts and other project revenue agreements to provide for payments to be made in, or indexed to, US Dollars or a currency freely convertible into US Dollars, its ability to do so in all cases may be limited. The international risks discussed above can potentially be magnified due to the volatility of foreign currencies. The foreign exchange rates of the Brazilian Real, Chilean Peso and Peruvian Sol have recently weakened due to various political and economic factors. This could result in comparatively lower contributions from our distribution investments in US Dollar terms. While we still expect certain of Energy Holdings' investments in Latin America to 38 contribute significantly to our earnings in the future, the political and economic risks associated with this region could have a material adverse impact on our remaining investments in the region. Certain of Global's projects are also subject to the risk of changing future energy prices, including its investment in two 1,000 MW facilities in Texas which have performed below expectations due to lower energy prices than we had anticipated, primarily resulting from the over-supply of energy in the Texas power market. Global expects this trend to continue until the 2004-2005 time frame when market prices are expected to increase, as older less efficient plants in the Texas power market are expected to be retired and the demand for electricity is expected to increase and has included these assumptions within its business plans. However, no assurances can be given as to the accuracy of these estimates and changes in these estimates could have a material impact on its forecasted results of operations, financial position, or net cash flows. Energy Holdings, through Resources, also faces risks with regard to the creditworthiness of its counterparties, as well as the risk of a change in the current tax treatment of its investments in leveraged leases. The manifestation of either of these risks could cause a materially adverse effect on its strategy and its forecasted results of operations, financial position, or net cash flows. For discussion of certain counterparties to these leases who have been downgraded to below investment grade by at least one of the rating agencies, see Item 3. Qualitative and Quantitative Disclosures about Market Risk. In addition, we have exposure to the equity and debt markets through our substantial use of short-term financing, lower pension fund balances, the effect of lower assumed rate of investment returns on our pension expense, the effect of a lower discount rate on our pension plan liabilities and costs, the potential impact to Resources' investment in the KKR leveraged buyout funds, and other equity and debt investments held by us. Also, increases in the cost of capital, which could result from market and lender concerns regarding us, our industry, United States and international economic conditions and other factors, could make it more difficult for us to enter into profitable investments. Recent market trends could also affect our ability to access capital, potentially impacting both our business plans and opportunities as well as our liquidity. Also, changes in our credit ratings by rating agencies could significantly impact our access to capital, cost of capital, ability to meet earnings expectations and future business plans. Also, as a result of market price volatility, the fair value of the debt of certain of our subsidiaries has experienced significant volatility. We are also subject to credit risk. See Item 3. Qualitative and Quantitative Disclosures about Market Risk for further discussion. Results of Operations Operating Revenues For the three months ended September 30, 2002, Operating Revenues increased by $711 million or 44%, due primarily to a $407 million increase in revenues from Power. Also contributing to the increase for the three months ended September 30, 2002 as compared to the same period in ~~2001~~2002. Colder weather, causing greater demand for heating was the key driver for improved margins at PSE&G during the first quarter of 2003. This improved PSE&G's earnings significantly when compared to the results produced during the mild winter last year and helped to offset higher operation and maintenance expenses, pension and other costs. PSE&G is projecting earnings of $210 million to $230 million for the full year of 2003.

Power

Power's Income from Continuing Operations increased $57 million to $177 million during the quarter ended March 31, 2003 as compared to the same period in 2002. The principal driver of these results was the effective management of its electric and natural gas portfolio during the period. The Basic Gas Supply Service (BGSS) and the Basic Generation Service (BGS) related contracts became effective on May 1 and August 1, 2002, respectively. The impact of these contracts helped provide Power with ongoing results that were ~~increases~~more than 35% higher than achieved in the first quarter of ~~$44~~last year. In addition, Power benefited in the first quarter from its operation of two generating facilities in Connecticut that were acquired in December 2002. Power is projecting Income from Continuing Operations at $475 million ~~$10~~to $520 million ~~and $7~~for the full year of 2003.

Also impacting the quarter was the adoption of SFAS 143 resulting in an after-tax benefit of $370 million. The benefit is related to the required remeasurement of Power's asset retirement obligations, mainly nuclear decommissioning, within its businesses. Earnings Available to PSEG from Power increased $427 million ~~at Global, PSE&G~~to $547 million during the first quarter ended March 31, 2003 versus 2002.

Energy Holdings

Energy Holdings' Income from Continuing Operations increased $53 million during the quarter ended March 31, 2003 as compared to the same period in 2002 due primarily to the timing of a contractual payment from Eagle Point Cogeneration Partnership (EPCP), which was recorded in the first quarter of 2003 as compared to the second quarter of 2002 and Resources, respectively. Included in Power's increase were increases of $172 million of gas revenues relating to its BGSS contract and off-system sales resulting from the Gas Contract transfer from PSE&G in May 2002. Also contributing to Power's increase was a $268 million increase in electric revenues, primarily due to the absence of the currency-related charges in Argentina recorded in 2002. Energy Holdings expects Income from Continuing Operations of $145 million to $155 million for the full year of 2003.

Earnings Available to PSEG increased $159 million to $38 million during the first quarter ended March 31, 2003 as compared to the same period in 2002. For the same period in 2002, Energy Holdings generated a loss of $121 million. The quarter-to-quarter change is largely attributable to the adoption of SFAS 142 in the first quarter of 2002, which resulted in an after-tax charge of $120 million. Also contributing was the timing of a contractual payment from EPCP, discussed above, which was partially offset by higher Losses from Discontinued Operations.

Results of Operations

PSEG

Operating Revenues

For the quarter ended March 31, 2003, Operating Revenues increased by $1.5 billion or 79%. This was due primarily to an increase at PSEG's operating companies including a $479 million increase from Power related to the new ~~BGS contracts with third party~~BGS-related revenues from third-party wholesale electric suppliers which went into effect August 1, 2002 and ~~comparably warmer weather which~~increased energy sales into the New England Power Pool resulting from Power's operation of two generation facilities in Connecticut that were acquired in December 2002, a $489 million increase in PSE&G's operating revenues due primarily to increased weather-related demand as explained below under PSE&G, and a $73 million increase in Energy Holdings' operating revenues relating to the withdrawal of EPCP and generation projects going into operation during 2002, partially offset by lower ~~MTC revenues primarily due to~~investment earnings at Resources, as detailed below under Energy Holdings.

In addition, a ~~4.9% rate reduction in August 2002 and a 2% rate reduction in August 2001. These rate reductions reduce~~portion of the MTC revenues that PSE&G remits to Power as part of its BGS contract. Also offsetting the increases were lower net trading revenues of approximately $23 million due to lower trading volumes and prices during the three months ended September 30, 2002 as compared to the same period in 2001. 39 ~~The~~ increase ~~in Operating Revenues at Global~~ was due primarily to $31 million of increases related to the acquisition late in the third quarter of 2001 of SAESA, a Chilean distribution company and $10 million of increases related to the acquisition in the fourth quarter of 2001 of Electroandes, a Peruvian generation company. Global's Operating Revenues also increased $32 million due to the generation facility located in Rades, Tunisia commencing operation via a retroactive commercial operating date in the second quarter of 2002. Also contributing $16 million to the increase in revenues was Skawina in Poland in which we purchased a majority ownership late in the second quarter of 2002. Revenues further increased by $8 million due to improved earnings from RGE as new regulatory changes allow RGE to recover from customers prior tariff charges previously expensed. Partially offsetting these increases was a decrease at EDEERSA of $18 million, which reflects the ongoing economic crisis in Argentina. There were also decreased earnings totaling $9 million at our GWF generation facilities due to a reversal of an accounts receivable reserve in 2001 related to California Power exchange pricing in 2001 and lower prices in 2002 as compared to 2001; and decreased earnings of $8 million at our TIE generation facilities due to lower energy prices in 2002 as compared to 2001. The increase in Operating Revenues from PSE&G related to $41 million of higher electric transmission and distribution revenues offset by $31 million of lower gas distribution revenues. The $7 million increase at Resources was primarily related to higher Net Gains (Losses) on Investments resulting from no net change in the carrying value of publicly traded and private securities held within the KKR leveraged buyout funds in the third quarter of 2002, as compared to a $8 million loss in the same period of 2001. The remaining $243 million increase is due primarily tofact that Power's BGS ~~or commodity~~ revenues ~~in August and September of 2002~~are not being eliminated in consolidation subsequent to July 2002 by PSEG. Under the prior BGS contract, which terminated on July 31, 2002, Power sold energy directly to PSE&G, which in turn sold this energy to its customers. These revenues were properly recognized on each company's stand-alone financial statements and were eliminated when preparing ~~our consolidated financial statements.~~PSEG's Consolidated Financial Statements. For the ~~new~~ BGS contract period beginning August 1, 2002, Power ~~sells to~~entered into contracts with third ~~party~~parties who are direct suppliers ~~and other load serving entities (LSEs)~~of New Jersey's Electric Distribution Companies (EDCs) and PSE&G purchases the energy for its customers' needs from ~~third party~~such direct suppliers. Due to this change in the BGS model, these revenues are no longer intercompany revenues and therefore are not eliminated in consolidation. ~~This amount would have been~~For the quarter ended March 31, 2003, PSEG's elimination related to intercompany BGS and Market Transition Charge (MTC) revenues decreased by approximately ~~$366~~$412 million for August and September 2002, representing the amount which PSE&G's cost to supply electricity to its customers, and is partially offset by $118 million of intercompany eliminations relatingas compared to the ~~BGSS contract between~~quarter ended March 31, 2002 due primarily to this change. Also related to this change in the BGS model, PSE&G, in 2002, began selling energy purchased under non-utility generation (NUG) contracts, which it had previously sold to Power, ~~and PSE&G which began in May 2002.~~to third parties. As a result, for the quarter ended March 31, 2003, PSEG's revenues related to NUG contracts increased by approximately $28 million.

Operating Expenses

Energy Costs

For the ~~nine months~~quarter ended ~~September 30,~~March 31, 2003 as compared to the quarter ended March 31, 2002, ~~Operating Revenues~~Energy Costs increased ~~by $373 million~~approximately $1.3 billion or ~~7%,~~173% due primarily to a ~~$422~~$401 million net increase in gas costs at PSE&G and Power, a $362 million increase at Power primarily related to increased energy purchases and third-party wholesale electric supplier contracts, discussed further below under Power, a $62 million increase in ~~revenues~~electric energy costs at PSE&G discussed further below under PSE&G and a $17

million increase at Energy Holdings, relating to projects going into operation at Global, discussed further below under Energy Holdings.

In addition, a portion of the increase was due to the fact that PSE&G no longer purchases electric energy directly from Power, as discussed above in Operating Revenues. Amounts attributable to this change totaled $440 million between the quarters ended March 31, 2003 and ~~$161~~2002.

Operations and Maintenance

For the quarter ended March 31, 2003, Operations and Maintenance expense increased $57 million or 12% as compared to the quarter ended March 31, 2002 due to a $16 million increase at Power primarily caused by scheduled outages at certain electric generating stations, an increase at Energy Holdings of $8 million, due mainly to costs associated with projects going into operation and a $32 million increase at PSE&G due primarily to higher Demand Side Management (DSM) amortization, discussed further below under PSE&G.

Depreciation and Amortization

For the quarter ended March 31, 2003, Depreciation and Amortization decreased by $31 million or 24% as compared to the quarter ended March 31, 2002, due primarily to a decrease of $29 million at PSE&G, mainly due to an increase in the amortization of the excess depreciation reserve.

Taxes Other Than Income Taxes

Taxes Other Than Income Taxes is comprised of the Transitional Energy Facility Assessment (TEFA) tax at PSE&G. Taxes Other Than Income Taxes increased $6 million or 16% for the quarter ended March 31, 2003 as compared to the quarter ended March 31, 2002. This increase was due primarily to an increase of $6 million in the TEFA due to increased sales. Legislation enacted in January 2002 freezes the TEFA unit rate surcharges at the 2001 levels through 2004 and then reduces the rates over the next three years, phasing out the TEFA by 2007.

Income from ~~Global.~~Equity Method Subsidiaries

Income from Equity Method Investments decreased $13 million or 43% to $17 million for the quarter ended March 31, 2003 from $30 million for the quarter ended March 31, 2002. This decrease was due primarily to lower earnings in 2002 of $8 million at Rio Grande Energia (RGE), an electric distribution company in Brazil mainly driven by regulatory changes that allowed RGE to recover from customers prior tariff charges previously expensed, as well as higher energy purchases, higher inflation rates and higher effective tax rates in the current year. Also contributing to the decrease was $3 million in interest income related to a note receivable from The AES Corporation (AES) in 2002.

Other Income

For the quarter ended March 31, 2003, Other Income increased by $49 million as compared to the quarter ended March 31, 2002, due primarily to a $47 million increase at Power, a $10 million increase at PSE&G, partially offset by a $7 million decrease at Energy Holdings. Power's increase is due primarily to realized gains and the recognition of interest and dividend income in its Nuclear Decommissioning Trust (NDT) Fund. The increase at PSE&G primarily relates to $8 million of gains recorded on the disposition of property in the current year. The decrease at Energy Holdings primarily relates to a decrease in net derivative gains.

Other Deductions

For the quarter ended March 31, 2003, Other Deductions decreased by $7 million as compared to the quarter ended March 31, 2002, due primarily to $52 million less in foreign currency transaction losses related to US Dollar debt in Argentina recorded in 2002. This was partially offset by the recognition of $33 million of realized losses in Power's NDT Fund.

Interest Expense

For the quarter ended March 31, 2003, Interest Expense decreased $4 million or 2% as compared to the quarter ended March 31, 2002 due primarily to a $6 million decrease at PSE&G and a $4 million decrease at Energy Holdings, partially offset by a $6 million increase at PSEG.

Preferred Securities Dividends

For the quarter ended March 31, 2003, Preferred Securities Dividends increased approximately $4 million due primarily to higher preferred dividend requirements at PSEG.

