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

FORM 10-Q

(Mark One)

~~[X]~~x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED ~~JUNE~~MARCH 3031, ~~2003~~2004

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

FOR THE TRANSITION PERIOD FROM TO

Commission File Number		Registrants, State of Incorporation, Address, and Telephone Number	I.R.S. Employer Identification No.
	001-09120	PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED (A New Jersey Corporation) 80 Park Plaza, P.O. Box 1171 Newark, New Jersey 07101-1171 973 430-7000 http://www.pseg.com		22-2625848
	001-00973	PUBLIC SERVICE ELECTRIC AND GAS COMPANY (A New Jersey Corporation) 80 Park Plaza, P.O. Box 570 Newark, New Jersey 07101-0570 973 430-7000 http://www.pseg.com		22-1212800
	000-49614	PSEG POWER LLC (A Delaware Limited Liability Company) 80 Park Plaza—T25 Newark, New Jersey 07102-4194 973 430-7000 http://www.pseg.com		22-3663480
	000-32503	PSEG ENERGY HOLDINGS LLC (A New Jersey Limited Liability Company) 80 Park Plaza—~~T22~~T20 Newark, New Jersey 07102-4194 973 456-3581 http://www.pseg.com		2242-~~2983750~~1544079

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

As of ~~July~~April 2522, ~~2003~~2004, Public Service Enterprise Group Incorporated had outstanding ~~226~~236,~~367~~603,~~848~~954 shares of its sole class of Common Stock, without par value.

As of ~~July~~April 2522, ~~2003~~2004, Public Service Electric and Gas Company had issued and outstanding 132,450,344 shares of Common Stock, without nominal or par value, all of which were privately held, beneficially and of record by Public Service Enterprise Group Incorporated.

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

Indicate by check mark whether each registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Public Service Enterprise Group Incorporated Yes ~~[X]~~x No [o ] Public Service Electric and Gas Company Yes [o ] No ~~[X]~~x PSEG Power LLC Yes [o ] No ~~[X]~~x PSEG Energy Holdings LLC Yes [o ] No ~~[X]~~x

TABLE OF CONTENTS

		Page
FORWARD-LOOKING STATEMENTS			ii
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Public Service Enterprise Group Incorporated		1
	Public Service Electric and Gas Company		5
	PSEG Power LLC		9
	PSEG Energy Holdings LLC		12
	Notes to Consolidated Financial Statements
	Notes to Condensed Consolidated Financial Statements
	Note 1. Organization and Basis of Presentation		16
	Note 2. New Accounting Standards		17
	Note 2. Restatement of Financial Statements		20
	Note 3. Adoption of SFAS 143		21
	Note 3. Recent Accounting Standards		21
	Note 4. Earnings Per Share		22
	Note 4. Adoption of SFAS 143		24
	Note 5. Discontinued Operations		2325
	Note 6. Regulatory Assets and Liabilities		25
	Note 6. Earnings Per Share		26
	Note 7. Commitments and Contingent Liabilities		2627
	Note 8. Risk Management		3235
	Note 9. Comprehensive Income		3538
	Note 10. Other Income and Deductions		36
	Note 10. Changes in Capitalization		38
	Note 11. Income Taxes		37
	Note 11. Other Income and Deductions		39
	Note 12. Financial Information by Business Segment		38
	Note 12. Income Taxes		40
	Note 13. Stock-Based Compensation		39
	Note 13. Financial Information by Business Segments		41
	Note 14. Related-Party Transactions		3941
	Note 15. Guarantees of Debt		4243
	Note 16. Subsequent Events		4345
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		4546
	Overview		4546
	Results of Operations		49
	Liquidity and Capital Resources		6056
	Capital Requirements		6761
	Accounting Issues		67
Item 3.	Qualitative and Quantitative Disclosures About Market Risk		62
Item 3.	Qualitative and Quantitative Disclosures About Market Risk		69
Item 4.	Controls and Procedures		67
Item 4.	Controls and Procedures		75
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		7669
Item 5.	Other Information		76
Item 4.	Submission of Matters to a Vote of Security Holders		70
Item 6.	Exhibits and Reports on Form 8-K		81
Item 5.	Other Information		70
Signatures			83
Item 6.	Exhibits and Reports on Form 8-K		72
Signatures			75

FORWARD-LOOKING STATEMENTS

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

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

PSEG, PSE&G, Power and Energy Holdings

• credit, commodity, interest rate, counterparty and other financial market risks; • liquidity and the ability to access capital and credit markets; • acquisitions, divestitures, mergers, restructurings or strategic initiatives that change PSEG's, PSE&G's, Power's and Energy Holdings' structure; • business combinations among competitors and major customers; • general economic conditions including inflation; • regulatory issues that significantly impact operations; • changes to accounting standards or accounting principles generally accepted in the U.S., which may require adjustments to financial statements; • changes in tax laws and regulations; • energy obligations, available supply and trading risks; • adverse weather conditions that significantly impact costs and/or operations; • changes in the electric industry including changes to power pools; • changes in the number of market participants and the risk profiles of such participants; • regulation and availability of power transmission facilities that impact the ability to deliver output to customers; • growth in costs and expenses; • environmental ~~regulation~~regulations that significantly impact operations; • changes in rates of return on overall debt and equity markets that could ~~have~~adversely ~~an adverse~~ impact on the value of pension assets and the Nuclear Decommissioning Trust Fund; • changes in political conditions, recession, acts of war or terrorism; • ~~insufficient~~availability of insurance coverage at commercially reasonable rates; • involvement in lawsuits including liability claims and commercial disputes ~~could affect profits or the ability to sell and market products~~; • inability to attract and retain management and other key employees; • ability to service debt as a result of any of the aforementioned events;

PSE&G and Energy Holdings

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

Power and Energy Holdings

• energy transmission constraints or lack thereof; • adverse changes in the market place for energy, capacity, natural gas, emissions credits, congestion credits and other commodity prices; • ~~excess~~surplus ~~supply~~of ~~due~~energy tocapacity ~~overbuild~~and inexcess ~~the industry~~supply; • generation operating performance may fall below projected levels; • substantial competition ~~from well capitalized participants~~ in the worldwide energy markets; • inability to effectively manage portfolios of electric generation assets, gas supply contracts and electric and gas supply obligations; • margin posting requirements; • availability of fuel at reasonable prices; • competitive position could be adversely affected by actions involving competitors or major customers; • changes in product or sourcing mix; • ~~tardy~~delays or cost escalations or unsuccessful acquisition, construction and development; • changes in technology that make power generation assets less competitive;

Power

• changes in regulation and safety and security measures at nuclear facilities;

Energy Holdings

• ~~adverse~~ international developments ~~that~~ negatively ~~impact~~impacting its business; • changes in foreign currency exchange rates; • substandard operating performance or cash flow from investments ~~could~~falling ~~fall~~ below projected levels, adversely impacting the ability to service its debt; and • deteriorating credit of lessees and their ability to adequately service ~~the~~lease ~~leases~~rentals.

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

iii

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

	For the Quarter Ended June 30,						For the Six Months Ended June 30,
	For the Quarters Ended March 31,
	2003			2002			2003			2002
				As Restated, see Note 2
	(Millions, except for Share Data) (Unaudited)
	2004			2003
OPERATING REVENUES	$	2,419		$	1,415		$	5,725		$	3,298
	(Millions, except for share data) (Unaudited)
OPERATING EXPENSES
OPERATING REVENUES	$	3,221		$	3,288
Energy Costs		1,412			449			3,376			1,189
OPERATING EXPENSES
Operation and Maintenance		487			457			1,007			920
Energy Costs		1,823			1,953
Write-down of Project Investments		—			506			—			506
Operation and Maintenance		546			519
Depreciation and Amortization		~~103~~172			~~135~~99			~~203~~			~~266~~
Taxes Other Than Income Taxes		2845			2644			72			64
Total Operating Expenses		2,~~030~~586			12,~~573~~615			~~4,658~~			~~2,945~~
Income from Equity Method Investments		3128			3320			48			63
OPERATING INCOME (LOSS)		420			(125	)		1,115			416
OPERATING INCOME		663			693
Other Income		3035			759			88			9
Other Deductions		(2123	)		(2743	)		~~(64~~	)		~~(70~~	)
Interest Expense		(~~190~~223	)		(~~188~~198	)		~~(377~~	)		~~(379~~	)
Preferred Securities Dividends		(18	)		(14	)		(36	)		(28	)
Preferred Stock Dividends		(1	)		(1	)
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		221			(347	)		726			(52	)
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		451			510
Income Taxes		(71	)		120			(255	)		6
Income Tax Expense		(180	)		(186	)
INCOME (LOSS) FROM CONTINUING OPERATIONS		150			(227	)		471			(46	)
INCOME FROM CONTINUING OPERATIONS		271			324
Loss from Discontinued Operations, including Loss on Disposal, net of tax		(2	)		(37	)		(17	)		(38	)
Loss from Discontinued Operations, including Loss on Disposal, net of tax benefit of $6 for 2003		—			(13	)
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE		148			(264	)		454			(84	)
INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE		271			311
Extraordinary Item, net of tax benefit of $12		(18	)		—			(18	)		—
Cumulative Effect of a Change in Accounting Principle, net of tax expense of $255 for 2003		—			370
Cumulative Effect of a Change in Accounting Principle, net of tax (expense) benefit of ($255) and $66 in 2003 and 2002, respectively		—			—			370			(120	)
NET INCOME	$	271		$	681
NET INCOME (LOSS)	$	130		$	(264	)	$	806		$	(204	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (THOUSANDS):
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
BASIC		236,193			225,342
BASIC		225,910			206,246			225,627			206,049
DILUTED		238,852			225,714
DILUTED		226,582			206,927			226,108			206,631
EARNINGS PER SHARE:
EARNINGS PER SHARE:
BASIC
BASIC
INCOME FROM CONTINUING OPERATIONS	$	1.15		$	1.44
INCOME (LOSS) FROM CONTINUING OPERATIONS	$	0.67		$	(1.10	)	$	2.09		$	(0.22	)
NET INCOME	$	1.15		$	3.02
NET INCOME (LOSS)	$	0.58		$	(1.28	)	$	3.57		$	(0.99	)
DILUTED
DILUTED
INCOME FROM CONTINUING OPERATIONS	$	1.14		$	1.43
INCOME (LOSS) FROM CONTINUING OPERATIONS	$	0.66		$	(1.10	)	$	2.09		$	(0.22	)
NET INCOME	$	1.14		$	3.01
NET INCOME (LOSS)	$	0.57		$	(1.28	)	$	3.57		$	(0.99	)
DIVIDENDS PAID PER SHARE OF COMMON STOCK	$	0.55		$	0.54
DIVIDENDS PAID PER SHARE OF COMMON STOCK	$	0.54		$	0.54		$	1.08		$	1.08

See Notes to Condensed Consolidated Financial Statements.

PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30, 2003			December 31, 2002
	March 31, 2004			December 31, 2003
	(Millions) (Unaudited)
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents	$	~~150~~470		$	~~165~~452
Accounts Receivable, net of allowances of $86 and $34 in 2003 and 2002, respectively		1,377			1,370
Accounts Receivable, net of allowances of $43 and $40 in 2004 and 2003, respectively		1,723			1,549
Unbilled Electric and Gas Revenues		171			275
Unbilled Revenues		192			261
Fuel		~~416~~194			~~412~~527
Materials and Supplies		~~226~~238			~~208~~227
Energy Trading Contracts		~~155~~157			~~157~~101
Restricted Cash		37			32
Assets of Discontinued Operations		283			298
Assets Held for Sale		72			83
Other		158			245
Prepayments		297			60
Total Current Assets		3,415			3,660
Current Assets of Discontinued Operations		31			107
PROPERTY, PLANT AND EQUIPMENT		17,572			17,406
Other		37			75
Less: Accumulated Depreciation and Amortization		(5,070	)		(4,984	)
Total Current Assets		2,969			2,944
Net Property, Plant and Equipment		12,502			12,422
PROPERTY, PLANT AND EQUIPMENT		17,329			16,571
Less: Accumulated Depreciation and Amortization		(5,193	)		(5,113	)
Net Property, Plant and Equipment		12,136			11,458
NONCURRENT ASSETS
Regulatory Assets		4,~~975~~710			54,~~002~~801
Long-Term Investments		4,~~687~~747			4,~~580~~808
Nuclear Decommissioning Trust (NDT) Funds		~~869~~981			~~766~~985
Other Special Funds		91460			72470
Goodwill		442			452
Goodwill and Other Intangibles		596			610
Other Intangibles		206			206
Other		304			302
Energy Trading Contracts		23			21
Total Noncurrent Assets		11,798			11,976
Other		172			201
TOTAL ASSETS	$	27,715		$	28,058
Total Noncurrent Assets		11,465			11,300
TOTAL ASSETS	$	26,570		$	25,702

See Notes to Condensed Consolidated Financial Statements.

PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30, 2003			December 31, 2002
	March 31, 2004			December 31, 2003
	(Millions) (Unaudited)
LIABILITIES AND CAPITALIZATION
CURRENT LIABILITIES
Long-Term Debt Due Within One Year	$	~~733~~456		$	~~749~~726
Commercial Paper and Loans		~~1,070~~290			~~762~~301
Accounts Payable		1,~~117~~083			1,~~115~~216
Energy Trading Contracts		85137			~~101~~72
Accrued Taxes		72185			~~229~~33
Current Liabilities of Discontinued Operations		31			83
Liabilities of Discontinued Operations		229			242
Other		~~762~~837			~~755~~754
Total Current Liabilities		3,~~870~~217			3,~~794~~344
NONCURRENT LIABILITIES
Deferred Income Taxes and Investment Tax Credits (ITC)		34,~~526~~124			24,~~918~~196
Regulatory Liabilities		~~362~~526			~~252~~536
Nuclear Decommissioning Liabilities		~~273~~290			~~766~~284
Other Postemployment Benefit (OPEB) Costs		~~513~~542			~~501~~532
Accrued Pension Costs		297			336
Other		831			612
Cost of Removal		—			131
Total Noncurrent Liabilities		6,313			6,160
Other		639			634
Total Noncurrent Liabilities		5,610			5,538
COMMITMENTS AND CONTINGENT LIABILITIES (See Note 7)
CAPITALIZATION
LONG-TERM DEBT
Long-Term Debt		78,~~060~~422			7,~~116~~921
Securitization Debt		2,~~160~~051			2,~~222~~085
Project Level, Non-Recourse Debt		~~1,808~~931			1,~~653~~738
Total Long-Term Debt		11,028			10,991
Debt Supporting Trust Preferred Securities		1,201			1,201
Total Long-Term Debt		12,605			12,945
SUBSIDIARIES' PREFERRED SECURITIES
Preferred Stock Without Mandatory Redemption		80			80
Preferred Stock Without Mandatory Redemption, $100 par value, 7,500,000 authorized; issued and outstanding, 2004 and 2003— 795,234 shares		80			80
Preferred Stock With Mandatory Redemption		460			460
Guaranteed Preferred Beneficial Interest in Subordinated Debentures		860			860
Total Subsidiaries' Preferred Securities		1,400			1,400
COMMON STOCKHOLDERS' EQUITY
Common Stock, issued; 2003—252,460,006 shares 2002—251,385,937 shares		4,100			4,056
Common Stock, no par, authorized 500,000,000 shares; issued; 2004—262,702,013 shares 2003—262,252,032 shares		4,502			4,490
Treasury Stock, at cost; 2003 and 2002—26,118,590 shares		(981	)		(981	)
Treasury Stock, at cost; 2004 and 2003—26,118,590 shares		(981	)		(981	)
Retained Earnings		2,~~160~~362			12,~~601~~221
Accumulated Other Comprehensive Loss		(~~617~~383	)		(~~697~~201	)
Total Common Stockholders' Equity		45,~~662~~500			35,~~979~~529
Total Capitalization		1718,~~090~~185			1618,~~370~~554
TOTAL LIABILITIES AND CAPITALIZATION	$	2627,~~570~~715		$	2528,~~702~~058

See Notes to Condensed Consolidated Financial Statements.

PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Six Months Ended June 30,
	For the Quarters Ended March 31,
	2003			2002
				As Restated, see Note 2
	2004			2003
	(Millions) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss)	$	806		$	(204	)
Net Income	$	271		$	681
Adjustments to Reconcile Net Income (Loss) to Net Cash Flows from Operating Activities:
Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities:
Extraordinary Item, net of tax		18			—
Loss on Disposal of Discontinued Operations, net of tax		2			8
Write-Down of Project Investments		—			506
Cumulative Effect of a Change in Accounting Principle, net of tax		—			(370	)
Loss on Disposal of Discontinued Operations, net of tax		9			34
Depreciation and Amortization		172			99
Cumulative Effect of a Change in Accounting Principle, net of tax		(370	)		120
Amortization of Nuclear Fuel		23			23
Depreciation and Amortization		203			266
Provision for Deferred Income Taxes (Other than Leases) and ITC		67			19
Amortization of Nuclear Fuel		46			42
Non-Cash Employee Benefit Plan Costs		54			44
Provision for Deferred Income Taxes (Other than Leases) and ITC		59			(154	)
Leveraged Lease Income, Adjusted for Rents Received		(49	)		(2	)
Non-Cash Employee Benefit Plan Costs		126			97
Undistributed Earnings from Affiliates		5			(7	)
Leveraged Lease Income, Adjusted for Rents Received		35			48
Foreign Currency Transaction Gain		—			(4	)
Undistributed Earnings from Affiliates		(3	)		(17	)
Unrealized Gains on Energy Contracts and Other Derivatives		(17	)		(4	)
Foreign Currency Transaction Loss		—			69
Over (Under) Recovery of Electric Energy Costs (BGS and NTC) and Gas Costs		35			(16	)
Unrealized Losses (Gains) on Energy Contracts and Other Derivatives		7			(37	)
Over Recovery of SBC		1			45
(Under) Over Recovery of Electric Energy Costs (BGS and NTC) and Gas Costs		(51	)		2
Net Realized Gains and Income from NDT Fund		(21	)		(14	)
Over Recovery of SBC		91			34
Other Non-Cash Credits		(10	)		(13	)
Net Realized Gains and Income from NDT Fund		(28	)		—
Net Change in Certain Current Assets and Liabilities		382			79
Other Non-Cash Charges		5			31
Employee Benefit Plan Funding and Related Payments		(19	)		(15	)
Net Change in Certain Current Assets and Liabilities		(176	)		(143	)
Proceeds from the Withdrawal of Partnership Interests and Other Distributions		66			46
Employee Benefit Plan Funding and Related Payments		(153	)		(130	)
Other		(12	)		42
Proceeds from the Withdrawal of Partnership Interests and Other Distributions		47			4
Net Cash Provided By Operating Activities		950			641
Other		(43	)		(32	)
Net Cash Provided By Operating Activities		628			536
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to Property, Plant and Equipment		(~~715~~235	)		(~~889~~315	)
Investments in Joint Ventures, Partnerships and Capital Leases		(173	)		(~~183~~18	)
Proceeds from the Sale of Investments and Return of Capital from Partnerships		249			90(2	)
Other		722			(962	)
Net Cash Used In Investing Activities		(~~723~~167	)		(~~1,078~~337	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net Change in Short-Term Debt		~~422~~(10	)		~~361~~(39	)
Issuance of Long-Term Debt		~~476~~489			~~733~~401
Issuance of Non-Recourse Debt		350			141
Issuance of Common Stock		21			21
Issuance of Common Stock		42			36
Redemptions of Long-Term Debt		(1,108	)		(501	)
Redemptions of Long-Term Debt		(933	)		(424	)
Cash Dividends Paid on Common Stock		(130	)		(122	)
Cash Dividends Paid on Common Stock		(244	)		(223	)
Other		(26	)		1
Other		(33	)		(1	)
Net Cash Used In Financing Activities		(764	)		(239	)
Net Cash Provided By Financing Activities		80			623
Effect of Exchange Rate Change		(1	)		—
Effect of Exhange Rate Change		—			(2	)
Net Change In Cash and Cash Equivalents		18			65
Net Change In Cash and Cash Equivalents		(15	)		79
Cash and Cash Equivalents at Beginning of Period		452			149
Cash and Cash Equivalents at Beginning of Period		165			167
Cash and Cash Equivalents at End of Period	$	470		$	214
Cash and Cash Equivalents at End of Period	$	150		$	246
Supplemental Disclosure of Cash Flow Information:
Income Taxes Paid	$	~~150~~1		$	~~145~~147
Interest Paid, Net of Amounts Capitalized	$	~~383~~180		$	~~391~~180

See Notes to Condensed Consolidated Financial Statements.

PUBLIC SERVICE ELECTRIC AND GAS COMPANY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

	For The Quarter Ended June 30,						For The Six Months Ended June 30,
	For the Quarters Ended March 31,
	2003			2002			2003			2002
	2004			2003
	(Millions) (Unaudited)
OPERATING REVENUES	$	12,~~342~~182		$	12,~~230~~148		$	~~3,490~~		$	~~2,889~~
OPERATING EXPENSES
Energy Costs		~~919~~1,419			~~758~~1,507			~~2,426~~			~~1,817~~
Operation and Maintenance		~~224~~278			~~239~~286			~~510~~			~~493~~
Depreciation and Amortization		63127			9766			~~129~~			~~192~~
Taxes Other Than Income Taxes		2845			2644			72			64
Total Operating Expenses		1,~~234~~869			1,~~120~~903			~~3,137~~			~~2,566~~
OPERATING INCOME		~~108~~313			~~110~~245			~~353~~			~~323~~
Other Income		3			210			13			2
Other Deductions		—(1	)		(1	)		(1	)		(1	)
Interest Expense		(9496	)		(~~100~~97	)		~~(188~~	)		~~(200~~	)
Preferred Securities Dividends		(3	)		(3	)		(6	)		(6	)
INCOME BEFORE INCOME TAXES		219			157
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM		14			8			171			118
Income Tax Expense		(94	)		(56	)
Income Benefit (Taxes)		8			—			(48	)		(42	)
NET INCOME		125			101
INCOME BEFORE EXTRAORDINARY ITEM		22			8			123			76
Preferred Stock Dividends		(1	)		(1	)
Extraordinary Item, net of tax benefit of $12		(18	)		—			(18	)		—
EARNINGS AVAILABLE TO PUBLIC SERVICE ENTERPRISE
NET INCOME		4			8			105			76
GROUP INCORPORATED	$	124		$	100
Preferred Stock Dividends		(1	)		(1	)		(2	)		(2	)
EARNINGS AVAILABLE TO PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED	$	3		$	7		$	103		$	74

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

PUBLIC SERVICE ELECTRIC AND GAS COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30, 2003			December 31, 2002
	March 31, 2004			December 31, 2003
	(Millions) (Unaudited)
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents	$	22318		$	35140
Accounts Receivable, net of allowances of $42 and $32 in 2003 and 2002, respectively		697			755
Accounts Receivable, net of allowances of $37 and $34 in 2004 and 2003, respectively		948			804
Unbilled Revenues		~~171~~192			~~275~~261
Materials and Supplies		5753			4550
Prepayments		230			25
Other		39			66
Restricted Cash		14			14
Total Current Assets		1,550			1,321
Other		25			16
PROPERTY, PLANT AND EQUIPMENT		9,828			9,793
Total Current Assets		1,216			1,165
Less: Accumulated Depreciation and Amortization		(3,284	)		(3,258	)
PROPERTY, PLANT AND EQUIPMENT		9,785			9,581
Net Property, Plant and Equipment		6,544			6,535
Less: Accumulated Depreciation and Amortization		(3,596	)		(3,604	)
Net Property, Plant and Equipment		6,189			5,977
NONCURRENT ASSETS
Regulatory Assets		4,~~975~~710			54,~~002~~801
Long-Term Investments		~~127~~133			~~123~~131
Other Special Funds		45263			44272
Intangibles		60			60
Other		106			102
Other		59			58
Total Noncurrent Assets		5,212			5,306
Total Noncurrent Assets		5,266			5,287
TOTAL ASSETS	$	13,306		$	13,162
TOTAL ASSETS	$	12,671		$	12,429

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

PUBLIC SERVICE ELECTRIC AND GAS COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS

			June 30, 2003				December 31, 2002
		March 31, 2004				December 31, 2003
		(Millions) (Unaudited)	~~(Millions) (Unaudited)~~
LIABILITIES AND CAPITALIZATION	~~LIABILITIES AND CAPITALIZATION~~
CURRENT LIABILITIES	~~CURRENT LIABILITIES~~
Long-Term Debt Due Within One Year	~~Long-Term Debt Due Within One Year~~	$	$425	~~419~~		$	$423	~~429~~
	Commercial Paper and Loans			502				224
Accounts Payable			250				286
	Accounts Payable			513				724
Accounts Payable—Affiliated Companies, net			453				431
	Other			336				315
Clean Energy Program			75				110
	Total Current Liabilities			1,770				1,692
Other			368				296
	NONCURRENT LIABILITIES
Total Current Liabilities			1,571				1,546
	Deferred Income Taxes and ITC			2,458				2,436
NONCURRENT LIABILITIES
	Regulatory Liabilities			362				252
Deferred Income Taxes and ITC			2,693				2,715
OPEB Costs	~~OPEB Costs~~		521	~~495~~			509	~~486~~
	Accrued Pension Costs			151				175
Regulatory Liabilities			526				536
Other	~~Other~~		236	~~181~~			187	~~209~~
Total Noncurrent Liabilities	~~Total Noncurrent Liabilities~~		3,976	~~3,647~~			3,947	~~3,558~~
COMMITMENTS AND CONTINGENT LIABILITIES (See Note 7)	~~COMMITMENTS AND CONTINGENT LIABILITIES (See Note 7)~~
CAPITALIZATION	~~CAPITALIZATION~~
LONG-TERM DEBT	~~LONG-TERM DEBT~~
Long-Term Debt	~~Long-Term Debt~~		3,044	~~2,491~~			3,044	~~2,627~~
Securitization Debt	~~Securitization Debt~~		2,051	~~2,160~~			2,085	~~2,222~~
Total Long-Term Debt	~~Total Long-Term Debt~~		5,095	~~4,651~~			5,129	~~4,849~~
PREFERRED SECURITIES	~~PREFERRED SECURITIES~~
	Preferred Stock Without Mandatory Redemption			80				80
Preferred Stock Without Mandatory Redemption, $100 par value, 7,500,000 authorized; issued and outstanding, 2004 and 2003— 795,234 shares			80				80
	Subsidiaries' Preferred Securities With Mandatory Redemption			155				155
COMMON STOCKHOLDER'S EQUITY
	Total Preferred Securities			235				235
Common Stock; 150,000,000 shares authorized, 132,450,344 shares issued and outstanding			892				892
	COMMON STOCKHOLDER'S EQUITY
Contributed Capital			170				170
	Common Stock; 150,000,000 shares authorized, 132,450,344 shares issued and outstanding			892				892
Basis Adjustment			986				986
	Contributed Capital			170				—
Retained Earnings			538				414
	Basis Adjustment			986				986
Accumulated Other Comprehensive Loss			(2	)			(2	)
	Retained Earnings			492				389
Total Common Stockholder's Equity			2,584				2,460
	Accumulated Other Comprehensive Loss			(172	)			(172	)
Total Capitalization			7,759				7,669
	Total Common Stockholder's Equity			2,368				2,095
TOTAL LIABILITIES AND CAPITALIZATION		$	13,306			$	13,162
	Total Capitalization			7,254				7,179
	TOTAL LIABILITIES AND CAPITALIZATION		$	12,671			$	12,429

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

PUBLIC SERVICE ELECTRIC AND GAS COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Six Months Ended June 30,
	For the Quarters Ended March 31,
	2003			2002
	2004			2003
	(Millions) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income	$	~~105~~125		$	76101
Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities:
Extraordinary Item, net of tax		18			—
Depreciation and Amortization		127			66
Depreciation and Amortization		129			192
Provision for Deferred Income Taxes and ITC		22			(17	)
Provision for Deferred Income Taxes and ITC		(11	)		(25	)
Non-Cash Employee Benefit Plan Costs		40			25
Non-Cash Employee Benefit Plan Costs		88			72
Non-Cash Interest Expense		6			5
Non-Cash Interest Expense		16			1
Over (Under) Recovery of Electric Energy Costs (BGS and NTC)		7			(50	)
(Under) Over Recovery of Electric Energy Costs (BGS and NTC)		(95	)		76
Over Recovery of Gas Costs		28			34
Over (Under) Recovery of Gas Costs		44			(74	)
Over Recovery of SBC		1			45
Over Recovery of SBC		91			34
Other Non-Cash Credits		1			(12	)
Gain on the Sale of Property, Plant and Equipment		(8	)		(1	)
Other Non-Cash Regulatory Credits		(9	)		—
Net Changes in Certain Current Assets and Liabilities:
Accounts Receivable and Unbilled Revenues		~~162~~(75	)		~~167~~(211	)
Natural Gas		—			415
Accounts Payable		(14	)		14
Fuel and Materials and Supplies		(12	)		(6	)
Other Current Assets and Liabilities		56			92
Prepayments		(205	)		(235	)
Employee Benefit Plan Funding and Related Payments		(14	)		(12	)
Accounts Payable		(211	)		(138	)
Other		(25	)		4
Other Current Assets and Liabilities		5			4
Net Cash Provided By Operating Activities		285			84
Employee Benefit Plan Funding and Related Payments		(95	)		(89	)
Other		(40	)		21
Net Cash (Used In) Provided By Operating Activities		(28	)		490
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to Property, Plant and Equipment		(~~229~~75	)		(~~196~~91	)
Proceeds from the Sale of Property, Plant and Equipment		91			18
Net Cash Used In Investing Activities		(~~220~~74	)		(~~195~~83	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net Change in Short-Term Debt		~~278~~—			—(58	)
Issuance of Long-Term Debt		~~150~~—			—150
Redemption of Securitization Debt		(5832	)		(5130	)
Redemption of Long-Term Debt		~~(300~~—	)		—(150	)
Contributed Capital		~~170~~—			—170
Dividends on Common Stock		—			(150	)
Preferred Stock Dividends		(1	)		(1	)
Other		(5	)		(5	)
Net Cash (Used In) Provided By Financing Activities		(33	)		81
Net Cash Provided By (Used In) Financing Activities		235			(206	)
Net Change In Cash and Cash Equivalents		178			82
Net Change In Cash and Cash Equivalents		(13	)		89
Cash and Cash Equivalents at Beginning of Period		140			35
Cash and Cash Equivalents at Beginning of Period		35			102
Cash and Cash Equivalents at End of Period	$	318		$	117
Cash and Cash Equivalents at End of Period	$	22		$	191
Supplemental Disclosure of Cash Flow Information:
Income Taxes Paid	$	7337		$	~~117~~53
Interest Paid, Net of Amounts Capitalized	$	~~183~~103		$	~~202~~102

