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 are a New Jersey corporation that is an exempt public utility holding company which has four principal direct wholly-owned subsidiaries: Public Service Electric and Gas Company (PSE&G), PSEG Power LLC (Power), PSEG Energy Holdings Inc. (Energy Holdings) and PSEG Services Corporation (Services).

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 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) 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). We also have a finance company subsidiary, PSEG Power Capital Investment Co. (Power Capital), which provides certain financing for its subsidiaries.

Energy Holdings has three principal direct wholly-owned subsidiaries; PSEG Global Inc. (Global), a developer and operator of domestic and international electric generation stations and distribution companies, PSEG Resources Inc. (Resources), which makes passive investments primarily in energy industry leveraged leases 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 is also the parent of Enterprise Group Development Corporation (EGDC) a commercial real estate property management business from which Energy Holdings is conducting a controlled exit. For a discussion of the formation of PSEG Energy Holdings L.L.C. and PSEG Resources L.L.C. as 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.

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 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- Continued

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 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. Recent 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

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

On January 1, 2002, we adopted SFAS 142. Under this standard, we were required to complete an impairment analysis of goodwill during 2002 and record any required impairment retroactive to the first quarter. Under SFAS 142, goodwill is considered a nonamortizable asset and is subject to an annual review for impairment and an interim review when certain events or changes in circumstances occur. The effect of no longer amortizing goodwill on an annual basis was not material to our 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 evaluated the recoverability of the recorded amount of goodwill based on certain operating and financial factors. Such impairment testing included discounted cash flow tests which require broad assumptions and significant judgment to be exercised by management. As a result, in the second quarter of 2002 we recorded after-tax charges to reflect the goodwill impairment of $120 million, retroactive to January 1, 2002, 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)

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.

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

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

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.

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.

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. The total amount of goodwill impairments is $120 million, net of tax of $66 million and was comprised of $36 million (after-tax) at EDEERSA, $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 74% owned by Global. 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, the remaining carrying value of goodwill was $464 million, of which $434 million was recorded 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.

As of September 30, 2002, our pro-rata share of the remaining goodwill included in equity method investees totaled $271 million. In accordance with generally accepted accounting principles, such goodwill is not consolidated on our balance sheet. Our share of the amortization expense related to such goodwill was $8 million for the year-ended December 31, 2001.

As of September 30, 2002 and December 31, 2001, our goodwill and pro-rata share of goodwill in consolidated equity method projects was as follows:

                                                               As of
                                                     September 30,  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              548
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 Share of Equity
       Investment Goodwill .........................     271              375
                                                       -----            -----
         Total Goodwill ............................   $ 735            $ 944
                                                       =====            =====

(1) The decrease at SAESA relates to final purchase price adjustments that resulted in higher value allocated to deferred tax assets.

(2) The decrease at EDEERSA relates to an impairment of $56 million under SFAS 142 and to purchase price adjustments of $7 million made subsequent to December 31, 2001.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- Continued

(3) The decrease at Electroandes relates to purchase price adjustments made subsequent to December 31, 2001 which resulted in higher value allocated to Property, Plant and Equipment.

(4) The decrease at RGE relates to an impairment under SFAS 142 totaling $50 million and the devaluation of the Brazilian Real amounting to $36 million.

(5) The decrease at Chilquinta relates to the devaluation of the Chilean Peso.

Note 4. Discontinued Operations

Energy Technologies' Investments

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 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.

                                     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)

The carrying amounts of the assets and liabilities of Energy Technologies' HVAC/mechanical operating companies, 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, on our Consolidated Balance Sheets and are summarized in the following table:

                                                   September 30,  December 31,
                                                       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
                                                        =====          =====

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 meets the criteria for classification as a component of discontinued operations and all prior periods have been reclassified to conform to the current year's presentation. 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 for the six months ended June 30, 2002 yielded income 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- Continued

The carrying amounts of 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 of the major classes of assets and liabilities of Tanir Bavi, as of September 30, 2002 and December 31, 2001, are summarized in the following tables:

                                                    September 30,   December 31,
                                                        2002            2001
                                                    -------------   ------------
                                                             (Millions)
Current Assets .....................................    $  34          $  36
Net Property, Plant 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
                                                        =====          =====

                                                    ----------------------------
                                                    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
                                                      =======          =======

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. In addition, Power has guaranteed payment of all amounts owed to PJM by ER&T without a stated dollar limit. The outstanding amount of exposure under those guarantees totaled $166 million as of September 30, 2002 representing the amount payable under these contracts and the net amount by which open contracts are below market.