Income Taxes

For the quarter ended March 31, 2003, Income Taxes increased $70 million or 61% as compared to the quarter ended March 31, 2002 including a $43 million increase at Power, a $14 million increase at PSE&G and a $17 million increase at Energy Holdings which were primarily attributable to higher pre-tax income. These increases were partially offset by a $364 million decrease in revenues from PSE&G. For the nine months ended September 30, 2002, Power's increased Operating Revenues included $273 million of gas revenues relating to its BGSS contract and off-system sales resulting from the Gas Contract transfer from PSE&G in May 2002. Also contributing to the increase was a $228 million increase in electric revenues, primarily due to the new BGS contracts with third party wholesale electric suppliers which went into effect August 1, 2002 and comparably warmer weather which were partially offset by lower MTC revenues primarily due to a 4.9% rate reduction in August 2002 and two 2% rate reductions in August 2001 and February 2001. Also offsetting the increases were lower net trading revenues of approximately $79 million due to lower trading volumes and prices during the nine months ended September 30, 2002 as compared to the same period in 2001. The increase at Global was due primarily to $142 million related to the acquisitions of SAESA and Electroandes and $32 million due to the inception of operations at Rades, as discussed previously. Also contributing $16 million to the increase in revenues was Skawina, in which we purchased a majority ownership late in the second quarter of 2002 as discussed above. Revenues further increased at Global by $21 million due to improved earnings from RGE as a result of the new regulatory changes described above. Partially offsetting these increases were decreases in earnings of $18 million at GWF Energy and $17 million at TIE as a result of lower energy prices. The decrease in PSE&G's Operating Revenues primarily related to a $344 million decrease in gas distribution revenues primarily due to decreased commodity rates, approximately $176 million, lower sales to interruptible 40 customers, approximately $111 million, lower sales volumes primarily from the warmer winter in 2002, approximately $90 million and lower off-system sales revenues, approximately $14 million. In addition, electric transmission and distribution revenues decreased $20 million. These decreases were partially offset by increased gas base rates, approximately $43 million and higher other operating revenues (approximately $7 million). The remaining $154 million increase is due primarily to Power's BGS or commodity revenues in August and September of 2002 not being eliminated in consolidation by PSEG as discussed previously. This amount would have been approximately $366 million for August and September 2002, representing the amount which PSE&G's cost to supply electricity to its customers, and is partially offset by $217 million of intercompany eliminations relating to the BGSS contract between Power and PSE&G which began in May 2002. Operating Expenses Energy Costs For the three months ended September 30, 2002, Energy Costs increased $590 million or 104% due primarily to increases of $332 million and $34 million at Power and Global, respectively, partially offset by a $17$4 million decrease at PSE&G. The remaining increase in Energy Costs is due primarily to a net difference in intercompany eliminations of approximately $248 million, discussed above in Operating Revenues. Power's increases were primarily due to increased energy purchases for the BGS and third party wholesale electric supplier contracts of approximately $122 million due to higher volumes and $197 million of increased gas purchases to satisfy Power's BGSS contract and its fuel needs for generation. Also contributing to the increase were approximately $43 million of increased network transmission expenses in the Pennsylvania-New Jersey-Maryland Power Pool (PJM). These increases were offset by $22 million of gains on fuel hedges, $5 million of reduced congestion charges due to more efficient unit scheduling by PJM and a $3 million decrease in nuclear fuel usage. The increases at Global for the three months ended September 30, 2002 were primarily due to operating expenses incurred at SAESA and Electroandes. The operating expenses for the comparable periods in 2001 did not include expenses for Electroandes as itPSEG, which was purchased in the fourth quarter of 2001, and included only a portion of expenses for SAESA as it was purchased late in the third quarter of 2001. The decrease at PSE&G primarily related to a decrease in gas costs primarily dueattributable to lower commodity rates, approximately $16 million, which became effective January 9, 2002, lower revenues from interruptible customers, approximately $12 million, due to lower volumes at lower rates and lower off-system sales revenues, approximately $5 million, due to lower volumes. These decreases were partially offset by increased electric energy costs primarily due to higher commodity sales volumes under the BGS contract, approximately $43 million, increases in the amortization of the excess electric distribution depreciation reserve, approximately $6 million (discussed below in Depreciation and Amortization), increases in MTC charges from Power, other than rate reductions, approximately $6 million and increases in Non-Utility Generation Transition Charge (NTC) costs due to higher sales volumes, approximately $3 million. Partially offsetting the increases is the impact of the rate reductions, approximately $42 million, discussed above in Operating Revenues. Under the BGSS, our gas costs in excess of (or below) the amount included in current commodity rates, are probable of being recovered from (returned to) to customers through future commodity rates. Under SFAS 71, we defer (record) costs in excess of (or below) the amount included in current commodity rates. Therefore any increase or decrease in our gas commodity revenue is offset by a corresponding increase or decrease in gas costs on the income statement. For the nine months ended September 30, 2002, Energy Costs increased $279 million or 14% due primarily to increases of $377 million and $92 million at Power and Global, respectively, partially offset by a $341 million 41 decrease at PSE&G. The remaining increase in Energy Costs is due primarily to a net difference in intercompany eliminations of approximately $149 million, discussed above in Operating Revenues. Power's increases were primarily due to increased energy purchases for the BGS and third party wholesale electric supplier contacts of approximately $144 million due to higher volumes and $276 million of increased gas purchases to satisfy Power's BGSS contract and its fuel needs for generation. Also contributing to the increase was higher network transmission expenses of $35 million for PJM and $11 million of increased coal purchases. These higher expenses were partially offset by a $13 million decrease in nuclear fuel usage and a $36 million decrease in oil consumption. Further expense reductions can be attributed to $14 million of decreases in fuel hedges, $13 million decrease in Non-Utility Generation (NUG) purchases and $13 million in lower congestion charges due to less constraint in the system. The increases at Global for the nine months ended September 30, 2002 were primarily due to operating expenses incurred at SAESA and Electroandes, discussed above. PSE&G's decreases were due primarily to a decrease in gas costs of approximately $350 million primarily due to lower commodity costs, approximately $176 million, lower revenues from interruptible customers, approximately $111 million, due to lower volumes at lower rates, lower sales volumes as a result of the warmer weather in 2002, approximately $52 million and lower off-system sales revenues, approximately $9 million. These decreases were partially offset by increased electric energy costs of $9 million primarily due to higher commodity sales volumes under the BGS contract, approximately $90 million and higher amounts paid to Power relating to the amortization of the excess electric distribution depreciation reserve, approximately $22 million. Partially offsetting the increases is the impact of the rate reductions, approximately $85 million, discussed above in Operating Revenues, lower NUG energy sales, approximately $13 million and lower market rates and lower MTC charges from Power, other than rate reductions, approximately $4 million. Operation and Maintenance For the three months ended September 30, 2002, Operations and Maintenance expense decreased $2 million as compared to same period in 2001 due primarily to a decrease at PSE&G resulting from a management initiative to lower PSE&G's Operation and Maintenance costs. This decrease was partially offset by increases at Power, primarily from scheduled outage work at its electric generating stations, and increases at Global, relating to the operations of SAESA and Electroandes, discussed previously. For the nine months ended September 30, 2002, Operations and Maintenance expense increased $13 million or 1% as compared to the same period in 2001 due primarily to increases at Power and Global, partially offset by the decreases at PSE&G, discussed above. Depreciation and Amortization For the three and nine-month periods ended September 30, 2002, Depreciation and Amortization increased $15 million or 10% and $61 million or 16%, respectively, as compared to the same periods in 2001, primarily due to increases at PSE&G, resulting from an increase in depreciable fixed assets, higher depreciation expense recorded in accordance with increased gas base rates and amortization related to securitization. The increases were partially offset by higher amortization of the excess electric distribution depreciation reserve. Interest Expense Interest Expense increased $9 million or 5% and $58 million or 11% for the three and nine-month periods ended September 30, 2002, respectively, as compared to the same periods in 2001 primarily due to additional long-term debt at Power and Energy Holdings issued to finance recent acquisitions and development. 42 Income Taxes Income taxes increased $75 million for the three months ended September 30, 2002 as compared to the same period in 2001 due partially to higher income in the current quarter. Prior period tax adjustments recorded in 2001 reflecting the conclusion of the 1994-96 IRS audit settlement and the actual filing of the 2000 tax return also contributed to the increase. Income taxes decreased $173 million for the nine months ended September 30, 2002 as compared to the same period in 2001 primarily due to lower income in the current year, offset by the prior period adjustments discussed above. pre-tax income.

Losses From Discontinued Operations Energy Technologies Energy Technologies is comprised of 11 heating, ventilating and air conditioning (HVAC) and mechanical operating companies and an asset management group which includes various Demand Side Management (DSM) investments. DSM investments in long-term contracts represent expenditures made by Energy Technologies to share DSM customers' costs associated with the installation of energy efficient equipment. DSM revenues are earned principally from monthly payments received from utilities, which represent shared electricity savings from the installation of the energy efficient equipment. During the second quarter of 2002, Energy Holdings completed its impairment testing of all recorded goodwill in accordance with guidance set forth in SFAS 142 including the goodwill associated with the 11 HVAC/mechanical operating companies acquired by Energy Technologies. Such analysis indicated that the entire $53 million of goodwill associated with the HVAC/mechanical companies was impaired, which resulted in a $32 million (after-tax) charge (net of $21 million in taxes). In accordance with SFAS 142, this charge was recorded as of January 1, 2002 as a Cumulative Effect of a Change in Accounting Principle and reflected in our results of operations for the nine months ended September 30, 2002. In June 2002, Energy Holdings adopted a plan to sell its interests in the HVAC/mechanical operating companies. The sale of these companies is expected to be completed by June 30, 2003. We have retained the services of an investment-banking firm to market these companies to interested parties. The HVAC/mechanical operating companies meet the criteria for classification as components of discontinued operations and all prior periods have been reclassified to conform to the current year's presentation. In the second quarter of 2002, Energy Holdings initiated a process for the sale of Energy Technologies' DSM investments, which we had expected to sell by June 30, 2003. Based on our assessments, we believe the fair market value of these assets approximates their carrying value as of September 30, 2002 and no reduction in the carrying amount is indicated. For the period ended June 30, 2002, Energy Technologies' DSM investments were classified as a component of discontinued operations. In the third quarter of 2002, Energy Holdings decided to continue to own the DSM investments. For the period ended September 30, 2002, all DSM investments were reclassified from discontinued operations to continuing operations and the consolidated statements for all periods presented have been restated to reflect this reclassification. In addition to the goodwill impairment, Energy Holdings has further reduced the carrying value of the investments in the 11 HVAC/mechanical operating companies to their fair value less costs to sell, and recorded a loss on disposal for the six months ended June 30, 2002 of $20 million, net of $11 million in taxes. As of September 30, 2002, the carrying value of the HVAC/mechanical operating companies approximates the fair value and accordingly no additional reduction in the carrying value was required for the three months ended September 30, 2002. Energy Holdings' remaining investment position in Energy Technologies is approximately $110 million, of which approximately $32 million relates to deferred tax assets from discontinued operations, for which no valuation allowance is deemed 43 necessary. Excluding the deferred tax assets from discontinued operations, approximately $40 million of our remaining investment balance relates to the asset management group. Although we believe that we will be able to sell the HVAC/mechanical companies, we can give no assurances that we will be able to realize their total carrying values.

Operating results of Energy Technologies' HVAC/mechanical operating companies, less certain allocated costs from Energy Holdings, have been reclassified into ~~discontinued operations~~Discontinued Operations in ~~our~~the Consolidated Statements of Operations. The results of operations of these discontinued operations for the ~~quarter~~quarters ended March 31, 2003 and ~~nine months ended September 30,~~ 2002 yielded additional after-tax losses of $3$6 million ~~(after-tax)~~ and ~~$12~~$4 million, ~~(after-tax), respectively,~~respectively. For additional information, see Note 4. Discontinued Operations of the Notes. Due to current market conditions, Energy Holdings re-evaluated the carrying value of Energy Technologies and are disclosed below: Quarter Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 2002 2001 2002 2001 ------ ------ ------ ------ (Millions) (Millions) Operating Revenues ............... $ 107 $ 127 $ 292 $ 328 Pre-Tax Operating Loss ........... (5) (5) (18) (25) Loss Before Income Taxes ......... (5) (6) (19) (29)has determined that an additional write-down to fair value less cost to sell was required. In the first quarter of 2003, Energy Holdings recorded an additional after-tax loss on disposal of Energy Technologies of $9 million.

In addition, Tanir Bavi, ~~At September 30, 2002, Global owned a 74% interest in Tanir Bavi Power Company Private Ltd. (Tanir Bavi), which owns and operates~~ a 220 MW barge mounted, combined-cycle generating facility in ~~India. A plan to exit Tanir Bavi~~India which was ~~adopted~~sold in ~~June 2002. Global signed an agreement in August~~the fourth quarter of 2002, under which an affiliate of its partner in this venture, GMR Vasavi Group, a local Indian company, purchased Global's majority interest in Tanir Bavi. The sale was completed in October 2002. Tanir Bavi meetsmet the criteria for classification as a component of discontinued operations and all prior periods have been reclassified to conform to the current year's presentation. In the second quarter of 2002, we reduced the carrying value of Tanir Bavi to the contracted sales price of $45 million and recorded a loss on disposal of $14 million (after-tax).operations. The operating results of Tanir Bavi for the ~~six months~~quarter ended ~~June 30,~~March 31, 2002 yielded after-tax income of $5$3 million.

Cumulative Effect of a Change in Accounting Principle

For the quarter ended March 31, 2003, Power recorded a $370 million ~~(after-tax)~~after-tax benefit to Net Income relating to the adoption of SFAS 143 as detailed further below under Power. In the first quarter of 2002, Energy Holdings recorded a $120 million after-tax charge to Net Income due to goodwill impairments relating to the adoption of SFAS 142 as detailed further below under Energy Holdings.

PSE&G

Operating Revenues

PSE&G's operating revenues increased by $489 million or 29% for the first quarter of 2003 as compared to the first quarter of 2002. The primary reason for the increase was a $459 million or 56% increase in gas revenues. Electric revenues also increased by $30 million or 4%. ~~See~~

Total gas sales volumes increased by 25% in 2003 due primarily to favorable weather conditions this past winter resulting in added revenues of $222 million comprised of commodity sales of $117 million and delivery sales of $105 million. Increase in prices added $245 million to 2003 revenues. Gas commodity charges vary monthly with the price of gas for commercial and industrial customers and those revenues increased $188 million for the quarter ended March 2003. Commodity charges to residential customers are levelized through the BGSS-RSG tariff with the difference between commodity revenue and cost deferred. Two BGSS-Residential Service Gas (RSG) rate increases were implemented during the first quarter of 2003 totaling 12%, which contributed $57 million to 2003

revenues. Other gas operating revenues declined by $7 million in 2003 as a result of no longer having off-system sales following the sale of the gas contract business to Power in May of 2002, a reduction of $13 million which was offset partially by a $4 million improvement in gas appliance repair sales.

Electric sales volumes increased by 7% due primarily to favorable weather conditions this past winter which resulted in approximately $60 million in added revenue. Offsetting this increase was the effect of a 4.9% rate decrease effective in August 2002, which reduced revenues by approximately $45 million. This is offset by lower Energy Costs, discussed below. Sales of NUG power added $20 million to 2003 revenues as compared to 2002 due primarily to an increase in the Pennsylvania-New Jersey-Maryland Power Pool (PJM) locational marginal pricing.

Operating Expenses

Energy Costs

Gas costs increased by $386 million or 73% for the first quarter of 2003 as compared to the first quarter of 2002. The cost of gas purchased increased $173 million due to a 25% increase in the price of gas, and $130 million due to an increase in commodity sales volume due primarily to favorable weather conditions this past winter. Additionally, gas cost increased by $75 million for the current deferral of BGSS-RSG costs to match current commodity revenues.

Electric costs increased $62 million or 12% for the first quarter of 2003 as compared to the first quarter of 2002. BGS purchases increased $67 million due to a 15% increase in prices effective August 1, 2002 and $30 million due to an increase in sales volumes due primarily to favorable weather conditions this past winter. Net MTC payments to Power increased $6 million due to a $52 million increase in the amortization of the excess depreciation reserve partially offset by the impact of the rate reduction of $45 million. NUG energy cost decreased $4 million as the result of a $15 million decrease in volumes purchased offset by a higher average price of $11 million. In addition, electric costs decreased by $37 million due to the deferral of energy costs in excess of the amount included in revenues.

Operations and Maintenance

Operations and Maintenance expense increased $32 million or 13% for the first quarter of 2003 as compared to the first quarter of 2002. The primary reason for the change was an $18 million increase in DSM program amortization driven by higher sales and a rate increase for gas DSM recovery in November 2002. The gas increase is included in the delivery volume revenue increase discussed above. DSM costs are deferred when incurred and amortized to Operations and Maintenance expense when recovered in revenues. Other contributors to the Operations and Maintenance expense increase were higher labor costs of $12 million, almost half of which was attributable to higher pension costs.

Depreciation and Amortization

Depreciation and Amortization decreased $29 million or 31% for the first quarter of 2003 as compared to the first quarter of 2002. The primary reason for the decrease is a reduction of $37 million for an increase in the amortization of an excess electric distribution depreciation reserve. This amortization will conclude on July 31, 2003, the end of the transition period. Offsetting this decrease was a $2 million increase in depreciation expense due to increased plants in service and a $6 million increase in the amortization of the regulatory asset related to securitization which was caused primarily by an increase in Securitization Transition Charge (STC) revenues.

Taxes Other Than Income Taxes

Taxes other than income taxes increased $6 million or 16% for the first quarter of 2003 as compared to the first quarter of 2002. The increase is the result of higher TEFA due to higher taxable sales in 2003. Legislation enacted in January 2002 freezes the TEFA unit rate surcharges at the 2001 levels through 2004 and then reduces the rates over the next three years, phasing out the TEFA by 2007.

Other Income

Other Income increased $10 million or 175% for the quarter ended March 31, 2003 as compared to the quarter ended March 31, 2002, due primarily to gains on the disposal of various electric transmission properties.

Interest Expense

Interest expense decreased by $6 million or 6% for the first quarter of 2003 as compared to the first quarter of 2002. Interest on long-term debt decreased $11 million due to the maturity of Medium-Term Notes in August and September 2002 and January 2003. These were offset by increased interest of $6 million due to Medium-Term Notes issued in September 2002 and January 2003.

Income Taxes

Income taxes increased $14 million or 33% for the quarter ended March 31, 2003 as compared to the quarter ended March 31, 2002 due primarily to an increase in pre-tax income offset by increased benefits attributable to the excess depreciation reserve adjustment in 2003.

Power

Operating Revenues

For the quarter ended March 31, 2003, Power's Operating Revenues increased $1.3 billion or 228% as compared to the quarter ended March 31, 2002, due primarily to the inclusion of approximately $900 million of gas revenues relating to its BGSS contract and off-system gas sales resulting from the gas contracts transferred from PSE&G in May 2002. Also contributing to the increase was an approximate $300 million increase in electric revenues, due primarily to the BGS related contracts with third party wholesale electric suppliers which went into effect August 1, 2002. Also contributing to the increase in revenues was an approximate $125 million increase in electric energy sales in the New England Power Pool from Power's operation of two Connecticut generating facilities that were acquired in December 2002.

Operating Expenses

Energy Costs

For the quarter ended March 31, 2003, Power's energy costs increased $1.2 billion or 870% compared to the quarter ended March 31, 2002, due primarily to increased gas purchases of $847 million to satisfy Power's BGSS contract with PSE&G and increased electric energy purchases and third party wholesale electric supplier contracts of approximately $266 million. Also contributing to the increase were higher network transmission expenses of $72 million. These higher expenses were partially offset by a $28 million decrease in NUG purchases.