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

PSEG POWER LLC CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

	For the Quarter Ended June 30,						For the Six Months Ended June 30,
	For the Quarters Ended March 31,
	2003			2002			2003			2002
	2004			2003
	(Millions) (Unaudited)
OPERATING REVENUES	$	1,~~236~~692		$	~~673~~1,830		$	~~3,065~~		$	~~1,249~~
OPERATING EXPENSES
Energy Costs		~~788~~1,224			~~284~~1,291			~~2,078~~			~~423~~
Operation and Maintenance		~~228~~230			~~189~~202			~~430~~			~~375~~
Depreciation and Amortization		2427			2723			47			50
Total Operating Expenses		1,~~040~~481			~~500~~1,516			~~2,555~~			~~848~~
OPERATING INCOME		~~196~~211			~~173~~314			~~510~~			~~401~~
Other Income		2735			—44			74			—
Other Deductions		(1220	)		—(30	)		~~(45~~	)		—
Interest Expense		(2841	)		(28	)		~~(56~~	)		~~(56~~	)
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE		~~183~~185			~~145~~300			~~483~~			~~345~~
Income Taxes		(74	)		(62	)		(197	)		(142	)
Income Tax Expense		(76	)		(123	)
INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE		109			83177			~~286~~			~~203~~
Cumulative Effect of a Change in Accounting Principle, net of tax of $255		—			—			370			—
Cumulative Effect of a Change in Accounting Principle, net of tax expense of $255 for 2003		—			370
EARNINGS AVAILABLE TO PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED	$	109		$	83547		$	~~656~~		$	~~203~~

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

PSEG POWER LLC CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30, 2003			December 31, 2002
	March 31, 2004			December 31, 2003
	(Millions) (Unaudited)
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents	$	2527		$	2627
Accounts Receivable, net of allowances of $31 and $0 in 2003 and 2002, respectively		525			499
Accounts Receivable		650			615
Accounts Receivable—Affiliated Companies		80			238
Accounts Receivable—Affiliated Companies, net		187			228
Fuel		409			406
Short-Term Loan to Affiliate		213			77
Materials and Supplies		158			148
Fuel		185			516
Energy Trading Contracts		155			157
Materials and Supplies		167			162
Other		13			44
Energy Trading Contracts		157			101
Total Current Assets		1,365			1,518
Other		31			53
PROPERTY, PLANT AND EQUIPMENT		5,686			5,342
Total Current Assets		1,617			1,779
Less: Accumulated Depreciation and Amortization		(1,365	)		(1,302	)
PROPERTY, PLANT AND EQUIPMENT		6,104			5,980
Net Property, Plant and Equipment		4,321			4,040
Less: Accumulated Depreciation and Amortization		(1,436	)		(1,399	)
Net Property, Plant and Equipment		4,668			4,581
NONCURRENT ASSETS
Deferred Income Taxes and Investment Tax Credits (ITC)		~~176~~66			~~547~~24
Nuclear Decommissioning Trust Funds		869			766
Nuclear Decommissioning Trust (NDT) Funds		981			985
Intangibles		141			141
Goodwill and Other Intangibles		107			108
Energy Trading Contracts		2338			2112
Other		104			143
Other Special Funds		114			115
Total Noncurrent Assets		1,313			1,618
Other		100			127
TOTAL ASSETS	$	6,999		$	7,176
Total Noncurrent Assets		1,406			1,371
TOTAL ASSETS	$	7,691		$	7,731
LIABILITIES AND MEMBER'S EQUITY
CURRENT LIABILITIES
Accounts Payable	$	~~678~~750		$	~~670~~800
Short-Term Loan from Affiliate		4			239
Energy Trading Contracts		137			72
Energy Trading Contracts		85			101
Derivative Contracts		111			37
Other		272			283
Accrued Interest		85			38
Total Current Liabilities		1,039			1,293
Other		106			118
Total Current Liabilities		1,189			1,065
NONCURRENT LIABILITIES
Nuclear Decommissioning Liabilities		~~273~~290			~~766~~284
Cost of Removal		—			131
Environmental Costs		58			58
Accrued Pension Costs		8814			~~101~~14
Other		~~128~~237			~~130~~89
Total Noncurrent Liabilities		~~489~~599			~~1,128~~445
COMMITMENTS AND CONTINGENT LIABILITIES (See Note 7)
LONG-TERM DEBT
Project Level, Non-Recourse Debt		~~800~~—			800
Long-Term Debt		23,~~516~~316			2,~~516~~816
Total Long-Term Debt		3,316			3,~~316~~616
MEMBER'S EQUITY
Contributed Capital		1,~~550~~700			1,~~550~~700
Basis Adjustment		(986	)		(986	)
Retained Earnings		1,~~622~~919			~~966~~1,810
Accumulated Other Comprehensive Loss		(31	)		(91	)
Accumulated Other Comprehensive (Loss) Income		(46	)		81
Total Member's Equity		2,~~155~~587			12,~~439~~605
TOTAL LIABILITIES AND MEMBER'S EQUITY	$	67,~~999~~691		$	7,~~176~~731

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

PSEG POWER LLC CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Six Months Ended June 30,
	For the Quarters Ended March 31,
	2003			2002
	2004			2003
	(Millions) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income	$	~~656~~109		$	~~203~~547
Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities:
Cumulative Effect of a Change in Accounting Principle, net of tax		(370	)		—
Cumulative Effect of a Change in Accounting Principle,
Depreciation and Amortization		47			50
net of tax		—			(370	)
Amortization of Nuclear Fuel		46			42
Depreciation and Amortization		27			23
Interest Accretion on NDT Liability		12			—
Amortization of Nuclear Fuel		23			23
Provision for Deferred Income Taxes		78			23
Interest Accretion on NDT Liability		6			6
Unrealized Gains on Energy Trading Contracts		(5	)		(35	)
Provision for Deferred Income Taxes and ITC		45			30
Non-Cash Employee Benefit Plan Costs		26			16
Unrealized Gains on Energy Contracts and Derivatives		(16	)		(4	)
Net Realized Gains and Income on NDT Fund		(28	)		—
Non-Cash Employee Benefit Plan Costs		10			13
Net Realized Gains and Income on NDT Fund		(21	)		(14	)
Net Changes in Certain Current Assets and Liabilities:
Fuel, Materials and Supplies		~~(13~~326	)		~~(287~~196	)
Accounts Receivable		~~132~~6			(~~116~~200	)
Accounts Payable		8(50	)		~~207~~314
Other Current Assets and Liabilities		1185			469
Benefit Plan Funding Payments		(37	)		(29	)
Employee Benefit Plan Funding and Other Payments		(1	)		—
Other		1721			~~(45~~42	)
Net Cash Provided By Operating Activities		~~580~~570			75615
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to Property, Plant and Equipment		(~~330~~147	)		(~~545~~153	)
Proceeds from the Sale of Property, Plant and Equipment		—			47
Short-Term Loan—Affiliate		(136	)		(204	)
Short-Term Loan—Affiliate		—			(22	)
Other		25			(8	)
Other		(16	)		(16	)
Net Cash Used In Investing Activities		(258	)		(365	)
Net Cash Used In Investing Activities		(346	)		(536	)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Long-Term Debt		—			629
Issuance of Recourse Long-Term Debt		488			—
Short-Term Loan—Affiliate		(235	)		(164	)
Redemption of Long-Term Debt		(800	)		—
Net Cash (Used In) Provided By Financing Activities		(235	)		465
Repayment of Note Payable—Affilated Company		—			(239	)
Net Change In Cash and Cash Equivalents		(1	)		4
Net Cash Used In Financing Activities		(312	)		(239	)
Cash and Cash Equivalents at Beginning of Period		26			9
Net Change In Cash and Cash Equivalents		—			11
Cash and Cash Equivalents at End of Period	$	25		$	13
Cash and Cash Equivalents at Beginning of Period		27			26
Cash and Cash Equivalents at End of Period	$	27		$	37
Supplemental Disclosure of Cash Flow Information:
Income Taxes Paid	$	942		$	653
Interest Paid, Net of Amounts Capitalized	$	~~108~~18		$	8739

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

PSEG ENERGY HOLDINGS LLC CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

	For The Quarter Ended June 30,						For The Six Months Ended June 30,
	For the Quarters Ended March 31,
	2003			2002			2003			2002
				As Restated, see Note 2
	(Millions) (Unaudited)
	2004			2003
OPERATING REVENUES
	(Millions) (Unaudited)
Electric Generation and Distribution Revenues	$	122		$	60		$	235		$	131
OPERATING REVENUES
Income from Capital and Operating Leases		54			59			110			116
Electric Generation and Distribution Revenues	$	126		$	91
Gain on Withdrawal from/Sale of Partnerships		—			40			45			47
Income from Capital and Operating Leases		52			56
Net Investment Gains (Losses)		6			(33	)		(5	)		(38	)
Other		35			43
Other		6			7			12			13
Total Operating Revenues		213			190
Total Operating Revenues		188			133			397			269
OPERATING EXPENSES
OPERATING EXPENSES
Energy Costs		46			35
Energy Costs		52			28			99			58
Operation and Maintenance		49			35
Operation and Maintenance		41			37			76			64
Depreciation and Amortization		13			8
Write-down of Project Investments		—			506			—			506
Total Operating Expenses		108			78
Depreciation and Amortization		14			6			24			14
Income from Equity Method Investments		28			20
Total Operating Expenses		107			577			199			642
OPERATING INCOME		133			132
Income from Equity Method Investments		31			33			48			63
Other Income		1			4
OPERATING INCOME (LOSS)		112			(411	)		246			(310	)
Other Deductions		—			(3	)
Other Income		—			—			1			1
Interest Expense		(63	)		(48	)
Other Deductions		(8	)		(26	)		(12	)		(69	)
INCOME BEFORE INCOME TAXES, MINORITY INTEREST
Interest Expense		(54	)		(54	)		(104	)		(108	)
AND DISCONTINUED OPERATIONS		71			85
INCOME (LOSS) BEFORE INCOME TAXES, MINORITY INTEREST, DISCONTINUED OPERATIONS AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE		50			(491	)		131			(486	)
Income Tax Expense		(21	)		(19	)
Income Taxes		(16	)		177			(33	)		177
Minority Interests in Earnings of Subsidiaries		(2	)		(5	)
Minority Interests in (Earnings) Losses of Subsidiaries		(1	)		4			(6	)		5
INCOME BEFORE DISCONTINUED OPERATIONS		48			61
INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE		33			(310	)		92			(304	)
Income (Loss) from Discontinued Operations, net of tax benefit
DISCONTINUED OPERATIONS
of $3 for 2003		2			(5	)
Loss From Discontinued Operations, net of tax		(2	)		(3	)		(8	)		(4	)
Loss on Disposal of Discontinued Operations, net of tax benefit
Loss on Disposal of Discontinued Operations, net of tax		—			(34	)		(9	)		(34	)
of $3 for 2003		(2	)		(8	)
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE		31			(347	)		75			(342	)
NET INCOME		48			48
Cumulative Effect of a Change in Accounting Principle, net of tax benefit of $66		—			—			—			(120	)
Preference Units Distributions		(5	)		(6	)
NET INCOME (LOSS)		31			(347	)		75			(462	)
EARNINGS AVAILABLE TO PUBLIC SERVICE ENTERPRISE
Preference Units Distributions/Preferred Stock Dividends		(5	)		(5	)		(11	)		(11	)
GROUP INCORPORATED	$	43		$	42
EARNINGS (LOSS) AVAILABLE TO PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED	$	26		$	(352	)	$	64		$	(473	)

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

PSEG ENERGY HOLDINGS LLC CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30, 2003			December 31, 2002
	March 31, 2004			December 31, 2003
	(Millions) (Unaudited)
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents	$	~~102~~123		$	104
Accounts Receivable:
Trade—net of allowances of $13 and $0 in 2003 and 2002, respectively		121			91
Trade, net of allowances of $6 and $6 in 2004 and 2003,
Other Accounts Receivable		118			24
respectively		100			103
Assets Held for Sale		72			83
Other Accounts Receivable		20			19
Affiliated Companies		100			173
Notes Receivable:
Affiliated Companies		~~131~~64			62300
Other		71			112
Inventory		1825			2226
Prepayments		47			47
Restricted Cash		23			18
Restricted Funds		30			16
Current Assets of Discontinued Operations		31			107
Assets of Discontinued Operations		283			298
Total Current Assets		~~627~~753			~~526~~1,048
PROPERTY, PLANT AND EQUIPMENT		1,~~758~~352			1,~~548~~362
Less: Accumulated Depreciation and Amortization		(~~162~~189	)		(~~139~~184	)
Net Property, Plant and Equipment		1,~~596~~163			1,~~409~~178
INVESTMENTS
NONCURRENT ASSETS
Capital Leases—net		2,929			2,844
Capital Leases, net		2,961			2,981
Corporate Joint Ventures		1,~~061~~041			1,~~003~~040
Partnership Interests		~~471~~490			~~484~~531
Other Investments		3331			3831
Total Investments		4,494			4,369
Goodwill and Other Intangibles		482			495
OTHER ASSETS
Other		152			153
Goodwill		426			436
Total Noncurrent Assets		5,157			5,231
Other		80			86
TOTAL ASSETS	$	7,073		$	7,457
Total Other Assets		506			522
TOTAL ASSETS	$	7,223		$	6,826

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

PSEG ENERGY HOLDINGS LLC CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30, 2003			December 31, 2002
	March 31, 2004			December 31, 2003
	(Millions) (Unaudited)
LIABILITIES AND MEMBER'S EQUITY
CURRENT LIABILITIES
Long-Term Debt Due Within One Year	$	~~314~~31		$	~~320~~303
Accounts Payable		~~224~~			~~257~~
Notes Payable		67			137
Trade		39			53
Current Liabilities of Discontinued Operations		31			95
Affiliated Companies		—			4
Total Current Liabilities		636			809
Accrued Interest		66			55
Notes Payable		1			2
Liabilities of Discontinued Operations		229			242
Other		59			69
Total Current Liabilities		425			728
NONCURRENT LIABILITIES
Deferred Income Taxes and Investment and Energy Tax Credits		1,~~252~~481			1,~~038~~487
Other Noncurrent Liabilities		216			179
Other		178			165
Total Noncurrent Liabilities		1,~~468~~659			1,~~217~~652
COMMITMENTS AND CONTINGENT LIABILITIES (See Note 7)
MINORITY INTERESTS		~~113~~33			~~103~~35
LONG-TERM DEBT
Project Level, Non-Recourse Debt		~~1,008~~931			~~853~~938
Senior Notes		1,~~800~~802			1,~~725~~800
Total Long-Term Debt		2,~~808~~733			2,~~578~~738
MEMBER'S EQUITY
Ordinary Unit		1,888			1,888
Preference Units		~~509~~434			509
Retained Earnings		~~171~~221			~~107~~178
Accumulated Other Comprehensive Loss		(~~370~~320	)		(~~385~~271	)
Total Member's Equity		2,~~198~~223			2,~~119~~304
TOTAL LIABILITIES AND MEMBER'S EQUITY	$	7,~~223~~073		$	67,~~826~~457

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

PSEG ENERGY HOLDINGS LLC CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	For The Six Months Ended June 30,
	For the Quarters Ended March 31,
	2003			2002
				As Restated, see Note 2
	2004			2003
	(Millions) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss)	$	75		$	(462	)
Net Income	$	48		$	48
Adjustments to Reconcile Net Income (Loss) to Net Cash Flows from Operating Activities:
Adjustments to Reconcile Net Income to Net Cash Flows from
Write-down of Project Investment		—			506
Operating Activities:
Cumulative Effect of a Change in Accounting Principle, net of tax		—			120
Loss on Disposal of Discontinued Operations, net of tax		2			8
Loss on Disposal of Discontinued Operations, net of tax		9			34
Depreciation and Amortization		15			10
Depreciation and Amortization		29			20
Deferred Income Taxes (Other than Leases)		(2	)		4
Deferred Income Taxes (Other than Leases)		(8	)		(177	)
Leveraged Lease Income, Adjusted for Rents Received		(49	)		(2	)
Leveraged Lease Income, Adjusted for Rents Received		35			48
Unrealized Loss on Investments		20			—
Investment Distributions		2			4
Change in Fair Value of Derivative Financial Instruments		(1	)		1
Change in Fair Value of Derivative Financial Instruments		12			(2	)
Undistributed Earnings from Affiliates		5			(7	)
Undistributed Earnings from Affiliates		(3	)		(17	)
Gain on Sale of Investments		(47	)		(33	)
Net Gain on Investments		(40	)		(9	)
Foreign Currency Transaction Gain		—			(4	)
Foreign Currency Transaction (Gain) Loss		(1	)		69
Other Non-Cash Charges		2			—
Proceeds on Withdrawal from Partnership		45			47
Net Changes in Certain Current Assets and Liabilities:
Accounts Receivable		1186			(~~105~~21	)
Accounts Payable		(97	)		(38	)
Inventory		—			(1	)
Other Current Assets and Liabilities		23			(25	)
Accounts Payable		(47	)		(49	)
Other		11			11
Other Current Assets and Liabilities		18			(19	)
Net Cash Provided By Operating Activities		103			24
Proceeds from Withdrawal of Partnership Interests and Other
Distributions		58			45
Other		11			—
Net Cash Provided By (Used In) Operating Activities		119			(20	)
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to Property, Plant and Equipment		(~~152~~12	)		(~~183~~70	)
Investments in Joint Ventures and Partnerships		(173	)		(~~152~~18	)
Investment in Capital Leases		—			(31	)
Proceeds from the Sale of Investments and Return of Capital
Return of Capital from Partnerships		2			90
from Partnerships		5			(3	)
Change in Note Receivable—Affiliated Company		(69	)		—
Proceeds from Termination of Capital Leases		44			—
Other		15			(83	)
Short-Term Loan Receivable—Affiliated Company		236			62
Net Cash Used In Investing Activities		(221	)		(359	)
Other		(1	)		(1	)
Net Cash Provided By (Used In) Investing Activities		269			(30	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Capital Contributions		—			200
Net Change in Short-Term Debt		—			91
Net Change in Short-Term Debt		45			21
Repayment of Senior Notes		(267	)		—
Cash Dividends Paid		(11	)		(11	)
(Repayment of) Proceeds from Project-Level Non-Recourse Long-
Net Decrease in Short-Term Affiliate Borrowings		—			(38	)
Term Debt		(12	)		251
Proceeds from Project-Level Non-Recourse Long-Term Debt		322			111
Redemption of Preference Units		(75	)		—
Proceeds from Sale of Senior Notes		343			134
Repayment of Medium-Term and Project-Level Non-Recourse
Repayment of Medium-Term and Project-Level Non-Recourse Debt		(575	)		(98	)
Debt		—			(321	)
Other		(8	)		2
Proceeds from Minority Shareholders		—			(10	)
Net Cash Provided By Financing Activities		116			321
Cash Dividends Paid on Preferred Stock		(5	)		(6	)
Effect of Exchange Rate Changes		—			(2	)
Restricted Cash		(13	)		16
Net Change In Cash and Cash Equivalents		(2	)		(16	)
Other		4			—
Cash and Cash Equivalents at Beginning of Period		104			54
Net Cash (Used In) Provided By Financing Activities		(368	)		21
Cash and Cash Equivalents at End of Period	$	102		$	38
Effect of Exchange Rate Change		(1	)		—
Net Change In Cash and Cash Equivalents		19			(29	)
Cash and Cash Equivalents at Beginning of Period		104			88
Cash and Cash Equivalents at End of Period	$	123		$	59
Supplemental Disclosure of Cash Flow Information:
Income Tax Receipts	$	(42	)	$	(14	)
Income Taxes (Paid) Received	$	(43	)	$	74
Interest Paid, Net of Amounts Capitalized	$	5733		$	8732

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Note 1. Organization and Basis of Presentation

Organization

PSEG

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

PSE&G

PSE&G is an operating public utility ~~providing~~company ~~electric~~engaged ~~and~~principally ~~gas~~in the transmission and distribution of electric energy and gas service in certain areas ~~within the State~~ of New Jersey. PSE&G also owns PSE&G Transition Funding LLC, a bankruptcy remote entity established for the purpose of purchasing intangible transition property and issuing transition bonds.

Power

Power is a multi-regional wholesale energy supply business that ~~optimizes~~utilizes ~~the~~energy ~~value of~~trading to comprehensively manage its portfolio of electric generation assets, gas supply and storage contracts and electric and gas supply obligations ~~by integrating the management of this portfolio with its energy trading and risk management functions~~. Power has three principal direct wholly-owned subsidiaries: PSEG Nuclear LLC (Nuclear), PSEG Fossil LLC (Fossil) and PSEG Energy Resources & Trade LLC (ER&T). ~~Power~~Nuclear ~~also~~and ~~has a~~Fossil ~~finance~~own ~~company~~and ~~subsidiary,~~operate ~~PSEG~~generation ~~Power~~and ~~Capital~~generation-related ~~Investment Co~~facilities., ~~which~~ER&T ~~provides certain~~is ~~financing~~responsible for ~~Power~~the day-to-day management of the portfolio. Fossil, Nuclear and ~~its~~ER&T ~~subsidiaries~~are Federal Energy Regulatory Commission (FERC) regulated public utilities.

Energy Holdings

Energy Holdings is the parent of PSEG Global LLC (Global), which ~~invests~~owns and ~~participates~~operates ~~in the development and operation of~~ international and domestic projects engaged in the generation and distribution of energy, ~~which~~including ~~include~~ cogeneration and independent power production facilities and electric distribution companies; PSEG Resources LLC (Resources), which ~~makes~~has ~~investments~~ primarily invested in energy-related leveraged leases; ~~PSEG Energy Technologies Inc. (Energy Technologies), presented as discontinued operations, which provided energy-related services~~ and ~~construction to industrial and commercial customers;~~ Enterprise Group Development Corporation (EGDC), a commercial real estate property management business. ~~which~~During ~~has~~the ~~been~~third ~~conducting~~quarter aof ~~controlled~~2003, ~~exit~~Energy ~~from~~Holdings ~~this~~completed ~~business~~the ~~since~~sale ~~1993;~~of PSEG ~~Capital~~Energy ~~Corporation~~Technologies Inc. (~~PSEG~~Energy ~~Capital~~Technologies), ~~which served as a financing vehicle for Energy Holdings' subsidiaries~~ and isits inassets. ~~the~~For ~~process~~additional ofinformation ~~dissolution;~~relating ~~and~~to ~~Enterprise~~Energy ~~Capital Funding Corporation~~Technologies, ~~which~~see isNote ~~currently~~5. ~~inactive~~Discontinued ~~and is also in the process of dissolution~~Operations.

~~Basis of Presentation~~ Services

Services provides management and administrative services to PSEG and its subsidiaries. These include accounting, ~~PSE&G~~legal, ~~Power~~communications, human resources, information technology, treasury and ~~Energy~~financial, ~~Holdings~~investor relations, stockholder services, real estate, insurance, risk management, tax, library and information services, security, corporate secretarial and certain planning, budgeting and forecasting services. Services charges PSEG and its subsidiaries for the cost of work performed and services provided pursuant to the terms and conditions of intercompany service agreements.

The respective financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for Quarterly Reports on 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 16

16NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

~~NOTES~~Basis TOof ~~CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~Presentation

The respective financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for Quarterly Reports on Form 10-Q. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations. These Condensed Consolidated Financial Statements and Notes to Condensed Consolidated Financial Statements (Notes) should be read in conjunction with and update and supplement matters discussed in the respective ~~2002~~2003 Annual Report on Form 10-K ~~and the Quarterly Report on Form 10-Q for the quarter ended March 31, 2003~~.

The unaudited condensed consolidated 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~~Condensed ~~balance~~Consolidated ~~sheets~~Balance Sheets were derived from the audited ~~consolidated~~Consolidated ~~financial~~Financial ~~statements~~Statements included in the ~~2002~~2003 Annual ~~Report~~Reports on Form 10-K. Certain reclassifications of prior period data have been made to conform with the current presentation.

~~Note~~Pension 2.and ~~New~~Other ~~Accounting~~Post-employment ~~Standards~~Benefit (OPEB)

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

PSEG, ~~PSE&G,~~sponsors ~~Power~~several qualified and ~~Energy~~nonqualified ~~Holdings~~pension plans and other post-retirement benefit plans covering PSEG and its participating affiliates' current and former employees who meet certain eligibility criteria.

OnThe ~~January~~following 1,table ~~2002,~~provides ~~PSEG,~~the ~~PSE&G,~~Components ~~Power and Energy Holdings each adopted SFAS 142. Under this standard, PSEG, PSE&G, Power and Energy Holdings were required to complete an impairment analysis~~ of ~~goodwill~~Net ~~before~~Periodic ~~June 30,~~Benefit ~~2002~~Costs ~~and~~relating ~~record any required impairment retroactive~~ to ~~January 1,~~all ~~2002.~~qualified ~~Under SFAS 142, goodwill is considered a nonamortizable asset~~ and isnonqualified ~~subject~~pension toplan ~~an annual review for impairment~~ and another ~~interim~~post-retirement ~~review~~benefit ~~when~~plans ~~certain events or changes in circumstances occur. At the time of adoption, PSE&G had no goodwill. The effect of no longer amortizing goodwill~~ on an ~~annual~~aggregate basis ~~was not material to PSEG's or Power's financial position and results of operations upon adoption~~.

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

	Pension Benefits						Other Benefits
	Quarters Ended March 31,						Quarters Ended March 31,
	2004			2003			2004			2003
	(Millions)
Components of Net Periodic Benefit Costs:
Service Cost	$	21		$	19		$	6		$	5
Interest Cost		49			49			14			13
Expected Return on Plan Assets		(58	)		(48	)		(2	)		(1	)
Amortization of Net
Transition Obligation		—			1			7			7
Prior Service Cost		4			4			—			—
Loss (Gain)		9			12			—			(1	)

Net Periodic Benefit Costs	$	25		$	37		$	25		$	23

~~In addition to goodwill,~~ PSEG~~'s total intangible assets as of June 30~~, ~~2003 and December 31~~PSE&G, ~~2002~~Power ~~were $206 million, all of which are not subject to amortization, including $114 million, $52 million~~ and ~~$40~~Energy ~~million related to defined benefit pension plans, emissions allowances, which are expensed as used, and various access rights, respectively.~~Holdings

PSE&G's, Power's and Energy Holdings' eligible employees participate in non-contributory pension and OPEB plans sponsored by PSEG and administered by Services.

~~As of June 30, 2003 and December 31, 2002,~~ PSE&G ~~had intangible assets relating to its defined benefit pension plans totaling $60 million. These intangible assets are not subject to amortization.~~

~~Power~~ PSE&G's pension costs amounted to approximately $13 million and $20 million for the quarters ended March 31, 2004 and 2003, respectively. PSE&G's OPEB costs amounted to approximately $22 million and $25 million for the quarters ended March 31, 2004 and 2003, respectively.

In addition to goodwill, as of June 30, 2003 and December 31, 2002, Power's intangible assets were $125 million, of which $33 million, $52 million and $40 million, related to its defined benefit pension plans, emissions allowances, which are expensed as used, and various access rights at its Albany Station, respectively.17

~~Energy~~NOTES ~~Holdings~~TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

~~On January 1, 2002, Energy Holdings recorded the results of its evaluation of the effect of SFAS 142. The total amount of goodwill impairments was $120 million, net of tax of $66 million.~~Power

AsPower's ofpension ~~June~~costs ~~30,~~amounted ~~2003~~to approximately $8 million and ~~December~~$12 ~~31,~~million ~~2002,~~for the ~~remaining~~quarters ~~carrying~~ended ~~value~~March of31, ~~Energy~~2004 ~~Holdings~~and 2003, respectively. Power's ~~goodwill~~OPEB ~~was~~costs ~~$426~~amounted ~~million~~to ~~and~~approximately $~~436~~2 million, ~~respectively,~~for aseach ~~displayed~~of in the ~~table~~quarters ~~below~~ended March 31, 2004 and 2003.