As of September 30, 2002, letters of credit issued by Power were outstanding in the amount of approximately $73 million in support of various contractual obligations of its subsidiaries.

In addition, certain International Swap Dealer Agreements (ISDA) and other supply contracts contain margin requirements that, as of September 30, 2002, could require Power to post collateral of approximately $270 million if our credit ratings are downgraded below investment grade.

Energy Holdings

Energy Holdings and/or Global have guaranteed certain obligations of Global's subsidiaries or affiliates, including the successful completion, performance or other obligations related to certain projects in an aggregate amount of approximately $244 million as of September 30, 2002. The guarantees consist of a $61 million equity commitment for ELCHO in Poland, $55 million of support for Skawina in Poland, $56 million of various guarantees for Dhofar Power Company in Oman, a $25 million guarantee related to bond payment obligations of Chilquinta Energia Finance Co. LLC in connection with electric distribution companies in Chile and Peru and various other guarantees comprising the remaining $47 million. A substantial portion of such guarantees is cancelled upon successful completion, performance and/or refinancing of construction debt with non-recourse project debt. Any downward revision in the current ratings of Energy Holdings' Senior Notes would require the issuance of letters of credit to replace the existing guarantee of $61 million for ELCHO and $25 million for Chilquinta.

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, Energy Technologies had $220 million of such bonds outstanding, of which $46 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 million of guaranteed obligations, discussed above. No assurances can be given that 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.

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 default and Global paid $2 million in sponsor guarantees that were due. This amount is included in the $632 million of Argentine investment exposure that was impaired 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

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 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. We do not anticipate that the compliance with these regulations will have a material adverse effect on our financial position, results of operations or net cash flows.

PSE&G Manufactured Gas Plant Remediation Program

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

At September 30, 2002 and December 31, 2001, PSE&G's estimated liability for remediation costs through 2004 aggregated $87 million. Expenditures beyond 2004 cannot be reasonably estimated.

Passaic River Site

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

In a separate matter, we and certain of our 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 costs to clean up former MGPs are recoverable from utility customers under the SBC. We have contracted to sell the site of the former generating site, contingent upon approval by state regulatory agencies, to a third party that would release and indemnify us for claims arising out of the site. We cannot predict what action, if any, the EPA or any third party may take against us with respect to this matter, or in such event, what costs we may incur to address any such claims. However, such costs may be material.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- Continued

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

In January 2002, Power reached an agreement with the state and the federal government to resolve allegations of noncompliance with federal and state NSR regulations. Under that agreement, Power will install advanced air pollution controls over 12 years that are expected to significantly reduce emissions of nitrogen oxides (NOx), sulfur dioxide (SO2) particulate matter, and mercury from its Hudson and Mercer coal burning units. The estimated cost of the program is $355 million and such costs, when incurred, will be capitalized as plant additions.

Power

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., 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 MW Albany, NY Steam Station. Total costs for this project are expected to be approximately $465 million with expenditures to date of approximately $114 million. Construction began in 2002 with the expected completion date in 2005, at which time the existing station will be retired.

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

Power is constructing through indirect, wholly-owned subsidiaries, two natural gas-fired combined cycle electric generation plants in Waterford, Ohio (821 MW) and Lawrenceburg, Indiana (1,096 MW) at an estimated aggregate total cost of $1.2 billion. Total expenditures to date on these projects have been approximately $1.1 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, approximately $247 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 agreement may expire if the current financing is repaid within five years. Additional equity contributions may be required by Power to the project company if the purchase price of electricity under this contract, which will be determined prior to commercial operations, results in revenues that are less than 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- Continued

Power also has contracts with outside parties to purchase upgraded turbines for the Salem Nuclear Generating Station Units 1 and 2 and to purchase upgraded turbines and to purchase a power uprate for Hope Creek Generating Station to increase its generating capacity. The contracts are subject to nuclear regulatory approval and 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.