Operations and Maintenance

For the quarter ended March 31, 2003, Operations and Maintenance expense increased $16 million or 9% as compared to the same period in 2002, due primarily to increases caused by higher accretion relating to the adoption of SFAS 143, higher pension related expenses, scheduled outage work at electric generating stations and the acquisition of the two Connecticut generating facilities in December 2002.

Depreciation and Amortization

For the quarter ended March 31, 2003, Depreciation and Amortization expense remained flat as compared to the same period in 2002. Power did have higher depreciation expense of approximately $7 million for the period ended March 31, 2003 due primarily to a higher asset base. Depreciation expense was offset by the absence of decommissioning charges which are no longer recorded as a result of the

implementation of SFAS 143. For additional information, see Note ~~4. Discontinued Operations~~3. Adoption of SFAS 143 of the Notes.

Other Income

For the quarter ended March 31, 2003, Other Income increased by $47 million as compared to the quarter ended March 31, 2002, due to realized gains and the recognition of interest and dividend income in the NDT Fund.

Other Deductions

For the quarter ended March 31, 2003, Other Deductions increased by $33 million as compared to the quarter ended March 31, 2002, due to the recognition of $33 million of realized losses in Power's NDT Fund.

Interest Expense

Interest Expense remained flat for ~~further discussion.~~ the quarter ended March 31, 2003 from the comparable period in 2002. Although Power incurred additional interest charges of $10 million for the period ended March 31, 2003 due primarily to the new financing of $600 million in June 2002, this increase was offset by capitalized interest relating to various construction projects of $8 million and $2 million of reductions associated with interest rate swap agreements.

Income Taxes

Income Taxes increased $43 million or 54% for the quarter ended March 31, 2003 as compared to the quarter ended March 31, 2002, due primarily to increases in pre-tax income.

Cumulative Effect of Change in Accounting Principle

Power has performed a review of its potential obligations under SFAS 143 and believes that its quantifiable obligations are primarily related to the decommissioning of its nuclear power plants. Upon adoption of this standard on January 1, 2003, Power recorded a Cumulative Effect of a Change in Accounting Principle in the amount of $370 million. See Note 2. New Accounting Standards and Note 3. Adoption of SFAS 143 of the Notes for additional information.

Energy Holdings

Operating Revenues

Energy Holdings' revenues increased $73 million, or 54%, to $209 million for the quarter ended March 31, 2003 from $136 million for the quarter ended March 31, 2002. This increase was driven by higher electric generation revenues at Global and the timing of an increased annual withdrawal payment from EPCP. In 2001, Global withdrew from its interest in EPCP in exchange for a series of payments through 2005, provided certain operating contingencies are met.

Global

For the quarter ended March 31, 2003, the operating revenues increased by $79 million or 101% to $157 million for the quarter ended March 31, 2003 from $78 million for the quarter ended March 31, 2002. This increase at Global was partly due to an increase of $37 million of realized revenue from the withdrawal from EPCP which was recorded in the first quarter of 2003 as compared to the second quarter of 2002. The increase in revenue was also due to a $26 million increase from Skawina, a generation facility in Poland, in which Global purchased a majority ownership in the second quarter of 2002 weand a $22 million increase from Rades, a generation facility in Tunisia which commenced operations in the second quarter of 2002. Also contributing is a $9 million increase at GWF Energy. In the second half of 2002, Global's ownership of GWF Energy increased to 76%. Accordingly, Global

consolidates GWF Energy as compared to the first quarter 2002 when it was recorded under the equity method. These increases were partially offset by a decrease of $15 million from Empresa Distribuidora de Electricidad de Entre Rios S.A. (EDEERSA), in Argentina, which was fully written off in 2002 and was abandoned in the first quarter of 2003.

Resources

Resources' operating revenues decreased $7 million or 12% to $51 million for the quarter ended March 31, 2003, from $58 million for the quarter ended March 31, 2002, due primarily to an increase of $5 million from net investment losses, of which $10 million resulted from other than temporary impairments of non-publicly traded equity securities within certain leveraged buyout funds and other investments. Also contributing was a $2 million decrease in income from capital leases due to terminated leases.

Operating Expenses

Operating Expenses increased $27 million or 42% to $92 million for the quarter ended March 31, 2003 from $65 million for the quarter ended March 31, 2002, due primarily to a $16 million increase related to the acquisition of Skawina, Poland which became majority owned in the second quarter 2002 and a $15 million increase related to Rades, Tunisia which commenced operation in the second quarter 2002.

Income from Equity Method Investments

Income from Equity Method Investments decreased $13 million or 43% to $17 million for the quarter ended March 31, 2003 from $30 million for the quarter ended March 31, 2002. This decrease was due primarily to lower earnings in 2002 of $8 million at RGE mainly driven by regulatory changes that allowed RGE to recover from customers prior tariff charges previously expensed, as well as higher energy purchases, higher inflation rates and higher effective tax rates in the current year. Also contributing to the decrease was $3 million in interest income related to a note receivable from AES in 2002.

Other Income

Other Income decreased $7 million for the quarter ended March 31, 2003 as compared to the same period in 2002 due to a decrease of $10 million of net derivative gains partially offset by an increase of $3 million of foreign currency transaction gains.

Other Deductions

Other Deductions decreased $46 million for the quarter ended March 31, 2003 as compared to the quarter ended March 31, 2002 due primarily to a decrease of $52 million in foreign currency transaction losses, primarily in Argentina in 2002, partially offset by an increase of $6 million in net derivative losses primarily related to the Rades Power Purchase Agreement (PPA) indexation.

Interest Expense

Interest Expense decreased $4 million or 7% to $50 million for the quarter ended March 31, 2003 from $54 million for the quarter ended March 31, 2002 due primarily to the retirement of $228 million of Medium-Term Notes at PSEG Capital Corporation (PSEG Capital) in 2002, which resulted in a decrease of $2 million in interest expense. Also contributing to the decrease was the repurchase of Senior Notes in 2002 and reductions in borrowings under the revolving credit facilities.

Income Taxes

Income Taxes expense increased $17 million for the quarter ended March 31, 2003 compared to the quarter ended March 31, 2002 due primarily to higher pre-tax income.

Losses From Discontinued Operations

Operating results of Energy Technologies' HVAC/mechanical operating companies, less certain allocated costs from Energy Holdings, have been reclassified into Discontinued Operations in the Consolidated Statements of Operations. The results of operations of these discontinued operations for the quarters ended March 31, 2003 and 2002 yielded additional after-tax losses of $6 million and $4 million, respectively. For additional information, see Note 4. Discontinued Operations of the Notes. Due to current market conditions, Energy Holdings re-evaluated the carrying value of Energy Technologies and has determined that an additional write-down to fair value less cost to sell was required. In the first quarter of 2003, Energy Holdings recorded an additional after-tax loss on disposal of Energy Technologies of $9 million.

In addition, Tanir Bavi, a 220 MW barge mounted, combined-cycle generating facility in India which was sold in the fourth quarter of 2002, met the criteria for classification as a component of discontinued operations. The operating results of Tanir Bavi for the quarter ended March 31, 2002 yielded after-tax income of $3 million.

Cumulative Effect of Change in Accounting Principle

In 2002, Energy Holding finalized ~~our~~the evaluation of the effect of adopting SFAS 142 on the recorded amount of goodwill. ~~Under this standard, we were required to complete an impairment analysis of our recorded goodwill and record any resulting impairment.~~ The total amount of goodwill impairments was $120 million, net of tax of $66 million and was comprised of write downs of $36 million (after-tax) at EDEERSA, $34 million (after-tax) at ~~Rio Grande Energia (RGE),~~RGE, $32 million (after-tax) at Energy Technologies and $18 million (after-tax) at Tanir Bavi. All of the goodwill onrelated to these companies, other than RGE, was fully impaired. In accordance with SFAS 142, this impairment charge was recorded as of January 1, 2002 as a component of the Cumulative Effect of a Change in Accounting Principle and is reflected in Consolidated Statement of Operations for the nine months ended September 30, 2002. 44 Operations in Argentina We, through our Energy Holdings subsidiary, have significant operations in Argentina. Over the past year, the business and economic conditions in that region have deteriorated. As of December 31, 2001, Energy Holdings' aggregate investment exposure in Argentina was $632 million. These investments included a 90% owned distribution company, Empresa Distribuidora de Electricidad de Entre Rios S.A. (EDEERSA); minority interests in three distribution companies, Empresa Distribuidora de Energia Norte S.A. (EDEN), Empresa Distribuidora de Energia Sur S.A. (EDES), and Empresa Distribuidora La Plata S.A. (EDELAP); and two generating companies, Central Termica San Nicolas (CTSN), and Parana which are under contract for sale to certain subsidiaries of The AES Corporation (AES). Net operating losses relating to these investments of $59 million have been incurred year-to-date and are mainly attributable to the falling value of the Argentine peso. Additionally, certain loss contingencies have been accrued of $11 million during the nine month period ended September 30, 2002. In June 2002, Energy Holdings determined that the carrying value of its Argentine investments was impaired. Energy Holdings recorded charges in connection with the impairment of $506 million ($329 million after-tax) during the second quarter of 2002. No such impairment charges were incurred during the third quarter ended September 30, 2002. For the three and nine periods ended September 30, 2001, operating expenses of $6 million and $11 million were incurred, respectively. See Note 3. Asset Impairments for further discussion.

Liquidity and Capital Resources

The following discussion of ~~our~~ liquidity and capital resources is on a consolidated basis for PSEG, noting the uses and contributions of ~~our~~PSEG's three direct operating subsidiaries, PSE&G, Power and Energy Holdings. ~~Financing Methodology Our capital requirements are met through liquidity provided by internally generated~~

Operating Cash Flows

PSEG

PSEG's operating cash flow ~~and external financings. PSEG,~~increased approximately $323 million for the quarter ended March 31, 2003 as compared to the quarter ended March 31, 2002, due primarily to increases of $455 million at Power and $18 million at Energy Holdings, partially offset by a $154 million decrease at PSE&G.

PSE&G

PSE&G's operating cash flow decreased approximately $154 million for the quarter ended March 31, 2003 as compared to the quarter ended March 31, 2002, due primarily to increased working capital needs, mostly due to seasonally higher accounts receivable balances as a result of increased billings in the colder than normal first quarter. This was partially offset by increased income from ~~time~~continuing operations, lower payments to ~~time make equity contributions or otherwise provide credit support to their respective direct~~benefit plans and ~~indirect subsidiaries to provide for part~~increased recoveries of their capital and cash requirements, generally relating to long-term investments. As of September 30, 2002, PSEG does not have any guaranteed equity contribution commitments. As of September 30, 2002, Power had guaranteed equity contribution commitments with respect to its subsidiaries of $153 million and has other guarantees and commitments of $73 million and Energy Holdings has guaranteed equity commitment guarantees of $153 milliondeferred commodity and other ~~guarantees of $91~~costs.

Power

Power's operating cash flow increased approximately $455 million ~~and $1 million relating~~for the quarter ended March 31, 2003 as compared to ~~Global and Energy Technologies, respectively. At times, we utilize intercompany dividends and intercompany loans (except that PSE&G may not make loans~~the quarter ended March 31, 2002, due primarily to ~~us or our subsidiaries and affiliates)~~decreased working capital needs, as Power's gas inventory was drawn down to satisfy various subsidiary needs and efficiently manage our and our subsidiaries' short-term cash needs. Any excess funds are invested in accordance with guidelines adopted by our Board of Directors. External funding to meet our needs and the needs of PSE&G, the majority of thesupply its requirements of Power and a substantial portion of the requirements of Energy Holdings, is comprised of corporate finance transactions. The debt incurred is the direct obligation of those respective entities. Some of the proceeds of these debt transactions are used by the respective obligor to make equity investments in its subsidiaries. As discussed below, depending on the particular company, external financing may consist of public and private capital market debt and equity transactions, bank revolving credit and term loans, commercial paper and/or project financings. Some of these transactions involve special purpose entities (SPEs), formed in accordance with applicable tax and legal requirements in order to achieve specified beneficial financial advantages, such as favorable tax and legal liability treatment. Substantially all SPEs are consolidated, where we have controlling interest. 45 ~~Global has certain investments that are accounted for~~ under the ~~equity method in accordance~~BGSS contract with ~~generally accepted accounting principles. Accordingly, an amount is recorded on our balance sheet that is primarily Global's equity investment~~PSE&G, and is increased ~~for Global's pro-rata share of earnings less any dividend distribution~~income from such investments. The companies in which Global invests that are accounted for under the equity method have an aggregate $1.89 billion of debt on their combined, consolidated financial statements. Global's pro-rata share of such debt is $697 million and is non-recourse to continuing operations.

Energy Holdings ~~Global and us.~~

Energy ~~Holdings is generally not required to support~~Holdings' operating cash flow increased approximately $18 million for the ~~debt service obligations of these companies. The availability and cost of external capital could be affected by each subsidiary's performance~~quarter ended March 31, 2003 as well as by the performance of their respective subsidiaries and affiliates. This could include the degree of structural separation between us and our subsidiaries and the potential impact of affiliate ratings on consolidated and unconsolidated credit quality. Additionally, compliance with applicable financial covenants will depend upon future financial position and levels of earnings and net cash flows, as to which no assurances can be given. Financing for Global's projects and investments is generally provided by non-recourse project financing transactions. These consist of loans from banks and other lenders that are typically secured by project and SPE assets and/or cash flows. Two of Power's projects currently under construction have similar financing. Non-recourse transactions generally impose no material obligation on the parent-level investor to repay any debt incurred by the project borrower. However, in some cases, certain obligations relatingcompared to the ~~investment being financed, including additional equity commitments, are guaranteed~~quarter ended March 31, 2002, due primarily to higher income from continuing operations, partially offset by Global, Energy Holdings, and/or Power for their respective subsidiaries. The consequences of permitting a project-level default include loss of any invested equity by the parent. PSEG has not currently provided any guarantees or credit support to PSE&G, Power or Energy Holdings, except for the minimum net worth maintenance support agreement to PSEG Capital Corporation, a subsidiary of Energy Holdings, which we plan to eliminate upon maturity of PSEG Capital Corporation's debt in May 2003. Over the next several years, PSEGlower rents received on leverage leases and its subsidiaries will be required to refinance maturing debt and expect to incur additional debt and provide equity to fund investment activity. Any inability to obtain required additional external capital or to extend or replace maturing debt and/or existing agreements at current levels and reasonable interest rates may adversely affect our financial condition, results of operations and net cash flows. During the third quarter of 2002, Energy Holdings purchased approximately $19 million of Senior Notes at prices below par value. In October 2002, Energy Holdings purchased an additional $20 million of Senior Notes at prices below par value. From time to time, PSEG and its subsidiaries may repurchase additional debt securities using funds from operations, asset sales, commercial paper, debt issuances, equity issuances and other sources of funding, and may make exchanges of new securities, including common stock, for outstanding securities. Such repurchases may be at variable prices below, at or above prevailing market prices and may be conducted by way of privately negotiated transactions, open-market purchases, tender or exchange offers or other means. We may utilize brokers or dealers or effect such repurchases directly. Any such repurchases may be commenced or discontinued at any time without notice. lower foreign currency transaction losses.