~~As of June 30, 2003 and December 31, 2002,~~ Energy Holdings' pro-rata share of the remaining goodwill included on the balance sheets of its equity method investees totaled $300 million and $287 million, respectively. In accordance with generally accepted accounting principles, such goodwill is not consolidated on the Energy Holdings' Consolidated Balance Sheets.

17 Energy Holdings' pension costs amounted to approximately $1 million for each of the quarters ended March 31, 2004 and 2003. Energy Holdings' OPEB costs were immaterial for each of the quarters ended March 31, 2004 and 2003.

~~NOTES~~Stock ~~TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~Compensation

In addition to goodwill, Energy Holdings has an intangible asset related to its defined benefit pension plans, which is not subject to amortization. This intangible asset totaled $5 million as of June 30, 2003 and December 31, 2002.PSEG

~~Power~~ PSEG applies Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and ~~Energy~~related ~~Holdings~~interpretations in accounting for stock-based compensation plans. Accordingly, no compensation cost has been recognized for fixed stock option grants since the exercise price of the stock options equaled the market price of the underlying stock on the date of grant.

AsThe offollowing ~~June~~table ~~30,~~illustrates ~~2003~~the effect on Net Income and ~~December~~Earnings ~~31,~~Per ~~2002,~~Share ~~Power~~if ~~and~~PSEG ~~Energy~~had ~~Holdings'~~applied ~~goodwill~~the ~~and~~fair ~~pro-rata~~value ~~share~~recognition provisions of ~~goodwill~~Statement inof ~~equity~~Financial ~~method~~Accounting ~~investments~~Standards ~~was~~(SFAS) asNo. 123, ~~follows~~“Accounting for Stock-Based Compensation,” to stock-based employee compensation:

	As of
	Quarters Ended March 31,
	June 30, 2003			December 31, 2002
	2004			2003
	(Millions)
	(Millions, except for share data)
Consolidated Investments
Net Income, as reported	$	271		$	681
Energy Holdings—Global
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(1	)		(2	)
Sociedad Austral de Electricidad S.A. (SAESA) (A)	$	287		$	290
Pro forma Net Income	$	270		$	679
Empresa de Electricidad de los Andes S.A. (Electroandes)(B)		133			140
Earnings Per Share:
Elektrocieplownia Chorzow Sp. Z o.o. (ELCHO)		6			6
Basic—as reported	$	1.15		$	3.02
Total Energy Holdings—Global		426			436
Basic—pro forma	$	1.15		$	3.01
Power—Albany Steam Station		16			16
Diluted—as reported	$	1.14		$	3.01
Total PSEG Consolidated Goodwill		442			452
Diluted—pro forma	$	1.13		$	3.00
Pro-Rata Share of Equity Method Investments
Energy Holdings—Global
Rio Grande Energia (RGE) (A)		72			60
Chilquinta Energia S.A. (Chilquinta)		164			163
Luz del Sur S.A.A		39			39
Kalaeloa		25			25
Pro-Rata Share of Equity Investment Goodwill		300			287
Total PSEG Goodwill	$	742		$	739

~~(A)~~ See ~~Changes~~Note ~~in goodwill relate to changes in foreign exchange rates~~6. ~~(B)~~Earnings ~~Changes~~Per inShare ~~goodwill~~for atfurther ~~Electroandes relate to purchase price allocation adjustments~~information.

SFAS No. ~~143~~ 142, ~~''Accounting~~“Goodwill ~~for~~and ~~Asset~~Other ~~Retirement~~Intangible ~~Obligations''~~Assets” (SFAS ~~143~~142)

PSEG, PSE&G, Power and Energy Holdings

~~Effective~~On January 1, ~~2003~~2002, PSEG, PSE&G, Power and Energy Holdings ~~each~~ adopted SFAS ~~143~~ 142. ~~SFAS~~Under ~~143~~this ~~addresses~~standard, ~~accounting~~PSEG, PSE&G, Power and ~~reporting~~Energy ~~for~~Holdings ~~legal~~were ~~obligations~~required ~~associated~~to ~~with~~complete ~~the~~an ~~retirement~~impairment analysis of ~~tangible~~goodwill. ~~long-lived~~Under ~~assets~~SFAS 142, ~~and~~goodwill ~~the~~is ~~associated~~a nonamortizable asset ~~retirement~~subject ~~costs.~~to Aan ~~legal~~annual ~~obligation~~review isfor aimpairment ~~liability~~and ~~that~~an ainterim ~~party~~review iswhen ~~required~~certain toevents ~~settle~~or aschanges ain ~~result~~circumstances occur. At the time of adoption, PSE&G had no goodwill. The effect of no longer amortizing goodwill on an ~~existing~~annual orbasis ~~enacted~~was ~~law,~~not ~~statute,~~material ~~ordinance~~to PSEG's or ~~contract~~Power's financial position and results of operations upon adoption.

Under SFAS 143, a company must initially recognize the fair value of a liability for an asset retirement obligation in the period in which it is incurred and concurrently capitalize an asset retirement cost by increasing the carrying amount of the related long-lived asset by the same amount as the liability. A company is required to subsequently accrete that asset retirement cost to expense over its useful life. In periods subsequent to initial measurement, an entity is required to recognize changes in the liability resulting from the passage of time (accretion) or due to revisions to either the timing or the amount of the originally estimated cash flows. Changes in the liability due to accretion will be charged to Operation and Maintenance expense on the Consolidated Statements of Operations, whereas 18

18NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

~~NOTES~~ Power TOand ~~CONSOLIDATED~~Energy ~~FINANCIAL STATEMENTS (UNAUDITED)~~Holdings

~~changes~~ As ~~due~~of toMarch 31, ~~the~~2004 ~~timing~~and orDecember 31, ~~amount~~2003, ofPower's ~~cash~~and ~~flows~~Energy ~~will~~Holdings' begoodwill anand ~~adjustment~~pro-rata toshare ~~the carrying amount~~ of ~~the~~goodwill ~~related~~in ~~asset.~~equity ~~See~~method ~~Note~~investments 3.was ~~Adoption~~as ~~of SFAS 143 for additional information.~~follows:

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

	As of
	March 31, 2004		December 31, 2003
	(Millions)
Consolidated Investments
Energy Holdings—Global
Sociedad Austral de Electricidad S.A. (SAESA)(A)	$	339	$	352
Empresa de Electricidad de los Andes S.A. (Electroandes)		133		133
Elektrocieplownia Chorzow Sp. Z o.o. (ELCHO)		6		6

Total Energy Holdings-Global		478		491
Power—Albany Steam Station		16		16

Total PSEG Consolidated Goodwill		494		507

Pro-Rata Share of Equity Method Investments
Energy Holdings-Global
Rio Grande Energia (RGE)(A)		74		73
Chilquinta Energia S.A. (Chilquinta)(A)		162		163
Luz del Sur S.A.A		63		63
Kalaeloa		25		25

Pro-Rata Share of Equity Investment Goodwill		324		324

Total PSEG Goodwill	$	818	$	831

~~PSEG~~(A) ~~and~~Changes ~~Power~~relate to changes in foreign exchange rates.

EITF 02-3 requires all gains and losses on energy trading derivatives to be reported on a net basis. Also, energy trading contracts that are not derivatives will no longer be marked to market. Instead, settlement accounting will be used. EITF 02-3 was effective for new contracts entered into on or after October 25, 2002. For contracts entered into prior to October 25, 2002, EITF 02-3 was effective January 1, 2003. Substantially all of Power's energy contracts qualify as derivatives under SFAS No. 133, ''Accounting for Derivative Instruments and Hedging Activities'' (SFAS 133) and will therefore continue to be marked to market. The impact of implementing these rules had no effect on PSEG~~'s or Power's earnings.~~

~~Financial~~ In ~~Interpretation~~addition ~~(FIN)~~to Nogoodwill, PSEG's total intangible assets as of March 31, 2004 were $102 million, all of which are not subject to amortization. 46These intangible assets totaled $14 million, $48 million and $40 million and are related to defined benefit pension plans, emissions allowances, which are expensed as used, and various access rights, respectively. PSEG'~~'Consolidation~~s total intangible assets as of ~~Variable~~December 31, ~~Interest~~2003 ~~Entities~~were ~~(VIE)''~~$103 ~~(FIN~~million, ~~46)~~including $14 million, $49 million and $40 million related to defined benefit pension plans, emissions allowances and various access rights, respectively.

~~PSEG,~~ PSE&G~~, Power and Energy Holdings~~

~~FIN~~As ~~46 clarifies the application~~ of ~~Accounting Research Bulletin No. 51~~March 31, ~~''Consolidated~~2004 Financial Statements'', to certain entities in which equity investors do not have the characteristics of a controlling financial interest. Because a controlling financial interest in an entity may be achieved through arrangements that do not involve voting interests, FIN 46 sets forth specific requirements with respect to consolidation, measurement and ~~disclosure of such relationships. Disclosure requirements for existing qualifying entities are effective for financial statements issued after January~~ December 31, 2003., ~~All~~PSE&G ~~enterprises~~had ~~with~~intangible ~~VIEs~~assets ~~created~~recorded ~~after~~related ~~February 1, 2003, are required~~ to ~~apply~~defined ~~the~~benefit ~~provisions~~pension ofplans ~~FIN~~totaling 46$2 ~~no later than the beginning of the first interim period beginning after June 15, 2003~~million. ~~PSEG,~~These ~~PSE&G,~~intangible ~~Power~~assets ~~and Energy Holdings~~ are ~~still~~not ~~evaluating~~subject ~~this~~to ~~guidance~~amortization.

~~SFAS No. 149, ''Amendment of Statement 133 on Derivative Instruments and Hedging Activities'' (SFAS 149)~~ Power

~~PSEG~~ In addition to goodwill displayed in the table above, ~~PSE&G~~as of March 31, 2004, Power's intangible assets were $91 million, of which $3 million, $48 million and ~~Energy~~$40 ~~Holdings~~million, related to its defined benefit pension plans, emissions allowances, which are expensed as used, and various access rights at its Albany Station, respectively. As of December 31, 2003, Power's intangible assets were $92 million, of which $3 million, $49 million and $40 million, related to its defined benefit pension plans, emissions allowances and various access rights at its Albany Station, respectively.

SFAS 149 amends and clarifies the accounting guidance for derivative instruments (including certain derivative instruments embedded in other contracts) and hedging activities that fall within the scope of SFAS 133.19

InNOTES ~~particular,~~TO ~~SFAS~~CONDENSED ~~149~~CONSOLIDATED ~~clarifies~~FINANCIAL circumstances under which a contract with an initial net investment meets the characteristic of a derivative discussed in SFAS 133, clarifies when a derivative contains a financing component and amends the definition of an underlying to conform it to language used in FIN No. 45, ''Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others''.STATEMENTS (UNAUDITED)

~~Additionally,~~Energy SFAS 149 amends SFAS 133's criteria for electing the normal purchase and sale exception, which exempts certain derivatives that meet the normal purchase and sales criteria, from fair value reporting. The new guidance allows ''normal'' treatment for a power purchase or sale agreement (whether a forward, an option or combination of both) that is a capacity contract, as defined, even if the contract is closed out before maturity. However, any non-power commodity contract (e.g. gas contracts) and non-capacity power contract closed out before maturity will be ineligible for ''normal'' treatment and could result in those contracts being marked to market.Holdings

19 In addition to goodwill, Energy Holdings has an intangible asset related to its defined benefit pension plans of $4 million as of March 31, 2004 and December 31, 2003, which is not subject to amortization.

~~NOTES~~Note TO2. ~~CONSOLIDATED~~Restatement ~~FINANCIAL~~of ~~STATEMENTS~~Financial ~~(UNAUDITED)~~Statements

~~SFAS 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. Although~~ PSEG, ~~PSE&G, Power~~ and Energy Holdings ~~do not expect a material impact on their respective financial statements due to the adoption of these rules, no assurances can be given.~~

~~SFAS~~ Subsequent ~~No.~~to ~~150~~the issuance of the Condensed Consolidated Financial Statements for the quarter ended March 31, 2003 and in preparation of the Condensed Consolidated Financial Statements for the year ended December 31, 2003, management determined that the recorded amount of Energy Holdings'~~'Accounting~~ investment in RGE was overstated due to a miscalculation of the amount of foreign currency translation adjustments. In addition, certain amounts related to this investment had been erroneously recorded as translation adjustments instead of foreign currency transactions. The impact on previously reported Net Income of PSEG and Energy Holdings of these adjustments resulted in an increase of $1 million for ~~Certain~~the quarter ended March 31, 2003. As a result, the accompanying Condensed Consolidated Financial ~~Instruments~~Statements ~~with~~of ~~Characteristics~~PSEG and Energy Holdings for the quarter ended March 31, 2003 have been restated from the amounts previously reported to reflect the correct amount of ~~both~~foreign ~~Liabilities~~currency translation adjustments and ~~Equity''~~to ~~(SFAS~~record ~~150)~~the effects of foreign currency transactions in earnings rather than as an adjustment to Accumulated Other Comprehensive Loss. In addition to the adjustments described above, certain other adjustments, previously considered to be immaterial individually and in the aggregate, were also recorded in the restated financial statements for the quarter ended March 31, 2003. The impact on previously reported Net Income of PSEG and Energy Holdings of these other adjustments resulted in an increase of $3 million for the quarter ended March 31, 2003.

~~PSEG~~ The effects on the financial statements of all adjustments and ~~PSE&G~~their related tax effects are detailed as follows:

~~SFAS~~Condensed ~~150,~~Consolidated ~~which~~Statement ~~is effective July 1, 2003, establishes standards for the classification and measurement~~ of certain financial instruments with characteristics of both liabilities and equity. Many of these instruments that were previously presented as equity or as mezzanine instruments (between the liabilities and the equity section) will now be recorded as liabilities. SFAS 150 requires an issuer to classify qualifying instruments issued in the form of shares that are mandatorily redeemable as liabilities. Those items will no longer be presented as mezzanine instruments on the Consolidated Balance Sheets.Operations

As of June 30, 2003, the following instruments are included in Preferred Securities on PSEG's and PSE&G's respective Consolidated Balance Sheets between Long-Term Debt and Common Equity.

	As Previously Reported			As Restated
	Quarter Ended March 31, 2003			Quarter Ended March 31, 2003
	(Millions, except for share data)
PSEG
Operating Revenues	$	3,364		$	3,288
Energy Costs	$	2,022		$	1,953
Income from Equity Method Investments	$	17		$	20
Operation and Maintenance	$	520		$	519
Other Income	$	60		$	59
Other Deductions	$	(45	)	$	(43	)
Interest Expense	$	(187	)	$	(198	)
Income Tax Expense	$	(184	)	$	(186	)
Loss from Discontinued Operations, including Loss on Disposal, net of tax	$	(15	)	$	(13	)
Net Income	$	676		$	681
Earnings Per Share (Basic)	$	3.00		$	3.02
Earnings Per Share (Diluted)	$	3.00		$	3.01

	Shares Outstanding		As of June 30, 2003
			(Millions)
PSEG (Parent)
PSEG Quarterly Guaranteed Preferred Beneficial Interest in PSEG's Subordinated Debentures
7.44%		9,000,000	$	225
Floating Rate		150,000		150
7.25%		6,000,000		150
8.75%		7,200,000		180
PSEG Participating Units
10.25%		9,200,000		460
Total PSEG (Parent)				1,165
PSE&G
PSE&G 8.00% Monthly Guaranteed Preferred Beneficial Interest in Subordinated Debentures		2,400,000		60
PSE&G Quarterly Guaranteed Preferred Beneficial Interest in PSE&G's 8.125% Subordinated Debentures		3,800,000		95
Total PSE&G				155
Total PSEG Consolidated			$	1,320

~~Effective~~NOTES ~~July~~TO 1,CONDENSED ~~2003,~~CONSOLIDATED ~~these~~FINANCIAL instruments will be presented separately in Noncurrent Liabilities on the Consolidated Balance Sheets and dividend payments on these instruments will be recorded as Interest Expense on the Consolidated Statements of Operations and be included in the Interest Paid supplemental disclosure on the Consolidated Statements of Cash Flows.STATEMENTS (UNAUDITED)

Other

	As Previously Reported			As Restated
	Quarter Ended March 31, 2003			Quarter Ended March 31, 2003
	(Millions)
Energy Holdings
Electric Generation and Distribution Revenues	$	113		$	91
Other Operating Revenues	$	40		$	43
Energy Costs	$	47		$	35
Income from Equity Method Investments	$	17		$	20
Other Income	$	3		$	4
Other Deductions	$	(6	)	$	(3	)
Interest Expense	$	(50	)	$	(48	)
Income Tax Expense	$	(17	)	$	(19	)
Loss from Discontinued Operations, including Loss on Disposal, net of tax	$	(15	)	$	(13	)
Net Income	$	44		$	48

~~PSEG~~ The amounts as previously reported do not reflect certain reclassifications due to the presentation of Energy Holdings' investment in Carthage Power Company (CPC), ~~PSE&G~~a generating facility in Rades, ~~Power~~Tunisia as a discontinued operation, as discussed in Note 5. Discontinued Operations and ~~Energy~~the ~~Holdings~~effects of the adoption of Financial Accounting Standards Board (FASB) Interpretation No. (FIN) 46 “Consolidation of Variable Interest Entities” (FIN 46), as discussed in Note 3. Recent Accounting Standards, and other reclassifications that have been made to conform with the current presentation.

InNote ~~January 2001, PSEG, PSE&G, Power and Energy Holdings each adopted SFAS 133~~3. InRecent ~~accordance with SFAS 133, all derivative instruments are recognized on the balance sheet at their fair values. In relation to this standard, the Financial~~ Accounting Standards ~~Board (FASB) Derivative Implementation Group (DIG) issued certain interpretive guidance, including DIG Issue C-11 that~~

20SFAS No. 143, “Accounting for Asset Retirement Obligations” (SFAS 143)

~~NOTES~~ PSEG, TOPSE&G, ~~CONSOLIDATED~~Power ~~FINANCIAL~~and ~~STATEMENTS~~Energy ~~(UNAUDITED)~~Holdings

~~relates~~ Effective toJanuary ~~contracts~~1, ~~which~~2003, ~~include~~PSEG, ~~broad~~PSE&G, ~~market~~Power ~~indices~~and ~~(e.g.,~~Energy ~~Consumer~~Holdings ~~Price~~each ~~Index)~~adopted SFAS 143. ~~That~~Under ~~interpretation~~SFAS 143, ~~sets~~a ~~forth~~company must initially recognize the ~~guidelines~~fair ~~under~~value ~~which~~of a ~~contract~~liability ~~could~~for ~~qualify~~an asasset aretirement ~~normal~~obligation ~~purchase~~in orthe ~~sale~~period ~~under~~in ~~SFAS~~which ~~133.~~it Inis ~~2003,~~incurred and concurrently capitalize an asset retirement cost by increasing the ~~FASB~~carrying ~~issued~~amount ~~DIG~~of ~~Issue~~the Crelated long-20lived toasset ~~amend~~by the ~~previous~~same ~~interpretation~~amount ~~stating~~as the liability. A company is required to subsequently depreciate that ~~the~~asset ~~phrase~~retirement ~~''not~~cost ~~clearly~~to ~~and~~expense ~~closely~~over ~~related~~its useful life. In periods subsequent to initial measurement, an entity is required to recognize changes in the ~~asset~~liability ~~being~~resulting ~~sold~~from the passage of time (accretion) or ~~purchased''~~due ~~should~~to ~~involve~~revisions anto ~~analysis~~either ofthe ~~both~~timing ~~qualitative~~or ~~and~~the ~~quantitative~~amount ~~considerations~~of the originally estimated cash flows. ~~PSE&G,~~Changes ~~Power~~in ~~and~~the ~~Energy~~liability ~~Holdings~~due ~~have~~to ~~reviewed~~accretion ~~their~~are ~~respective~~charged ~~contracts~~to Operation and ~~each~~Maintenance ~~have~~on ~~determined~~the ~~that~~Condensed ~~there~~Consolidated ~~will~~Statements beof noOperations, ~~impact~~whereas ~~resulting~~changes ~~from~~due to the ~~adoption~~timing or amount of ~~this~~cash ~~interpretation~~flows are adjustments to the carrying amount of the related asset. See Note 4. Adoption of SFAS 143 for additional information.

~~Note~~FIN 3.46R ~~Adoption~~and ofFIN ~~SFAS 143~~46

PSEG, PSE&G, Power and ~~Power~~Energy Holdings

InFASB ~~the~~Interpretation ~~first quarter of 2003, Power completed its review of potential obligations under SFAS 143 and determined that these obligations are primarily related to the decommissioning of its nuclear power plants~~No. 46 ~~Power's~~(revised ~~liability as of~~ December 312003), ~~2002~~“Consolidation ~~was approximately $766 million, which equaled the balance~~ of ~~its~~Variable ~~Nuclear~~Interest ~~Decommissioning~~Entities ~~Trust~~ (~~NDT~~VIEs) ~~Fund~~”, asor ~~discussed~~FIN ~~below.~~46R Asamends ofFIN ~~January 1~~46, ~~2003,~~which aswas ~~calculated~~issued ~~under~~July ~~SFAS 143~~1, ~~the liability was approximately $261 million and the asset was approximately $50 million~~2003. ~~This~~FIN ~~asset~~46R ~~and~~replaces ~~liability~~FIN ~~were~~46 calculated using a probability-weighted average of multiple scenarios. The scenarios were each based on estimated cash flows, which were discounted using Power's risk-adjusted interest rate at the required effective date of the standard and ~~considering~~clarifies the ~~expected~~application ~~time period~~ of ~~the~~Accounting ~~cash~~Research ~~outflows.~~Bulletin ~~The scenarios included estimates for inflation~~No. 51, ~~contingencies~~“Consolidated ~~and~~Financial ~~assumptions~~Statements” ~~related~~ to ~~the~~certain ~~timing~~entities ofin ~~decommissioning costs, using the current license lives for each unit as well as early shutdown and license extensions scenarios. Management believes that these assumptions,~~ which ~~had~~equity ainvestors ~~material~~do ~~impact~~not onhave ~~the~~sufficient ~~calculation~~equity ofat ~~the~~risk ~~liability,~~for ~~and therefore~~ the ~~cumulative~~entity ~~effect~~to ~~adjustment~~finance ~~resulting~~its ~~from~~activities ~~the~~without ~~adoption~~additional ofsubordinated ~~this~~financial ~~new accounting standard, were reasonable and appropriate~~support.

InFIN ~~addition~~46R tomust ~~the~~be ~~$261~~adopted ~~million~~by ~~nuclear~~public ~~decommissioning~~entities ~~liability, Power identified certain other legal obligations~~ (that ~~meet certain of the criteria of SFAS 143, which at this time~~ are not ~~quantifiable~~small ~~but~~business ~~could~~issuers) beby ~~material in~~ the ~~future.~~first ~~These~~reporting ~~obligations~~period ~~relate~~ending toafter ~~certain~~March ~~industrial~~15, ~~establishments~~2004. ~~subject to the New Jersey Industrial Site Recovery Act (ISRA)~~PSEG, ~~underground storage tanks subject to closure requirements~~PSE&G, ~~permits~~Power and ~~authorizations,~~Energy Holdings adopted the ~~restoration~~provisions of anFIN ~~area~~46 toas ~~be occupied by a reservoir at the end~~ of ~~its~~July ~~useful life~~1, an2003. ~~obligation~~There towas ~~retire~~no ~~certain~~effect ~~plants~~on ~~prior~~Power due to the ~~start~~adoption up of athese ~~new plant and the demolition and restoration of certain other plant sites once they are no longer in service~~rules.

Power also had $131 million of cost of removal liabilities, as of December 31, 2002, which did not meet the requirements of an asset retirement obligation (ARO) and were therefore reversed and included in the Cumulative Effect of a Change in Accounting Principle recorded in the first quarter of 2003.21

AsNOTES aTO ~~result~~CONDENSED ofCONSOLIDATED ~~reducing~~FINANCIAL the existing nuclear decommissioning and cost of removal liabilities to their fair value and recording an ARO asset, PSEG and Power recorded a Cumulative Effect of a Change in Accounting Principle of $370 million after-tax in the first quarter of 2003. Of this amount, $292 million STATEMENTS (~~after-tax~~UNAUDITED) ~~relates to Nuclear and $78 million (after-tax) relates to the cost of removal liabilities for the fossil units being reversed.~~

InThe ~~July~~adoption ~~2003, the New Jersey Board~~ of ~~Public~~FIN ~~Utilities~~46R ~~(BPU)~~did ~~issued an oral decision determining that PSE&G's customers will no longer pay, and do~~ not ~~have~~impact ~~responsibility for nuclear decommissioning costs after July 31, 2003. Beginning August 1, 2003,~~ the ~~responsibility~~implementation ~~rests with the owners~~ of ~~the~~FIN ~~nuclear~~46 ~~power~~(discussed ~~plants.~~below) ~~The~~by ~~BPU~~PSEG, ~~also indicated in the oral decision that~~ PSE&G ~~is required to refund $30 million~~, ~~pre-tax,~~Power ~~related~~and toEnergy ~~revenues~~Holdings ~~previously~~or ~~collected~~have ~~through the SBC for nuclear decommissioning, however, the refund will not affect~~ any ~~previously~~other ~~collected~~effect ~~funds~~on ~~deposited~~their ~~into~~respective ~~external~~financial ~~trusts~~statements. ~~For additional information relating to the oral decision issued in connection with PSE&G's Electric Base Rate Case, see Note 16. Subsequent Events.~~

21 The adoption of FIN 46 required PSEG and PSE&G to deconsolidate their capital trusts and Energy Holdings to consolidate its investments in four real estate partnerships. Prior period financial statements have been reclassified for comparability in accordance with FIN 46.

~~NOTES~~ PSEG TOand ~~CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~PSE&G

PSEG and PSE&G evaluated their respective interests in PSEG Capital Trusts I-IV, PSEG Funding Trust I (trust holding Participating Equity Preference Securities (PEPS)), PSE&G Capital Trust LP and PSE&G Capital Trust II and determined them to be VIEs under FIN 46. It was further determined that PSEG and PSE&G were not the primary beneficiaries of those entities and therefore were prohibited from consolidating them into the financial statements. Accordingly, these entities were deconsolidated as of July 1, 2003 and were recorded under the equity method of accounting. This resulted in the removal of the preferred securities issued by the trusts from the Condensed Consolidated Balance Sheets and the addition to the Condensed Consolidated Balance Sheets of long-term debt in an equal amount between PSEG, PSE&G and their respective trusts, which previously had been eliminated in consolidation. In December 2003, PSE&G redeemed its preferred securities mentioned above. Additionally, PSEG's Condensed Consolidated Balance Sheets reflect its equity investment in these entities, which also were previously eliminated in consolidation resulting in the recording of equal amounts of additional assets and long-term debt of $36 million as of March 31, 2004 and December 31, 2003. The invested cash was loaned back to PSEG in connection with the issuance of the preferred securities.

~~PSE&G~~The ~~has~~following ~~identified~~table ~~certain~~displays ~~other legal obligations that meet~~ the ~~criteria of SFAS 143~~securities, ~~which at this time are not quantifiable~~ and ~~therefore~~their ~~are~~original ~~unable~~issuance ~~to be recorded. These obligations relate to certain industrial establishments subject to the ISRA~~amounts, ~~underground~~held ~~storage~~by ~~tanks subject to closure requirements, leases and licenses, and~~ the ~~requirement~~trusts tothat ~~seal~~have ~~natural~~been ~~gas pipelines at all sources of gas when the pipelines are no longer in service~~deconsolidated.

As of January 1, 2003, PSE&G had no legal liabilities, as contemplated under SFAS 143, recorded on its Consolidated Balance Sheets and, therefore, the effect of adoption did not result in an adjustment to the Consolidated Financial Statements. PSE&G does, however, have cost of removal liabilities embedded within Accumulated Depreciation and Amortization pursuant to SFAS No. 71, ''Accounting for the Effects of Certain Types of Regulation'' (SFAS 71). Since PSE&G is a regulated enterprise, these amounts, which total approximately $358 million as of June 30, 2003, continue to be recorded and presented in Accumulated Depreciation and Amortization on the Consolidated Balance Sheets.

	As of
	March 31, 2004		December 31, 2003
	(Millions)
PSEG
PSEG Quarterly Guaranteed Preferred Beneficial Interest in PSEG's Subordinated Debentures
7.44%	$	225	$	225
Floating Rate		150		150
7.25%		150		150
8.75%		180		180
PSEG Participating Units
10.25%		460		460

Total PSEG	$	1,165	$	1,165

~~Energy~~ PSEG ~~Holdings~~and PSE&G now record interest expense (previously eliminated against the interest income of the trust) instead of preferred securities dividends (since the preferred dividends are in the trusts that are no longer consolidated). For PSEG, this amount totaled $14 million and $17 million for the quarters ended March 31, 2004 and 2003, respectively. For PSE&G, this amount totaled $3 million for the quarter ended March 31, 2003.