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

Minimum Fuel Purchase Requirements

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. On average, Power has various multi-year requirements-based purchase commitments that total approximately $100 million per year to meet Salem-Hope Creek fuel needs. Power has been advised by Exelon that it has similar purchase contracts to satisfy the fuel requirements of 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

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 fuel. To pay for this service, the nuclear plant owners were required to contribute to a Nuclear Waste Fund at a rate of one mil per 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 the BGS contract through July 2002. Payments made to the United States Department of Energy (DOE) for disposal costs are based on nuclear generation and are included in Energy Costs in the Consolidated Statements of Operations.

Under the NWPA, the DOE was required to begin taking possession of the spent nuclear fuel by no later than 1998. The DOE has announced that it does not expect a facility to be available earlier than 2010. Exelon has advised us that it had signed an agreement with the DOE applicable to Peach Bottom under which Exelon would be reimbursed for costs 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 portion of Peach Bottom's Nuclear Waste Fund fees have been reduced by approximately $18 million through August 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 filed a petition against DOE in the U.S. Court of Appeals for the Eleventh Circuit, seeking to set aside the receipt of credits by Exelon out of the Nuclear Waste Fund as stipulated in the Peach Bottom agreement. On September 24, 2002 the 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. Under the terms of

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 that if such negotiations are unsuccessful, the agreement will be null and void. Any payments required by Power resulting from a disallowance of the previously reduced fees would be included in Energy Costs in the Consolidated Statements of Operations.

In February 2002, President Bush announced that Yucca Mountain in Nevada would be the permanent disposal facility for nuclear wastes. On April 8, 2002, the Governor of Nevada submitted his veto to the sitting decision. On July 9, 2002, Congress affirmed the President's decision. The DOE must still license and construct the facility. No assurances can be given as to the final outcome of this matter.

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 should it or the majority owner of the project, take certain actions including forcing or permitting certain loan parties to declare bankruptcy. In addition, the guarantee can be triggered by transferring the shares of certain loan parties without lender consent. Breach of this transfer covenant can be cured by delivering certain pledge agreements relating to the ownership of loan parties to the lenders. Global could also be liable for any incremental direct damages arising from the breach of these covenants. Given the likely cure of any breach by the project sponsors, such a contingent obligation has a low probability of being triggered, and therefore no provision has been made in our 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 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 Commission of the State of California (CPUC) and the State of California Electricity Oversight Board (collectively the California Parties) relating to complaints filed with FERC under Section 206 of the Federal Power Act resulted in the execution of (i) an amended and restated PPA that has been affirmed by the CPUC as "just and reasonable" and (ii) a settlement agreement with the California Parties, the 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, 2003 under the amended and restated PPA discussed above. Total project cost for these plants is estimated at

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 from 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) in the Indian state of Tamil Nadu. Energy Holdings' investment exposure in this facility is approximately $44 million. Power from the facility is sold under a long-term power purchase agreement with the Tamil Nadu Electricity Board (TNEB) which sells the power to retail end user customers. The TNEB has not been able to make full payment to the plant for the purchase of energy under contract due to its overall poor liquidity situation. The current past due receivable at the project company is approximately $55 million, our share of which is approximately $11 million.

Poland

In June 2002, Global completed its acquisition of a 35% interest in the 590 MW (electric) and 618 MW (thermal) coal-fired Skawina CHP Plant (Skawina), located in Poland and in June 2002 increased its ownership interest to approximately 50%. The transaction includes the obligation to purchase additional shares in 2004 that will bring Global's aggregate interest in Skawina to approximately 75%. Skawina supplies electricity to three local distribution companies and heat mainly to the city of Krakow, under annual one-year contracts. The sale is part of 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.

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

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 to settle this dispute. The facility was built by Alstom Centrales Energetiques SA, (Alstom) an independent contractor, who was also obligated to complete construction by September 3, 2001. CPC believes it is entitled to liquidated damages from Alstom in amounts greater than the claims by STEG. Such liquidated damages are secured by letters of credit totaling $30 million.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- Continued

Note 7. Financial Instruments, Energy Trading and Risk Management

Our operations are exposed to market risks from changes in commodity prices, foreign currency exchange rates, interest rates and equity prices that could affect our results of operations and financial condition. We manage our exposure to these market risks through our regular operating and financing activities and, when deemed appropriate, hedge these risks through the use of derivative financial instruments. We use the term hedge to mean a strategy designed to manage risks of volatility in prices or rate movements on certain assets, liabilities or anticipated transactions 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. We use derivative instruments as risk management tools consistent with our business plans and prudent business practices and for energy trading purposes.