Debt Covenants Cross Default Provisions, Material Adverse Clause Changes, and Ratings Triggers The PSEG credit agreements contain default provisions under which a default by it or its major subsidiaries (PSE&G, Power, Energy Holdings) in an aggregate amount of $50 million would result in a default and the potential acceleration of payment under the agreements. The Energy Holdings credit agreements contain default provision under which a default by it or its major subsidiaries (Resources, Global) in an aggregate amount of $5 million, or a default by PSEG in an aggregate amount of $75 million would result in an event of default and the potential acceleration of payment under the agreements. The Energy Holdings Senior Note Indenture contains cross-default provisions under which a default by it or its major subsidiaries (Resources, Global) in an aggregate amount of $25 million would result in a default and the potential acceleration of payment under the indenture. The Power Senior Debt Indenture contains a default provision under which a default by it or its subsidiaries (Nuclear, Fossil, ER&T) in an aggregate amount of $50 million would result in a default and the potential acceleration of payment under the indenture. There are no cross-defaults within Power's indenture from PSEG, Energy Holdings or PSE&G. The PSE&G First and Refunding Mortgage (Mortgage) and credit agreements have no cross- 46 defaults. The PSE&G Medium Term Note Indenture has a cross-default to the PSE&G Mortgage. The credit agreements have cross-defaults under which a default by PSE&G in the aggregate of $50 million would result in a default and the potential acceleration of payment under the credit agreements. A failure to make principal and/or interest payments, when due, would be a default under the respective credit agreements and indentures of

PSEG, PSE&G, Power and Energy Holdings. Any inability to satisfy required covenants and/or borrowing conditions would have a similar impact. If a default were to occur, the respective lenders and debt holders, after giving effect to any applicable grace and/or cure periods, could determine that debt payment obligations may be accelerated. In the event of any likely default or failure to satisfy covenants or conditions, we, or the relevant subsidiary, would seek to renegotiate terms of the agreements with the lenders. No assurances can be given as to whether these efforts would be successful. A declaration of cross-default could severely limit PSEG's and the applicable subsidiaries' liquidity and restrict the ability to meet respective debt, capital and, in extreme cases, operational cash requirements which could have a material adverse effect on our financial condition, results of operations and net cash flows, and those of our subsidiaries.Holdings

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

As explained in detail below, some of these credit agreements also contain maximum ~~debt to equity~~debt-to-equity ratios, minimum cash flow tests and other restrictive covenants and conditions to borrowing. Compliance with applicable financial covenants will depend upon ~~our~~PSEG's future financial position and the level of earnings and cash flow, as to which no assurances can be given. ~~The debt indentures and credit agreements do not contain any material "ratings triggers"~~Management believes that would cause an acceleration of the required interest and principal payments in the event of a ratings downgrade. However, in the event of a downgrade, we and/or our subsidiaries may be subject to increased interest costs on certain bank debt. Also, in connection with its energy trading business,PSEG, PSE&G, Power must meet certain credit quality standards as are required by counterparties. If Power loses its investment grade credit rating, ER&T would have to provide credit support (letters of credit or cash), which would significantly impact the cost of the energy trading business. These same contracts provide reciprocal benefits to Power. Providing this credit support would increase our costs of doing business and limit our ability to successfully conduct our energy trading operations. In addition, our counterparties may require us to meet margin or other security requirements that may include cash payments. Global and Energy Holdings ~~may have to provide collateral~~are in compliance with all covenants as of March 31, 2003. The ratios presented below are for certain of their equity commitments if Energy Holdings' ratings should fall below investment grade. Similarly, Power may also have to provide credit support for certain of its equity commitments if Power loses its investment grade rating. Credit Ratings The current ratings of securities of PSEG and its subsidiaries are shown below and reflect the ~~respective views~~benefit of the ~~rating agencies, from whom an explanation~~investors of the ~~significance of their ratings may be obtained. There is no assurance that these ratings will continue for any given period of time~~related securities to which the covenants apply. They are not intended as a financial performance or that they will not be revised or withdrawn entirely by the rating agencies, if, in their respective judgments, circumstances so warrant. Any downward revision or withdrawal may adversely effect the market price of PSEG's, Energy Holdings', Power's and PSE&G's securities and serve to increase those companies' cost of capital, and access to capital. 47 Moody's(1) Standard & Poor's(2) Fitch(3) ---------- -------------------- -------- PSEG: Preferred Securities Baa3 BB+ BBB Commercial Paper P2 A2 Not Rated PSE&G: Mortgage Bonds A3 A- A Preferred Securities Baa1 BB+ A- Commercial Paper P2 A2 F1 Power: Senior Notes Baa1 BBB BBB+ Energy Holdings: Senior Notes Baa3 BBB- BBB- PSEG Capital: Medium-Term Notes Baa2 BBB- Not Rated (1) On October 11, 2002 Moody's reaffirmed these credit ratings but changed the outlook from stable to negative for PSEG, Power and Energy Holdings. (2) Affirmed in the second quarter of 2002 and noted an outlook of Stable. Standard and Poor's has established an overall corporate credit rating of BBB for us and each of our subsidiaries listed above. (3) Affirmed in the second quarter of 2002 and noted an outlook of Stable, except for PSE&G Mortgage Bonds, which was noted as negative. Short-Term Liquidity We and our subsidiaries have revolving credit facilities to provide liquidity for our $1 billion commercial paper program and PSE&G's $400 million commercial paper program and for various funding purposes. The following table summarizes the various revolving credit facilities of measure.

PSEG PSE&G and Energy Holdings as of September 30, 2002. Power relies on PSEG for its short-term financing needs and has a $50 million Letter of Credit Facility expiring in August 2005. Expiration Total Primary Company Date Facility Purpose - --------------------------- -------------- ---------- ------------ (Millions of Dollars) PSEG: 364-day Credit Facility March 2003 $620 CP Support 364-day Bilateral Facility March 2003 100 CP Support 5-year Credit Facility March 2005 280 CP Support 5-year Credit Facility December 2002 150 Funding Uncommitted Bilateral Agreement N/A * Funding PSE&G: 364-day Credit Facility June 2003 200 CP Support 3-year Credit Facility June 2005 200 CP Support Uncommitted Bilateral Agreement N/A * Funding Energy Holdings: 364-day Credit Facility May 2003 200 Funding 5-year Credit Facility May 2004 495 Funding Uncommitted Bilateral Agreement N/A * Funding * Availability varies based on market conditions. As of September 30, 2002, our consolidated total short-term debt outstanding was $1.657 billion, including $673 million and $94 million of commercial paper at PSEG and PSE&G, respectively, $271 million of non-recourse short-term financing at Global and $329 million, $37 million and $253 million outstanding under credit facilities and through the uncommitted bilateral agreements at PSEG, PSE&G and Energy Holdings, respectively. In addition, we have a total of $742 million of long-term debt due within one year, comprised of $300 million at PSE&G, $128 million at Transition Funding and $314 million at Energy Holdings including $32 million of non-recourse debt. 48 PSEG In 2002, we began issuing new shares under our Dividend Reinvestment and Employee Stock Purchase Plan (DRASPP), rather than purchasing them on the open market. For the nine months ended September 30, 2002 we issued approximately 1.5 million shares for approximately $57 million. Dividend payments on Common Stock for the quarter and nine months ended September 30, 2002 were $0.54 and $1.62 per share and totaled approximately $111 million and $334 million, respectively. Our dividend rate has remained constant since 1992 in order to retain additional capital for reinvestment and to reduce the payout ratio as earnings grow. Although we presently believe we will have adequate earnings and cash flow in the future from our subsidiaries to maintain common stock dividends at the current level, earnings and cash flows required to support the dividend will become more uncertain as our business continues to change from one that was principally regulated to one that is principally competitive. Future dividends declared will necessarily be dependent upon our future earnings, cash flows, financial requirements, alternate investment opportunities and other factors.

Financial covenants contained in ~~our~~PSEG's credit facilities include a ratio of debt (excluding non-recourse project financings and securitization debt and including commercial paper and loans, certain letters of credit and similar instruments) to total capitalization covenant. This covenant requires that at the end of any quarterly financial period, such ratio not be more than 0.70 to 1. As of ~~September 30, 2002, our~~March 31, 2003, PSEG's ratio of debt to capitalization (as defined above) was ~~0.65~~0.59 to 1. Recent downturns in the stock markets could affect the value of our pension plans that may result in a charge to our stockholders' equity at year-end. If required, this would result in an increase to our debt to capitalization ratio. See Accounting Matters for further information. As part of our financial planning forecast, we perform stress tests on our financial covenants that include a consideration of the impacts of potential asset impairments, foreign currency fluctuations, adjustments relating to our pension plans and other items. Our current forecasts do not indicate that we will exceed the required ratio of debt to total capitalization, however, no assurances can be given and, if an event of default were to occur, it could materially impact our results of operations, cash flow and financial position. On May 21, 2002, $275 million of Floating Rate Notes matured. In September 2002, we issued 9.2 million Participating Units with a stated amount of $50 per unit. Each unit consists of a 6.25% trust preferred security due 2007 having a liquidation value of $50, and a stock purchase contract obligating the purchasers to purchase shares of our common stock in an amount equal to $50 on November 16, 2005. In exchange for the obligations under the purchase contract, the purchasers will receive quarterly contract adjustment payments at the annual rate of 4.00% until such date. The number of new shares issued will depend upon the average closing price per share of our common stock for the 20 consecutive trading days ending the third trading day immediately preceding November 16, 2005. Based on the formula described in the purchase contract, at that time we will issue between 11,429,139 and 13,714,967 shares of its common stock. The net proceeds from the sale of the Participating Units was $446.2 million. In October 2002, we closed on a $245 million private placement debt transaction with a five-year average life, with the proceeds being used to reduce short-term debt. In the third quarter of 2002, we contributed $100 million of equity to Energy Holdings and we expect to contribute an additional $100 million in the fourth quarter of 2002. 49

PSE&G Under its Mortgage, PSE&G may issue new First and Refunding Mortgage Bonds against previous additions and improvements, provided that its ratio of earnings to fixed charges calculated in accordance with its Mortgage is at least 2:1, and/or against retired Mortgage Bonds. At September 30, 2002, PSE&G's Mortgage coverage ratio was 3:1. As of September 30, 2002, the Mortgage would permit up to approximately $1 billion aggregate principal amount of new Mortgage Bonds to be issued against previous additions and improvements. PSE&G is required to obtain BPU authorization to issue any financing necessary for its capital program, including refunding of maturing debt and opportunistic refinancing. PSE&G has authorization from the BPU to issue up to an aggregate of $1 billion of long-term debt through December 31, 2003 for the refunding of maturing debt and opportunistic refinancing of debt. We currently have authorization from the BPU to issue up to $2 billion in short-term debt through December 31, 2002. In October 2002, we filed a petition with the BPU requesting authority to issue up to $750 million of short-term debt through January 4, 2005. In addition, PSE&G expects to securitize approximately $250 million of deferred BGS costs, the proceeds of which will be used to reduce short-term debt.

Financial covenants contained in PSE&G's credit facilities include a ratio of Long-Term Debt (excluding Long-Term Debt Maturing within 1 Year) to Total Capitalization covenant. This covenant requires that at the end of any quarterly financial period, such ratio will not be more than 0.65 to 1. As of ~~September 30, 2002, our~~March 31, 2003, PSE&G's ratio of Long-Term Debt to Total Capitalization was ~~0.508~~0.52 to 1. In August 2002, $257 million of 6.125% Series RR Mortgage Bonds matured. In September 2002, PSE&G issued $300 million of 5.125% Medium-Term Notes due 2012, the proceeds of which were used to repay $290 million of 7.19% Medium-Term Notes that matured. During 2002, PSE&G Transition Funding LLC, a wholly-owned subsidiary of PSE&G, has repaid $85 million of securitization bonds. Since 1986, PSE&G has made regular cash payments to us in the form of dividends on outstanding shares of its common stock. PSE&G paid common stock dividends of $150 million and $112 million to us for the nine months ended September 30, 2002 and 2001, respectively.

PSEG/Power Power's short-term financing needs will be met using PSEG's commercial paper program or lines of credit discussed above. In June 2002, Power issued $600 million of 6.95% Senior Unsecured Notes due 2012. The proceeds were used to repay short-term funding from us, including amounts related to the Gas Contract Transfer from PSE&G in May 2002. Energy Holdings As of September 30, 2002, Energy Holdings had two separate revolving credit facilities with a syndicate of banks as discussed in the table above. The five-year facility permits up to $250 million of letters of credit to be issued of which $12 million were outstanding as of September 30, 2002.

Financial covenants contained in ~~these~~the PSEG/Power joint and several credit facility include a ratio of debt to total capitalization covenant for each specific borrower. When PSEG is the borrower, the covenant described above in PSEG is applicable. When Power is the borrower a debt (excluding non-recourse project financings and including loans, certain letters of credit and similar instruments) to total capitalization, adjusted for the $986 million Basis Adjustment (see Power's Consolidated Balance Sheets), covenant applies. This covenant requires that at the end of any quarterly financial period, such ratio will not be more than 0.65 to 1. As of March 31, 2003, Power's ratio of debt to capitalization (as defined above) was 0.46 to 1.

Energy Holdings

Financial covenants contained in Energy Holdings' credit facilities include the ratio of cash flow available for debt service (CFADS) to fixed charges. CFADS includes, but is not limited to, operating cash flows 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. 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. As of March 31, 2003, Energy Holdings ratio of 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 us to the extent not used to fund 50 ~~investing activity.~~fixed charges was 5.4x. In addition, the ratio of consolidated recourse indebtedness to recourse capitalization, as at the end of any quarterly financial period, shall not be greater than 0.60 to ~~1.00.~~1. 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 ~~us.~~PSEG. As of ~~September 30, 2002, the latest 12 months CFADS coverage~~March 31, 2003, Energy Holdings' ratio ~~was 6.3 and the ratio~~ of consolidated recourse indebtedness to recourse capitalization was ~~0.47~~0.43 to 1.00.

On April 16, 2003, Energy Holdings issued $350 million of Senior Notes which contain financial covenants that include debt incurrence tests consisting of a debt service coverage test and a ratio of consolidated recourse indebtedness to recourse capitalization test. These tests require that Energy Holdings will not incur additional consolidated recourse indebtedness, other than certain permitted indebtedness, such as permitted refinancings, unless, on a pro forma basis giving effect to the incurrence of the additional consolidated recourse indebtedness, (i) the debt service coverage ratio would be at least 2 to 1 and (ii) the ratio of consolidated recourse indebtedness to recourse capitalization would not exceed 0.60 to 1. These covenants also restrict Energy Holdings from selling greater than 10% of its assets in any four consecutive quarters, unless the proceeds are used to reduce debt of Energy Holdings or its subsidiaries or are reinvested or retained by Energy Holdings.

Cross Default Provisions

Certain information reported in the December 31, 2002 Form 10-K is updated below.

PSEG

The PSEG credit agreements and certain of its financing agreements contain several default provisions one of which is a payment cross default whereby a default by it, PSE&G, Power or Energy Holdings in an aggregate amount of $50 million would result in a default and the potential acceleration of payment under those credit and financing agreements. All of the PSEG credit agreements contain provisions that will eliminate this cross-default to Energy Holdings, once Energy Holdings $495 million Credit Agreement expires in May 2004, or is renewed prior to that time. PSEG expects to negotiate similar provisions in PSEG's financing agreements, as applicable.

Ratings Triggers

PSEG, PSE&G, Power and Energy Holdings

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

Power

In connection with its energy marketing and trading activities, Power must meet certain credit quality standards required by counterparties. If Power loses its investment grade credit rating, ER&T would have to provide credit support (letters of credit or cash), which would significantly impact the cost of the energy trading activities. Power's Master Agreements and other supply contracts contain margin and/or other collateral requirements that, as of March 31, 2003, could require Power to post additional collateral of approximately $652 million if Power were to lose its investment grade credit rating and all counterparties were entitled to and called for collateral. These same contracts provide reciprocal benefits to Power. Providing this credit support would increase Power's costs of doing business and could limit Power's ability to successfully conduct its energy trading operations.

Energy Holdings

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

Short-Term Liquidity

PSEG, PSE&G, Power and Energy Holdings

As of March 31, 2003, PSEG had a total of approximately $2.4 billion of committed credit facilities, with approximately $544 million drawn against such facilities, including $7 million and $75 million in letters of credit at Power and Energy Holdings, respectively, resulting in $1.8 billion in available liquidity. In addition to this amount, PSEG had access to certain uncommitted credit facilities under which $82 million was outstanding as of March 31, 2003. The following table summarizes the various revolving credit facilities of PSEG and its subsidiaries and the liquidity available as of March 31, 2003.

Company	Expiration Date	Total Facility		Primary Purpose	Usage at 03/31/2003		Available Liquidity at 03/31/2003
	(millions)
PSEG:
364-day Credit Facility	March 2004	$	350	CP Support	$	306	$	44
5-year Credit Facility	March 2005	$	280	CP Support	$	—	$	280
3-year Credit Facility	December 2005	$	350	CP Support/ Funding	$	—	$	350
Uncommitted Bilateral Agreement	N/A		*	Funding	$	25		N/A
PSE&G:
364-day Credit Facility	June 2003	$	200	CP Support	$	156	$	44
3-year Credit Facility	June 2005	$	200	CP Support	$	—	$	200
Uncommitted Bilateral Agreement	N/A		*	Funding	$	10		N/A
Power:
364-day Credit Facility(A)	March 2004	$	250	CP Support/ Funding	$	—	$	250
(PSEG/Power)
3-year Credit Facility	August 2005	$	25	Funding	$	7	$	18
Energy Holdings:
364-day Credit Facility	May 2003	$	200	Funding	$	—	$	200
5-year Credit Facility	May 2004	$	495	Funding	$	75	$	420
Uncommitted Bilateral Agreement	N/A		*	Funding	$	47		N/A

(A) PSEG/Power co-borrower facility

In addition, PSEG had approximately $76 million of cash available as of March 31, 2003 to retire commercial paper.

In order to support its short-term financing requirements as well as those of Power, PSEG has revolving credit facilities that are used both as a source of short-term funding and to provide backup liquidity for its $1 billion commercial paper program.

On March 19, 2003, PSEG closed on two 364-day credit facilities; a $350 million facility for PSEG and a joint and several PSEG/Power $250 million facility. These facilities replace two existing 364-day facilities at PSEG. The new PSEG facility provides liquidity support for the PSEG commercial paper program. The joint and several PSEG/Power facility also provides liquidity support for the PSEG commercial paper program and can be used by either PSEG or Power as a source of short-term funding and to issue letters of credit. Under this facility, either PSEG or Power may borrow, and both are jointly and severally liable to repay the loans.