Energy Holdings has identified certain legal obligations that meet the criteria of SFAS 143. However, it has determined that they are not material to its financial position, results of operations or net cash flows.PSE&G

~~Effect~~ PSE&G onreviewed its Non-Utility Generation (NUG) contracts to determine if the ~~NDT~~entities ~~Fund~~involved were VIEs and, if so, if PSE&G was the primary beneficiary. These entities consist of power plants that sell their output to PSE&G, which PSE&G is required to purchase at a variable price that correlates

~~Power~~22

~~Prior~~NOTES toTO ~~the~~CONDENSED ~~adoption~~CONSOLIDATED ofFINANCIAL SFAS 143, amounts collected from PSE&G customers that have been deposited into the NDT Fund and realized and unrealized gains and losses in the trust were all recorded as changes in the NDT Fund with an offsetting charge to the nuclear decommissioning liability. Due to the oral decision issued by the BPU that PSE&G's customers will no longer fund the NDT Fund, deferral accounting is no longer appropriate. In anticipation of this decision, beginning January 1, 2003, realized gains and losses were recorded in earnings and unrealized gains and losses were recorded as a component of Other Comprehensive Income STATEMENTS (~~OCI~~UNAUDITED), as appropriate under SFAS No. 115, ''Accounting for Certain Investments in Debt and Equity Securities'' (SFAS 115). Additionally, because deferral accounting was no longer appropriate, as of January 1, 2003, Power had expensed approximately $40 million of the $68 million of pre-tax unrealized losses on securities in the NDT Fund which were other than temporarily impaired and recorded this amount against earnings in the Cumulative Effect of a Change in an Accounting Principle.

~~Note~~with 4some of the major operating costs of the plants. ~~Earnings~~As ~~Per~~a ~~Share~~result, PSE&G assumes some of the variability inherent in the operation of these plants.

~~PSEG~~ PSE&G held a potentially significant variable interest in two such entities, but was unable to obtain the information necessary to conduct the analysis required under FIN 46R or consolidate the entities financial statements due to NUGs' belief that it was competitive and proprietary data. As a result, PSE&G applied the scope exception to FIN 46R that exempts entities who conduct exhaustive efforts to obtain the necessary information.

~~Diluted~~PSE&G ~~earnings~~incurred ~~per~~costs ~~share~~related ~~are~~to ~~calculated~~the byNUG ~~dividing~~contracts ~~net~~of ~~income~~approximately by$81 million for the ~~weighted~~quarters ~~average~~ended ~~number~~March of31, ~~shares~~2004 ofand ~~common~~2003. ~~stock~~PSE&G ~~outstanding,~~sells ~~including~~the ~~shares~~electricity ~~issuable~~purchased ~~upon~~under ~~exercise~~the ofNUG ~~stock~~contracts ~~options~~at ~~outstanding~~market ~~under~~prices ~~PSEG's~~in ~~stock~~PJM ~~option~~and ~~plans.~~recovers ~~The~~the ~~following~~difference ~~table~~between ~~shows~~these ~~the~~variable ~~effect~~price ofand ~~these~~market ~~stock~~price through the NUG Transition Charge (NTC).

22 PSE&G's maximum loss exposure relates to the variable pricing components in the contract increasing. PSE&G's maximum loss exposure from these two contracts is undeterminable due to the inability to obtain the necessary information.

~~NOTES~~ Energy ~~TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~Holdings

~~options~~ Energy onHoldings ~~the~~evaluated ~~weighted~~its ~~average~~interests ~~number~~in four real estate partnerships previously accounted for under the equity method of ~~shares~~accounting. ~~outstanding~~These ~~used~~entities inwere ~~calculating~~determined ~~diluted~~to ~~earnings~~be ~~per~~VIEs ~~share:~~and Energy Holdings was determined to be the primary beneficiary and, therefore, was required to consolidate these entities. The current presentation reflects these entities on a fully consolidated basis and all periods were restated in accordance with FIN 46.

	Quarter Ended June 30,												Six Months Ended June 30,
	2003			2003			2002			2002			2003			2003			2002			2002
	Basic			Diluted			Basic			Diluted			Basic			Diluted			Basic			Diluted
EPS Numerator:
Earnings (Loss) (Millions)
Continuing Operations	$	150		$	150		$	(227	)	$	(227	)	$	471		$	471		$	(46	)	$	(46	)
Discontinued Operations		(2	)		(2	)		(37	)		(37	)		(17	)		(17	)		(38	)		(38	)
Extraordinary Item		(18	)		(18	)		—			—			(18	)		(18	)		—			—
Cumulative Effect of a Change in Accounting Principle		—			—			—			—			370			370			(120	)		(120	)
Net Income (Loss)	$	130		$	130		$	(264	)	$	(264	)	$	806		$	806		$	(204	)	$	(204	)
EPS Denominator (Thousands):
Weighted Average Common Shares Outstanding		225,910			225,910			206,246			206,246			225,627			225,627			206,049			206,049
Effect of Stock Options		—			672			—			681			—			481			—			582
Total Shares		225,910			226,582			206,246			206,927			225,627			226,108			206,049			206,631
Earnings (Loss) per share:
Continuing Operations	$	0.67		$	0.66		$	(1.10	)	$	(1.10	)	$	2.09		$	2.09		$	(0.22	)	$	(0.22	)
Discontinued Operations		(0.01	)		(0.01	)		(0.18	)		(0.18	)		(0.08	)		(0.08	)		(0.19	)		(0.19	)
Extraordinary Item		(0.08	)		(0.08	)		—			—			(0.08	)		(0.08	)		—			—
Cumulative Effect of a Change in Accounting Principle		—			—			—			—			1.64			1.64			(0.58	)		(0.58	)
Net Income (Loss)	$	0.58		$	0.57		$	(1.28	)	$	(1.28	)	$	3.57		$	3.57		$	(0.99	)	$	(0.99	)

The consolidation of the real estate partnerships on the Condensed Consolidated Balance Sheets resulted in an increase of approximately $31 million in assets and liabilities. There was no material impact of consolidating the real estate partnerships on Operating Revenues and Operating Expenses.

~~There were~~Emerging ~~approximately~~Issues ~~5.4~~Task ~~million~~Force ~~stock~~(EITF) ~~options~~Issue ~~and 9~~No.2 03-1, ~~million~~“The ~~participating~~Meaning ~~units not~~of ~~included~~Other-Than-Temporary inImpairment ~~the~~and ~~weighted~~Its ~~average~~Application ~~common shares calculation used for diluted earnings per share due~~ to ~~their~~Certain ~~antidilutive~~Investments” ~~effect~~(EITF ~~for the quarter ended June 30, 2003.~~03-1)

~~Note~~ PSEG, 5.PSE&G, ~~Discontinued~~Power ~~Operations~~and Energy Holdings

EITF 03-1 considers the meaning of “other-than-temporary impairment” and its application to debt and equity securities. Impairment occurs when the fair value of a security is less than its cost basis. When such a condition exists, the investor is required to evaluate whether the impairment is other-than-temporary as defined in EITF 03-1. When an impairment is other-than-temporary, the security must be written down to its fair value. EITF 03-1 is effective for periods beginning after June 15, 2004. PSEG, PSE&G, Power and Energy Holdings do not expect any material effect from the adoption of EITF 03-1 on their respective financial statements.

~~Energy~~EITF ~~Technologies'~~Issue ~~Investments~~No. 03-6, “Participating Securities and the Two-Class Method under Financial Accounting Standards Board (FASB) Statement No. 128, Earnings per Share” (EITF 03-6)

Energy Technologies is comprised primarily of its remaining heating, ventilating and air conditioning (HVAC) and mechanical operating companies. In June 2002, Energy Holdings adopted a plan to sell its HVAC/mechanical operating companies. 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.PSEG

~~Energy~~EITF 03-6 ~~Holdings~~requires ~~continues~~that tothe retwo-~~evaluate~~class ~~the~~method ~~carrying value~~ of ~~Energy~~accounting ~~Technologies'~~be ~~assets~~applied ~~and liabilities~~ to ~~determine~~participating ifconvertible ~~current~~securities ~~market~~in ~~conditions require additional write-downs to fair value less cost to sell. For~~ the ~~six~~computation ~~months ended June 30, 2003, Energy Holdings recorded an additional loss on disposal~~ of ~~Energy~~basic ~~Technologies~~Earnings ofPer ~~$9 million, net of a $2 million tax benefit~~Share. OfEITF 03-6 ~~the~~is 11effective ~~HVAC companies held~~ for ~~sale~~periods inbeginning ~~2002,~~after ~~eight were sold by June 30~~March 31, ~~2003~~2004. InPSEG ~~July~~does ~~2003~~not ~~two~~expect ~~additional~~any ~~companies~~material ~~were~~effect ~~sold~~on ~~at book value and a letter of intent has been entered into to sell~~ the ~~final~~computation ~~company. The sale~~ of ~~the~~basic ~~remaining~~Earnings ~~company~~Per ~~has~~Share ~~been delayed~~ due to ~~market conditions, however, Energy Holdings expects~~ the ~~sale~~adoption ~~to be completed by the end~~ of ~~the third quarter of 2003~~EITF 03-6.

Energy Holdings' remaining investment position in Energy Technologies as of June 30, 2003 consists of $86 million in assets and $49 million in liabilities. Of the $86 million in assets approximately $31 million relates to tax assets associated with tax benefits from the sale of the HVAC companies, with the remaining balance relating primarily to its investment in the remaining three HVAC companies.23

23NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

~~NOTES~~EITF TOIssue ~~CONSOLIDATED~~No. 02-3, ~~FINANCIAL~~“Issues ~~STATEMENTS~~Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities” (~~UNAUDITED~~EITF 02-3)

~~The~~PSEG ~~revenues~~ and ~~results of operations of Energy Technologies for the quarter and six months ended June 30, 2003 and 2002 are displayed below:~~Power

	Quarter Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2002
	(Millions)
Operating Revenues	$	12		$	91		$	61		$	186
Pre-Tax Operating Loss	$	(4	)	$	(9	)	$	(13	)	$	(15	)
Net Loss	$	(2	)	$	(5	)	$	(8	)	$	(9	)

EITF 02-3 requires all gains and losses on energy trading derivatives to be reported on a net basis. Also, energy trading contracts that are not derivatives under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133) are no longer marked to market. EITF 02-3 became fully effective January 1, 2003. The majority of Power's energy trading contracts qualify as derivatives under SFAS 133 and will therefore continue to be marked to market. The impact of implementing these rules had no effect on PSEG's or Power's Net Income. Prior period Operating Revenues and Energy Costs on the Condensed Consolidated Statements of Operations have been reclassified on a net basis for comparability.

~~The~~Note ~~carrying~~4. ~~amounts~~Adoption of ~~the assets and liabilities of the HVAC/mechanical operating companies, as of June 30, 2003 and December 31, 2002 are summarized in the following table:~~SFAS 143

	As of
	June 30, 2003		December 31, 2002
	(Millions)
Current Assets	$	10	$	82
Noncurrent Assets		21		25
Total Assets	$	31	$	107
Current Liabilities	$	15	$	85
Noncurrent Liabilities		5		5
Long-Term Debt		11		5
Total Liabilities	$	31	$	95

PSEG and Power

~~Tanir~~ In ~~Bavi~~the first quarter of 2003, Power ~~Company~~completed ~~Ltd~~a review of potential obligations under SFAS 143 and determined that the obligations were primarily related to the decommissioning of its nuclear power plants. Power's recorded liability for decommissioning as of December 31, 2002 was approximately $766 million and equaled the balance of its Nuclear Decommissioning Trust (~~Tanir~~NDT) ~~Bavi~~Fund, as discussed below. As of January 1, 2003, this liability was recalculated under SFAS 143 and was determined to be approximately $261 million. Concurrently, an asset was recorded of approximately $50 million that represented the fair value of the asset retirement obligation (ARO) at adoption.

In addition to the ~~fourth~~$261 ~~quarter~~million ofnuclear ~~2002~~decommissioning liability, ~~Global~~Power ~~sold~~identified ~~its~~certain ~~74%~~other ~~interest~~legal inobligations that meet the ~~Tanir~~criteria ~~Bavi~~of ~~generating~~SFAS 143, ~~facility~~which inare ~~India~~currently ~~for~~not ~~approximately~~quantifiable, ~~$45~~but ~~million~~could be material in the future. ~~The~~These ~~facility~~obligations ~~met~~relate to certain industrial establishments subject to the ~~criteria~~New ~~for~~Jersey ~~classification~~Industrial asSite aRecovery ~~component~~Act of(ISRA), ~~discontinued~~underground ~~operations~~storage tanks subject to closure requirements, permits and ~~all~~authorizations, ~~prior~~the ~~periods~~restoration ~~were~~of ~~reclassified~~an area to ~~conform~~be occupied by a reservoir at the end of its useful life, an obligation to ~~that~~retire ~~presentation.~~certain ~~The~~plants ~~operating~~prior ~~results~~to the start up of ~~Tanir~~a ~~Bavi~~new ~~for~~plant and the ~~quarter~~demolition and ~~six~~restoration ~~months~~of ~~ended~~certain ~~June~~other ~~30,~~plant ~~2002~~sites once they are ~~summarized~~no ~~below~~longer in service. Because these legal obligations are not quantifiable, no amounts have been recorded.

	Quarter Ended June 30, 2002		Six Months Ended June 30, 2002
	(Millions)
Operating Revenues	$	32	$	61
Pre-Tax Operating Income	$	3	$	9
Net Income	$	2	$	5

Power also had $131 million of cost of removal liabilities recorded as of December 31, 2002, which did not meet the requirements of an ARO and were therefore reversed and included in the Cumulative Effect of a Change in Accounting Principle recorded in the first quarter of 2003.

24 As a result of adopting SFAS 143, PSEG and Power recorded a Cumulative Effect of a Change in Accounting Principle of $370 million, after-tax, in the first quarter of 2003. Of this after-tax amount, $292 million related to decommissioning at Nuclear and $78 million related to the cost of removal liabilities for the fossil units that were reversed.

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~PSE&G

~~Note~~ PSE&G 6identified certain legal obligations that meet the criteria of SFAS 143, which are currently not quantifiable and therefore are not recorded. ~~Regulatory~~These ~~Assets~~obligations relate to certain industrial establishments subject to the ISRA, underground storage tanks subject to closure requirements, leases and ~~Liabilities~~licenses and the requirement to seal natural gas pipelines when the pipelines are no longer in service.

~~PSEG and~~ PSE&G had cost of removal liabilities of approximately $401 million and $395 million recorded as of March 31, 2004 and December 31, 2003, respectively, which do not meet the requirements of an ARO and are therefore classified as regulatory liabilities.

~~As of June 30, 2003 and December 31, 2002, respectively, PSEG and PSE&G had deferred the following regulatory assets and liabilities on the Consolidated Balance Sheets:~~24

	As of
	June 30, 2003		December 31, 2002		Recovery/Refund Period
	(Millions)
Regulatory Assets
Securitized Stranded Costs	$	3,782	$	3,885		Through December 2015(1)(2)
Deferred Income Taxes		371		326		Various
OPEB-Related Costs		183		193		Through December 2012(2)
Manufactured Gas Plant Remediation Costs		115		115		Various(2)
Unamortized Loss on Reacquired Debt and Debt Expense		84		86		Over remaining debt life(1)
Underrecovered Gas Costs		110		154		Through September 2004(1)
Non-Utility Generation Transition Charge (NTC)		68		—		Through December 31, 2005(1)
Unrealized Losses on Interest Rate Swap		73		66		Through December 2015(2)
Repair Allowance Taxes		97		93		Through August 2013(1)(2)
Decontamination and Decommissioning Costs		21		21		Through December 2007(2)
Plant and Regulatory Study Costs		24		25		Through December 2021(2)
Regulatory Restructuring Costs		42		33		Through August 2013(1)(2)
Other		5		5
Total Regulatory Assets	$	4,975	$	5,002
Regulatory Liabilities
Excess Depreciation Reserve	$	179	$	171		Through December 31, 2005(2)
NTC		—		27		Through December 31, 2005(1)
Societal Benefits Charges (SBC)		177		50		Through December 31, 2005(1)(2)
Other		6		4		Various(1)
Total Regulatory Liabilities	$	362	$	252

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(1)		Recovered/Refunded with interest
(2)		Recoverable/Refundable per specific rate order

Energy Holdings

InEnergy ~~July~~Holdings ~~2003,~~has ~~the~~identified ~~BPU~~certain ~~issued~~legal anobligations ~~oral~~that ~~decision~~meet ~~in PSE&G's Electric Base Rate Case. The descriptions below supplement~~ the ~~information~~criteria ~~contained~~of ~~in Note 7~~SFAS 143. ~~Regulatory~~However, ~~Assets~~it ~~and~~has ~~Liabilities~~determined inthat ~~the~~they ~~2002~~are ~~Annual~~not ~~Report~~material ~~on Form 10-K~~ to ~~reflect~~its ~~the~~financial ~~effects~~position, results of ~~changes~~operations ~~resulting~~or ~~from~~net ~~the~~cash ~~oral decision~~flows. ~~For additional information relating to the oral decision, see Note 16. Subsequent Events.~~

~~SBC:~~SFAS 143 ~~The~~Effect ~~SBC,~~on ~~as authorized by~~ the ~~BPU~~NDT and the Energy Competition Act, includes costs related to PSE&G's electric and gas business as follows: 1) the universal service fund; 2) nuclear plant decommissioning; 3) demand side management (DSM) programs; 4) social programs which include bad debt expense; 5) consumer education; and 6) Market Transition Charge (MTC) over recovery. All components except for MTC accrue interest. Effective August 1, 2003, nuclear plant decommissioning will no longer be included in the electric SBC.Fund

~~NTC:~~Power ~~This~~and clause was established by the Energy Competition Act to account for above market costs related to non-utility generation (NUG) contracts, as approved by the BPU. Costs or benefits associated with the restructuring of these contracts are deferred. This clause also includes Basic Generation Service (BGS) costs in excess of current rates, as approved by the BPU.PSE&G

~~Repair~~Prior ~~Allowance~~to ~~Taxes:~~the ~~This~~adoption ~~represents~~of ~~tax~~SFAS 143, ~~interest~~amounts collected from PSE&G customers through rates were deposited into the NDT Fund and ~~carrying~~realized ~~charges~~and ~~relating~~unrealized gains and losses in the trust were all recorded as changes in the NDT Fund with an offsetting charge to ~~disallowed~~the ~~tax~~nuclear ~~deductions~~decommissioning liability. Prior to the adoption of SFAS 143, this was appropriate under SFAS No. 71, “Accounting for ~~repair~~the ~~allowance~~Effects asof ~~authorized~~Certain Types of Regulation” (SFAS 71) and other related accounting guidance. Based on an order issued by the New Jersey Board of Public Utilities (BPU), ~~with~~PSE&G's ~~recovery~~customers ~~over~~are 10no ~~years~~longer ~~effective~~required ~~August~~to 1fund the NDT Fund, ~~2003~~and therefore deferral accounting is no longer appropriate for changes in the fair value of securities within the NDT Fund.

~~Regulatory~~Beginning ~~Restructuring~~January ~~Costs:~~1, ~~These~~2003, ~~are~~realized ~~costs~~gains ~~related~~and tolosses ~~the~~were ~~restructuring~~recorded in earnings and unrealized gains and losses were recorded as a component of ~~the~~Accumulated ~~energy~~Other ~~industry~~Comprehensive Income (OCI), net of tax, as required under SFAS No. 115, “Accounting for Certain Investments in ~~New~~Debt ~~Jersey~~and ~~through~~Equity Securities” (SFAS 115). Additionally, because deferral accounting was no longer appropriate, as of January 1, 2003, Power recognized $68 million of pre-tax unrealized losses on securities in the ~~Energy~~NDT ~~Competition~~Fund, ~~Act~~of which approximately $40 million was deemed other than temporarily impaired and ~~include~~recorded ~~such~~this ~~items~~amount asagainst earnings in the ~~system~~Cumulative ~~design~~Effect ~~work~~of a Change in an Accounting Principle in the first quarter of 2003.

25 As of March 31, 2004 and December 31, 2003, the fair market value of the NDT Fund was approximately $981 million and $985 million, respectively.

~~NOTES~~Note TO5. ~~CONSOLIDATED~~Discontinued ~~FINANCIAL STATEMENTS (UNAUDITED)~~Operations

~~necessary~~Energy to transition PSE&G to a transmission and distribution only company, as well as costs incurred to transfer and establish the generation function as a separate corporate entity with recovery over 10 years beginning August 1, 2003.Holdings

~~Excess~~Carthage ~~Depreciation~~Power ~~Reserve:~~Company As required by the BPU in 1999, PSE&G reduced its depreciation reserve for its electric distribution assets and recorded such amount as a regulatory liability. The remaining amount of the original liability as of June 30, 2003 is $24 million, which will be amortized in July 2003. In June 2003, PSE&G recorded an additional $155 million liability as a result of the oral decision issued by the BPU in PSE&G's Electric Base Rate Case. This $155 million will be amortized from August 1, 2003 through December 31, 2005.(CPC)

~~Note~~ Global 7has a controlling interest in CPC, which owns and operates a power plant located in Rades, Tunisia. ~~Commitments~~In December 2003, Global entered into a definitive purchase and ~~Contingent~~sale ~~Liabilities~~agreement related to the sale of its majority interest in CPC, for approximately $43 million. The completion of the sale is expected to occur in the second quarter of 2004 and is subject to certain conditions, including government and lender approvals, which cannot be assured. Under the terms, as subsequently amended, of the agreement, Global expects to receive approximately $16 million in cash and a promissory note of $27 million, bearing interest at 5% which will be payable in three annual installments following the close of the sale of approximately $5 million, $10 million and $12 million, plus interest. If the sale is unable to be completed, Global will seek another buyer for this facility. CPC meets the criteria for classification as a component of Discontinued Operations and all prior periods have been reclassified to conform to the current year's presentation. Global has reduced its carrying value of CPC to its fair value less cost to sell and recorded an estimated loss on disposal of $2 million (after-tax) for the quarter ended March 31, 2004.

~~Guaranteed~~ The ~~Obligations~~operating results of CPC for the quarters ended March 31, 2004 and 2003 are summarized below.

~~Power~~25

~~Power~~NOTES ~~has~~TO ~~guaranteed~~CONDENSED ~~certain~~CONSOLIDATED ~~commodity~~FINANCIAL related transactions for its subsidiary, ER&T, which is involved in energy marketing activities. These guarantees were provided to counterparties in order to facilitate physical and financial agreements in gas, pipeline capacity, transportation, oil, electricity and related commodities and services. These Power guarantees support the current exposure, interest and other costs on sums due and payable by ER&T under these agreements. Guarantees offered for trading and marketing cover the granting of lines of credit between entities and are often reciprocal in nature. The exposure between counterparties can go either direction. The face value of the guarantees outstanding on June 30, 2003 and December 31, 2002 was $1.5 billion and $1.1 billion, respectively. In orderSTATEMENTS for Power to experience a liability of $1.5 billion, ER&T would have to fully utilize the credit granted to it by every counterparty to whom Power has provided a guarantee and all of ER&T's contracts would have to be ''out-of-the-money'' (~~if the contracts are terminated, Power would owe money to the counterparties~~UNAUDITED). The probability of all contracts at ER&T being simultaneously ''out-of-the-money'' is highly unlikely. For this reason, the current exposure at any point in time is a more meaningful representation of the potential liability to Power under these guarantees. The current exposure consists of the net of accounts receivable and accounts payable (AR/AP) and the forward value on open positions, less any margins posted. The current exposure from such liabilities was $313 million and $268 million as of June 30, 2003 and December 31, 2002, respectively. Of the $313 million, $240 million is recorded on Power's Consolidated Balance Sheets as of June 30, 2003. A significant portion of the current exposure under such guarantees is attributable to the load contracts that expire on July 31, 2003 and the overlap of the mark-to-market exposure of those contracts and the contracts recently signed through the auction for the period beginning August 1, 2003. The load contracts are accounted for on a settlement basis. As energy is delivered under all of these contracts, the portion of Power's exposure under such guarantees will decrease.

In addition, all Master Agreements and other supply contracts, including Power's BGS-related load contracts, contain margin and/or other collateral requirements that, as of June 30, 2003, could require Power to post additional collateral of approximately $353 million if a) Power were to lose its investment grade credit rating, and b) all counterparties with whom Power is ''out-of-the money'' under such contracts, were entitled to and called for collateral.

	Quarters Ended March 31,
	2004		2003
	(Millions)
Operating Revenues	$	26	$	22
Pre-Tax Operating Income	$	2	$	2
Net Income	$	2	$	1

InThe ~~addition,~~carrying ~~Power~~amounts ~~has issued an approximate $40 million guarantee on behalf~~ of ~~a third party's performance under a BGS contract expiring in July 2003. Because Power supplies~~ the ~~third~~assets ~~party~~and ~~with~~liabilities ~~the~~of ~~energy~~CPC ~~needed~~as ~~for~~of ~~performance~~March ~~under the guarantee~~31, it2004 isand ~~highly~~December ~~unlikely Power would incur any liabilities in connection with the guarantee. As of June 30~~31, 2003, ~~there~~are ~~were~~summarized ~~no amounts recorded~~ in ~~connection with~~ the ~~guarantee.~~following table:

Also, Power has issued a guarantee relating to potential future environmental liabilities at its Connecticut facilities to the State regulatory bodies.

	As of
	March 31, 2004		December 31, 2003
	(Millions)
Current Assets	$	41	$	45
Noncurrent Assets		242		253

Total Assets	$	283	$	298

Current Liabilities	$	159	$	161
Noncurrent Liabilities		70		81

Total Liabilities	$	229	$	242

26 Energy Technologies' Investments

~~NOTES~~ In TOJune ~~CONSOLIDATED~~2002, ~~FINANCIAL~~Energy ~~STATEMENTS~~Holdings adopted a plan to sell its heating, ventilating and air conditioning (~~UNAUDITED~~HVAC)/mechanical operating companies. The HVAC/mechanical operating companies meet the criteria for classification as components of Discontinued Operations. During the first quarter of 2003, Energy Holdings re-evaluated the carrying value of Energy Technologies' assets and liabilities and determined that market conditions required an additional write-down to fair value less cost to sell and recorded an additional loss on disposal of Energy Technologies of $8 million, net of a $3 million tax benefit. The sale of the HVAC/mechanical operating companies and Energy Technologies was complete as of September 30, 2003.

AsThe ofrevenues ~~June~~and ~~30,~~results ~~2003,~~of ~~letters~~operations of ~~credit~~Energy ~~issued~~Technologies byfor ~~Power were outstanding in~~ the ~~amount~~quarter ofended ~~approximately~~March ~~$86 million in support of various contractual obligations~~31, ~~environmental~~2003 ~~liabilities~~are ~~and~~as ~~to satisfy trading collateral obligations.~~follows:

Power has also guaranteed equity contributions by its subsidiaries relating to the construction of its Lawrenceburg, Indiana and Waterford, Ohio facilities. Should Power lose its investment grade credit rating, it would be required to post $128 million in letters of credit for those projects. Such guarantees will be cancelled upon satisfaction of Power's equity commitments, which are included in its anticipated capital expenditures for the remainder of 2003.