Energy Trading Contracts

Power maintains a strategy of entering into trading positions to optimize the value of its portfolio of generation assets 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 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 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
                                     =====       =====       =====       =====

                                    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
                                   ==      =====       ====         ==      =====       ====

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 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 margin deposits as of September 30, 2002 was approximately $9 million.

Derivative Instruments and Hedging Activities

Commodity Contracts

The availability and price of energy commodities are subject to fluctuations from factors such as weather, environmental policies, changes in supply and demand, state and federal regulatory policies and other events. To reduce price risk caused by market fluctuations, Power enters into forwards, futures, swaps and options with approved counterparties to hedge its anticipated demand. 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 the energy delivery from its generating stations based on the forward price curve movement of energy and, as a result, entered into swaps, options and futures transactions to hedge the price of gas to meet its gas purchases requirements for generation. These transactions qualified for hedge accounting treatment under SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). As of September 30, 2002, the fair value of these hedges were $17 million with offsetting charges to Other Comprehensive Income (OCI) of $10 million (after-tax). These hedges will mature through 2003.

Also, prior to May 2002, PSE&G had entered into gas forwards, futures, options and swaps to hedge its forecasted requirements for natural gas, which was required under an agreement with the BPU in 2001. Effective with the transfer of PSE&G's gas contracts to Power on May 1, 2002, Power also acquired all of the derivatives entered into by PSE&G. Power accounts for these derivative instruments pertaining to residential customers in a similar manner to PSE&G. Gains or losses from these derivatives will be recovered from 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 derivatives are deferred and reported as a component of OCI. There were no ineffective 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 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 requirements with a fair value of approximately $(137) million. The maximum term of these contracts is approximately one year.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- Continued

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. Most of these contracts are option contracts on gas purchases for generation requirements that do not qualify for hedge accounting. Therefore, the changes in fair market value of these derivative contracts are recorded in the income statement at the end of each reporting period. For the three and nine months ended September 30, 2002, Power recorded gains (losses) on these contracts of $(6) million and $24 million, respectively, 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
                                               ====              ====          ====             ====

As of September 30, 2002 and December 31, 2001, substantially all of these contracts had terms of 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 are subject to the risk of fluctuating interest rates in the normal course of business. Our policy is to manage interest rate risk through the use of fixed rate debt, floating rate debt, interest rate derivatives. As of September 30, 2002, a hypothetical 10% change in market interest rates would result in a consolidated change of $12 million in annual interest costs related to short-term and floating rate debt consisting of $2 million, $3 million, $3 million and $4 million at 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.

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 to the same benchmark interest rate. Therefore, 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 that 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, are initially recorded in OCI. Reclassification of unrealized gains or losses on cash flow hedges of variable-rate debt instruments from OCI into earnings occurs as interest payments are accrued on the debt instrument and generally offsets the change in the interest accrued on the underlying variable

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- Continued

rate debt. We estimate reclassifying $18 million of losses from 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. 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 December 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, net foreign currency devaluations have reduced the reported amount of our total Stockholder's Equity by $324 million, of which $212 million and $105 million were caused by the devaluation of the Brazilian Real and the Chilean Peso, respectively. For the net foreign currency devaluations for the quarter and nine months ended September 30, 2002 and 2001, see Note 10. Comprehensive Income.

In May 2002, Energy Holdings purchased foreign currency call options in order to hedge its average 2002 earnings denominated in Brazilian Reais and in Peruvian Nuevo Sols for the remainder of 2002. As of September 30, 2002, there were three call options outstanding on the Brazilian Real, one expiring in each month through December 2002. The aggregate notional and fair values 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, 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 value of foreign currency derivatives, designated and effective as cash flow hedges, are initially recorded in OCI. Reclassification of unrealized gains or losses on cash flow hedges from OCI into earnings generally occurs when the hedged transaction is recorded in earnings and generally offsets the change in the value of the hedged item. 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.

                                                                      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

As of October 30, 2002, the fair value of the long-term debt for Power and Energy Holdings had declined in value to an estimated fair value of $3.1 billion 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 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 our common stock. Prior to such conversion, the securities will be accounted for under the Treasury Stock method for purposes of calculating fully diluted earnings per share. These securities will be dilutive to earnings per share to the extent that the market price of our common stock exceeds $40.248. The net proceeds from the sale of the Participating Units were $446.2 million.

                                                                      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%

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. 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.