PSE&G

PSE&G maintains credit facilities to provide backup for its $400 million commercial paper program.

In June 2003, a $200 million, 364-day facility is expiring. PSE&G intends to renew this facility in a similar amount during June 2003.

Power

Power has access to the $250 million, 364-day joint and several PSEG/Power credit facility and a separate $25 million credit facility, but primarily relies on PSEG for its short-term financing needs. For information regarding affiliate borrowings, see Note 12. Related-Party Transactions of the Notes.

As of March 31, 2003, letters of credit issued by Power were outstanding in the amount of approximately $74 million, including the $7 million drawn against its credit facilities, in support of various contractual obligations, environmental liabilities, and to satisfy trading collateral obligations.

Energy Holdings

Energy Holdings has credit facilities totaling $695 million that are used both as a source of short-term funding and to issue letters of credit. In May 2003, a $200 million facility is expiring and it is not anticipated that this facility will be renewed as that level of short-term funding is not necessary for Energy Holdings' financing needs. As of March 31, 2003, in addition to amounts outstanding under Energy Holdings' credit facilities shown in the above table, subsidiaries of Global had $96 million of non-recourse short-term financing. For information regarding affiliate borrowings, see Note 12. Related-Party Transactions of the Notes.

External Financings

PSEG

In 2002, PSEG began issuing shares of its common stock under its Dividend Reinvestment Program and Employee Stock Purchase Plan, rather than purchasing them on the open market. For the quarter ended March 31, 2003, PSEG issued approximately 570,000 shares for approximately $21 million pursuant to these plans.

Dividend payments on common stock for the quarter ended March 31, 2003 were $0.54 per share and totaled approximately $122 million. Future dividends declared will be dependent upon PSEG's future earnings, cash flows, financial requirements, alternate investment opportunities and other factors. PSEG would consider increasing the dividend if the payout ratio approached 50% and could be sustained at that level.

PSE&G

In January 2003, PSE&G issued $150 million of 5.00% Medium-Term Notes due 2013. The proceeds of approximately $149 million were used to repay $150 million of 6.875% Series MM Mortgage Bonds which matured in January 2003.

Also in January 2003, PSEG contributed $170 million to PSE&G to offset a 2002 minimum pension liability charge to Other Comprehensive Income (OCI).

During the quarter ended March 31, 2003, Transition Funding, a wholly-owned subsidiary of PSE&G, repaid $30 million of securitization bonds as scheduled.

Energy Holdings

During January and February of 2003, Sociedad Austral de Electricidad S.A. (SAESA) and Empresa Electrica de la Frontera S.A. (Frontel) refinanced certain non-recourse short-term obligations through a combination of bonds, a syndicated bank facility and equity from Global. SAESA issued two series of bonds equivalent to $117 million with final maturity in 2009 and 2023. Frontel executed a

syndicated loan facility equivalent to $23 million with final maturity in 2010. In addition, during January 2003, Global made equity contributions to SAESA and Frontel totaling $55 million.

In March 2003, Electroandes refinanced a $100 million bridge loan with a $70 million seven-year amortizing facility and two $15 million one-year facilities.

In April 2003, Energy Holdings, in a private placement, issued $350 million of 7.75% Senior Notes, due in 2007. Proceeds of $344 million will be used for general corporate purposes including repayment of $252 million of 6.25% Medium-Term Notes at PSEG Capital that mature in May 2003.

Credit Risk

PSEG, PSE&G, Power and Energy Holdings

Credit risk relates to the risk of loss that PSEG, PSE&G, Power and Energy Holdings would incur as a result of non-performance by counterparties pursuant to the terms of their contractual obligations. PSEG, PSE&G, Power and Energy Holdings have established credit policies that they believe significantly mitigate credit risk. These policies include an evaluation of potential counterparties' financial condition (including credit rating), collateral requirements under certain circumstances and the use of standardized agreements, which may allow for the netting of positive and negative exposures associated with a single counterparty.

Power

Counterparties expose Power to credit losses in the event of non-performance or non-payment. Power has a ~~$650 million Medium-Term Note program~~credit management process which ~~provides~~is used to assess, monitor and mitigate counterparty exposure for Power and its subsidiaries. In the ~~private placement~~event of ~~Medium-Term Notes. This Medium-Term Note program is supported~~non-performance or non-payment by a ~~minimum~~major counterparty, there may be a material adverse impact on Power and its subsidiaries' financial condition, results of operations or net ~~worth maintenance agreement between PSEG Capital~~cash flows. As of March 31, 2003 over 93% of the credit exposure (mark to market plus net receivables and ~~us which provides, among other things, that we (1) maintain its ownership, directly or indirectly,~~payables, less cash collateral) for Power's trading operations was with investment grade counterparties. As of ~~all outstanding common stock of PSEG Capital, (2) cause PSEG Capital to have~~March 31, 2003, Power's trading operations had over 171 active counterparties.

Energy Holdings

Project cash flows 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~~Texas Independent Energy L.P. (TIE) were insufficient to pay ~~its debt obligations. We will eliminate our~~the loan installment of approximately $2 million due to Global on March 31, 2003 and Panda Energy International, Inc. (Panda)/Teco Power Services (Teco) failed to fund the 50% of the partnership cash call due from them in support of ~~PSEG Capital~~the March 31, 2003 debt byservice payment. Consequently, the loan due to Global is in default and the interest rate has increased to the default rate of 14%. If the default continues, Global has the right to foreclose on Panda/Teco's 50% interest in TIE, which has been pledged to secure the loans due to Global. As of May 1, 2003, Global has not received the March 31, 2003 loan repayment, including interest. Therefore, under the terms of the partnership agreement Global has gained significant control over TIE and it is expected that Global will consolidate TIE beginning in the second quarter of 2003. ~~In July 2002, an~~For additional $100 million of PSEG Capital MTNs with an average borrowing rate of 6.95% matured. These MTNs were refunded with proceeds from borrowings under Energy Holdings' bank facilities with current interest costs of approximately 2.7%. As of September 30, 2002, remaining maturities under the PSEG Capital Corporation program were $282 million, $30 million of which matured in October 2002, and $252 million of which matures in May 2003. These issues will be refunded with proceeds of borrowings at Energy Holdings and cash from operations. information relating to this loan, see Note 12. Related-Party Transactions.

Capital Requirements We have substantially reduced our capital expenditure forecast in response to tightening market conditions resulting from market and lender concerns regarding

PSE&G

During the overall economy and our industry in particular, including an investor and rating agency focus on leverage ratios. These conditions have made it more difficult for us to access capital, impacting our business plans and opportunities to enter into profitable investments. Power's capital needs will be dictated by its strategy to continue to develop as a profitable, growth-oriented supplier in the wholesale power market. Power has revised its schedule for completion of several projects under development to provide better sequencing of its construction program with anticipated market demand. This will allow Power to conserve capital inquarter ended March 31, 2003, and allow Power to take advantage of the expected recovery of the electric markets and their need for capacity in 2005. Power's subsidiaries have substantial commitments as part of their growth strategies and ongoing construction programs. Power will continue to evaluate its development and construction requirements in relation to the energy and financial markets. We expect that the majority of each subsidiaries' capital requirements over the next five years will come from internally generated funds, with the balance to be provided by the issuance of debt at the subsidiary or project level and equity contributions from us. Projected construction and investment expenditures, excluding nuclear fuel purchases for Power, for our subsidiaries for the next five years are as follows: 2002 2003 2004 2005 2006 ------ ------ ------ ------ ------ (Millions) Power ........... $1,100 $ 500 $ 675 $ 250 $ 80 Energy Holdings . 600 100 50 50 50 PSE&G ........... 485 440 440 450 465 ------ ------ ------ ------ ------ Total ....... $2,185 $1,040 $1,165 $ 750 $ 595 ====== ====== ====== ====== ====== 51 ~~All of the forecasted expenditures in 2004 through 2006 related to Energy Holdings are discretionary. For the nine months ended September 30, 2002, we made~~had net plant additions of ~~$1,310 million. The majority~~$89 million related to improvements in its transmission and distribution system, gas system and common facilities.

Power

During the quarter ended March 31, 2003, Power made approximately $153 million of ~~these additions, $792 million,~~capital expenditures, primarily related to ~~Power for~~ developing the Lawrenceburg, Indiana, Waterford, Ohio and Bethlehem, NY (Albany) sites and adding capacity to the ~~Bergen and~~ Linden ~~stations~~station in New Jersey. ~~In addition, PSE&G had net plant additions~~

Energy Holdings

During the quarter ended March 31, 2003, Energy Holdings made approximately $106 million of ~~$322 million~~capital expenditures, primarily related to ~~improvements~~equity investments in ~~its transmission~~SAESA and ~~distribution system, gas system~~development of Salalah, Oman and ~~common facilities. Also,~~the GWF Energy ~~Holdings' subsidiaries made investments totaling approximately $390 million~~Tracy plants.

Accounting Issues

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

PSEG, PSE&G, Power and Energy Holdings

Effective January 1, 2003, PSEG, PSE&G, Power and Energy Holdings adopted SFAS 143. SFAS 143 addresses accounting and reporting for legal obligations associated with the ~~nine months ended September 30, 2002, respectively. These investments include~~retirement of tangible long-lived assets and the associated asset retirement costs. A legal obligation is a liability that a party is required to settle as a result of an ~~approximate 50% interest~~existing or enacted law, statute, ordinance or contract.

Under SFAS 143, a company must initially recognize the fair value of a ~~coal-fired generation facility, currently under construction~~liability for an asset retirement obligation in ~~Poland,~~the period in which it is incurred and ~~additional investments in existing generation and distribution facilities and projects~~concurrently capitalize an asset retirement cost by ~~Global and investment in capital leases by Resources. Partially offsetting these investments was an $88 million loan repayment from TIE. For a discussion~~increasing the carrying amount of the ~~loans~~related long-lived asset by the same amount as the liability. A company shall subsequently allocate that asset retirement cost to ~~TIE, see~~expense over its useful life. In periods subsequent to initial measurement, an entity shall recognize changes in the liability resulting from the passage of time (accretion) or due to revisions to either the timing or the amount of the originally estimated cash flows. Changes in the liability due to accretion will be charged to the Consolidated Statements of Operations, whereas changes due to the timing or amount of cash flows shall be an adjustment to the carrying amount of the related asset. See Note 12. Related Party Transactions. The $1,310 million of net plant additions and $390 million of investments were included in our forecasted expenditures for the year. Long-Term Debt Maturities The following table summarizes recourse and non-recourse expected debt payments for the fourth quarter of 2002 and subsequent years. Payments for PSE&G Transition Funding LLC are based on expected payment dates rather than final maturity dates. 2002 2003 2004 2005 Thereafter ------ ------ ------ ------ ---------- (Millions) Power ................... $ -- $ -- $ -- $ -- $2,515 Energy Holdings* ........ 30 252 289 -- 1,472 PSE&G ................... -- 300 286 125 2,214 PSE&G Transition Funding LLC ........... 35 129 138 146 1,940 Non-recourse project financing ............. 32 45 30 835 571 ------ ------ ------ ------ ------ Total ............... $ 97 $ 726 $ 743 $1,106 $8,712 ====== ====== ====== ====== ====== * The $282 million of maturities in 2002 and 2003 at Energy Holdings represents the total remaining maturities under the PSEG Capital Corporation program, $30 million of which matured in October 2002, and $252 million of which matures in May 2003. ACCOUNTING MATTERS For a discussion3. Adoption of SFAS ~~142, SFAS~~ 143 SFAS 144, SFAS 145, SFAS 146 and EITF 02-03, see Note 2. Recent Accounting Pronouncements. SFAS 87 - "Employers' Accounting for Pensions" SFAS 87 requires a pension plan sponsor to recognize an additional minimum pension liability to the extent that its accumulated benefit obligation under any of its pension plans exceeds the fair market value of its plan assets as of its annual measurement date. This additional minimum pension liability represents the amount by which its unfunded accumulated benefit obligation exceeds the fair market value of the ~~plan's assets,~~Notes for additional information.

Emerging Issues Task Force (EITF) Issue No. 02-3, ''Accounting for Contracts Involved in Energy Trading and is partially offset byRisk Management Activities'' (EITF 02-3)

Power

Financial Interpretation (FIN) No. 46, ''Consolidation of Variable Interest Entities (VIE)'' (FIN 46)

PSEG, PSE&G, Power and Energy Holdings

FIN 46 clarified the application of Accounting Research Bulletin No. 51, ''Consolidated Financial Statements'', to certain entities in which equity investors do not have the characteristics of a controlling financial interest. Because a controlling financial interest in an intangible asset no larger than the unrecognized net transition obligation and prior service cost, with no impact to earnings. At this time, we are monitoring the fair market value of our investments and our accumulated benefit obligation and are evaluating options available to usentity may be achieved through arrangements that do not involve voting interests, FIN 46 sets forth specific requirements with respect to consolidation, measurement and disclosure of such relationships. Disclosure requirements for existing qualifying entities are effective for financial statements issued after January 31, 2003. All enterprises with VIEs created after February 1, 2003, shall apply the provisions of FIN 46 no later than the beginning of the first interim period beginning after June 15, 2003. The adoption of this ~~issue. Since our measurement date~~standard is ~~December 31, 2002 we are unable~~not

expected to ~~predict what~~have a material impact on PSEG, PSE&G, Power and Energy Holdings' respective financial statements.

Other

PSEG, PSE&G, Power and Energy Holdings

At the January 2003 EITF meeting, the Financial Accounting Standards Board (FASB) was requested to reconsider an interpretation of SFAS 133. The interpretation, which is contained in the Derivatives Implementation Group's C-11 guidance, relates to contracts that include broad market indices (e.g., CPI). That interpretation sets forth the guidelines under which the contract could qualify as a normal purchase or sale under SFAS 133. PSE&G, Power and Energy Holdings reevaluated their respective contracts and determined that there were no contracts impacted by this interpretation and accordingly there was no effect on the Consolidated Financial Statements. The FASB has agreed to reconsider the guidance under C-11. Although the ultimate outcome is uncertain, this potential change in guidance is not expected to have a material impact ~~could be, however the impact could be material to our~~on PSEG, PSE&G, Power and Energy Holdings' respective financial ~~position and, more specifically, could result in a decrease in equity. 52~~ ~~FORWARD LOOKING STATEMENTS~~statements.

Forward-Looking Statements

Except for the historical information contained herein, certain of the matters discussed in this report constitute ~~"forward-looking statements"~~''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"~~''will'', ~~"anticipate"~~''anticipate'', ~~"intend"~~''intend'', ~~"estimate"~~''estimate'', ~~"believe"~~''believe'', ~~"expect"~~''expect'', ~~"plan"~~''plan'', ~~"hypothetical"~~''hypothetical'', ~~"potential"~~''potential'', ~~"forecast"~~''forecast'', ~~"projections"~~''projections'', variations of such words and similar expressions are intended to identify forward-looking statements. WePSEG, PSE&G, Power and Energy Holdings undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The following review of factors should not be construed as ~~exhaustive or as any admission regarding the adequacy of our disclosures prior to the effective date of the Private Securities Litigation Reform Act of 1995.~~exhaustive.

In addition to any assumptions and other factors referred to specifically in connection with such forward-looking statements discussed above, factors that could cause actual results to differ materially from those contemplated in any forward-looking statements include, among others, the following: o because a portion of our business is conducted outside the United States, adverse international developments could negatively impact our business; o credit, commodity,

PSEG, PSE&G, Power and financial market risks may have an adverse impact; o energy obligations, available supply and trading risks may have an adverse impact; o the electric industry is undergoing substantial change; o generation operating performance may fall below projected levels; o if our operating performance or cash flow from minority interests falls below projected levels, we may not be able to service our debt; o ability to obtain adequate and timely rate relief; o we and our subsidiaries are subject to substantial competition from well capitalized participants in the worldwide energy markets; o our ability to service debt could be limited; o power transmission facilities may impact our ability to deliver our output to customers; o regulatory issues significantly impact our operations; o environmental regulation significantly impacts our operations; o we are subject to more stringent environmental regulation than many of our competitors; o insurance coverage may not be sufficient; o acquisition, construction and development may not be successful; o changes in technology may make our power generation assets less competitive; and o recession, acts of war or terrorism could have an adverse impact.Energy Holdings

		•		credit, commodity, interest rate, counterparty and other financial market risks;
		•		liquidity and the ability to access capital and credit markets;
		•		acquisitions, divestitures, mergers, restructurings or strategic initiatives that change PSEG's, PSE&G's, Power's and Energy Holdings' structure;
		•		business combinations among competitors and major customers that could change the financial position, results of operations or net cash flows;
		•		general economic conditions including inflation;
		•		changes to accounting standards or generally accepted accounting principles, which may require adjustments to financial statements;
		•		changes in tax laws and regulations which could affect cash flows and business prospects;
		•		energy obligations, available supply and trading risks;
		•		changes in the electric industry including changes to power pools;
		•		regulation and availability of power transmission facilities that impact the ability to deliver output to customers;
		•		growth in costs and expenses;

	•	environmental regulation that significantly impact operations;
	•	changes in rates of return on overall debt and equity markets could have an adverse impact on the c value of pension assets and the Nuclear Decommissioning Trust Fund;
	•	changes in political conditions, recession, acts of war or terrorism;
	•	insufficient insurance coverage;
	•	nvolvement in lawsuits including liability claims and commercial disputes could affect profits or the ability to sell and market products;
	•	inability to attract and retain management and other key employees;
	•	ability to service debt as a result of any of the aforementioned events;

PSE&G and Energy Holdings

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

Power and Energy Holdings

	•	adverse changes in the market place for energy prices;
	•	excess supply due to overbuild in the industry;
	•	generation operating performance may fall below projected levels;
	•	substantial competition from well capitalized participants in the worldwide energy markets;
	•	inability to effectively manage trading risk;
	•	margin posting requirements;
	•	availability of fuel at reasonable prices;
	•	competitive position could be adversely affected by actions involving competitors or major customers;
	•	changes in product or sourcing mix;
	•	tardy or unsuccessful acquisition, construction and development;
	•	changes in technology that make power generation assets less competitive;

Power

	•	changes in regulation and security measures at nuclear facilities;
	•	determination by the BPU of the cost responsibility for nuclear decommissioning;

Energy Holdings

	•	adverse international developments that negatively impact its business;
	•	changes in foreign currency exchange rates;
	•	unavailability of leveraged lease investments with adequate returns at reasonable risk;
	•	inadequate operating performance or legal protection of leveraged lease investments;
	•	substandard operating performance or cash flow from investments could fall below projected levels, is adversely impacting the ability to service its debt; and
	•	credit of lessees to service the leases.