	Quarter Ended March 31, 2003
	(Millions)
Operating Revenues	$	49
Pre-Tax Operating Loss	$	(9	)
Net Loss	$	(6	)

~~Energy~~Note ~~Holdings~~6. Earnings Per Share

Energy Holdings and/or Global have guaranteed certain obligations of their subsidiaries or affiliates, including the successful completion, performance or other obligations related to certain projects in an aggregate amount of approximately $261 million as of June 30, 2003. The guarantees include a $61 million equity commitment for ELCHO in Poland, a $49 million standby equity commitment for Skawina CHP Plant in Poland (Skawina), $17 million of various guarantees for Dhofar Power Company in Oman, and a $25 million contingent guarantee related to debt service obligations of Chilquinta Energia Finance LLC in connection with electric distribution companies in Chile and Peru. Additional guarantees consist of a $38 million leasing agreement guarantee for Prisma in Italy and various other guarantees comprising the remaining $71 million. Approximately $61 million of such guarantees will be cancelled upon satisfaction of Global's equity commitments, which are included in Energy Holdings' anticipated capital expenditures for the remainder of 2003.PSEG

InDiluted ~~the~~Earnings ~~normal~~Per ~~course~~Share ofis ~~business,~~calculated ~~Energy~~by ~~Technologies~~dividing ~~secures~~Net ~~construction~~Income ~~obligations~~by ~~with~~the ~~performance~~weighted ~~bonds~~average ~~issued~~number byof ~~insurance~~shares ~~companies.~~of Ascommon ofstock ~~June 30~~outstanding, ~~2003,~~including ~~Energy~~shares ~~Technologies~~issuable ~~had~~upon ~~$209~~exercise ~~million~~ of ~~such~~stock ~~bonds~~options outstanding, ofunder ~~which~~PSEG's ~~$34~~stock ~~million~~option ~~related to ongoing construction projects~~plans. The ~~performance~~following ~~bonds~~table ~~are~~shows ~~not included in~~ the ~~$261~~effect ~~million~~ of ~~guaranteed~~these ~~obligations~~stock ~~discussed~~options ~~above.~~on In January 2003, Energy Holdings provided an indemnification agreement and $31 million of letters of credit in support of Energy Technologies' obligations. As of June 30, 2003, $25 million in letters of credit remain, including obligations relating to certain of the ~~HVAC~~weighted ~~companies~~average ~~that~~number ~~have been previously sold. These amounts are expected to decrease over time as each~~ of ~~the~~shares ~~HVAC~~outstanding ~~companies~~used ~~completes the work~~ in ~~process or~~calculating ~~transfers~~Diluted ~~ownership~~Earnings toPer ~~other companies.~~Share:

~~Environmental Matters~~26

~~PSE&G~~NOTES ~~and~~TO ~~Power~~CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Hazardous Waste

	Quarters Ended March 31,
	2004				2003
	Basic		Diluted		Basic			Diluted
EPS Numerator:
Earnings (Millions)
Continuing Operations	$	271	$	271	$	324		$	324
Discontinued Operations		—		—		(13	)		(13	)
Cumulative Effect of a Change in Accounting Principle		—		—		370			370

Net Income	$	271	$	271	$	681		$	681

EPS Denominator (Thousands):
Weighted Average Common Shares Outstanding		236,193		236,193		225,342			225,342
Effect of Stock Options		—		1,203		—			278
Effect of Forward Contracts (PEPS)		—		1,456		—			94

Total Shares		236,193		238,852		225,342			225,714

Earnings Per Share:
Continuing Operations	$	1.15	$	1.14	$	1.44		$	1.43
Discontinued Operations		—		—		(0.06	)		(0.06	)
Cumulative Effect of a Change in Accounting Principle		—		—		1.64			1.64

Net Income	$	1.15	$	1.14	$	3.02		$	3.01

~~The~~There ~~New~~were ~~Jersey~~approximately ~~Department~~531,500 ~~of Environmental Protection (NJDEP) regulations concerning site investigation~~ and ~~remediation~~6,089,000 ~~require~~stock anoptions ~~ecological~~not ~~evaluation~~included ~~of potential injuries to natural resources~~ in ~~connection~~the ~~with~~weighted aaverage ~~remedial~~common ~~investigation~~shares ofcalculation ~~contaminated~~used ~~sites.~~for ~~The~~Diluted ~~NJDEP~~Earnings isPer ~~presently~~Share ~~working~~due ~~with the energy industry~~ to ~~develop~~their ~~procedures~~antidilutive effect for ~~implementing these regulations. These regulations may substantially increase~~ the ~~costs~~quarters ofended ~~remedial~~March ~~investigations and remediations~~31, ~~where~~2004 ~~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~~2003, ~~certain of which are currently the subject of remedial activities~~respectively. The financial impact of these regulations on these projects is not currently estimable. PSE&G and Power do not anticipate that the compliance with these regulations will have a material adverse effect on their respective financial positions, results of operations or net cash flows.

27Note 7. Commitments and Contingent Liabilities

~~NOTES~~Old TODominion ~~CONSOLIDATED~~Electric ~~FINANCIAL~~Cooperative ~~STATEMENTS~~ (~~UNAUDITED~~ODEC)

PSE&G and Power

In 1995, PSE&G ~~Manufactured~~entered ~~Gas~~into ~~Plant~~a ten-year wholesale power contract with ODEC expiring in December 2004. The contract was transferred to Power in conjunction with the generation asset transfer in 2000. The contract provided for PSE&G to supply ODEC with capacity and energy for a bundled rate that included a component to recover multiple transmission charges (~~MGP)~~referred ~~Remediation~~to ~~Program~~as “pancaked transmission rates”).

~~PSE&G~~In isNovember ~~currently~~1997, ~~working~~the ~~with~~FERC issued the ~~NJDEP~~PJM ~~under~~Interconnection aLLC ~~program~~ (~~Remediation Program~~PJM) toRestructuring ~~assess~~Order, ~~investigate~~which ~~and,~~required ~~if necessary, remediate environmental conditions at~~ PSE&G's ~~former~~to ~~MGP~~modify ~~sites.~~its Tocontract ~~date,~~with 38ODEC ~~sites~~to ~~have~~remove ~~been~~pancaked ~~identified~~transmission rates. ~~The~~While ~~Remediation Program is periodically reviewed and revised by~~ PSE&G ~~based~~sought onrehearing ~~regulatory requirements, experience with the Remediation Program and available remediation technologies. The long-term costs~~ of ~~the~~this ~~Remediation~~order, ~~Program~~it ~~cannot~~was benonetheless ~~reasonably~~required ~~estimated,~~to ~~but~~reduce ~~experience~~its rate to ~~date~~ODEC ~~indicates~~by ~~that~~approximately ~~at least~~ $206 million per year, ~~could~~effective beApril ~~incurred~~1, ~~over a period of about 30 years since inception of the program in 1988 and that the overall cost could be material~~1998. ~~The costs for this remediation effort are recovered through SBC charges to utility customers.~~

AsIn of2000, ~~June~~FERC 30issued its order denying the request for rehearing. Thereafter, ~~2003~~Power successfully appealed the matter. In December 2002, ~~PSE&G's~~based ~~estimated~~on ~~net~~a ~~liability~~court ruling FERC reversed its November 1997 order, thereby reinstating the original contract terms. Since ODEC did not seek rehearing, that order is Final. This allowed Power to collect amounts for ~~remediation~~April ~~costs~~1998 through ~~2005~~December ~~aggregated~~2002 pursuant to the original contract. Power billed ODEC for this amount in January 2003. Power has been billing, recording and receiving payment on the higher rate for services provided since January 2003. ODEC is paying such increased rates currently under protest, but has refused to pay past due amounts aggregating $~~115~~31 million. ~~Expenditures~~On ~~beyond~~October ~~2005~~22, ~~cannot~~2003, beFERC issued ~~reasonably~~an ~~estimated~~order dismissing ODEC's untimely petition to reopen the matter, affirming the prices in the original contract and ~~are~~denying ~~therefore~~ODEC's ~~not~~request ~~accrued~~for reconsideration and its request for a stay. ODEC sought rehearing of that order on November 21, 2003. ODEC continues to withhold payment of the amounts due for the period prior to January 2003.

~~Passaic River Site~~27

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

~~PSE&G~~Accordingly, ~~and~~on ~~certain~~November of26, ~~its predecessors conducted industrial operations at properties within the Passaic River facility. The operations included one operating electric generating station~~2003, ~~one~~Power ~~former~~filed ~~generating~~suit ~~station~~against ~~and~~ODEC four former MGPs. PSE&G's costs to clean up former MGPs are recoverable from utility customers through the SBC. PSE&G has sold the site of the former generating station and obtained releases and indemnities for ~~liabilities~~breach ~~arising out~~ of ~~the~~contract ~~site~~ in ~~connection with the sale~~U.S. ~~The~~District ~~operating~~Court ~~generating~~in ~~station~~Newark, ~~was~~New ~~transferred~~Jersey. toOn ~~Power~~January in29, ~~August~~2004, ~~2000.~~ODEC ~~PSE&G~~filed ~~cannot~~a ~~predict~~motion ~~what~~to ~~action,~~dismiss ifclaiming ~~any,~~that the ~~EPA~~ongoing orFERC ~~any~~proceeding ~~third~~must ~~party~~be ~~may~~completed ~~take~~before ~~against~~any ~~PSE&G~~judicial ~~with~~intervention. ~~respect~~On toFebruary ~~this matter~~13, ~~or in such an event~~2004, ~~what~~Power ~~costs~~filed ~~may~~a bemotion ~~incurred~~for tosummary ~~address any such claims~~judgment. ~~However,~~This ~~such~~matter ~~costs~~is ~~may be material~~pending.

~~Power~~Guaranteed Obligations

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

~~The~~Power ~~EPA~~has ~~and~~unconditionally ~~the~~guaranteed ~~NJDEP~~payment ~~issued~~by aits ~~demand~~subsidiary, ER&T, in ~~March~~certain ~~2000~~commodity-related ~~under~~transactions entered into in the ~~Federal~~ordinary ~~Clean~~course ~~Air~~of ~~Act~~business. ~~(CAA)~~These ~~requiring~~payment ~~information~~guarantees were provided to ~~assess~~counterparties ~~whether~~in ~~projects~~order ~~completed~~to ~~since~~obtain ~~1978~~credit atunder physical and financial agreements in gas, pipeline capacity, transportation, oil, electricity and related commodities and services. These Power payment guarantees support the ~~Hudson~~current exposure, interest and ~~Mercer~~other ~~coal~~costs ~~burning~~on ~~units~~sums ~~were~~due ~~implemented~~and inpayable ~~accordance~~by ~~with~~ER&T ~~applicable~~under ~~PSD/NSR~~these ~~regulations~~agreements. ~~Power~~Guarantees ~~completed~~offered ~~its~~for ~~response~~trading toand marketing cover the ~~information~~granting ~~request~~of lines of credit between entities and are often reciprocal in ~~November 2000~~nature. InThe ~~January 2002,~~exposure ~~Power~~between ~~reached~~counterparties ancan ~~agreement~~go ~~with~~either ~~New~~direction. ~~Jersey~~The maximum ~~and~~total ~~the~~potential ~~federal~~liability ~~government~~or toface ~~resolve~~value ~~allegations~~of the guarantees outstanding as of ~~noncompliance~~March ~~with~~31, ~~federal~~2004 and ~~New~~December ~~Jersey~~31, ~~PSD/NSR~~2003 ~~regulations~~was $1.5 ~~Under~~billion ~~that~~and ~~agreement~~$1.4 billion, ~~over~~respectively. In order for Power to incur a liability for the ~~course~~face value of 10the ~~years~~outstanding guarantees, ~~Power~~ER&T ~~must~~would ~~install~~have ~~advanced~~to ~~air~~fully ~~pollution~~utilize ~~controls~~the ~~that~~credit ~~are~~granted ~~designed~~to it by every counterparty to ~~reduce~~whom ~~emissions~~Power has provided a guarantee and all of ~~Nitrogen~~ER&T's ~~Oxide~~contracts ~~(NOx),~~would ~~Sulfur~~have ~~Dioxide~~to be “out-of-the-money” (~~SO2)~~if the contracts are terminated, ~~particulate~~Power ~~matter~~would ~~and~~owe ~~mercury~~money to the counterparties). The ~~estimated~~probability ~~cost~~of all contracts at ER&T being simultaneously “out-of-the-money” is highly unlikely. For these reasons, the ~~program~~current exposure at ~~the~~any point in time is a more meaningful representation of the ~~settlement~~potential ~~was~~liability ~~$337~~to ~~million~~Power tounder these beguarantees. ~~incurred~~The ~~through~~current ~~2011.~~amounts ~~Power~~payable, ~~also~~which ~~paid~~are aguaranteed ~~$1.4~~consists ~~million~~of ~~civil~~the ~~penalty~~net ~~and~~of ~~has~~accounts ~~agreed~~receivable toand ~~spend~~accounts uppayable toand $6the ~~million~~forward value on ~~supplemental~~open ~~environmental~~positions, ~~projects~~less any margins posted. The ~~agreement~~exposure ~~resolving~~from ~~the~~such ~~NSR~~liabilities ~~allegations~~was ~~concerning~~$430 ~~the~~million ~~Hudson~~ and ~~Mercer~~$228 ~~coal-fired~~million ~~units~~as ~~also~~of ~~resolved~~March ~~the~~31, ~~dispute~~2004 ~~over~~and ~~Bergen 2~~December ~~regarding~~31, 2003, respectively. Of the ~~applicability~~$430 ofmillion ~~PSD~~exposure, ~~requirements~~$109 ~~and~~million ~~allowed~~is ~~construction~~recorded ofon ~~the~~Power's ~~unit~~Consolidated toBalance beSheets ~~completed~~as ~~and~~of ~~operation~~March to31, ~~commence~~2004.

~~Power~~In ~~has~~addition, ~~notified~~many ~~the~~of ~~EPA~~these agreements contain margin and/or ~~the~~other ~~NJDEP~~collateral requirements that, as itof isMarch ~~evaluating~~31, ~~the~~2004, ~~continued~~would ~~operation~~require Power to post additional collateral of ~~the~~approximately ~~Hudson~~$601 ~~coal~~million ~~unit~~if: ~~beyond~~a) Power ~~2006,~~were into ~~light~~lose ofits ~~changes~~investment ingrade ~~the~~credit ~~energy~~rating and ~~capacity~~b) ~~markets~~all ~~and~~counterparties ~~increases~~with inwhom ~~the~~Power ~~cost~~is “out-of-the ~~pollution~~money” ~~control~~under ~~equipment~~such contracts were entitled to and ~~other~~called ~~necessary~~for ~~modifications~~collateral. ~~Power~~An isincrease ~~also~~in ~~exploring~~energy ~~the~~prices causes a commensurate increase in collateral requirements for Power.

28 As of March 31, 2004, letters of credit issued by Power were outstanding in the amount of approximately $152 million in support of various contractual obligations and environmental liabilities as well as to satisfy trading collateral obligations.

~~NOTES~~ Power's TOguarantees ~~CONSOLIDATED~~of ~~FINANCIAL~~equity ~~STATEMENTS~~contributions ~~(UNAUDITED)~~by its subsidiaries relating to the construction of its Lawrenceburg and Waterford facilities were cancelled upon repayment of the project level debt to which the guarantees pertained.

~~feasibility~~ Energy of installing less costly pollution control equipment at the Hudson coal unit to satisfy the requirements of its agreement with the EPA and the NJDEP. A decision is expected to be made in 2003 as to the Hudson unit's continued operation. The related costs associated with these modifications have not been included in Power's capital expenditure projections.Holdings

~~New~~ Energy ~~Generation~~Holdings and/or ~~Development~~Global have guaranteed certain obligations of their subsidiaries or affiliates, including the successful completion, performance or other obligations related to certain projects in an aggregate amount of approximately $173 million and $180 million as of March 31, 2004 and December 31, 2003, respectively. As of March 31, 2004 and December 31, 2003, the guarantees of payment include a $49 million standby equity commitment for Skawina CHP Plant in Poland (Skawina) expiring in August 2007, a $10 million equity commitment for ELCHO in Poland which expired in April 2004 and a $25 million contingent guarantee related to debt service obligations of Chilquinta Energia Finance Co. LLC expiring in 2011. Additional guarantees consist of a $36 million and $37 million leasing agreement guarantee for Prisma 2000 S.p.A. (Prisma) in Italy as of March 31, 2004 and

~~Power and Energy Holdings~~28

~~Completion~~NOTES ofTO ~~the~~CONDENSED ~~projects,~~CONSOLIDATED ~~discussed~~FINANCIAL below, within the estimated time frames and cost estimates cannot be assured. Construction delays, cost increases and various other factors could result in changes in the operational dates or ultimate costs to complete.STATEMENTS (UNAUDITED)

~~Power~~December 31, 2003, respectively, $22 million and $24 million of performance and payment guarantees related to Energy Technologies as of March 31, 2004 and December 31, 2003, respectively, that are supported by letters of credit and expire in May 2005, discussed below, and various other guarantees comprising the remaining $31 million and $35 million as of March 31, 2004 and December 31, 2003, respectively, expiring through 2010.

~~Through~~In anSeptember ~~indirect~~2003, ~~wholly-owned~~Energy ~~subsidiary~~Holdings completed the sale of Energy Technologies and nearly all of its assets. However, ~~Power~~Energy isHoldings ~~developing~~retained ~~the~~certain ~~Bethlehem~~outstanding construction and warranty obligations related to ongoing construction projects previously performed by Energy ~~Center~~Technologies. These construction obligations have performance bonds issued by insurance companies. As of March 31, a2004, ~~763 MW~~there ~~combined-cycle~~were ~~power~~$80 ~~plant~~million ~~that~~of ~~will~~such ~~replace~~bonds outstanding, of which $5 million related to uncompleted construction projects. These performance bonds are not included in the ~~376 MW~~$173 ~~Albany,~~million NYof ~~Steam~~guaranteed ~~Station~~obligations discussed above. ~~Total~~In ~~costs~~January ~~for~~2003, ~~this~~Energy ~~project~~Holdings ~~are~~provided ~~expected~~an toindemnification beagreement ~~approximately~~and $~~500~~31 million ~~with~~in ~~expenditures~~letters toof ~~date~~credit in support of ~~approximately~~such obligations. As of March 31, 2004, $~~248~~22 million in letters of credit remain outstanding. ~~Construction~~These ~~began~~amounts inare ~~2002~~expected ~~with~~to decrease over the ~~expected~~next ~~completion~~two ~~date~~years as the work in ~~2005~~process is completed and are included in the $173 million, discussed above.

~~Power~~Environmental is constructing a 1,220 MW combined-cycle generation plant at Linden, New Jersey. Total costs are estimated at approximately $750 million with expenditures to date of approximately $587 million. Completion is expected in 2005.Matters

~~Power is constructing~~PSEG, ~~through~~PSE&G ~~indirect, wholly-owned subsidiaries, two natural gas-fired combined-cycle electric generation plants in Waterford, Ohio (821 MW)~~ and Lawrenceburg, Indiana (1,096 MW) at an estimated aggregate total cost of $1.2 billion. Total expenditures to date on these projects have been approximately $1.0 billion. The required estimated equity investment in these projects is approximately $400 million, with the remainder being financed with non-recourse bank financing. As of June 30, 2003, approximately $337 million of equity has been invested in these projects. In connection with these projects, ER&T has entered into a five-year tolling agreement pursuant to which it is obligated to purchase the output of these facilities. Based on current prices, the purchase price under this contract is currently above market. ER&T may terminate the agreement upon repayment of the current financing scheduled for August 2005. Additional equity investments may be required if the proceeds received from ER&T under this tolling agreement are not sufficient to cover the required payments under the bank financing. The Waterford facility is currently scheduled to achieve commercial operation in August 2003. The Lawrenceburg facility is currently scheduled to achieve commercial operation in the fourth quarter of 2003.Power

~~Power~~Hazardous also has contracts with outside parties to purchase upgraded turbines for the Salem Nuclear Generating Station (Salem) Units 1 and 2 and to purchase upgraded turbines and complete a power uprate for Hope Creek Generating Station (Hope Creek) to increase its generating capacity. The power uprate for Hope Creek is currently scheduled to be completed by 2005, assuming timely approval from the Nuclear Regulatory Commission (NRC). The turbine replacements are currently scheduled to be completed by 2004 for Salem Unit 1 and Hope Creek and 2006 for Salem Unit 2. Power's aggregate estimated costs for these projects are $210 million, with expenditures to date of approximately $61 million.Waste

~~Power~~The ~~has~~New ~~commitments~~Jersey toDepartment ~~purchase~~of ~~gas~~Environmental ~~turbines~~Protection (NJDEP) adopted regulations concerning site investigation and~~/or~~ ~~other~~remediation ~~services~~that torequire ~~meet~~an ~~its~~ecological ~~current~~evaluation ~~plans~~of potential damages to ~~develop~~natural ~~additional~~resources ~~generating~~in ~~capacity.~~connection ~~The~~with ~~aggregate~~an ~~amount~~environmental ~~due~~investigation ~~under~~of ~~these~~contaminated ~~commitments~~sites. isThese ~~approximately~~regulations ~~$480~~may ~~million,~~substantially ~~approximately~~increase ~~$370~~the ~~million~~costs of ~~which~~environmental isinvestigations ~~included~~and inremediation, ~~estimated~~where ~~costs~~necessary, ~~for~~particularly ~~the~~at ~~projects~~sites ~~discussed~~situated ~~above.~~on ~~The~~surface ~~approximate~~water ~~$110~~bodies. ~~million~~PSE&G, ~~remaining~~Power ~~relates~~and torespective ~~obligations~~predecessor tocompanies ~~purchase~~own ~~hardware~~or owned and/or ~~services~~operate ~~that~~or ~~have~~operated ~~not~~certain ~~been~~facilities ~~designated~~situated toon ~~any~~surface ~~specific~~water ~~projects.~~bodies, ~~Power~~certain isof ~~currently~~which ~~discussing~~are currently the ~~restructuring~~subject of ~~these~~remedial ~~obligations~~activities. The ~~negotiation~~financial ~~period~~impact ~~for~~of ~~restructuring~~ these ~~contracts~~regulations ~~has~~on ~~been~~these ~~extended~~projects is ~~from~~not ~~July 2003~~currently toestimable. ~~September 30~~However, ~~2003~~neither ~~and~~PSE&G nor Power ~~has~~anticipate ~~provided~~that acompliance ~~letter~~with ofthese ~~credit~~regulations towill ~~the~~have ~~supplier~~a ~~for~~material ~~the~~adverse ~~potential~~effect ~~penalty~~on ~~amount,~~their ~~which~~respective ~~will~~financial ~~expire~~positions, onresults ~~that~~of ~~date.~~operations ~~Power~~or ~~believes~~net ~~that~~cash ~~this~~ flows.

29 Passaic River Site

~~NOTES~~ The TOUnited ~~CONSOLIDATED~~States ~~FINANCIAL~~Environmental ~~STATEMENTS~~Protection Agency (~~UNAUDITED~~EPA) has determined that a six mile stretch of the Passaic River in the area of Newark, New Jersey is a “facility” within the meaning of that term under the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA). PSE&G and certain of its predecessors conducted industrial operations at properties adjacent to the Passaic River facility. The operations included one operating and one former generating station and four former Manufactured Gas Plants (MGPs). PSE&G's costs to clean up former MGPs are recoverable from utility customers through the Societal Benefits Charge (SBC). PSE&G has sold the site of the former generating station and obtained releases and indemnities for liabilities arising out of the site in connection with the sale. The operating generating station was transferred to Power in August 2000. Power assumed any environmental liabilities of PSE&G associated with the electric generating stations that PSE&G transferred to it, including the Essex Generating Station.

~~matter~~ In ~~will~~2003, bethe ~~satisfactorily~~EPA ~~resolved~~notified 41 potentially responsible parties (PRPs), ~~however~~including PSE&G, nothat ~~assurances~~it ~~can~~was beexpanding ~~given.~~its Ifassessment of the ~~negotiations~~Passaic ~~are~~River ~~unsuccessful,~~Study ~~Power~~Area ~~may~~to bethe ~~subject~~entire to17-mile ~~penalties~~tidal reach of upthe lower Passaic River. The EPA further indicated, with respect to ~~$24~~PSE&G, ~~million~~that it believed that hazardous substances were being released from the Essex Generating Station, an operating electric generating station, and a former MGP located in Harrison, New Jersey, which also includes facilities for PSE&G's ongoing gas operations. The EPA has estimated that its study would require five to seven years to

~~Energy Holdings~~29

~~California~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

~~GWF~~complete ~~Energy~~and ~~LLC~~would ~~(GWF~~cost ~~Energy),~~approximately ~~which~~$20 ismillion, ~~jointly~~of ~~owned~~which byit ~~Global~~would ~~and~~seek ~~Harbinger~~to ~~GWF~~recover ~~LLC~~$10 ~~(Harbinger),~~million ~~owns~~from ~~and~~the ~~operates three peaker plants in California~~PRPs, including ~~the~~PSE&G ~~Tracy Peaker Plant, a 170 MW facility that completed construction~~ and ~~achieved~~Power. ~~commercial~~Power ~~operation~~will ~~under~~evaluate ~~GWF~~seeking ~~Energy's~~recovery ~~power purchase agreement with the California Department~~ of ~~Water~~any ~~Resources~~disbursed inamounts ~~the~~from ~~second~~its ~~quarter~~insurance ~~of 2003~~carriers.

~~Poland~~ Also, in 2003, PSEG, PSE&G and 56 other PRPs received a Directive and Notice to Insurers from the NJDEP that directed the PRPs to arrange for a natural resource damage assessment and interim compensatory restoration of natural resource injuries along the lower Passaic River and its tributaries pursuant to the New Jersey Spill Compensation and Control Act. The NJDEP alleged in the Directive that it had determined that hazardous substances had been discharged from the Essex Site and the Harrison Site. The NJDEP announced that it had estimated the cost of interim natural resource injury restoration activities along the lower Passaic River to approximate $950 million. PSE&G and Power have indicated to both the EPA and NJDEP that they are willing to work with the agencies in an effort to resolve their claims and, along with approximately 30 other PRPs, has executed an agreement with the EPA that provides for sharing the costs of the study between the government organizations and the PRPs. PSEG, PSE&G and Power cannot predict what further actions, if any, or the costs or the timing thereof, that may be required with respect to the Passaic River or natural resource damages. However, such costs could be material.

InPSE&G ~~2002, Global acquired a 50% interest in the 590 MW (electric)~~ and 618 MW (thermal) coal-fired Skawina plant, located in Poland. The transaction includes Global's obligation to increase its equity interest in Skawina to approximately 65% and the obligation to offer to purchase an additional 10% from Skawina's employees, increasing Global's potential ownership interest to 75%. Global's total equity investment is expected to be approximately $105 million, including contingencies and equity commitment guarantees. Through June 30, 2003, Global's equity exposure was approximately $37 million at Skawina.Power

~~Minimum~~ MGP ~~Fuel~~Remediation ~~Purchase Requirements~~Program

~~Power~~ PSE&G is currently working with the NJDEP under a program to assess, investigate and, if necessary, remediate environmental conditions at PSE&G's former MGP sites (Remediation Program). 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 the inception of the program in 1988 and that the overall cost could be material. The costs for this remediation effort are recovered through SBC charges to utility customers. As of March 31, 2004, PSE&G's estimated net liability for remediation costs through 2006 totaled $123 million. Expenditures beyond 2006 cannot be reasonably estimated and are therefore not accrued. For further discussion related to this matter see “Passaic River Site” above.

Power uses coal for certain of its fossil electric generation stations. Power purchases coal through various contracts and in the spot market for its generation plants. The total minimum purchase requirements included in these contracts amount to approximately $229 million through 2008.

~~Power~~Prevention ~~has~~of ~~several~~Significant ~~long-term~~Deterioration purchase contracts with uranium suppliers, converters, enrichers and fabricators to meet the currently projected fuel requirements for Salem and Hope Creek nuclear power plants. On average, Power has various multi-year requirements-based purchase commitments that total approximately $88 million per year to meet Salem's and Hope Creek's fuel needs. Power has been advised by Exelon Generation LLC (~~Exelon~~PSD),/New ~~the~~Source ~~co-owner~~Review ~~and operator of Peach Bottom Atomic Power Station~~ (~~Peach Bottom~~NSR)~~, that it has similar purchase contracts to satisfy the fuel requirements for Peach Bottom.~~

InThe ~~addition~~PSD/NSR toregulations, ~~its~~promulgated ~~fuel~~under ~~requirement~~the Clean Air Act (CAA), ~~Power~~require ~~has~~major ~~entered~~sources ~~into~~of ~~various~~certain ~~multi-year~~air ~~contracts~~pollutants ~~for~~to ~~firm~~obtain ~~transportation~~permits, install pollution control technology and ~~storage~~obtain ~~capacity~~offsets ~~for~~in ~~natural~~some ~~gas.~~circumstances Aswhen ofthose ~~June~~sources ~~30,~~undergo ~~2003~~a “major modification,” as defined in the ~~total~~regulations. ~~minimum~~The ~~purchase~~Federal ~~requirements~~government ~~under~~is ~~these~~seeking ~~contracts~~to ~~was~~order ~~approximately~~companies not in compliance to install the best available air pollution control technology at the affected plants and to pay monetary penalties of up to $~~1.1~~27,500 ~~billion~~for ~~through~~each ~~2016~~day of continued violation.

~~Nuclear~~ The ~~Fuel~~EPA ~~Disposal~~and the NJDEP issued a demand to PSE&G in March 2000 under the CAA requiring information to assess whether projects completed since 1978 at the Hudson and Mercer coal burning units were implemented in accordance with applicable PSD/NSR regulations. Power completed its response to the requests for information and, in January 2002, reached an agreement with New Jersey and the Federal government to resolve allegations of noncompliance with Federal and New Jersey PSD/NSR regulations. Under that agreement, over the course of 10 years, Power must install advanced air pollution controls that are designed to reduce emissions of Nitrogen Oxide (NOx), Sulfur Dioxide (SO2), particulate matter and mercury. The estimated cost of the program at the time of the settlement was $337 million to be incurred through 2011 with the majority of these costs to be incurred at Hudson.

~~Power~~30

~~Under~~NOTES ~~the~~TO ~~Nuclear~~CONDENSED ~~Waste~~CONSOLIDATED ~~Policy~~FINANCIAL ~~Act of 1982, as amended~~ STATEMENTS (~~NWPA~~UNAUDITED), the Federal government has entered into contracts with the operators of nuclear power plants for transportation and ultimate disposal of spent nuclear fuel. To pay for this service, nuclear plant owners are required to contribute to a Nuclear Waste Fund at a rate of one mil ($0.001) per Kilowatt-hour (kWh) of nuclear generation, subject to such escalation as may be required to assure full cost recovery by the Federal government. Under the NWPA, the US Department of Energy (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.

30Power also paid a $1.4 million civil penalty and has agreed to spend up to $6 million on supplemental environmental projects. The agreement resolving the NSR allegations concerning the Hudson and Mercer coal-fired units also resolved the dispute over Bergen 2 regarding the applicability of PSD requirements and allowed construction of the unit to be completed and operation to commence.

~~NOTES~~ Power TOhas ~~CONSOLIDATED~~notified ~~FINANCIAL~~the ~~STATEMENTS~~EPA ~~(UNAUDITED)~~and the NJDEP that it is evaluating the continued operation of the Hudson coal unit, in light of market changes in the energy and capacity markets and increases in the cost of pollution control equipment and other necessary modifications to the unit. A decision is expected to be made in 2004 as to the Hudson unit's continued operation. The related costs associated with the modifications for Hudson have not been included in Power's capital expenditure projections.

~~Pursuant~~The toindependent ~~NRC~~contractor ~~rules,~~retained ~~spent~~by ~~nuclear~~Power ~~fuel~~to ~~generated~~design, inconstruct ~~any~~and ~~reactor~~install ~~can~~the beselective ~~stored~~catalytic inreduction ~~reactor~~systems ~~facility~~(SCRs) ~~storage pools or in independent spent fuel storage installations located~~ at ~~reactors~~Mercer orrequired ~~away-from-reactor~~under ~~sites~~the ~~for~~agreement atwith ~~least 30 years beyond~~ the ~~licensed~~EPA ~~life~~and ~~for reactor operation (which may include~~ the ~~term~~NJDEP ofrecently provided a revised orconstruction ~~renewed~~schedule ~~license).~~to ~~The~~Power ~~availability~~that ofindicated ~~adequate~~substantial ~~spent~~completion ~~fuel~~of ~~storage~~the ~~capacity~~SCR ~~is estimated through 2011~~ for ~~Salem 1,~~one ~~2015~~of ~~for~~the ~~Salem 2~~Mercer ~~and~~units ~~2007~~would ~~for~~not ~~Hope~~occur ~~Creek.~~until ~~Power~~after ~~presently~~the ~~expects~~date tospecified ~~construct~~in anthe ~~on-site~~agreement ~~storage~~with ~~facility that would satisfy~~ the ~~spent~~EPA ~~fuel storage needs of both Salem~~ and ~~Hope Creek through~~ the ~~end~~NJDEP offor ~~their~~construction ~~respective~~and ~~license~~operation ~~lives~~technology. ~~This~~Power ~~construction~~has ~~will~~notified ~~require certain regulatory approvals,~~ the ~~timely~~EPA ~~receipt~~and NJDEP of ~~which~~this ~~cannot~~development, bebut ~~assured.~~the ~~Exelon~~impact, ~~has~~if ~~advised~~any, to Power ~~that it has constructed an on-site storage facility~~ at ~~Peach~~this ~~Bottom~~time ~~that~~ is ~~now licensed and operational~~uncertain. ~~This on-site storage facility will satisfy Peach Bottom's fuel storage until at least 2014.~~

~~Exelon~~New ~~has~~Generation advised Power that it had signed an agreement with the DOE applicable to Peach Bottom under which Exelon would be reimbursed for costs incurred resulting from the DOE's delay in accepting spent nuclear fuel. Under this agreement, Power's portion of Peach Bottom's Nuclear Waste Fund fees have been reduced by approximately $18 million through August 31, 2002, at which point the credits were fully utilized and covered the cost of Exelon's storage facility. In 2000, a petition was filed against the DOE in the US Court of Appeals for the Eleventh Circuit, seeking to set aside the receipt of credits by Exelon. In September 2002, the Court issued an opinion upholding the challenge by the petitioners. Under the terms of the agreement, the DOE and Exelon are required to meet and discuss alternative funding sources for the settlement credits. The Eleventh Circuit's opinion suggests that the federal judgment fund should be available as an alternate source. If such negotiations are unsuccessful, any payments required by Power resulting from a disallowance of the previously reduced fees would be included in Energy Costs on the Consolidated Statements of Operations.Development

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

InCompletion ~~October~~of ~~2001,~~the ~~Power~~projects ~~filed~~discussed abelow, ~~complaint~~within in the USestimated ~~Court~~time offrames ~~Federal~~and ~~Claims,~~cost ~~along~~estimates ~~with~~cannot abe ~~number~~assured. ofConstruction ~~other plaintiffs~~delays, ~~seeking~~cost ~~$28~~increases ~~million~~and invarious ~~relief~~other ~~from~~factors ~~past~~could ~~overcharges~~result byin ~~the~~changes ~~DOE~~in ~~for~~the ~~enrichment~~operational ~~services.~~dates Noor ~~assurances~~ultimate ~~can~~costs ~~be given as~~ to ~~any damage recovery~~complete.

~~Other~~ Power

Through an indirect, wholly-owned subsidiary, Power is constructing the Bethlehem Energy ~~Holdings~~Center that will replace the Albany, New York Steam Station. Total costs for this project are estimated to be approximately $500 million with expenditures to date of approximately $335 million. Construction began in 2002 with the expected completion date in 2005, at which time the existing station will be retired.

~~Argentina~~ Power is constructing a natural gas-fired generation plant at Linden, New Jersey. Total costs are estimated at approximately $780 million with expenditures to date of approximately $640 million. Completion is scheduled for 2005. Power has recently detected corrosion on the tubes in both steam generator condensers. While this situation is now in the preliminary stages of investigation and assessment, this corrosion has the potential to delay the scheduled commercial operation date. The cost to correct this condition is not included in the construction estimate, but it is not expected to be material.

~~The~~Through ~~shares~~an ~~formerly~~indirect, ~~held~~wholly-owned bysubsidiary, ~~Global~~Power inis ~~Empresa~~constructing ~~Distribuidora~~a Lanatural ~~Plata~~gas-fired ~~S.A.~~generation ~~(EDELAP)~~plant ~~have~~in ~~been~~Lawrenceburg, ~~transferred~~Indiana. to The ~~AES~~plant ~~Corporation.~~has Inan ~~connection~~estimated ~~with~~aggregate ~~that~~total ~~transfer,~~cost ~~certain~~of ~~contingent~~$620 ~~obligations~~million. ~~Global~~Expenditures ~~had~~on ~~with~~the ~~respect~~project to ~~the~~date ~~project~~are ~~loans~~approximately ~~relating~~$610 tomillion ~~EDELAP~~with ~~have~~expected ~~been~~completion ~~terminated~~in bythe ~~agreement~~second ~~with~~quarter ~~the~~of ~~lenders~~2004.

~~India~~ Power also has contracts with outside parties to purchase upgraded turbines for the Salem Nuclear Generating Station (Salem) Units 1 and 2 and to purchase upgraded turbines and complete a power uprate for Hope Creek Generating Station (Hope Creek) to modestly increase its generating capacity. The power uprate for Hope Creek is currently scheduled to be completed by 2006, assuming timely approval from the Nuclear Regulatory Commission (NRC). The turbine replacements are currently scheduled to be completed during planned refueling outages in 2004 for Salem Unit 1, 2006 for Hope Creek and 2008 for Salem Unit 2. Power's aggregate estimated share of the costs for these projects are $211 million, with expenditures to date of approximately $116 million.

Global has a 20% interest in a 330 MW plant, PPN Power Generating Station (PPN) in the Indian State of Tamil Nadu. Output from the facility is sold under a long-term Power Purchase Agreement (PPA) with the Tamil Nadu Electricity Board (TNEB) which sells the power to retail end-user customers. TNEB has not made full payment to PPN for the purchase of energy under contract. The past due receivable at PPN as of June 30, 2003 was approximately $85 million, Global's share of which is approximately $8 million, net of a $9 million reserve. Global's exposure to the open receivables is included in the $40 million investment exposure discussed below.31

OnNOTES ~~April~~TO 1,CONDENSED ~~2003,~~CONSOLIDATED ~~PPN~~FINANCIAL did not receive two expected partial payments from TNEB, which resulted in PPN defaulting on a debt payment of $10 million to its project lenders. Consequently, PPN advised lenders of its inability to make the scheduled debt payment. Also, PPN has not paid working capital STATEMENTS (UNAUDITED)

31 Power has entered into a long-term contractual services agreement with a vendor to provide the outage and service needs for certain of Power's generating units at market rates. The contract covers approximately twenty-five years and could result in annual payments ranging from approximately $10 million to $50 million for services, parts and materials rendered.

~~NOTES~~Energy ~~TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~Holdings

interest, amounts due under letters of credit covering fuel supplies, gas supply invoices and fuel supply letters of credit due in April 2003. As a result, PPN closed the plant as of April 10, 2003. TNEB was notified of the plant closing resulting from PPN's inability to procure fuel and fund operating expenses due to non-payment by TNEB. Subsequently TNEB made adequate payments in May 2003 to enable PPN to pay its lenders and fuel suppliers. The plant restarted on May 30, 2003 and has been in operation since then. Adequate payments were also made by TNEB in June 2003 to enable PPN to meet its debt payment obligations on June 30, 2003. As a result of these issues, Energy Holdings has performed an impairment test on this investment and determined that no impairment is necessary as of June 30, 2003. If TNEB fails to make required payments under the PPA, PPN may have further liquidity problems. Negotiations with TNEB are continuing and Energy Holdings cannot predict the outcome of this matter. Energy Holdings' investment exposure is approximately $40 million. An adverse outcome to such negotiations could potentially result in an impairment of this investment, which could be material to PSEG's and Energy Holdings' respective results of operations. Poland

~~Tunisia~~ In 2002, Global acquired a controlling interest in the electric and thermal coal-fired Skawina plant. In accordance with the purchase agreement, Global is required to offer to purchase an additional 12% from Skawina's employees in 2004, increasing Global's potential ownership interest to approximately 75%. In addition, Global has approximately $49 million of equity commitment guarantees related to the modernization of the plant for environmental upgrades over an eight-year period, which could increase Global's total equity investment to $99 million. However, Global expects that cash generated from Skawina's operations will be sufficient to fund all such modernization costs.

On April 24, 2003, Carthage Power Company (CPC) and Alstom Centrales Energetiques S.A. (Alstom) entered in an agreement settling all liquidated damages caused by the delay in construction. As per this agreement, Alstom paid to CPC an aggregate amount of approximately $17 million composed of approximately $9 million in cash, $3 million in spare parts and Alstom waived payments from Societe Tunisienne de l' Electricite et du Gaz (STEG) for contracts for equipment totaling approximately $5 million. On June 5, 2003, STEG confirmed to CPC its acceptance of the services to be provided by Alstom as settlement of its claims of liquidated damages for the delay in the start of operations.Other

~~Note~~ There 8are additional minor capital projects at certain of Global's subsidiaries that are expected to be financed locally on a non-recourse basis or through internally generated cash flows. ~~Risk~~Included ~~Management~~in the projects is a 45 MW generation project at SAESA with total costs estimated at approximately $15 million with completion expected in 2004.

~~PSEG,~~Minimum ~~PSE&G,~~Fuel ~~Power~~Purchase ~~and Energy Holdings~~Requirements

~~The operations of PSEG, PSE&G,~~ Power and Energy Holdings are exposed to market risks from changes in commodity prices, foreign currency exchange rates, interest rates and equity prices that could affect their results of operations and financial conditions. PSEG, PSE&G, Power and Energy Holdings manage exposure to these market risks through their regular operating and financing activities and, when deemed appropriate, hedge these risks through the use of derivative financial instruments. PSEG, PSE&G, Power and Energy Holdings use the term ''hedge'' to mean a strategy designed to manage risks of volatility in prices or rate movements on certain assets, liabilities or anticipated transactions and by creating a relationship in which gains or losses on derivative instruments are expected to counterbalance the losses or gains on the assets, liabilities or anticipated transactions exposed to such market risks. Each of PSEG, PSE&G, Power and Energy Holdings use derivative instruments as risk management tools consistent with their respective business plans and prudent business practices.

~~Derivative~~ Power ~~Instruments~~purchases ~~and~~coal ~~Hedging~~for ~~Activities~~certain of its fossil generation stations through various long-term contracts. The total minimum purchase requirements included in these contracts amount to approximately $207 million through 2008.

~~Energy~~ Power ~~Trading~~has ~~Contracts~~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 has various multi-year requirements-based purchase commitments that total approximately $97 million per year to meet Salem's and Hope Creek's fuel needs, of which Power's share is approximately $70 million per year through 2008. Power has been advised by Exelon Generation LLC (Exelon), the co-owner and operator of Peach Bottom Atomic Power Station (Peach Bottom), that it has similar purchase contracts to satisfy the fuel requirements for Peach Bottom through 2008, of which Power's share is approximately $35 million per year.

In addition to its fuel requirements, Power has entered into various multi-year contracts for firm transportation and storage capacity for natural gas, primarily to meet its gas supply obligations. As of March 31, 2004, the total minimum purchase requirements under these contracts was approximately $820 million through 2016.

~~Power~~Basic ~~actively~~Generation ~~trades~~Service ~~energy and energy-related products, including electricity, natural gas, electric capacity, fixed transmission rights~~ (~~FTR~~BGS), coal and emission allowances, in the spot, forward and futures markets, primarily in the Pennsylvania-New Jersey-Maryland Power Pool (PJM), and also in the surrounding region, which extends from Maine to the Carolinas and the Atlantic Coast to Indiana and natural gas in the producing region.Supply

Power maintains a strategy of entering into trading positions to optimize the value of its portfolio of generation assets, gas supply contracts and its electric and gas supply obligations. Power does not PSE&G

32 PSE&G's objective is to obtain all of its energy supply needs for its customers through the New Jersey BGS auctions. Through the BGS auctions, PSE&G has entered into contracts to provide BGS for its anticipated load requirements. In addition, PSE&G has a full requirements contract with Power under which Power will provide PSE&G with its gas supply through 2007.

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~32

~~engage~~NOTES inTO ~~the~~CONDENSED ~~practice~~CONSOLIDATED ofFINANCIAL 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. These contracts also involve financial transactions including swaps, options and futures.STATEMENTS (UNAUDITED)

Power marks to market its energy trading contracts in accordance with SFAS 133. As of June 30, 2003 and December 31, 2002, substantially all of these contracts had terms of two years or less. Wherever possible, fair values for these contracts were obtained from quoted market sources. For contracts where no quoted market exists, modeling techniques were employed using assumptions reflective of current market rates, yield curves and forward prices as applicable to interpolate certain prices. The effect of using such modeling techniques is not material to Power's financial results.

Power's ~~routinely~~objective ~~enters~~is to enter into ~~exchange-traded~~load ~~futures~~serving contracts and ~~options~~trading ~~transactions~~positions for ~~electricity~~at ~~and~~least ~~natural~~75% ~~gas~~of asits ~~part~~anticipated ofoutput ~~its~~over ~~operations.~~an ~~Generally,~~18-month ~~exchange~~to 24-~~traded~~month ~~futures~~horizon. ~~contracts~~To ~~require~~achieve its objective, Power, as a ~~deposit~~result of ~~margin~~the ~~cash,~~New ~~the~~Jersey ~~amount~~BGS ofauction ~~which~~in isFebruary ~~subject~~2004 contracted to ~~change~~directly ~~based~~supply onPSE&G ~~market~~and ~~movement~~another ~~and~~New inJersey ~~accordance~~EDC with ~~exchange~~a ~~rules~~portion of their BGS requirements commencing June 1, 2004. ~~The~~In ~~amount~~addition ofto the contracts entered into resulting from the BGS auction, Power's ~~margin~~has ~~deposits~~entered asinto offirm ~~June 30~~contracts in Pennsylvania, ~~2003~~Connecticut, ~~was~~Maryland ~~approximately~~and ~~$18~~other ~~million~~firm sales and trading positions and commitments, including 10-month and 34-month contracts ending May 31, 2004 and 2006, respectively, to supply energy and capacity to direct suppliers of New Jersey EDCs.

~~Commodity~~Nuclear ~~Contracts~~Fuel Disposal

Power

~~The~~Under ~~availability~~the ~~and~~Nuclear ~~price~~Waste Policy Act of ~~energy~~1982, ~~commodities~~as ~~are~~amended ~~subject~~(NWPA), tothe ~~fluctuations~~Federal ~~from~~government ~~factors~~has ~~such~~entered asinto ~~weather,~~contracts ~~environmental~~with ~~policies,~~the ~~changes~~operators inof ~~supply~~nuclear ~~and~~power ~~demand,~~plants ~~state~~for transportation and ~~federal~~ultimate ~~regulatory~~disposal ~~policies~~of ~~and~~spent ~~other~~nuclear ~~events~~fuel. ~~Power~~To ~~manages~~pay ~~its~~for ~~risk~~this ofservice, ~~fluctuations~~nuclear plant owners are required to contribute to a Nuclear Waste Fund at a rate of ~~energy~~one ~~price~~mil ~~and~~($0.001) ~~availability~~per ~~through~~Kilowatt-hour ~~derivative~~(kWh) ~~instruments~~of nuclear generation, subject to such escalation as ~~forward~~may ~~purchase~~be ~~contracts,~~required ~~swaps~~to assure full cost recovery by the Federal government. Under the NWPA, ~~options~~the ~~and~~U.S. ~~futures~~Department of Energy (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.

~~Cash~~ Exelon ~~Flow~~previously ~~Hedges~~has advised Power that it had signed an agreement with the DOE applicable to Peach Bottom under which Exelon would be reimbursed for costs incurred resulting from the DOE's delay in accepting spent nuclear fuel. Under this agreement, Power's portion of Peach Bottom's Nuclear Waste Fund fees have been reduced by approximately $18 million through August 31, 2002. On August 14, 2003, Exelon received a letter from the DOE demanding repayment of previously received credits from the Nuclear Waste Fund. The letter also demanded approximately $1.5 million of accrued interest (100% share). PSEG and Power continue to believe that it is the Federal government's obligation to pay for storage related costs due to DOE's failure to take possession of the spent nuclear fuel. Further, PSEG and Power also believe that any current payments potentially required relating to the past Nuclear Waste Fund fees will ultimately be recovered and, accordingly, no amounts have been accrued. Exelon has advised Power that it filed suit in January 2004 in the U.S. Court of Federal Claims seeking damages caused by the DOE not taking possession of spent nuclear fuel in 1998.

In ~~order~~September ~~to hedge a portion of its forecasted energy purchases to meet its electric supply requirements~~2001, Power ~~enters~~filed ~~into~~a ~~forward~~complaint ~~purchase contracts, futures, options, swaps and FTR contracts. These contracts,~~ in ~~conjunction with owned electric generation capacity, are designed to cover estimated wholesale electric customer commitments. Power also forecasts~~ the energy delivery from its generating stations based on the forward price curve movement of energy and, as a result, it enters into swaps, options and futures transactions to hedge the price of fuel to meet its fuel purchase requirements for generationU. ~~These derivative transactions are designated and effective as cash flow hedges under SFAS 133~~S. AsCourt of ~~June 30,~~Federal ~~2003,~~Claims ~~the~~seeking ~~fair~~damages ~~value~~caused ofby ~~these hedges was $(12) million. During~~ the ~~next~~DOE 12not ~~months,~~taking $7possession ~~million~~ of ~~unrealized~~spent ~~losses~~nuclear ~~(net~~fuel ~~of gains) on these commodity derivatives accumulated~~ in ~~OCI~~1998. isNo ~~expected~~assurances tocan be ~~reclassified~~given as ~~earnings.~~to Asany ~~defined~~damage inrecovery ~~SFAS 133, there was no ineffectiveness associated with these hedges since the terms of the instruments perfectly match the transaction~~ or ~~risk~~ the ~~instruments~~ultimate ~~are~~availability ~~hedging.~~of ~~These~~a ~~hedges~~disposal ~~will mature through 2004~~facility.

~~Effective~~In ~~with~~October ~~the transfer of PSE&G's gas contracts to Power on May 1~~2001, ~~2002,~~ Power ~~acquired~~filed ~~all~~a ofcomplaint in the ~~gas-related derivatives entered into by PSE&G~~U.S. ~~The~~Court ~~derivatives~~of ~~used~~Federal toClaims, ~~hedge~~along ~~the~~with ~~forecasted~~a ~~purchase~~number ~~and sale~~ of ~~natural~~other ~~gas~~plaintiffs, ~~are~~seeking ~~designated~~$28 ~~and~~million ~~effective~~in asrelief ~~cash flow hedges. Gains or losses~~ from ~~the~~past ~~derivatives~~overcharges ~~entered~~by ~~into to hedge residential customer requirements are deferred and recovered from PSE&G's customers as part of~~ the ~~monthly~~DOE ~~billing~~for toenrichment ~~PSE&G~~services. ~~Unrealized~~No ~~gains~~assurances orcan ~~losses~~be ongiven ~~the~~as ~~derivatives entered~~ to ~~hedge~~any ~~commercial~~damage ~~and industrial customer requirements are recorded to OCI~~recovery. There was no ineffectiveness realized on these hedges. As of June 30, 2003, the fair value of hedge instruments associated with hedging residential customer requirements was $38 million. These hedges will mature through 2005.

33Spent Fuel Pool Leakage

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~ Power

~~Other~~ The ~~Derivatives~~spent fuel pool at each Salem unit has an installed leakage collection system. This normal leakage path was recently found to be obstructed, causing concern about the extent of leakage contact with the fuel handling building's concrete structure. Nuclear is developing a solution to maintain the design function of the leakage collection system and is investigating the extent of any structural degradation caused by the leakage. The investigation should take approximately one year. If any significant degradation is identified, the repair costs could be material. The NRC issued Information

Power also enters into certain other contracts which are derivatives, but do not qualify for hedge accounting under SFAS 133. Most of these contracts are for fuel purchases for generation requirements. Therefore, the changes in fair market value of these derivative contracts are recorded in Energy Costs on the Consolidated Statements of Operations at the end of each reporting period.33

~~Interest~~NOTES ~~Rates~~TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

~~PSEG,~~Notice ~~PSE&G,~~2004-05 ~~Power~~in March 2004 concerning this emerging industry issue and ~~Energy~~Power ~~Holdings~~cannot predict what further actions the NRC may take on this matter.

~~PSEG,~~Elevated ~~PSE&G,~~concentrations ~~Power~~of ~~and~~tritium ~~Energy~~in ~~Holdings~~the ~~are~~shallow ~~subject~~groundwater near Salem Unit 1 were detected in early 2003. This information was reported to the ~~risk~~NJDEP ofand ~~fluctuating~~the ~~interest~~NRC, ~~rates~~as required. Nuclear is conducting a comprehensive investigation in accordance with NJDEP site remediation regulations to determine the ~~normal~~source ~~course~~and extent of ~~business~~the tritium in the groundwater. ~~PSEG's~~The ~~policy~~investigation is toongoing ~~manage~~and ~~interest~~therefore ~~rate~~the ~~risk~~costs ~~through~~necessary ~~the~~to ~~use~~address ofthis ~~fixed~~groundwater ~~rate~~contamination ~~debt~~issue are not known fully, ~~floating~~however, ~~rate~~such ~~debt~~costs ~~and~~are ~~interest~~not ~~rate~~expected ~~derivatives~~to be material.

~~Cash Flow Hedges~~Other

PSEG, and PSE&G~~, Power and Energy Holdings~~

~~PSEG,~~Investment ~~PSE&G,~~Tax ~~Power~~Credits and Energy Holdings use interest rate swaps and other interest rate derivatives to manage their exposures to the variability of cash flows, primarily related to variable-rate debt instruments. The interest rate derivatives are designated and effective as cash flow hedges. The fair value changes of these derivatives are initially recorded in OCI. As of June 30, 2003, the fair value of these cash flow hedges was $(~~268~~ITC) million, including $(24) million, $(73) million, $(10) million and $(161) million at PSEG, PSE&G, Power and Energy Holdings, respectively. The $(73) million at PSE&G is deferred and will be recovered from PSE&G's customers. During the next 12 months, $25 million of unrealized losses (net of gains) on interest rate derivatives accumulated in OCI is expected to be reclassified as earnings, including $(4) million, $(3) million and $(18) million at PSEG, Power and Energy Holdings, respectively.

~~Foreign~~ As ~~Currencies~~of June 1999, the Internal Revenue Service (IRS) had issued several private letter rulings that concluded that the refunding of excess deferred tax and ITC balances to utility customers was permitted only over the related assets' regulatory lives, which were terminated upon deregulation. Based on this, PSEG and PSE&G reversed the deferred tax and ITC liability relating to PSE&G's generation assets that were transferred to Power and recorded a $235 million reduction of the extraordinary charge in 1999 due to the deregulation of the utility industry in New Jersey. PSE&G was directed by the BPU to seek a ruling from the IRS to determine if the ITC included in the impairment write-down of generation assets could be credited to customers without violating the tax normalization rules of the Internal Revenue Code. PSE&G filed a private letter ruling request with the IRS in 2002, which is still pending.

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

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

AsIn of2003, ~~June~~a ~~30,~~proposed ~~2003,~~class ~~net~~action ~~foreign~~lawsuit ~~currency~~was ~~devaluations~~filed ~~have~~against ~~reduced~~PSE&G and PSEG in the ~~total~~Superior ~~amount~~Court of ~~Energy~~New ~~Holdings'~~Jersey ~~Member~~alleging that PSE&G's ~~Equity~~installation byof ~~$284~~outdoor ~~million,~~gas meters within three feet of ~~which~~driveways ~~$181~~or ~~million~~garages ~~and~~at ~~$110~~residential ~~million~~locations ~~were~~is ~~caused~~negligent. byThe suit also requests the ~~devaluation~~court ofto order PSE&G to establish a fund for the ~~Brazilian~~purposes ~~Real~~of ~~and~~remediating the ~~Chilean~~allegedly ~~Peso,~~improper ~~respectively~~meter installations.

34 In August 2003, the court ordered the transfer of the matter to the BPU to review regulatory issues within that agency's primary jurisdiction. The court retained jurisdiction over the negligence-based issues. In December 2003, the parties filed testimony with the BPU. Additional hearings, which were scheduled for early January 2004, have been postponed to allow the parties to conduct settlement discussions. PSE&G cannot predict the ultimate outcome of this matter.

~~NOTES~~Energy ~~TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~Holdings

~~Cash Flow Hedges~~ Argentina

~~Affiliates~~Empresa ofDistribuidora ~~Energy~~de ~~Holdings~~Eleutricidad ~~purchase~~de ~~forward-exchange~~Entre ~~contracts~~Rios ~~as hedges of anticipated payments to contractors for projects under construction~~S. ~~These contracts are designed to hedge against the risk that the future cash payments will be adversely affected by changes in foreign currency rates~~A. As of June 30, 2003 Energy Holdings recorded its pro-rata share of the fair value on the forward-exchange contracts as an increase of $2 million in OCI. There was no ineffectiveness associated with these hedges.(EDEERSA)

~~Additionally,~~In anMarch ~~affiliate~~2003, of Energy Holdings ~~entered~~formally ~~into~~and airrevocably ~~PPA~~renounced, ~~that~~and ~~contains~~effectively anabandoned, ~~embedded~~its ~~derivative.~~entire ~~This~~economic ~~embedded~~and ~~derivative~~legal isinterest ~~designated as a cash flow hedge of foreign currency debt exposure. To the extent that the derivative is effective~~ in ~~offsetting foreign currency exposure, the amount is recorded in OCI~~EDEERSA. ~~Amounts~~The ~~will~~shares bewere ~~reclassified~~relinquished ~~from~~and ~~OCI~~ownership towas ~~earnings~~assumed ~~over~~by ~~the~~an ~~life~~Argentine oftrust ~~the~~benefiting ~~debt.~~current ToEDEERSA ~~the extent that the derivative is provided to hedge a return in US Dollars~~employees, ~~the~~including ~~offsetting~~all ~~amount~~of ~~is recorded in earnings, which amounted to approximately $3 million for~~ the ~~six~~existing ~~months~~EDEERSA ~~ended~~Class ~~June 30,~~C ~~2003.~~shareholders Aswho ofreceived ~~June 30,~~their ~~2003,~~shares ~~the~~from ~~fair value of~~ the ~~derivative~~Province ~~was~~as ~~$13~~part ~~million. The ineffectiveness associated with this hedge was immaterial to earnings. The maximum term~~ of ~~these cash flow hedges is related to~~ the ~~embedded derivative, which will expire in 2022.~~initial

~~Equity Securities~~34

~~Energy~~NOTES ~~Holdings~~TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

~~During~~privatization ~~the~~process. ~~first~~The ~~quarter~~regulator ofin ~~2003,~~the ~~Resources~~Province ~~recognized~~requested ~~$10~~that ~~million~~51% of ~~other~~the ~~than~~EDEERSA ~~temporary~~shares ~~impairments~~be oftransferred ~~non-publicly~~from ~~traded equity securities, which are held within its investment in certain leveraged buyout funds. In~~ the ~~second~~trust ~~quarter~~to ~~of 2003, Resources recognized a $6 million gain on~~ the ~~publicly traded equity securities within those funds~~Province. ~~These~~That ~~gains~~transfer ~~and~~took ~~losses~~place ~~are~~during ~~included~~March ~~in Operating Revenues in the Consolidated Statements of Operations~~2004. AsThe ofregulator ~~June 30,~~also ~~2003,~~requested ~~Resources~~the ~~had~~government ~~investments~~to inconduct ~~leveraged~~an ~~buyout~~offering ~~funds~~process of ~~approximately~~the ~~$87~~mentioned ~~million,~~shares ofduring ~~which~~2004. ~~$29~~A ~~million~~representative ~~was comprised~~ of ~~public~~the ~~securities~~labor ~~with~~union ~~available~~representing ~~market~~EDEERSA ~~prices~~filed ~~and~~a ~~$58~~criminal ~~million~~complaint ~~was~~against ~~comprised~~the oftransaction ~~non-publicly~~alleging ~~traded~~that ~~securities.~~the Asunion ofshould ~~December 31,~~have ~~2002,~~been ~~Resources~~allocated ~~had~~more ~~investments~~interest in ~~leveraged~~EDEERSA ~~buyout~~than ~~funds~~the oftrust ~~approximately~~arrangement ~~$93~~currently ~~million,~~provides. ofThe ~~which $24~~court ~~million~~dismissed ~~was~~the ~~comprised~~case ~~of public securities with available market prices~~ and ~~$69~~no ~~million~~appeal ~~was~~has ~~comprised~~been ~~of non-publicly traded securities~~filed.