Consequently, all of the forward-looking statements made in this report are qualified by these cautionary statements and wePSEG, PSE&G, Power and Energy Holdings cannot assure you that the results or developments anticipated by usmanagement will be realized, or even if realized, will have the expected consequences to, or effects on usPSEG, PSE&G, Power and Energy Holdings or ~~our~~its business

prospects, financial condition or results of operations. ~~You~~Undue reliance should not ~~place undue reliance~~be placed on these forward-looking statements in making any investment decision. WeEach PSEG, PSE&G, Power and Energy Holdings expressly disclaim any obligation or undertaking to release publicly any updates or revisions to these forward-looking statements to reflect events or circumstances that occur or arise or are anticipated to occur or arise after the date hereof. In making any investment decision regarding ~~our~~PSEG, PSE&G, Power and Energy Holdings' securities, ~~we are~~PSEG, PSE&G, Power and Energy Holdings is not making, and you should not infer, any representation about the likely existence of any particular future set of facts or circumstances. The forward-looking statements contained in this report are intended to qualify for the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. 53 ~~ITEM~~

Item 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISKQualitative and Quantitative Disclosures About Market Risk

PSEG, PSE&G, Power and Energy Holdings

The market risk inherent in ~~our~~PSEG's, PSE&G's, Power's and Energy Holdings' market risk sensitive instruments and positions is the potential loss arising from adverse changes in foreign currency exchange rates, commodity prices, equity security prices and interest rates as discussed in ~~the notes~~Note 7. Risk Management to the ~~financial statements. Our~~Notes to the Consolidated Financial Statements. Each of PSEG, PSE&G, Power and Energy Holdings' policy is to use derivatives to manage risk consistent with ~~our~~its respective business plans and prudent practices. ~~We have~~PSEG, PSE&G, Power and Energy Holdings use a Risk Management Committee (RMC) comprised of executive officers which ~~utilizes~~utilize an independent risk oversight function to ensure compliance with corporate policies and prudent risk management practices. Except as discussed below, there were no material changes from the disclosures in PSEG, PSE&G, Power and Energy Holdings' Annual Reports on Form 10-K for the year ended December 31, 2002.

Commodity Contracts

Power and Energy Holdings

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

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

Power

VaR Model

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

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

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

The model is an augmented variance/~~co-variance~~covariance model adjusted for the delta of positions with a 95% two-tailed confidence level ~~and assuming~~for a one-week ~~time horizon as~~holding period. The model is augmented to incorporate the non log-normality of ~~September 30, 2002~~energy-related commodity prices, especially emissions and capacity and the non-stationary nature of energy volatility. In many commodities the natural log of prices is normally distributed. This is not true of energy commodities which have a higher frequency of extreme events than would be predicted by a normal distribution. The model also assumes no hedging activity throughout the holding period whereas Power actively manages its portfolio.

As of March 31, 2003, VaR was approximately ~~$19~~$29 million, compared to the December 31, ~~2001~~2002, level of ~~$18~~$7 million. ~~Credit Risk Credit risk relates~~Previous to Power's obligation being determined by annual auctions, Power's load was considered an indefinite obligation; therefore, for consistency purposes Power decided to model both the ~~risk~~cost to serve its load obligation and the value of ~~loss that we would incur as~~its generation assets on a ~~result~~rolling 12-month basis. At present, Power's load obligation is determined by the results of ~~non-performance by counterparties pursuant to~~ the ~~terms~~annual BGS auction. To maintain an actionable VaR, generation and load (based on an assumed success rate in the auction) are both modeled at 100% of their ~~contractual~~assumed value through May 2004 and at one-third of the assumed value of each from June 2004 through May 2006.

Power's VaR Associated with Generating Assets and Commodity Contracts

For the Quarter Ended March 31, 2003	Total VAR
	(Millions)
95% Confidence Level, Five-Day Holding Period, Two-Tailed:
Period End	$	29
Average for the Period	$	21
High	$	34
Low	$	10
99% Confidence Level, One-Day Holding Period, Two-Tailed:
Period End	$	17
Average for the Period	$	12
High	$	20
Low	$	6

Energy Holdings

VaR Model

In general, Energy Holdings manages its commodity exposure through power purchase agreements. One notable exception is its partial ownership of TIE, which owns two merchant energy plants that sell substantially all of their output in the day-ahead market.

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

As of March 31, 2003 and December 31, 2002, Energy Holdings' VaR was approximately $17 million and $4 million, respectively.

Energy Holdings' VaR Associated with Generating Assets and Commodity Contracts

For the Quarter Ended March 31, 2003	Total VAR
	(Millions)
95% Confidence Level, Five-Day Holding Period, Two-Tailed:
Period End	$	17
Average for the Period	$	11
High	$	25
Low	$	5
99% Confidence Level, One-Day Holding Period, Two-Tailed:
Period End	$	10
Average for the Period	$	6
High	$	15
Low	$	3

Item 4. Controls and Procedures

PSEG, PSE&G, Power and Energy Holdings

PSEG, PSE&G, Power and Energy Holdings have established credit policies that we believe significantly minimize credit risk. These policies include an evaluation of potential counterparties' financial condition (including credit rating), collateral requirements under certain circumstances and the use of standardized agreements, which may allow for the netting of positive and negative exposures associated with a single counterparty. Power Counterparties expose us to credit losses in the event of non-performance or non-payment. We have a credit management process which is used to assess, monitor and mitigate counterparty exposure for us and our subsidiaries. In the event of non-performance or non-payment by a major counterparty, there may be a material adverse impact on our and our subsidiaries' financial condition, results of operations or net cash flows. As of September 30, 2002 over 97% of the credit exposure (mark to market plus net receivables and payables) for Power's trading operations was with investment grade counterparties. As of September 30, 2002, Power's trading operations had over 145 active counterparties. As a result of the New Jersey BGS auction, Power has contracted to provide energy to the direct suppliers of New Jersey electric utilities, including PSE&G, commencing August 1, 2002. Subsequently, a portion of the contracts with those bidders was reassigned to Power. Therefore, for a limited portion of the New Jersey retail load, Power will be a direct supplier to one utility, although this utility is not PSE&G. These bilateral contracts are subject to credit risk. This risk is substantially higher than the risk that was associated with potential nonpayment by PSE&G under the BGS contract which expired on July 31, 2002, since PSE&G is a rate-regulated entity. This credit risk relates to the ability of counterparties to meet their payment obligations for the power delivered under each BGS contract. Power sells electricity to approximately nine supplier-counterparties that serve the load of the utilities, and one utility directly. Four of these supplier-counterparties pay Power directly, and one of the four prepays its purchases. The revenue from the remaining five counterparties is paid directly from the utilities that those suppliers serve, and the related margin due to the counterparties is recorded as a liability and will be remitted to those counterparties separately. Any failure to collect these payments under the new BGS contracts could have a material impact on Power's results of operations, cash flows and financial position. Energy Holdings Resources also has credit risk related to its investments in leveraged leases, totaling $1.6 billion, which is net of deferred taxes of $1.4 billion, as of September 30, 2002. These investments are significantly concentrated in the 54 energy related industry and have some exposure to the airline industry. Resources is the lessor of domestic generating facilities in several US energy markets. As a result of recent actions of the rating agencies due to concerns over forward energy prices, the credit of some of the transaction lessees, or ultimate guarantors of the lease obligations, was downgraded. As of September 30, 2002, 75% of the lease portfolio were with counterparties that were investment grade as rated by both S&P and Moody's, as compared to 86% at June 30, 2002. Specifically, the lessees in the following transactions were downgraded over the quarter by the rating agencies. Resources' investment in such transactions was approximately $451 million, net of deferred taxes of $266 million as of September 30, 2002. Resources leases 1,173 MW of coal-fired generation to Reliant Energy Mid Atlantic Power Holdings LLC (REMA), an indirect wholly-owned subsidiary of Reliant Resources Incorporated (RRI). The leased assets are the Keystone, Conemaugh and Shawville generating facilities located in the Pennsylvania New Jersey Maryland Power Pool (PJM) West market in Pennsylvania. In addition to the leased assets, REMA also owns and operates another 2,830 MW located within PJM. REMA is capitalized with over $1 billion of equity from RRI and has no debt obligations senior to the lease obligations. REMA is currently rated BB+ by S&P, and Baa3 by Moody's. As the lessor/equity participant in the lease, Resources is protected with significant lease covenants that restrict the flow of dividends from REMA to its parent, and by over-collateralization of REMA with an additional 2,830 MWs of non-leased assets, transfer of which is restricted by the financing documents. Restrictive covenants include historical and forward cash flow coverage tests that prohibit discretionary capital expenditures and dividend payments to the parent/lessee if stated minimum coverages are not met, and similar cash flow restrictions if ratings are not maintained at stated levels. The covenants are designed to maintain cash reserves in the transaction entity for the benefit of the non-recourse lenders and the lessor/equity participants in the event of a market downturn, or degradation in operating performance of the leased assets. Resources' investment in the REMA transaction was $125 million, net of deferred taxes of $88 million at September 30, 2002. Resources is the lessor of the Collins facility to Midwest Generation LLC (Midwest), an indirect subsidiary of Edison Mission Energy (EME). Collins is comprised of 2,698 MWs of oil and natural gas fired assets located in the MAIN power market located in the mid-western region of the United States. Midwest has a contract with Exelon to supply capacity and energy for 1,078 MWs for Collins through December 2003 with an option to extend. Both Midwest and EME are rated BBB- by S&P and Ba3 by Moody's. In addition to the leased assets, Midwest owns and operates an additional 4,459 MWs of generation assets. The restrictive covenants protecting us are similar to those noted above in the REMA transaction. Resources' investment in the Collins facility was $108 million, net of deferred taxes of $69 million at September 30, 2002. Resources also leases the Powerton and Joliet generating stations located in the Mid-American Interconnected Network (MAIN) market to Midwest. Both Powerton and Joliet are coal fired stations comprising 2,896 MWs of generating capacity. The lease obligations are guaranteed by EME. The guarantee contains certain restrictive covenants including, but not limited to, additional investment, liens, and sales of non-leased collateral. In addition, EME is required to maintain a minimum net worth equal to $400 million plus cumulative, consolidated net income earned by it and its subsidiaries since 1992 (without subtracting losses). Resources' investment in the Powerton and Joliet transaction was $87 million, net of deferred taxes of $74 million at September 30, 2002. Resources is the lessor of the 370 MW coal fired Danskammer plant to Dynegy Danskammer LLC (Danskammer), and the 1,200 MW natural gas/oil fired Roseton plant to Dynegy Roseton LLC (Roseton). Both Danskammer and Roseton are indirect subsidiaries of Dynegy Holdings Inc (DHI). The lease obligations are guaranteed by DHI which is currently rated B+ by S&P and B3 by Moody's. Resources' investment in the Danskammer and Roseton transaction was $131 million, net of deferred taxes of $34 million as of September 30, 2002. In the domestic lease transactions described above, Resources has protected its equity investment by providing for the right to assume the debt obligation at its discretion in the event of default by the lessee with the condition that the debt is investment grade. If we were pursuing a debt assumption, we would first seek to renegotiate all relevant terms of the agreement with the lenders. Debt assumption normally only would occur if an appraisal of the leased property yielded a value that 55 exceeds the present value of the debt outstanding. Should Resources ever directly assume a debt obligation, the fair value of the underlying asset and the associated debt would be recorded on the balance sheet instead of the net equity investment in the lease. As of September 30, 2002, Resources determined that the collectibility of the minimum lease payments under its leveraged lease investments is still reasonably predictable and therefore continues to account for these investments as leveraged leases. Resources has leasehold interests in the 340 MW natural gas fired Kings Lynn generating facility and the 360 MW natural gas fired Peterborough generating facility located in the United Kingdom. The counter-party is an indirect subsidiary of TXU Europe, which is wholly owned by the TXU Corporation. The TXU Corporation recently announced their decision to reduce their financial commitment to TXU Europe further noting their intention to sell the subsidiary. Moody's recently reduced their ratings to Ca citing that the entity is not meeting its financial commitments to suppliers or creditors when due. Our lease transactions are secured, and we believe that in any event of default, we will be able to recover our lease investment which totals $65 million, net of deferred taxes of $109 million as of September 30, 2002, although no assurances can be given. Foreign Operations As of September 30, 2002, Global and Resources had approximately $2.870 billion and $1.425 billion, respectively, of international assets. As of September 30, 2002, foreign assets represented 17% of our consolidated assets and the revenues related to those foreign assets contributed 6% to consolidated revenues for the quarter and nine months ended September 30, 2002. For discussion of foreign currency risk and asset impairments related to our investments in Argentina, see Note 3. Asset Impairments, Note 6. Commitments and Contingent Liabilities and Note 7. Financial Instruments, Energy Trading and Risk Management. ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES We have has established and maintained disclosure controls and procedures which are designed to provide reasonable assurance that material information relating to ~~us,~~the each company, including ~~our~~their respective consolidated subsidiaries, is made known to usthe Chief Executive Officer and Chief Financial Officer of each company, by others within those ~~entities, particularly during the period in which this quarterly report is being prepared. We~~entities. PSEG, PSE&G, Power and Energy Holdings have established a Disclosure Committee which is made up of several key management employees and reports directly to the Chief Financial Officer and Chief Executive Officer of each company, to monitor and evaluate these disclosure controls and procedures. The Chief Financial Officer and Chief Executive Officer of each company have evaluated the effectiveness of ~~our~~the disclosure controls and procedures as of a date within 90 days prior to the filing date of ~~this~~these quarterly ~~report~~reports (the ~~"Evaluation Date"~~''Evaluation Date'')~~. Based~~ and based on this evaluation, ~~we have~~it was concluded that ~~our~~the disclosure controls and procedures were effective in providing reasonable assurance during the period covered in ~~this~~these quarterly ~~report.~~reports. There were no significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of ~~our~~each companies' most recent evaluation. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

PART II. II
OTHER INFORMATION ITEM

Item 1. LEGAL PROCEEDINGSLegal Proceedings

Certain information reported under Item 3 of Part I of ~~our 2001~~the 2002 Annual Report on Form 10-K ~~Amended Quarterly Report on Form 10-Q/A for the quarter ended March 31, 2002 and Form 10-Q for the quarter ended June 30, 2002~~ is updated below. ~~March 31,~~

2002 Form ~~10-Q/A,~~10-K, Page 4437. The Brazilian Consumer Association of Water and ~~June 30,~~Energy Notice of Appeal with the State Court of Appeals, filed in November 2002 Form 10-Q, Page 55. On November 15, 2001, Consolidated Edison, Inc. (Con Edison) filed a complaint against PSE&G at FERC pursuant to Section 206 of the Federal Power Act asserting that PSE&G had breached agreements covering 1,000 MW of transmission by curtailing servicehas been discharged and failing to maintain sufficient system capacity to satisfy all of its service obligations. PSE&G denied the allegations set forth in the complaint. While finding that Con Edison's presentation of evidence failed to demonstrate several of the allegations in April 2002, FERC found sufficient reason to set the complaint for hearing. An initial decision issued by an administrative law judge in April 2002 upheld PSE&G's claim that the contracts do not require the provision of "firm" transmission service to Con Edison but also accepted Con Edison's contentions that PSE&G was obligated to provide service to Con Edison utilizing all the facilities comprising its electrical system including generation facilities and that PSE&G was financially responsible for above-market generation costs needed to effectuate the desired power flows. Under FERC procedures, an administrative law judge initial decision is not binding unless and until its findings have been approved by FERC. PSE&G filed a brief taking exception to the adverse findings of the April 25, 2002 order. A FERC decision concerning the findings of the April 25, 2002 order was expected on July 31, 2002. Settlement discussions between the companies with respectno further action related to this matter have been on-going and, on July 17, 2002, representatives of the companies met for settlement discussions mediated by a FERC administrative law judge. Based on progress made at these and subsequent discussions, Con Edison has twice sought to extend the date for the issuance of the FERC decision addressing the April 25, 2002 initial decision and to extend the date for the commencement of a hearing with respect to issues in the case not addressed by the April 25, 56 ~~2002 initial decision. At present, in the event the dispute~~ is not settled, the FERC decision is expected in mid-November, 2002 and the hearing before the administrative law judge will commence in early December 2002. The findings in the April 25, 2002 initial decision notwithstanding, PSE&G believes it has complied with the terms of the Agreements and will vigorously defend its position. The nature and cost of any remedy, which is expected to be prospective only, cannot be predicted. Further, even in the event settlement is reached with Con Edison, PSE&G could still be required to bear substantial levels of additional costs. Docket No. EL02-23-000. June 30, 2002 Form 10-Q, Page 56. On July 12, 2002, the United States Court of Appeals, D.C. Circuit, issued an opinion in favor of PSE&G and the other utility petitioners, reversing an order of the FERC relating to the restructuring of PJM into an Independent System Operator. The Court agreed with PSE&G's position and ruled that FERC lacks authority to require the utility owners to give up their statutory rights under Section 205 of the Federal Power Act. Hence, FERC was wrong to require a modification to the PJM ISO Agreement eliminating their rights to file changes to rate design. The court further noted that FERC lacks authority under Section 203 of the Federal Power Act to require the utility owners to obtain approval of their withdrawal from the PJM ISO. Hence, FERC had no right under Section 203 to eliminate the withdrawal rights to which the utilities had agreed. Further, in ruling on a specific argument raised by PSE&G, the Court held that FERC had not justified its decision to generically abrogate wholesale power requirements contracts; FERC was required to make a particularized finding with respect to the public interest, which was not done here. This matter is now pending on remand before the FERC. In addition, seeexpected.