~~Note 9. Comprehensive Income~~ Peru

	PSE&G			Power (A)			Energy Holdings (B)			Other (C)			Consolidated Total
	(Millions)
For the Quarter Ended June 30, 2003:
Net Income (Loss)	$	4		$	109		$	31		$	(14	)	$	130
Other Comprehensive Income		1			24			34			3			62
Comprehensive Income (Loss)	$	5		$	133		$	65		$	(11	)	$	192
For the Quarter Ended June 30, 2002:
Net Income (Loss)	$	8		$	83		$	(347	)	$	(8	)	$	(264	)
Other Comprehensive Income (Loss)		—			(14	)		34			(5	)		15
Comprehensive Income (Loss)	$	8		$	69		$	(313	)	$	(13	)	$	(249	)
For the Six Months Ended June 30, 2003:
Net Income (Loss)	$	105		$	656		$	75		$	(30	)	$	806
Other Comprehensive Income		—			60			14			6			80
Comprehensive Income (Loss)	$	105		$	716		$	89		$	(24	)	$	886
For the Six Months Ended June 30, 2002:
Net Income (Loss)	$	76		$	203		$	(462	)	$	(21	)	$	(204	)
Other Comprehensive Income (Loss)		(1	)		(7	)		(38	)		(4	)		(50	)
Comprehensive Income (Loss)	$	75		$	196		$	(500	)	$	(25	)	$	(254	)

Luz del Sur S.A.A. (LDS)

~~(A)~~ The ~~Changes~~Superintendencia atNacional ~~Power~~de ~~primarily~~Administracion ~~relate~~Tributaria to(SUNAT), ~~unrealized~~the ~~gains~~governing ~~and~~tax ~~losses~~authority in Peru, claimed past-due taxes for the ~~NDT~~period ~~Fund~~between in1999-2001, ~~2003.~~plus ~~(B)~~penalties ~~Changes~~and atinterest, ~~Energy~~resulting ~~Holdings~~from ~~primarily~~an ~~relate~~interpretation toof ~~foreign~~the ~~currency~~law ~~translation~~that ~~adjustments.~~allowed ~~(C)~~LDS ~~Other~~to ~~primarily~~restate ~~consists~~its ofassets ~~activity~~to atfair ~~PSEG~~market ~~(parent~~value ~~company),~~for ~~Services~~tax purposes and ~~intercompany~~take ~~eliminations~~advantage of the resulting higher tax deductions from depreciation.

35 SUNAT stated that the revaluation study, performed in 1994, was not performed correctly and was therefore invalid. It is LDS's position that laws and regulations did not define the methodology to be used in these matters and its study was based on generally accepted practices and the only constraint was not to exceed market value. LDS's total potential liability related to this matter is approximately $45 million, of which $18 million is currently recorded at LDS. Global's share of the net potential liability related to the claim by SUNAT is estimated at $12 million.

~~NOTES~~ In TOJanuary ~~CONSOLIDATED~~2004, ~~FINANCIAL~~the ~~STATEMENTS~~Fiscal ~~(UNAUDITED)~~Court ruled in favor of LDS in respect of the 1996-1998 matter and ruled that the LDS studies are valid. However, the ruling allows SUNAT to present its own study to challenge the LDS studies. No assurances can be given as to the ultimate outcome of this matter.

Note 108. ~~Other~~Risk ~~Income and Deductions~~Management

	PSE&G		Power		Energy Holdings		Other (A)		Consolidated Total
	(Millions)
Other Income:
For the Quarter Ended June 30, 2003:
Interest Income	$	2	$	4	$	—	$	—	$	6
NDT Fund Realized Gains		—		21		—		—		21
NDT Dividend Income		—		2		—		—		2
Other		1		—		—		—		1
Total Other Income	$	3	$	27	$	—	$	—	$	30
For the Quarter Ended June 30, 2002:
Interest Income	$	1	$	—	$	—	$	—	$	1
Gain on Disposition of Property		1		—		—		—		1
Minority Interest		—		—		—		4		4
Other		—		—		—		1		1
Total Other Income	$	2	$	—	$	—	$	5	$	7
For the Six Months Ended June 30, 2003:
Interest Income	$	4	$	9	$	—	$	—	$	13
Gain on Disposition of Property		8		—		—		—		8
NDT Fund Realized Gains		—		60		—		—		60
NDT Dividend Income		—		5		—		—		5
Other		1		—		1		—		2
Total Other Income	$	13	$	74	$	1	$	—	$	88
For the Six Months Ended June 30, 2002:
Interest Income	$	1	$	—	$	—	$	—	$	1
Gain on Disposition of Property		1		—		—		—		1
Change in Derivative Fair Value		—		—		1		—		1
Minority Interest		—		—		—		5		5
Other		—		—		—		1		1
Total Other Income	$	2	$	—	$	1	$	6	$	9

PSEG, PSE&G, Power and Energy Holdings

	PSE&G		Power		Energy Holdings		Other (A)		Consolidated Total
	(Millions)
Other Deductions:
For the Quarter Ended June 30, 2003:
NDT Fund Realized Losses and Expenses	$	—	$	12	$	—	$	—	$	12
Minority Interest		—		—		—		1		1
Change in Derivative Fair Value		—		—		6		—		6
Foreign Currency Losses		—		—		2		—		2
Total Other Deductions	$	—	$	12	$	8	$	1	$	21
For the Quarter Ended June 30, 2002:
Donations	$	1	$	—	$	—	$	—	$	1
Change in Derivative Fair Value		—		—		9		—		9
Foreign Currency Losses		—		—		17		—		17
Total Other Deductions	$	1	$	—	$	26	$	—	$	27
For the Six Months Ended June 30, 2003:
Donations	$	1	$	—	$	—	$	—	$	1
NDT Fund Realized Losses and Expenses		—		45		—		—		45
Minority Interest		—		—		—		6		6
Change in Derivative Fair Value		—		—		12		—		12
Total Other Deductions	$	1	$	45	$	12	$	6	$	64
For the Six Months Ended June 30, 2002:
Donations	$	1	$	—	$	—	$	—	$	1
Foreign Currency Losses		—		—		69		—		69
Total Other Deductions	$	1	$	—	$	69	$	—	$	70

The operations of PSEG, PSE&G, Power and Energy Holdings are exposed to market risks from changes in commodity prices, foreign currency exchange rates, interest rates and equity prices that could affect their results of operations and financial conditions. PSEG, PSE&G, Power and Energy Holdings manage exposure to these market risks through their regular operating and financing activities and, when deemed appropriate, hedge these risks through the use of derivative financial instruments. PSEG, PSE&G, Power and Energy Holdings use the term “hedge” to mean a strategy designed to manage risks of volatility in prices or rate movements on certain assets, liabilities or anticipated transactions and by creating a relationship in which gains or losses on derivative instruments are expected to counterbalance the losses or gains on the assets, liabilities or anticipated transactions exposed to such market risks. Each of PSEG, PSE&G, Power and Energy Holdings use derivative instruments as risk management tools consistent with their respective business plans and prudent business practices.

~~(A)~~Derivative ~~Other~~Instruments ~~consists~~and ofHedging ~~reclassifications for minority interests in PSEG's consolidated results of operations.~~Activities

36Energy Trading Contracts

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~ Power

~~Note~~ Power, ~~11.~~through ~~Income~~ER&T, ~~Taxes~~actively trades energy and energy-related products, including electricity, natural gas, electric capacity, firm transmission rights (FTRs), coal and emission allowances in the spot, forward and futures markets, primarily in the PJM, but also in the surrounding region, which extends from Maine to the Carolinas and the Atlantic Coast to Indiana and natural gas in the producing region.

AnPower ~~analysis~~maintains a strategy of entering into trading positions to optimize the ~~tax~~value ~~provision~~of ~~expense~~its isportfolio asof ~~follows:~~generation assets, gas supply contracts and its electric and gas supply obligations. Power engages in

	PSE&G (A)			Power			Energy Holdings			Other (B)			Consolidated Total
	(Millions)
For the Quarter Ended June 30, 2003:
Income (Loss) before Income Taxes	$	14		$	183		$	50		$	(26	)	$	221
Tax computed at the statutory rate		5			64			18			(9	)		78
Increase (decrease) attributable to flow through of certain tax adjustments:
State Income Taxes after Federal Benefit		3			10			—			(1	)		12
Rate Differential of Foreign Operations		—			—			(1	)		—			(1	)
Plant Related Items		(14	)		—			—			—			(14	)
Other		(2	)		—			(1	)		(1	)		(4	)
Total Income Tax Expense	$	(8	)	$	74		$	16		$	(11	)	$	71
Effective income tax rate		(57.1	)%		40.4	%		32.0	%		42.3	%		32.1	%
For the Quarter Ended June 30, 2002:
Income (Loss) before Income Taxes	$	8		$	145		$	(491	)	$	(9	)	$	(347	)
Tax computed at the statutory rate		2			51			(172	)		(3	)		(122	)
Increase (decrease) attributable to flow through of certain tax adjustments:
State Income Taxes after Federal Benefit		1			10			—			(1	)		10
Rate Differential of Foreign Operations		—			—			(6	)		—			(6	)
Plant Related Items		(5	)		—			—			—			(5	)
Other		2			1			1			(1	)		3
Total Income Tax Expense	$	—		$	62		$	(177	)	$	(5	)	$	(120	)
Effective income tax rate		0.0	%		42.8	%		36.0	%		55.6	%		34.6	%
For the Six Months Ended June 30, 2003:
Income (Loss) before Income Taxes	$	171		$	483		$	131		$	(59	)	$	726
Tax computed at the statutory rate		60			169			46			(21	)		254
Increase (decrease) attributable to flow through of certain tax adjustments:
State Income Taxes after Federal Benefit		14			28			—			(3	)		39
Rate Differential of Foreign Operations		—			—			(13	)		—			(13	)
Plant Related Items		(26	)		—			—			—			(26	)
Other		—			—			—			1			1
Total Income Tax Expense	$	48		$	197		$	33		$	(23	)	$	255
Effective income tax rate		28.1	%		40.8	%		25.2	%		39.0	%		35.1	%
For the Six Months Ended June 30, 2002:
Income (Loss) before Income Taxes	$	118		$	345		$	(486	)	$	(29	)	$	(52	)
Tax computed at the statutory rate		41			121			(170	)		(10	)		(18	)
Increase (decrease) attributable to flow through of certain tax adjustments:
State Income Taxes after Federal Benefit		10			20			1			(2	)		29
Rate Differential of Foreign Operations		—			—			(9	)		—			(9	)
Plant Related Items		(7	)		—			—			—			(7	)
Other		(2	)		1			1			(1	)		(1	)
Total Income Tax Expense	$	42		$	142		$	(177	)	$	(13	)	$	(6	)
Effective income tax rate		35.6	%		41.2	%		36.4	%		44.8	%		11.5	%

(A)		For the quarters ended June 30, 2003 and 2002, regulatory accounting differences, primarily plant-related items, are proportionally higher relative to pre-tax income resulting in relatively low or negative effective tax rates.
(B)		PSEG's other activities include amounts applicable to PSEG (parent corporation) that primarily relate to financing and certain administrative and general costs.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

37physical 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. These contracts also involve financial transactions including swaps, options and futures.

~~NOTES~~ Power TOmarks ~~CONSOLIDATED~~its ~~FINANCIAL~~derivative ~~STATEMENTS~~energy ~~(UNAUDITED)~~trading contracts to market in accordance with SFAS 133, as amended, with changes in fair value charged to the Condensed Consolidated Statement of Operations. Wherever possible, fair values for these contracts are obtained from quoted market sources. For contracts where no quoted market exists, modeling techniques are employed using assumptions reflective of current market rates, yield curves and forward prices as applicable to interpolate certain prices. The effect of using such modeling techniques is not material to Power's financial results.

~~Note~~ Power 12routinely enters into exchange-traded futures and options transactions for electricity and natural gas as part of its operations. ~~Financial~~Generally, ~~Information~~exchange-traded byfutures ~~Business~~contracts ~~Segments~~require a deposit of margin cash, the amount of which is subject to change based on market movement and in accordance with exchange rules. The aggregate amount of Power's margin deposits as of March 31, 2004 and December 31, 2003 was approximately $12 million and $36 million, respectively.

~~Information~~Commodity ~~related to the segments of PSEG and its subsidiaries is detailed below:~~Contracts

						Energy Holdings
	PSE&G			Power		Resources			Global			Other (A)			Other (B)			Consolidated Total
	(Millions)
For the Quarter Ended June 30, 2003:
Total Operating Revenues	$	1,342		$	1,236	$	67		$	122		$	(1	)	$	(347	)	$	2,419
Income (Loss) from Continuing Operations		22			109		23			11			(1	)		(14	)		150
Loss from Discontinued Operations, net of tax		—			—		—			—			(2	)		—			(2	)
Extraordinary Item, net of tax		(18	)		—		—			—			—			—			(18	)
Net Income (Loss)		4			109		23			11			(3	)		(14	)		130
Segment Earnings (Loss)		3			109		22			7			(3	)		(8	)		130
Gross Additions to Long-Lived Assets		132			177		—			62			1			(2	)		370
For the Six Months Ended June 30, 2003:
Total Operating Revenues	$	3,490		$	3,065	$	118		$	279		$	—		$	(1,227	)	$	5,725
Income (Loss) from Continuing Operations		123			286		37			57			(2	)		(30	)		471
Loss from Discontinued Operations, net of tax		—			—		—			—			(17	)		—			(17	)
Extraordinary Item, net of tax		(18	)		—		—			—			—			—			(18	)
Cumulative Effect of a Change In Accounting Principle, net of tax		—			370		—			—			—			—			370
Net Income (Loss)		105			656		37			57			(19	)		(30	)		806
Segment Earnings (Loss)		103			656		34			49			(19	)		(17	)		806
Gross Additions to Long-Lived Assets		229			330		—			167			2			4			732
As of June 30, 2003:
Total Assets	$	12,671		$	6,999	$	3,177		$	3,967		$	79		$	(323	)	$	26,570
Investments in Equity Method Subsidiaries	$	—		$	—	$	111		$	1,344		$	20		$	—		$	1,475
For the Quarter Ended June 30, 2002:
Total Operating Revenues	$	1,230		$	673	$	32		$	101		$	—		$	(621	)	$	1,415
Income (Loss) from Continuing Operations		8			83		(3	)		(305	)		(2	)		(8	)		(227	)
Loss from Discontinued Operations, net of tax		—			—		—			(11	)		(26	)		—			(37	)
Net Income (Loss)		8			83		(3	)		(316	)		(28	)		(8	)		(264	)
Segment Earnings (Loss)		7			83		(4	)		(320	)		(28	)		(2	)		(264	)
Gross Additions to Long-Lived Assets		120			267		1			177			8			32			605
For the Six Months Ended June 30, 2002:
Total Operating Revenues	$	2,889		$	1,249	$	90		$	179		$	—		$	(1,109	)	$	3,298
Income (Loss) from Continuing Operations		76			203		14			(314	)		(4	)		(21	)		(46	)
Loss from Discontinued Operations, net of tax		—			—		—			(9	)		(29	)		—			(38	)
Cumulative Effect of a Change In Accounting Principle, net of tax		—			—		—			(89	)		(31	)		—			(120	)
Net Income (Loss)		76			203		14			(412	)		(64	)		(21	)		(204	)
Segment Earnings (Loss)		74			203		11			(420	)		(64	)		(8	)		(204	)
Gross Additions to Long-Lived Assets		196			545		6			406			6			(7	)		1,152
As of December 31, 2002:
Total Assets	$	12,429		$	7,176	$	3,086		$	3,790		$	(50	)	$	(729	)	$	25,702
Investments in Equity Method Subsidiaries	$	—		$	—	$	118		$	1,305		$	20		$	—		$	1,443

Power

~~(A)~~ The ~~Energy~~availability ~~Holdings'~~and ~~other~~price ~~activities~~of ~~include~~energy ~~amounts~~commodities ~~applicable~~are subject to ~~Energy~~fluctuations ~~Holdings~~from ~~(parent~~factors ~~company)~~such as weather, ~~the~~environmental ~~HVAC/operating~~policies, ~~companies~~changes ofin ~~Energy~~supply ~~Technologies~~and demand, ~~which~~state ~~were~~and ~~reclassified~~federal ~~into~~regulatory ~~discontinued~~policies, ~~operations~~market ~~in 2002~~conditions, transmission availability and ~~EGDC~~other events. ~~The~~Power ~~net~~manages ~~losses~~its ~~primarily~~risk ~~relate~~of tofluctuations ~~financing~~of energy price and ~~certain~~availability ~~administrative~~through ~~and~~derivative ~~general~~instruments, ~~costs~~such atas ~~the~~forward ~~Energy~~purchase ~~Holdings~~or ~~parent~~sale ~~corporation.~~contracts, ~~For~~swaps, aoptions, futures and FTRs.

38 Cash Flow Hedges

~~NOTES~~ Power TOuses ~~CONSOLIDATED~~forward ~~FINANCIAL~~sale ~~STATEMENTS~~and purchase contracts, swaps and FTR contracts to hedge forecasted energy sales from its generation stations and to hedge related load obligations. Power also enters into swaps, options and futures transactions to hedge the price of fuel to meet its fuel purchase requirements for generation. These derivative transactions are designated and effective as cash flow hedges under SFAS 133, as amended. As of March 31, 2004, the fair value of these hedges was $(~~UNAUDITED~~240) million, $(142) million, after-tax. During the next 12 months, $65 million of unrealized losses (after-tax) on these commodity derivatives in Accumulated OCI is expected to be reclassified to earnings. As defined in SFAS 133, hedge ineffectiveness associated with these hedges was insignificant. The expiration date of the longest dated cash flow hedge is in 2008.

~~discussion~~ Other ~~of the charges relating to Discontinued Operations at Energy Technologies, see Note 5. Discontinued Operations.~~Derivatives

~~(B)~~ Power ~~PSEG's~~also ~~other~~enters ~~activities~~into ~~include~~certain ~~amounts~~other ~~applicable~~contracts towhich ~~PSEG~~are ~~(parent corporation)~~derivatives, ~~and~~but ~~intercompany~~do ~~eliminations,~~not ~~primarily~~qualify ~~relating~~for tohedge ~~intercompany~~accounting ~~transactions~~under ~~between~~SFAS ~~Power and PSE&G~~133. NoMost ~~gains~~of orthese ~~losses~~contracts are ~~recorded~~used onfor ~~any~~fuel ~~intercompany~~purchases ~~transactions,~~for ~~rather,~~generation ~~all~~requirements. ~~intercompany transactions are at cost or~~Therefore, in the ~~case~~changes ofin ~~the~~fair ~~BGS~~market ~~and~~value ~~Basic~~of ~~Gas~~these ~~Supply~~derivative ~~Service (BGSS)~~ contracts ~~between~~are ~~Power~~recorded ~~and~~in ~~PSE&G,~~Energy atCosts ~~rates~~on ~~prescribed by~~ the ~~BPU.~~Condensed ~~For~~Consolidated aStatements ~~further discussion~~ of ~~the intercompany transactions between Power and PSE&G, see Note 14~~Operations. ~~Related-Party Transactions.~~ The ~~net~~fair ~~losses~~value ~~primarily~~of ~~relate~~these toinstruments ~~financing~~as ~~and~~of ~~certain~~March ~~administrative~~31, ~~and~~2004 ~~general~~was ~~costs~~$23 ~~at the PSEG parent corporation~~million.

~~Note~~Interest ~~13. Stock-Based Compensation~~Rates

PSEG ~~applies Accounting Principles Board (APB) Opinion No. 25~~, ~~''Accounting for Stock Issued to Employees~~PSE&G,'' Power and ~~related~~Energy interpretations in accounting for stock-based compensation plans. Accordingly, no compensation cost has been recognized for fixed stock option grants since the exercise price of the stock options equaled the market price of the underlying stock on the date of grant.Holdings

~~The~~PSEG, ~~following~~PSE&G, ~~table~~Power ~~illustrates~~and Energy Holdings are subject to the ~~effect~~risk onof ~~net~~fluctuating ~~income~~interest ~~and~~rates ~~earnings~~in ~~per~~the ~~share~~normal ifcourse of business. PSEG's ~~had~~policy ~~applied~~is ~~the~~to ~~fair~~manage ~~value~~interest ~~recognition~~rate ~~provisions~~risk ofthrough ~~SFAS~~the ~~No.~~use ~~123,~~of ~~''Accounting~~fixed ~~for~~and ~~Stock-Based~~floating ~~Compensation,''~~rate todebt ~~stock-based~~and ~~employee~~interest ~~compensation:~~rate derivatives.

	Quarter Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2002
	(Millions, except Share Data)
Net Income (Loss), as reported	$	130		$	(264	)	$	806		$	(204	)
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(2	)		(3	)		(4	)		(5	)
Pro forma Net Income (Loss)	$	128		$	(267	)	$	802		$	(209	)
Earnings per share:
Basic—as reported	$	0.58		$	(1.28	)	$	3.57		$	(0.99	)
Basic—pro forma	$	0.57		$	(1.29	)	$	3.55		$	(1.01	)
Diluted—as reported	$	0.57		$	(1.28	)	$	3.57		$	(0.99	)
Diluted—pro forma	$	0.56		$	(1.29	)	$	3.55		$	(1.01	)

~~Note~~NOTES ~~14.~~TO ~~Related-Party~~CONDENSED ~~Transactions~~CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

~~BGSS~~ Fair ~~and~~Value ~~BGS Contracts~~Hedges

~~PSE&G~~ Energy ~~and Power~~Holdings

~~Effective~~In ~~May~~April 2003, 1Energy Holdings, ~~2002~~in a private placement, ~~PSE&G~~issued ~~transferred~~$350 ~~its~~million ~~gas~~of ~~supply~~7.75% Senior ~~contracts~~Notes ~~and~~due ~~gas~~in ~~inventory~~2007. ~~requirements~~Energy Holdings used interest rate swaps to ~~Power~~convert $200 million of this fixed-rate debt into variable-rate debt. OnThe ~~the~~interest rate ~~same~~swaps ~~date,~~are ~~PSE&G~~designated ~~entered~~and ~~into~~effective aas ~~requirements~~fair ~~contract~~value ~~with~~hedges. ~~Power~~The ~~under~~fair ~~which~~value changes ~~Power~~of ~~provides~~these interest rate swaps are fully offset by the ~~gas~~fair ~~supply~~value ~~services~~changes in ~~needed~~the tounderlying ~~meet~~debt. ~~PSE&G's~~As ~~BGSS~~of ~~requirements~~March 31, 2004, the fair value of these hedges was $2 million. There was no ineffectiveness related to these hedges.

~~For~~Cash ~~the~~Flow quarter ended June 30, 2003 and 2002, Power billed PSE&G approximately $293 and $97 million, respectively, for BGSS. For the six months ended June 30, 2003 and 2002, Power billed PSE&G approximately $1.1 billion and $97 million, respectively, for BGSS. As of June 30, 2003 and December 31, 2002, PSE&G's payable to Power related to the BGSS contract was approximately $67 million and $241 million, respectively.Hedges

~~Power charged PSE&G for the energy and capacity provided to meet its BGS requirements through July 31~~PSEG, ~~2002. Power also charges~~ PSE&G ~~for the MTC through July 31~~, ~~2003. For the quarters ended June 30, 2003 and 2002,~~ Power ~~charged PSE&G approximately $53 million~~ and ~~$488~~Energy ~~million,~~ Holdings

39 PSEG, PSE&G, Power and Energy Holdings use interest rate swaps and other interest rate derivatives to manage their exposures to the variability of cash flows, primarily related to variable-rate debt instruments. The interest rate derivatives used are designated and effective as cash flow hedges. The fair value changes of these derivatives are initially recorded in Accumulated OCI. As of March 31, 2004, the fair value of these cash flow hedges was $(194) million, including $(19) million, $(59) million, and $(116) million at PSEG, PSE&G, and Energy Holdings, respectively. The $(59) million at PSE&G is deferred and is expected to be recovered from PSE&G's customers. During the next 12 months, $28 million of unrealized losses (net of taxes) on interest rate derivatives in Accumulated OCI is expected to be reclassified to earnings, including $4 million and $24 million at PSEG and Energy Holdings, respectively. Hedge ineffectiveness associated with these hedges was immaterial.

~~NOTES~~ Other ~~TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~Derivatives

~~respectively,~~ Energy for the MTC and BGS. For the six months ended June 30, 2003 and 2002, Power charged PSE&G approximately $101 million and $948 million, respectively, for the MTC and BGS. As of June 30, 2003 and December 31, 2002, PSE&G's payable to Power relating to these costs was approximately $14 million and $2 million, respectively.Holdings

~~For~~Foreign ~~the~~subsidiaries ~~quarter~~ and ~~six~~affiliates ~~months~~of ~~ended~~Energy ~~June~~Holdings ~~30,~~entered ~~2002~~into interest rate forward contracts, ~~PSE&G~~which ~~sold~~effectively ~~energy~~converted ~~and~~Energy ~~capacity~~Holdings' variable rate debt to ~~Power~~fixed atrate. Changes in the ~~market~~fair ~~price~~value of ~~approximately~~these ~~$35~~derivative ~~million~~instruments ~~and~~are ~~$63~~recorded ~~million,~~directly ~~respectively,~~to ~~which~~interest ~~PSE&G~~expense. ~~purchased~~The ~~under~~fair ~~various~~value ~~NUG~~of ~~contracts~~these atinstruments ~~costs~~as ~~above~~of ~~market~~March ~~prices~~31, 2004 was immaterial.

~~Affiliate~~Foreign ~~Loans~~Currencies

~~PSEG~~ Energy ~~and Power~~Holdings

AsGlobal ofis ~~June~~exposed ~~30,~~to ~~2003~~foreign currency risk and ~~December~~other ~~31,~~foreign ~~2002,~~operations ~~Power~~risk ~~had~~that aarise ~~payable~~from toinvestments ~~PSEG~~in foreign subsidiaries and affiliates. A key component of ~~approximately~~this $4risk ~~million~~is that some of its foreign subsidiaries and ~~$239~~affiliates ~~million~~have functional currencies other than the consolidated reporting currency, ~~respectively~~the U.S. Dollar. Additionally, ~~for~~Global ~~short-term~~and ~~funding~~certain ~~needs~~of its foreign subsidiaries and affiliates have entered into monetary obligations and maintain receipts/receivables in U.S. ~~There~~Dollars ~~was~~or nocurrencies ~~interest~~other ~~expense~~than ~~related~~their own functional currencies. Global, a U.S. Dollar functional currency entity, is primarily exposed to ~~these~~changes ~~borrowings~~in ~~for~~the Brazilian Real, the ~~quarter~~Euro, ~~ended~~the ~~June~~Polish 30Zloty, ~~2003~~the Peruvian Nuevo Sol and the Chilean Peso. With respect to the foreign currency risk associated with the Brazilian Real, asthere ~~compared~~has already been significant devaluation since the initial acquisition of these investments, which has resulted in reduced U.S. Dollar earnings and cash flows relative to $2initial projections.9 ~~million~~These subsidiaries and affiliates have attempted to limit potential foreign exchange exposure by entering into revenue contracts that adjust for ~~the~~changes ~~quarter~~in ~~ended~~foreign ~~June~~exchange 30rates. Global also uses foreign currency forward, ~~2002~~swap and option agreements to manage risk related to certain foreign currency fluctuations.

~~PSEG~~ As ~~and~~of March 31, 2004, net cumulative foreign currency devaluations have reduced the total amount of Energy Holdings' Member's Equity by $225 million, of which $230 million was caused by the devaluation of the Brazilian Real.

As of June 30, 2003 and December 31, 2002, Energy Holdings had a receivable due from PSEG of $131 million and $62 million, respectively, for short-term funding needs. Interest Income related to this intercompany transaction was immaterial.37

~~Energy~~NOTES ~~Holdings~~TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

~~Loans~~Hedges toof ~~Texas~~Net ~~Independent~~Investments ~~Energy,~~in ~~L.P.~~Foreign ~~(TIE)~~Operations

~~Global and its partner, Panda~~ Energy International, Inc. (Panda), own and operate two electric generation facilities in Texas through TIE, a 50/50 joint venture. In January 2003, Panda indirectly transferred 50% of its interest in TIE to Teco Power Services (Teco). As of June 30, 2003, Global's investment in TIE was approximately $238 million including $72 million of loans that earn interest at an annual rate of 12% and that are scheduled to be repaid in quarterly installments through 2012. The quarterly loan installments due to Global are expected to be repaid out of the project cash flows or additional contributions from project partners in the event of insufficient project cash flows. For the quarter and six months ended June 30, 2003, Global recorded approximately $3 million and $5 million, respectively, of interest income related to this loan.Holdings

InAn ~~March~~affiliate ~~2003,~~of ~~Global~~Energy ~~funded~~Holdings ~~$14~~entered ~~million~~into ofa ~~convertible~~cross ~~preferred~~currency ~~equity~~interest torate ~~the~~swap ~~two~~agreement. ~~TIE~~The ~~projects~~swap asis ~~part~~designed ofto ~~its~~hedge ~~negotiations~~the ~~with~~net ~~project~~investment ~~lenders~~in toa ~~amend~~foreign subsidiary associated with the ~~projects'~~exposure ~~credit~~in ~~agreements~~the U.S. ~~The~~Dollar ~~convertible~~to ~~preferred~~Chilean ~~equity~~Peso ~~has~~exchange arate. ~~15%~~As ~~coupon~~of ~~and~~March is31, ~~convertible~~2004, atEnergy ~~Global~~Holdings's ~~option~~pro-rata ~~into~~share anof ~~approximate~~the ~~13%~~fair ~~equity~~value ~~interest~~of the cross currency swap was immaterial. The effective portion of the change in ~~TIE~~fair ifvalue ~~not~~will ~~repaid~~be recorded in ~~full~~Cumulative byTranslation ~~June~~Adjustment ~~2004~~within Accumulated OCI.