See information on the following proceedings at the pages indicated: ~~(1) March 31, 2002 Form 10-Q/A, Pages 11-13~~

	(1)		Page 23. (Power) Protest filed by ODEC at FERC against Power.
	(2)		Page 25. (PSE&G) PSE&G's MGP Remediation Program.
	(3)		Page 26. (PSE&G) Investigation and additional investigation by the EPA regarding the Passaic River site. Docket No. EX93060255.
	(4)		Page 27. (Energy Holdings) Complaint filed by Harbinger with the Circuit Court of Shelby, Co., Alabama addressing ownership interest in GWF. Harbinger GWF LLC, et al. v. PSEG California Corp., et al.
	(5)		Page 29. (Power) DOE Overcharges, Docket No. 01-592C.
	(6)		Page 29. (Power) DOE not taking possession of spent nuclear fuel, Docket No. 01-551C.
	(7)		Page 29. (Energy Holdings) AES termination of the Stock Purchase Agreement, relating to the sale of certain Argentine assets. New York State Supreme Court for New York County (Docket No. 60155/2002) PSEG Global, et al vs. The AES Corporation, et al.
	(8)		Page 64. (PSE&G) PSE&G electric rate case filed with the BPU.
	(9)		Page 66. (Energy Holdings) Global's rate case in Brazil.
	(10)		Page 66. (Energy Holdings) SUNAT claim for past-due taxes at Luz del Sur.

Item 4. Submission of Matters to a Vote of Security Holders

PSEG's Annual Meeting of Stockholders was held on April 15, 2003. Proxies for the meeting were solicited pursuant to Regulation 14A under the Securities Act of 1934. There was no solicitation of proxies in opposition to management's nominees as listed in the proxy statement and ~~June 30, 2002 Form 10-Q, Page 9-10. See Page 10. AES termination~~all of management's nominees were elected to the Board of Directors. Details of the Stock Purchase Agreement, relating to the sale of certain Argentine assets. New York State Supreme Court for New York County. PSEG Global, et al vs. The AES Corporation, et al. Docket No. 60155/2002. (2) Form 10-K, Page 100, March 31, 2002 Form 10-Q/A, Page 8 and June 30, 2002 Form 10-Q, Page 18. See Page 16. PSE&G's MGP Remediation Program. (3) Form 10-K, Page 100, March 31, 2002 Form 10-Q/A, Page 8-9 and June 30, 2002 Form 10-Q, Page 19. See Page 16. Investigation and additional investigation by the EPA regarding the Passaic River site. Docket No. EX93060255. (4) Form 10-K, Page 102, March 31, 2002 Form 10-Q/A, Page 10-11 and June 30, 2002 Form 10-Q, Page 22. See Page 19. Complaint filed with the FERC addressing contract terms of certain Sellers of Energy and Capacity under Long-Term Contracts with the California Department of Water Resources. Public Utilities Commission of the State of California v. Sellers of Long Term Contracts to the California Department of Water Resources FERC Docket No. EL02-60-000. California Electricity Oversight Board v. Sellers of Energy and Capacity Under Long-Term Contracts with the California Department of Water Resources FERC Docket No. EL02-62-000. (5) Form 10-K, Pages 26 and 27 and June 30, 2002 Form 10-Q, Page 55. See Page 18. DOE not taking possession of spent nuclear fuel, Docket No. 01-551C. (6) Form 10-K, Pages 26 and 27 and June 30, 2002 Form 10-Q, Page 56. See Page 18 DOE Overcharges, Docket No. 01-592C. (7) June 30, 2002 Form 10-Q, Page 59. See Page 58. PSE&G electric rate case filed with the BPU. 57 voting are provided below:

	Votes For		Votes Withheld
Proposal 1:
Election of Directors
Class I—Term expiring in 2006
Caroline Dorsa		192,013,649		3,745,289
Ernest H. Drew		192,162,031		3,596,907
E. James Ferland		191,295,942		4,462,996
Class III—Terms expiring in 2005
Thomas A. Renyi		192,130,546		3,628,392
Directors Whose Terms Continue Beyond the 2003 Annual Meeting:
Class II—Terms expiring in 2004
Albert R. Gamper, Jr.
William V. Hickey
Richard J. Swift
Class III—Terms expiring in 2005
Conrad K. Harper
Shirley Ann Jackson

~~ITEM~~
Votes
For
Votes Against
Abstentions
Broker Non-Votes
       Proposal 2:
       Ratification of Appointment of Deloitte & Touche
     LLP as Independent Auditors      188,693,260      5,182,126      1,883,544      —
       Proposal 3:
       Shareholder Proposal      12,751,471      142,074,682      4,773,535      36,159,250

Item 5. OTHER INFORMATIONOther Information

Certain information reported under ~~our 2001~~the 2002 Annual Report on Form 10-K ~~Amended Quarterly~~is updated below. Additionally, certain information is provided for new matters that have arisen subsequent to the filing of the 2002 Annual Report on Form ~~10-Q/A for the quarter ended March 31, 2002 and Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 is updated below.~~10-K. References are to the related pages on the Form 10-K ~~Form 10-Q/A and Form 10-Q~~ as printed and distributed. Nuclear Regulatory Commission (NRC) Form 10-K, page 18 and March 31, 2002 Form 10-Q/A, Page 46. A pressurized water reactor nuclear unit (PWR) not owned by us was recently identified with a degradation of the reactor vessel head, which forms part of the pressure boundary for the reactor coolant system. In August 2002, the NRC issued bulletin 2002-02, requiring that all operators of PWR units submit information concerning: (i) a summary discussion of the supplemental inspections to be implemented, and (ii) if no changes are to be implemented, justification for reliance on visual examinations as the primary method to detect degradation. In September 2002 we provided the requested information for Salem Nuclear Generating Station (Salem). The response stated that a bare metal visual examination will be performed on the Salem reactor vessel heads during each unit's next refueling outage, in compliance with the bulletin. If repairs are determined to be necessary, it is estimated that the repair would extend the outage by approximately four weeks. Our Hope Creek nuclear unit and our interests in the Peach Bottom units 2 and 3 are unaffected as they are Boiling Water Reactor nuclear units. We cannot predict what other actions the NRC may take on this issue.

PSE&G

Electric Base Rate Case June 30,

2002 Form ~~10-Q,~~10-K, Page ~~56.~~ 13. On ~~May 24,~~April 3, 2003, the New Jersey Ratepayer Advocate (RPA), the New Jersey Board of Public Utilities (BPU) Staff and other parties filed briefs in this case based on actual financial data through December 31, 2002, the end of the test year. PSE&G ~~filed~~supported an ~~electric~~increase of $298 million based on actual data although the increase will be limited to the requested amount of $250 million. The RPA is recommending rate ~~case with~~relief of $82 million and the ~~BPU. In this filing,~~BPU Staff is recommending rate relief of $164 million. The two major differences among the parties relate to return on equity and depreciation expense. PSE&G requested ~~an annual $250 million rate increase for its electric distribution business. The proposed rate increase includes $187 million of increased revenues relating to~~ a $1.7 billion increase in PSE&G's rate base, which is primarily due to the investment that PSE&G has made in its electric distribution facilities since the last rate case in 1992; $18 million in higher depreciation rates and $45 million to recover various other expenses, such as wages, fringe benefits, and the need to enhance the security and reliability of the electric distribution system. The requested increase proposes a11.75% return on equity, ~~of 11.75% for~~while the RPA is recommending a 9.50% return on equity and the BPU Staff is recommending 9.75%. PSE~~&G's~~&G did not request a change in electric distribution ~~business. Assuming current cost levels~~depreciation expenses while the RPA and ~~a normal business environment,~~ the ~~proposed rate increase would significantly impact our earnings~~BPU Staff are recommending reductions of approximately $100 million and operating cash flows. The non-depreciation portion of the rate increase ($232 million) would have a positive effect on our earnings and operating cash flows. The depreciation portion of the rate increase ($18 million) would have no impact on our earnings, as the increased operating cash flows would be offset by higher depreciation charges.$66 million, respectively.

In accordance with the BPU's Final Order ~~which implemented~~implementing parts of ~~New Jersey's Electric Discount and~~the Energy Competition Act, PSE&G was required to ~~reduce electric rates~~provide temporary billing discounts in four steps totaling 13.9% during the ~~four year~~four-year transition ~~period.~~period ending July 31, 2003. The last step, a 4.9% decrease, took effect on August 1, 2002. ~~If approved,~~The combined effects of base rate relief, the ~~proposed rate increase would be effective August 1, 2003,~~underrecovery of costs related to the ~~end~~2002 BGS contracts and amortization of various deferral balances is expected to yield rates comparable to those in effect at the beginning of the transition period. While the proposed rate increase would increase electric distribution rates by 12.8% from the July 31, 2003 level, rates would remain 2.6% lower than the levels in April 1999, when the BPU issued its Final Order. We cannotderegulation process. Neither PSEG nor PSE&G can predict the outcome of these rate proceedings at the current time. ~~As directed~~All hearings have been completed and an initial recommendation by the BPU in its July 22, 2002 Order, on August 28, 2002, PSE&G filed supplemental testimony to address the use of securitization proceeds and proceeds from the sale of generation assets. The issue of electronic meters must also be addressed in a separate filing in an expedited timeframe. We are also working to resolve the open Service Company filing and its Street Lighting Tariff. If not resolved, these issues may be consolidated into the rate case. The electric base rate case is scheduled to be transferred from the Office of Administrative Law ~~back~~(OAL) is scheduled to be issued by May 23, 2003 then forwarded to the BPU ~~by May~~for a final decision. The new rates are proposed to be effective August 1, ~~2003. The Ratepayer Advocate and other parties filed testimony in this case in October 2002 and~~2003, consistent with the ~~case is on schedule. 58~~ ~~Standard Market Design Notice of Proposed Rulemaking (NOPR)~~Final Order.

Affiliate Standards

2002 Form 10-K, Page ~~17.~~ 12. On April 22, 2003, the BPU issued for public comment the report of its consultant on the competitive services audit that commenced in July ~~31, 2002~~2002. The report concluded that PSE&G had implemented the ~~FERC issued~~recommendations from the BPU's March 2000 order and was operating in compliance with Affiliate Standards, with limited exceptions which PSE&G expects to be able to resolve in the ordinary course. The report further raised some potential concerns about the impact on PSE&G from affiliate operations and proposed that the BPU ask for a ~~NOPR~~demonstration that adequate steps will be taken to ~~create~~assure a ~~Standard Market Design~~continuing ability of PSE&G to gain access to the capital markets. PSE&G cannot make any predictions with respect to this matter.

On April 4, 2003, the RPA filed a motion formally requesting an extra 60 days to review the competitive services audit reports for gas utilities. A similar motion is expected for the ~~wholesale electricity markets~~electric utilities competitive services reports. The BPU, in a letter dated April 11, 2003, granted the ~~United States.~~RPA an extra 30 days for its comment period. The ~~NOPR seeks~~RPA motion(s) also requested the BPU to ~~improve~~conduct a discovery

process and hearings regarding the ~~consistency of market rules throughout the country, including issues related~~competitive services reports. The BPU is expected to ~~reliability, market power concerns, transmission, pricing, congestion, governance and other issues. We cannot predict the outcome of~~address this matter ~~or its impact upon us if adopted, which could significantly affect transmission and generation in the various markets in which we operate.~~ at a future meeting.

Deferral Proceeding New Matter.

2002 Form 10-K, Page 14. In August 2002, PSE&G filed a petition proposing changes to two components of its rates, the ~~SBC~~Societal Benefits Clause (SBC) and ~~NTC.~~the Non-Utility Generation Transition Charge (NTC). The proposed result, if adopted, will result in aan annual reduction of revenues of ~~about~~approximately $122 million or approximately a 3.4% reduction in amounts paid by customers effective on August 1, 2003. The case has been transferred to the ~~Office of Administrative Law. Deferral Audit New Matter. In September 2002,~~OAL and a hearing was held during the first quarter 2003. A decision is scheduled to be issued by May 23, 2003.

On March 20, 2003, the BPU ~~retained~~recalled from the ~~services of two audit firms to conduct a review~~OAL certain issues including whether the Basic Generation Service (BGS) costs deferred in the fourth year of the ~~State's~~transition period ending July 31, 2003 should be securitized or amortized and if amortized what should the amortization period and the applicable interest rate be. These issues were recalled from all of the electric ~~utility's deferred costs for compliance with BPU orders. PSE&G has estimated~~companies' pending deferral cases at the OAL in an ~~overrecovery balance of approximately $30 million~~effort by ~~the end of July 2003. BGSS Filing New Matter. In September 2002, PSE&G filed with~~ the BPU to ~~increase~~achieve common standards for the resolution of these issues for all of the electric companies.

Investment Tax Credits (ITC)

As of June 1999, the Internal Revenue Service (IRS) had issued several private letter rulings that concluded that the refunding of ITC balances to utility customers was permitted only over the related assets' regulatory lives, which were terminated upon deregulation. Based on this fact, in 1999, PSEG and PSE&G reversed the excess deferred tax and ITC liabilities relating to its ~~Residential BGSS Commodity Charge~~generation assets that were transferred to Power and recorded a $235 million reduction as a component of the extraordinary charge recorded in 1999 to its Consolidated Financial Statements due to the deregulation of the electric industry in New Jersey. PSE&G was directed by ~~November 1,~~the BPU to seek a ruling from the IRS to determine if the ITC included in the impairment write-down of generation assets could be credited to customers without violating the tax normalization rules of the Internal Revenue Code. PSE&G filed for a private letter ruling in 2002, ~~to recover approximately $89 million in additional revenues ($83 million of~~ which is ~~associated~~still pending.

In January 2003, the IRS has proposed for comment regulations that, if adopted, would allow utilities to elect retroactive application to pass these amounts back to customers over periods equivalent to the ones in place prior to deregulation. While PSEG cannot predict the outcome of this matter, a requirement to refund such amounts to customers could have a material impact on PSEG's and PSE&G's financial condition, results of operations and net cash flows.

Universal Service Fund (USF)

In March 2003, the BPU voted to implement a permanent USF program. The program will be a statewide program initially set at $30 million for qualified gas and electric customers. Discussions are in process regarding the feasibility of an arrearage forgiveness component for the fund. Amounts related to this program will be included in the SBC and collected from utility customers with deferred accounting treatment.

PSE&G and Power

FERC

Regional Transmission Organization (RTO) Orders

2002 Form 10-K, Page 15. In July 2002, FERC initiated a rate investigation to determine whether the ''regional through-and-out rates'' between MISO and PJM should be eliminated. On March 31, 2003, a FERC Administrative Law Judge (ALJ) found such rates not to be unjust and unreasonable, which was consistent with the positions of PSE&G and Power. The ALJ decision is now before the FERC for consideration. The ultimate outcome of this proceeding on PSE&G and Power cannot be predicted.

In April 2002, PJM successfully implemented its ''PJM West'' expansion. Also, in December 2002, several major utilities in the Midwest and mid-atlantic area petitioned FERC to become transmission owners within PJM. Implementation of this filing would more than double the size of the current PJM region and would result in a market encompassing more than 153,000 MW of generation capacity and more than 128,000 MW of peak load. On April 1, 2003, FERC approved the applications of AEP and Commonwealth Edison to join PJM and rejected Virginia Power's request for an ~~underrecovered balance) or~~interim reciprocity agreement. Approval for AEP is subject to additional state regulatory approvals, however, PJM has announced its plans to integrate Commonwealth Edison into PJM in the fourth quarter of 2003.

Other

2002 Form 10-K, Page 16. In January 2003, FERC also proposed a ~~7.4%~~new transmission pricing policy that would give rate incentives to engage in certain transactions, including transfer of control of transmission facilities to a FERC-approved RTO; and joining an RTO as part of an independent transmission company and constructing new transmission facilities pursuant to a regional transmission plan. The ultimate outcome of this proposal cannot be predicted.

Energy Holdings

State Regulation

Texas

The Market Oversight Division (MOD) of the Public Utility Commission of Texas (PUCT) instituted an investigation with regard to the price spikes in the ERCOT balancing energy and ancillary services market that occurred during the February 24-26, 2003 extreme weather conditions, including whether any market manipulation occurred and whether any existing protocols need to be revised on those days, during several trading periods, prices in the Electric Reliability Council of Texas (ERCOT) balancing energy market cleared at up to $990 per megawatt-hour (MWh), which is near the $1,000 price cap. Bids submitted by the projects owned by TIE may have set this clearing price. As part of the PUCT investigation, the TIE projects, along with the other market participants, were requested to provide certain information to the MOD relating to its bids from its two generation projects during this period. TIE has supplied all requested information, and TIE believes such information demonstrates that TIE's bidding activities were consistent with ERCOT protocols. The MOD is preparing a report of its findings for presentation to the PUCT this spring. Energy Holdings believes that such report will likely result in changes to bidding protocols within ERCOT that may impose further restrictions on bidding practices, however, Energy Holdings cannot predict the final outcome of this investigation with any certainty.

Foreign Regulation

Brazil

2002 Form 10-K, page 17. Rio Grande Energia S.A. (RGE) is regulated by Agencia Nacional de Energia Eletrica (ANEEL), the national regulatory authority. In April 2003, ANEEL approved a 36.07% tariff increase for RGE. The majority of this increase became effective on April 16, 2003 while a portion of this increase is not effective until 2004. The result of this rate case was in line with management's recent expectations. This rate increase is sufficient to maintain the current level of goodwill related to RGE.

Peru

Peru's Internal Revenue Agency (SUNAT) claimed past-due taxes for period between 1996-1998, plus penalties and interest, resulting from their differing interpretation of the ~~typical residential gas heating customer. 59~~ law that allowed Luz del Sur to restate its assets to fair market value and take advantage of the resulting higher deductions from depreciation. While Luz del Sur prevailed on this issue in arbitration proceedings that ended in

~~ITEM~~

December 2001, SUNAT pursued the claim in the local Tax Court. The Tax Court ordered SUNAT to rule according to the arbitration, which was favorable to Luz del Sur. The Tax Court did make a reference to a certain article of the law which requires consideration of the legitimacy of the business motives leading to a corporate reorganization, such as the one made by Luz del Sur and which gave rise to the original dispute. Luz del Sur did have legitimate business motives to reorganize when it did and management believes that it acted in accordance with the applicable law and that accordingly Luz del Sur's position should prevail although no assurances can be given. Total liability in the event of a negative ruling is estimated at $22 million.

Empresa Distribuidora de Electricidad de Entre Rios S.A. (EDEERSA)

2002 Form 10-K, Page 132. Energy Holdings has been in the process of exiting from the EDEERSA electric distribution company in the Province of Entre Rios, Argentina. In March 2003, PSEG formally and irrevocably renounced, and effectively abandoned, its entire economic and legal interest in EDEERSA. The shares were relinquished, and ownership was assumed by an Argentine trust benefiting current EDEERSA employees, including all of the existing EDEERSA Class C shareholders who received their shares from the Province as part of the initial privatization process.

This decision by Energy Holdings was directly the result of actions taken by the government of the Republic of Argentina and the Province of Entre Rios that unilaterally altered the terms of EDEERSA's Concession Agreement, ''pesofying'' and de-indexing EDEERSA's tariff, and obligated EDEERSA to accept illiquid public debt securities known as Bonos Federales as payment in respect of its tariff. Additionally, such laws significantly restricted Global's ability to control the operations of EDEERSA, as unilateral changes enacted by the government restricted Global's ability to manage its operations to reduce the financial losses incurred as a result of such actions. As a result of these and other actions of the federal and provincial governments, EDEERSA has experienced financial difficulties that substantially impaired its value.

Item 6. EXHIBITS AND REPORTS ON FORMExhibits and Reports on Form 8-K

(A) A listing of exhibits being filed with this document is as follows: Exhibit Number Document - -------------- -------- 10 Public Service Enterprise Group Incorporated 1989 Long Term Inceptive Plan Amended as of October 22, 2002. 12 Computation of Ratios of Earnings to Fixed Charges 99 Certification by E. James Ferland, Chief Executive Officer of Public Service Enterprise Group Incorporated Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code 99.1 Certification by Thomas M. O'Flynn, Chief Financial Officer of Public Service Enterprise Group Incorporated Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code

a. PSEG:

Exhibit 12: Computation of Ratios of Earnings to Fixed Charges

Exhibit 99: Certification by E. James Ferland Pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934

Exhibit 99.1: Certification by Thomas M. O'Flynn Pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934

Exhibit 99.2: Certification by E. James Ferland Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code

Exhibit 99.3: Certification by Thomas M. O'Flynn Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code

b. PSE&G:

Exhibit 12.1: Computation of Ratios of Earnings to Fixed Charges

Exhibit 12.2: Computation of Ratios of Earnings to Fixed Charges Plus Preferred Stock Dividend Requirements

Exhibit 99.4: Certification by E. James Ferland Pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934

Exhibit 99.5: Certification by Robert E. Busch Pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934

Exhibit 99.6: Certification by E. James Ferland Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code

Exhibit 99.7: Certification by Robert E. Busch Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code

c. Power:

Exhibit 12.3: Computation of Ratios of Earnings to Fixed Charges

Exhibit 99.8: Certification by E. James Ferland Pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934

Exhibit 99.9: Certification by Thomas M. O'Flynn Pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934

Exhibit 99.10: Certification by E. James Ferland Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code

Exhibit 99.11: Certification by Thomas M. O'Flynn Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code

d. Energy Holdings:

Exhibit 12.4: Computation of Ratios of Earnings to Fixed Charges

Exhibit 99.12: Certification by E. James Ferland Pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934

Exhibit 99.13: Certification by Thomas M. O'Flynn Pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934

Exhibit 99.14: Certification by E. James Ferland Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code

Exhibit 99.15: Certification by Thomas M. O'Flynn Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code

(B) Reports on Form 8-K : Date Form Items ---- ---- ----- October 11, 2002 8-K 5 & 7 September 10, 2002 8-K 5 & 7 July 30, 2002 8-K 5 & 7 July 29, 2002 8-K/A 5 & 7 July 18, 2002 8-K 5 & 7 60 8-K:

	a. PSEG:
	Items Reported Item 5		Date of Report April 15, 2003
	b. PSE&G:
	Items Reported Item 5		Date of Report April 15, 2003
	c. Power:
	Items Reported Item 5		Date of Report April 15, 2003
	d. Energy Holdings:
	Items Reported Item 5		Date of Report April 15, 2003

SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED (Registrant) By: Patricia A. Rado ------------------------ Patricia A. Rado Vice PresidentThe signature of the undersigned company shall be deemed to relate only to matters having reference to such company and ~~Controller (Principal Accounting Officer)~~ any subsidiaries thereof.

PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
(Registrant)

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

Date: ~~November 1, 2002 61~~ May 2, 2003

~~Certification~~

SIGNATURE

Pursuant to ~~Rules 13a-14 and 15d-14~~the requirements of Section 13 or 15(d) of the ~~1934~~ Securities Exchange Act ~~I certify that: 1. I have reviewed~~of 1934, the registrant has duly caused this ~~quarterly~~ report to be signed on Form 10-Q of Public Service Enterprise Group Incorporated (the registrant); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to makeits behalf by the ~~statements made, in light~~undersigned thereunto duly authorized. The signature of the ~~circumstances under which~~undersigned company shall be deemed to relate only to matters having reference to such ~~statements were made, not misleading with respect~~company and any subsidiaries thereof.

PUBLIC SERVICE ELECTRICAND GAS COMPANY
(Registrant)

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

Date: May 2, 2003

SIGNATURE

Pursuant to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, resultsrequirements of ~~operations and cash flows~~Section 13 or 15(d) of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 1, 2002 /s/ E. James Ferland ------------------------- ---------------------------- E. James Ferland Chief Executive Officer 62 ~~Certification Pursuant to Rules 13a-14 and 15d-14 of the 1934~~ Securities Exchange Act ~~I certify that: 1. I have reviewed~~of 1934, the registrant has duly caused this ~~quarterly~~ report to be signed on Form 10-Q of Public Service Enterprise Group Incorporated (the registrant); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to makeits behalf by the ~~statements made, in light~~undersigned thereunto duly authorized. The signature of the ~~circumstances under which~~undersigned company shall be deemed to relate only to matters having reference to such ~~statements were made, not misleading with respect~~company and any subsidiaries thereof.

PSEG POWER LLC
(Registrant)

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

Date: May 2, 2003

SIGNATURE

Pursuant to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, resultsrequirements of ~~operations and cash flows~~Section 13 or 15(d) of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inSecurities Exchange Act ~~Rules 13a-14 and 15d-14) for~~of 1934, the registrant ~~and we have: a) designed such disclosure controls and procedures~~has duly caused this report to ~~ensure that material information relating to~~be signed on its behalf by the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectivenessundersigned thereunto duly authorized. The signature of the ~~registrant's disclosure controls~~undersigned company shall be deemed to relate only to matters having reference to such company and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. subsidiaries thereof.

PSEG ENERGY HOLDINGS LLC
(Registrant)

By /s/ DEREK M. DIRISIO
Derek M. DiRisio
Vice President and Controller
(Principal Accounting Officer)

Date: November 1, 2002 /s/ Thomas M. O'Flynn ------------------------- ---------------------------- Thomas M. O'Flynn Chief Financial Officer 63

May 2, 2003

	Earnings (Losses)						Contribution to Earnings Per Share (Basic and Diluted)
	Quarters Ended March 31,						Quarters Ended March 31,
	2003			2002			2003			2002
	(Millions)
Power	$	177		$	120		$	0.78		$	0.58
PSE&G		100			67			0.44			0.32
Energy Holdings:
Resources		12			15			0.05			0.07
Global		42			(13	)		0.19			(0.06	)
Other (A)		(1	)		(2	)		—			(0.01	)
Other (B)		(9	)		(6	)		(0.04	)		(0.02	)

Income from Continuing Operations	$	321		$	181		$	1.42		$	0.88
Loss from Discontinued Operations, including Loss on Disposal		(15	)		(1	)		(0.06	)		(0.01	)
Cumulative Effect of a Change in Accounting Principle (C)		370			(120	)		1.64			(0.58	)

PSEG Net Income	$	676		$	60		$	3.00		$	0.29

	Votes For		Votes Against		Abstentions		Broker Non-Votes
Proposal 2:
Ratification of Appointment of Deloitte & Touche LLP as Independent Auditors		188,693,260		5,182,126		1,883,544		—
Proposal 3:
Shareholder Proposal		12,751,471		142,074,682		4,773,535		36,159,250

UNITED STATESSECURITIES AND EXCHANGE COMMISSION Washington, DCWASHINGTON, D.C. 20549 FORM

FORM 10-Q (Mark

(Mark One) |X|

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003

OR |_|

FOR THE TRANSITION PERIOD FROM TO

TABLE OF CONTENTS

PART IFINANCIAL INFORMATION

Item 1. Financial Statements

PUBLIC SERVICE ENTERPRISE GROUP INCORPORATEDCONSOLIDATED STATEMENTS OF OPERATIONS

PUBLIC SERVICE ENTERPRISE GROUP INCORPORATEDCONSOLIDATED BALANCE SHEETS

PUBLIC SERVICE ENTERPRISE GROUP INCORPORATEDCONSOLIDATED BALANCE SHEETS

PUBLIC SERVICE ENTERPRISE GROUP INCORPORATEDCONSOLIDATED STATEMENTS OF CASH FLOWS

PUBLIC SERVICE ELECTRIC AND GAS COMPANYCONSOLIDATED STATEMENTS OF OPERATIONS

PUBLIC SERVICE ELECTRIC AND GAS COMPANYCONSOLIDATED BALANCE SHEETS

PUBLIC SERVICE ELECTRIC AND GAS COMPANYCONSOLIDATED BALANCE SHEETS

PUBLIC SERVICE ELECTRIC AND GAS COMPANYCONSOLIDATED STATEMENTS OF CASH FLOWS

PSEG POWER LLCCONSOLIDATED STATEMENTS OF OPERATIONS

PSEG POWER LLCCONSOLIDATED BALANCE SHEETS

PSEG POWER LLCCONSOLIDATED STATEMENTS OF CASH FLOWS

PSEG ENERGY HOLDINGS LLCCONSOLIDATED STATEMENTS OF OPERATIONS

PSEG ENERGY HOLDINGS LLCCONSOLIDATED BALANCE SHEETS

PSEG ENERGY HOLDINGS LLCCONSOLIDATED BALANCE SHEETS

PSEG ENERGY HOLDINGS LLCCONSOLIDATED STATEMENTS OF CASH FLOWS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)

Note 1. Organization and Basis of Presentation

Organization

Basis of Presentation

Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill''Goodwill and Other Intangible Assets"Assets'' (SFAS 142)

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

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

Financial Interpretation (FIN) No. 46, ''Consolidation of Variable Interest Entities (VIE)'' (FIN 46)

Other

Note 3. Adoption of SFAS 143

PSEG, PSE&G and Power

PSE&G

Energy Holdings

Effect on the NDT Fund

Note 4. Discontinued Operations

Energy Holdings

Tanir Bavi

Note 5. Commitments and Contingent Liabilities

Old Dominion Electric Cooperative (ODEC)

Guaranteed Obligations

Environmental Matters

New Generation and Development

Minimum Fuel Purchase Requirements

Nuclear Fuel Disposal

Other

Note 7. Financial Instruments, Energy Trading and6. Risk Management Our

PSEG, PSE&G, Power and Energy Holdings

Derivative Instruments and for energy trading purposes. Hedging Activities

Interest Rates We

Foreign Currencies

Equity Securities

Note 7. Comprehensive Income

Comprehensive Income, Net of our common stock exceeds $40.248. The net proceeds from the sale of the Participating Units were $446.2 million. 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- Continued Tax:

Note 8. Other Income and Deductions

Other Income:

Other Deductions:

Note 9. Income Taxes A tax expense has been recorded for the results of continuing operations.

Note 11. Stock-Based Compensation

Note 12. Related-Party Transactions

BGSS and certain administrativeBGS Contracts

Affiliate Loans

Changes in Capitalization

PSEG, PSE&G, Power and Energy Holdings

Note 13. Subsequent Events PSEG Energy Holdings L.L.C. PSEG Energy Holdings L.L.C., a New Jersey limited liability company,Guarantees of Debt

Power

Overview

PSEG

PSE&G

Power

Energy Holdings

Results of Operations

PSEG

PSE&G

Power

Energy Holdings

Liquidity and Capital Resources

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

PART I
FINANCIAL INFORMATION

PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS

PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED BALANCE SHEETS

PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED BALANCE SHEETS

PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS

PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS

PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONSOLIDATED BALANCE SHEETS

PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONSOLIDATED BALANCE SHEETS

PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS

PSEG POWER LLC
CONSOLIDATED STATEMENTS OF OPERATIONS

PSEG POWER LLC
CONSOLIDATED BALANCE SHEETS

PSEG POWER LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS

PSEG ENERGY HOLDINGS LLC
CONSOLIDATED STATEMENTS OF OPERATIONS

PSEG ENERGY HOLDINGS LLC
CONSOLIDATED BALANCE SHEETS

PSEG ENERGY HOLDINGS LLC
CONSOLIDATED BALANCE SHEETS

PSEG ENERGY HOLDINGS LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

PART II. II
OTHER INFORMATION ITEM