~~Loans~~Equity ~~to GWF Energy~~Securities

~~As of June 30, 2003, Global has provided GWF~~ Energy $4 million of working capital loans to fund construction costs pending completion of permanent project financing. The loan earns interest at 20% per annum and is not convertible into equity. Global's ownership interest in GWF Energy was approximately 76% as of June 30, 2003. Harbinger has the right to buy back from Global up to one-half of the reduction of its equity ownership in GWF Energy from the 50% ownership level.Holdings

AsFor ~~of June~~the 30quarter ended March 31, ~~2003~~2004, ~~Global's~~Resources ~~equity~~recognized ~~investment~~a in$3 ~~GWF~~million ~~Energy~~(pre-tax) ~~was~~loss ~~$212~~related ~~million~~to ~~and its~~non-publicly ~~ownership~~traded ~~interest~~equity securities, which are held within its investments in ~~GWF~~certain ~~Energy~~venture ~~was~~capital ~~approximately~~and ~~76%~~leveraged buyout funds. ~~Global~~As ~~and~~of ~~Harbinger are~~March ~~currently~~31, 2004, Resources had investments in ~~arbitration~~leveraged ~~over~~buyout ~~allegations~~funds ~~that~~of ~~Global~~approximately ~~wrongfully~~$67 ~~diluted Harbinger's~~million, ~~ownership~~of ~~percentage~~which ~~interest~~$22 inmillion ~~GWF~~was ~~Energy.~~comprised ~~Global~~of public securities with available market prices and ~~Harbinger agreed~~$45 onmillion ~~June~~was 4comprised of privately-held interests in certain companies. As of December 31, 2003, ~~that~~Resources ~~the~~had ~~issues~~investments ~~and~~in ~~claims~~leveraged ~~raised~~buyout byfunds ~~Harbinger~~of ~~will~~approximately ~~be determined~~$75 inmillion, ~~arbitration~~of ~~and~~which ~~that~~$26 ~~the~~million ~~deadline~~was ~~for~~comprised ~~Harbinger~~of topublic ~~buy~~securities ~~back~~with ~~from~~available market prices and $49 million was comprised of privately ~~Global~~held upinterests toin certain companies.

40Note 9. Comprehensive Income

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

	PSE&G			Power (A)			Energy Holdings (B)			Other (C)			Consolidated Total
	(Millions)
For the Quarter Ended March 31, 2004:
Net Income (Loss)	$	125		$	109		$	48		$	(11	)	$	271
Other Comprehensive Loss		—			(127	)		(49	)		(6	)		(182	)

Comprehensive Income (Loss)	$	125		$	(18	)	$	(1	)	$	(17	)	$	89

For the Quarter Ended March 31, 2003:
Net Income (Loss)	$	101		$	547		$	48		$	(15	)	$	681
Other Comprehensive Income (Loss)		(1	)		39			(32	)		—			6

Comprehensive Income (Loss)	$	100		$	586		$	16		$	(15	)	$	687

~~50%~~(A) ofChanges ~~the~~at ~~dilution~~Power ofprimarily ~~its~~relate ~~ownership~~to ~~interest~~SFAS in133 ~~GWF~~unrealized ~~Energy~~loss ~~would~~hedge beadjustment ~~extended~~and tounrealized 30gains ~~days~~and ~~after~~losses on the ~~issuance~~NDT ofFund. ~~the~~(B) ~~decision~~Changes inat ~~the~~Energy ~~arbitration.~~Holdings Inprimarily ~~addition,~~relate ~~Harbinger~~to ~~agreed~~foreign tocurrency ~~dismiss~~translation ~~such~~adjustments ~~action~~and ~~with~~unrealized ~~prejudice~~gains ~~upon~~and ~~completion~~losses ofon ~~the~~various ~~arbitration~~derivative transactions. ~~The~~(C) ~~parties~~Other ~~are~~primarily ~~targeting~~consists toof ~~complete~~activity ~~the~~at ~~arbitration~~PSEG by(as ~~November~~parent 30company), ~~2003~~Services ~~though~~and nointercompany ~~assurances can be given~~eliminations.

Note 10. Changes in Capitalization

PSE&G

OnIn ~~January~~March 212004, ~~2003,~~PSE&G ~~PSEG~~Transition ~~contributed~~Funding LLC repaid approximately $~~170~~32 million of ~~equity~~its totransition ~~PSE&G~~bonds.

~~PSEG, PSE&G,~~ Power ~~and Energy Holdings~~

~~Services provides~~In March 2004, Power issued $250 million of 3.75% Senior Notes due April 2009 and ~~bills~~$250 ~~administrative~~million ~~services~~of to5.00% ~~PSE&G~~Senior Notes due April 2014. The net proceeds of $488 million, ~~Power~~together ~~and~~with ~~Energy~~available ~~Holdings as~~cash, ~~follows:~~were used to fund the repayment of $800 million of project finance debt of certain of Power's subsidiaries.

	Services Billings for the Quarter Ended June 30,				Services Billings for the Six Months Ended June 30,				Payable to Services as of
	2003		2002		2003		2002		June 30, 2003		December 31, 2002
	(Millions)
PSE&G	$	54	$	51	$	100	$	103	$	17	$	16
Power		27		31		54		66		6		2
Energy Holdings		4		5		8		10		2		3

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

41 Energy Holdings

~~NOTES~~ In TOFebruary ~~CONSOLIDATED~~2004, ~~FINANCIAL~~Energy ~~STATEMENTS~~Holdings ~~(UNAUDITED)~~repaid $267 million of its 9.125% Senior Notes at maturity, utilizing cash on hand.

~~Note~~ In ~~15.~~February ~~Guarantees~~2004, Energy Holdings redeemed $75 million of ~~Debt~~preference units to PSEG.

~~Power~~Note 11. Other Income and Deductions

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

	PSE&G			Power		Energy Holdings		Other (A)			Consolidated Total
	(Millions)
Other Income:
For the Quarter Ended March 31, 2004:
Interest Income	$	6		$	1	$	—	$	—		$	7
Gain on Disposition of Property		(3	)		—		—		—			(3	)
NDT Fund Realized Gains		—			28		—		—			28
NDT Interest and Dividend Income		—			6		—		—			6
Change in Derivative Fair Value		—			—		1		—			1
Other		—			—		—		(4	)		(4	)

Total Other Income	$	3		$	35	$	1	$	(4	)	$	35

For the Quarter Ended March 31, 2003:
Interest Income	$	2		$	—	$	—	$	—		$	2
Gain on Disposition of Property		8			—		—		—			8
NDT Fund Realized Gains		—			39		—		—			39
NDT Interest and Dividend Income		—			5		—		—			5
Foreign Currency Income		—			—		4		—			4
Other		—			—		—		1			1

Total Other Income	$	10		$	44	$	4	$	1		$	59

		Power			Guarantor Subsidaries			Other Subsidaries			Consolidating Adjustments			Total
	PSE&G			Power			Energy Holdings			Other (A)			Consolidated Total
	(Millions)							~~(Millions)~~
For the Quarter Ended June 30, 2003:
Other Deductions:
Operating Revenues	$	—		$	1,488		$	74		$	(326	)	$	1,236
For the Quarter Ended March 31, 2004:
Operating Expenses		—			1,314			52			(326	)		1,040
Donations	$	1		$	—		$	—		$	—		$	1
Operating Income		—			174			22			—			196
NDT Fund Realized Loss		—			13			—			—			13
Other Income		106			65			—			(144	)		27
Minority Interest		—			—			—			2			2
Other Deductions		—			(45	)		—			33			(12	)
Other		—			7			—			—			7
Interest Expense		(50	)		(21	)		32			11			(28	)
Total Other Deductions	$	1		$	20		$	—		$	2		$	23
Income Taxes		54			(108	)		(19	)		(1	)		(74	)
For the Quarter Ended March 31, 2003:
Net Income (Loss)	$	110		$	65		$	35		$	(101	)	$	109
Donations	$	1		$	—		$	—		$	—		$	1
For the Six Months Ended June 30, 2003:
NDT Fund Realized Loss		—			30			—			—			30
Operating Revenues	$	—		$	3,546		$	144		$	(625	)	$	3,065
Minority Interest		—			—			—			5			5
Operating Expenses		—			3,070			110			(625	)		2,555
Change in Derivative Fair Value		—			—			3			—			3
Operating Income (Loss)		—			476			34			—			510
Other		—			—			—			4			4
Other Income		677			80			—			(683	)		74
Total Other Deductions	$	1		$	30		$	3		$	9		$	43
Other Deductions		—			(45	)		—			—			(45	)
Interest Expense		(91	)		(39	)		63			11			(56	)
Income Taxes		71			(232	)		(36	)		—			(197	)
Cumulative Effect of a Change in Accounting Principle		—			366			4			—			370
Net Income (Loss)	$	657		$	606		$	65		$	(672	)	$	656
For the Six Months Ended June 30, 2003:
Net Cash Provided By (Used In) Operating Activities	$	261		$	736		$	8		$	(425	)	$	580
Net Cash (Used In) Provided By Investing Activities	$	(403	)	$	(478	)	$	(11	)	$	546		$	(346	)
Net Cash Provided By (Used In) Financing Activities	$	142		$	(270	)	$	12		$	(119	)	$	(235	)
For the Quarter Ended June 30, 2002:
Operating Revenues	$	1		$	668		$	4		$	—		$	673
Operating Expenses		16			478			6			—			500
Operating (Loss) Income		(15	)		190			(2	)		—			173
Other Income		117			9			—			(126	)		—
Interest Expense		(41	)		(14	)		27			—			(28	)
Income Taxes		22			(74	)		(10	)		—			(62	)
Net Income (Loss)	$	83		$	111		$	15		$	(126	)	$	83
For the Six Months Ended June 30, 2002:
Operating Revenues	$	1		$	1,242		$	6		$	—		$	1,249
Operating Expenses		36			802			10			—			848
Operating (Loss) Income		(35	)		440			(4	)		—			401
Other Income		273			13			—			(286	)		—
Interest Expense		(82	)		(30	)		56			—			(56	)
Income Taxes		47			(170	)		(19	)		—			(142	)
Net Income (Loss)	$	203		$	253		$	33		$	(286	)	$	203

42(A) Other consists of reclassifications for minority interests in PSEG's consolidated results of operations and intercompany eliminations at PSEG (as parent company).

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~39

		Power			Guarantor Subsidaries			Other Subsidaries			Consolidating Adjustments			Total
								(Millions)
For the Six Months Ended June 30, 2002:
Net Cash (Used In) Provided By Operating Activities	$	(413	)	$	714		$	(23	)	$	(203	)	$	75
Net Cash (Used In) Provided By Investing Activities	$	(224	)	$	(466	)	$	(157	)	$	311		$	(536	)
Net Cash Provided By (Used In) Financing Activities	$	637		$	(244	)	$	180		$	(108	)	$	465
As of June 30, 2003:
Current Assets	$	1,255		$	1,498		$	154		$	(1,542	)	$	1,365
Property, Plant and Equipment, net		37			2,567			1,717			—			4,321
Noncurrent Assets		3,675			1,616			1,342			(5,320	)		1,313
Total Assets	$	4,967		$	5,681		$	3,213		$	(6,862	)	$	6,999
Current Liabilities	$	116		$	1,954		$	636		$	(1,667	)	$	1,039
Noncurrent Liabilities		97			433			24			(65	)		489
Note Payable—Affiliated Company		79			1,150			—			(1,229	)		—
Long-Term Debt		2,516			—			800			—			3,316
Member's Equity		2,159			2,144			1,753			(3,901	)		2,155
Total Liabilities and Member's Equity	$	4,967		$	5,681		$	3,213		$	(6,862	)	$	6,999
As of December 31, 2002:
Current Assets	$	1,329		$	1,566		$	102		$	(1,479	)	$	1,518
Property, Plant and Equipment, net		42			2,430			1,568			—			4,040
Noncurrent Assets		3,258			1,786			1,360			(4,786	)		1,618
Total Assets	$	4,629		$	5,782		$	3,030		$	(6,265	)	$	7,176
Current Liabilities	$	367		$	1,907		$	522		$	(1,503	)	$	1,293
Noncurrent Liabilities		209			991			29			(101	)		1,128
Note Payable—Affiliated Company		97			1,150			—			(1,247	)		—
Long-Term Debt		2,516			—			800			—			3,316
Member's Equity		1,440			1,734			1,679			(3,414	)		1,439
Total Liabilities and Member's Equity	$	4,629		$	5,782		$	3,030		$	(6,265	)	$	7,176

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

~~There~~Note ~~are~~12. noIncome ~~restrictions on the ability of Power's subsidiaries to transfer funds in the form of dividends, loans or advances to Power for the periods noted above.~~Taxes

~~Note~~ An ~~16.~~analysis ~~Subsequent~~of ~~Events~~the tax provision expense is as follows:

PSE&G

	PSE&G			Power			Energy Holdings			Other (A)			Consolidated Total
	(Millions)
For the Quarter Ended March 31, 2004:
Income (Loss) before Income Taxes	$	219		$	185		$	71		$	(24	)	$	451
Tax computed at the statutory rate		77			65			25			(8	)		159
Increase (decrease) attributable to flow through of certain tax adjustments:
State Income Taxes after Federal Benefit		16			11			—			(2	)		25
Rate Differential of Foreign Operations		—			—			(7	)		—			(7	)
Plant Related Items		(1	)		—			—			—			(1	)
Other		2			—			3			(1	)		4

Total Income Tax Expense (Benefit)	$	94		$	76		$	21		$	(11	)	$	180

Effective income tax rate		42.9	%		41.1	%		29.6	%		45.8	%		39.9	%

For the Quarter Ended March 31, 2003:
Income (Loss) before Income Taxes	$	157		$	300		$	85		$	(32	)	$	510
Tax computed at the statutory rate		55			105			30			(12	)		178
Increase (decrease) attributable to flow through of certain tax adjustments:
State Income Taxes after Federal Benefit		11			18			—			(2	)		27
Rate Differential of Foreign Operations		—			—			(12	)		—			(12	)
Plant Related Items		(12	)		—			—			—			(12	)
Other		2			—			1			2			5

Total Income Tax Expense (Benefit)	$	56		$	123		$	19		$	(12	)	$	186

Effective income tax rate		35.7	%		41.0	%		22.4	%		37.5	%		36.5	%

~~Electric~~(A) ~~Base~~PSEG's ~~Rate~~other ~~Case~~activities include amounts applicable to PSEG (as parent corporation) that primarily relate to financing and certain administrative and general costs.

In May 2002, PSE&G filed an Electric Base Rate Case with the BPU requesting an annual $250 million increase for its electric distribution business. In June 2003, a proposed settlement was filed with the Administrative Law Judge (ALJ) who recommended approval of the settlement to the BPU. In July 2003, PSE&G received an oral decision from the BPU approving the proposed settlement with certain modifications. As a result of the oral decision, in the second quarter of 2003, PSE&G has:40

		•		recorded a regulatory liability by reducing its depreciation reserve for its electric distribution assets by $155 million, which will be amortized from August 1, 2003 through December 31, 2005; and
		•		recorded certain adjustments in connection with the resolution of various issues relating to the Final Order PSE&G received from the BPU in 1999 relating to PSE&G's rate unbundling, stranded costs and restructuring proceedings. These amounts include a $30 million pre-tax refund related to revenues previously collected through the SBC for nuclear decommissioning. Because this amount reflects the final accounting for PSEG's generation-related business pursuant to the

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

43Note 13. Financial Information by Business Segments

~~NOTES~~ Information TOrelated ~~CONSOLIDATED~~to ~~FINANCIAL~~the ~~STATEMENTS~~segments ~~(UNAUDITED)~~of PSEG and its subsidiaries is detailed below:

four year transition plan mandated by PSE&G's Final Order received from the BPU in 1999 relating to the New Jersey Electric Discount and Energy Competition Act, the adjustment has been recorded as an $18 million, after-tax, Extraordinary Item as required under APB No. 30, ''Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions'' (APB 30). Also included is an $18 million, pre-tax, increase in MTC overcollections which was recorded as a reduction to Operating Revenues and a $4 million, pre-tax, reduction in interest capitalized on various deferred balances during the transition period which was recorded as a charge to Interest Expense. On July 31, 2003, PSE&G received a summary written order which was substantially consistent with the oral decision.

					Energy Holdings
	PSE&G		Power		Resources		Global		Other (A)			Other (B)			Consolidated Total
	(Millions)
For the Quarter Ended March 31, 2004:
Total Operating Revenues	$	2,182	$	1,692	$	38	$	173	$	2		$	(866	)	$	3,221
Income (Loss) from Continuing Operations		125		109		1		49		(2	)		(11	)		271
Net Income (Loss)		125		109		1		49		(2	)		(11	)		271
Segment Earnings (Loss)		124		109		—		45		(2	)		(5	)		271
Gross Additions to Long-Lived Assets		75		147		1		13		1			1			238
As of March 31, 2004:
Total Assets	$	13,306	$	7,691	$	3,220	$	3,720	$	133		$	(355	)	$	27,715
Investments in Equity Method Subsidiaries	$	—	$	—	$	84	$	1,442	$	4		$	—		$	1,530
For the Quarter Ended March 31, 2003:
Total Operating Revenues	$	2,148	$	1,830	$	51	$	135	$	4		$	(880	)	$	3,288
Income (Loss) from Continuing Operations		101		177		13		50		(2	)		(15	)		324
Loss from Discontinued Operations, net of tax		—		—		—		1		(14	)		—			(13	)
Cumulative Effect of a Change in Accounting Principle, net of tax		—		370		—		—		—			—			370
Net Income (Loss)		101		547		13		51		(16	)		(15	)		681
Segment Earnings (Loss)		100		547		12		46		(16	)		(8	)		681
Gross Additions to Long-Lived Assets		91		153		—		87		1			1			333
As of December 31, 2003:
Total Assets	$	13,162	$	7,731	$	3,277	$	3,814	$	366		$	(292	)	$	28,058
Investments in Equity Method Subsidiaries	$	—	$	—	$	94	$	1,472	$	4		$	—		$	1,570

(A)		Energy Holdings' other activities include amounts applicable to Energy Holdings (as parent company), the HVAC/operating companies formerly owned by Energy Holdings' subsidiaries, which are classified in discontinued operations and EGDC. The net losses primarily relate to financing and certain administrative and general costs of Energy Holdings. For a discussion of the charges relating to Discontinued Operations at Energy Technologies, see Note 5. Discontinued Operations.
(B)		PSEG's other activities include amounts applicable to PSEG (as parent corporation) and intercompany eliminations, primarily relating to intercompany transactions between Power and PSE&G. No gains or losses are recorded on any intercompany transactions, rather, all intercompany transactions are at cost or, in the case of the BGS and Basic Gas Supply Service (BGSS) contracts between Power and PSE&G, at rates prescribed by the BPU. For a further discussion of the intercompany transactions between Power and PSE&G, see Note 14. Related-Party Transactions. The net losses primarily relate to financing and certain administrative and general costs at PSEG, as parent corporation.

~~ITEM~~Note 214. ~~MANAGEMENT'S~~Related-Party ~~DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)~~Transactions

~~Following~~The ~~are~~majority the significant changes in or additions to information reported in the 2002 Annual Report on Form 10-K and Quarterly Report on Form 10-Q for the quarter ended March 31, 2003, affecting the consolidated financial condition and the results of ~~operations of~~ the ~~registrants.~~following ~~This~~ discussion ~~refers~~relates to ~~the~~intercompany ~~registrants'~~transactions ~~Consolidated~~that ~~Financial~~are ~~Statements~~eliminated ~~(Statements)~~during ~~and~~ the ~~related~~PSEG ~~Notes~~consolidation toprocess ~~Consolidated Financial Statements (Notes) and should be read~~ in ~~conjunction~~accordance with ~~such Statements and Notes~~GAAP.

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

~~OVERVIEW~~ PSE&G and Power

~~PSEG~~ Effective May 1, 2002, PSE&G entered into a requirements contract with Power under which Power provides the gas supply services needed to meet PSE&G's BGSS and other contractual requirements.

PSEG's business consists of four reportable segments, which are Power, PSE&G, PSEG Global LLC (Global) and PSEG Resources LLC (Resources). The following is a discussion of the major financial statement variances and follows the financial statement presentation as it relates to each of the segments. PSEG's results of operations are primarily comprised of the results of operations of its operating subsidiaries, PSE&G, Power and Energy Holdings. For a more detailed discussion of the changes referenced for PSEG, see the applicable results of operations discussion for each respective subsidiary registrant.41

~~Income~~NOTES ~~from~~TO ~~Continuing~~CONDENSED ~~Operations~~CONSOLIDATED ~~for~~FINANCIAL the quarter ended June 30, 2003 was $150 million or $0.66 per share. Losses from Continuing Operations for the quarter ended June 30, 2002 were $227 million or $1.10 per share, which included after-tax losses of $343 million or $1.66 per share related to Energy Holdings' abandoned investments in Argentina. Net Income STATEMENTS (~~Loss~~UNAUDITED) ~~for the quarters ended June 30, 2003 and 2002 was $130 million and $(264) million or $0.57 and $(1.28) per share of common stock, respectively.~~

~~Income~~For ~~from Continuing Operations for~~ the ~~six~~quarters ~~month period~~ ended ~~June~~March 3031, ~~2003~~2004 ~~was~~and ~~$471~~2003, ~~million~~Power orbilled ~~$2.09~~PSE&G ~~per~~approximately ~~share. Losses from Continuing Operations for the six month period ended June 30, 2002 were~~ $46847 million orand $~~0.22~~832 ~~per~~million, ~~share~~respectively, ~~which~~for ~~included~~BGSS. ~~after-tax~~As ~~losses~~ of ~~$374~~March 31, ~~million~~2004 orand ~~$1.81~~December 31, ~~per~~2003, ~~share~~PSE&G's ~~related~~payable to ~~Energy~~Power ~~Holdings'~~related ~~abandoned~~to ~~investments in Argentina. Net Income (Loss) for~~ the ~~six~~BGSS ~~month~~contract ~~periods ended June 30, 2003 and 2002~~ was ~~$806~~approximately ~~million and~~ $~~(204)~~194 million ~~or $3.57~~ and $~~(0.99)~~268 ~~per share of common stock~~million, respectively.

~~Based~~Power oncharged these results, PSEG continues to project 2003 Income from Continuing Operations to be within its original range of $3.70 to $3.90 per share. In addition, PSEG has established initial 2004 guidance for Income from Continuing Operations in the range of $3.75 to $3.95 per share. These projected results will depend on several factors, including, but not limited to, the expected benefits from the conclusion of PSE&G's ~~Electric~~for Base Rate Case, Power's ability to continue to effectively manage its portfolio of electric generation assets, gas supply contracts and electric and gas supply obligations, and Power's ability to mitigate against the ~~effects~~Market ofTransition ~~volatility~~Charge ~~in energy prices on the outcome of the next Basic Generation Service~~ (~~BGS) auction and the loss of the market transition charge (~~MTC) ~~revenues~~through ~~effective August 1~~July 31, 2003~~, and the continued contributions from investments at Resources and Global~~. ~~PSEG~~For ~~is reviewing its dividend policy and is considering~~ the ~~viability~~quarter ofended ~~an increase to its current dividend level as earnings continue to grow~~March 31, ~~however~~2003, aPower ~~decision~~charged isPSE&G ~~not~~approximately ~~expected~~$48 ~~until~~million ~~approximately~~for the ~~end~~MTC ~~of 2003. This decision will be based on several factors, including a review of PSEG's expected earnings~~ and ~~long-term growth rate, credit quality, dividend payout ratio, anticipated future cash flows and financial requirements and ability to maintain the dividend at a consistent level~~BGS.

~~The~~Power ~~significant~~was ~~period~~a participant in the BGS auction held in February 2003. As a result of this participation, Power entered into contracts for a ten-~~to-~~month period ~~increase~~beginning August 1, 2003, to supply hourly priced energy, capacity and ancillary services to PSE&G, which in ~~Income~~turn ~~from~~provides ~~Continuing~~these ~~Operations~~services to certain large industrial and commercial customers. As a result, Power charged PSE&G approximately $19 million for the quarter ~~and~~ended ~~six~~March ~~months~~31, ~~ended~~2004. ~~June~~As 30of March 31, 2004 and December 31, 2003, asPSE&G's ~~compared~~payable to ~~the~~Power ~~same~~related ~~periods~~to inthese ~~the~~costs ~~prior~~was ~~year~~$4 ismillion ~~due~~and ~~primarily~~$9 million, respectively.

45 Power was also a participant in the BGS auction held in February 2004. As a result of this participation, Power entered into contracts for twelve and thirty-six months, commencing in June 2004 to supply fixed price and hourly priced energy, capacity and ancillary services to PSE&G.

toAffiliate the absence of losses from Energy Holdings' Argentine investments recorded in 2002. Also contributing to the increase were higher margins at Power from the electric and natural gas portfolio, improved earnings at PSE&G due to favorable weather effects and improvements at Energy Holdings, largely due to the absence of write-downs of securities at Resources held within certain leveraged buyout funds recorded in the second quarter of 2002 combined with improvements in the performance of Resources' lease portfolio. For the quarter ended June 30, 2003, as compared to the same period in 2002, these favorable amounts were partially offset due to the timing of an annual partnership withdrawal installment payment for the Eagle Point Cogeneration Partnership (EPCP) which was received in the first quarter of 2003 compared to the second quarter of 2002.Loans

~~Additionally, during the first quarter of 2003,~~ PSEG recorded an after-tax benefit to Net Income in the amount of $370 million related to the adoption of Statement of Financial Accounting Standard (SFAS) No. 143, ''Accounting for Asset Retirement Obligations'' (SFAS 143). This benefit was due mainly to the required remeasurement of Power's nuclear decommissioning obligations. Similarly, for the first quarter of 2002, PSEG adopted SFAS No. 142, ''Goodwill and ~~Other Intangible Assets'' (SFAS 142) and incurred an after-tax charge of $120 million related to goodwill impairments at Energy Holdings.~~Power

~~Also~~As ~~contributing~~of toMarch ~~the~~31, ~~changes~~2004 inand ~~Net~~December ~~Income~~31, ~~was~~2003, aPower ~~decrease~~had ina ~~Energy~~note ~~Holdings'~~receivable ~~Loss~~ from ~~Discontinued~~PSEG ~~Operations~~ of approximately $35213 million and $2177 million ~~for the quarter and six months ended June 30~~, ~~2003,~~ respectively, asreflecting ~~compared to~~ the ~~same~~investment ~~periods in 2002, and an $18 million, after-tax, extraordinary charge recorded at PSE&G in the second quarter~~ of ~~2003~~its ~~related~~excess tocash ~~the~~with ~~oral decision received from the New Jersey Board of Public Utilities (BPU) in July 2003, discussed below in PSE&G's Overview~~PSEG.

~~The results for~~ PSEG, ~~PSE&G, Power~~ and Energy Holdings ~~for the quarter and six months ended June 30, 2003 and 2002 are presented below:~~

	Earnings (Losses)						Earnings (Losses)
	Quarter Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2002
	(Millions)						(Millions)
PSE&G	$	22		$	8		$	123		$	76
Power		109			83			286			203
Energy Holdings:
Global (A)		11			(305	)		57			(314	)
Resources		23			(3	)		37			14
Other (B)		(1	)		(2	)		(2	)		(4	)
Total Energy Holdings (A)		33			(310	)		92			(304	)
Other (C)		(14	)		(8	)		(30	)		(21	)
Income from Continuing Operations (A)	$	150		$	(227	)	$	471		$	(46	)
Loss from Discontinued Operations, including Loss on Disposal (D)		(2	)		(37	)		(17	)		(38	)
Extraordinary Item (E)		(18	)		—			(18	)		—
Cumulative Effect of a Change in Accounting Principle (F)		—			—			370			(120	)
PSEG Net Income (A)	$	130		$	(264	)	$	806		$	(204	)

As of March 31, 2004 and December 31, 2003, Energy Holdings had a note receivable due from PSEG of $64 million and $300 million, respectively, reflecting the investment of its excess cash with PSEG. Interest income related to this intercompany transaction was immaterial.

46 Energy Holdings

	Contribution to Earnings Per Share (Diluted)						Contribution to Earnings Per Share (Diluted)
	Quarter Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2002
PSE&G	$	0.10		$	0.04		$	0.54		$	0.37
Power		0.48			0.40			1.27			0.98
Energy Holdings:
Global (A)		0.05			(1.47	)		0.25			(1.52	)
Resources		0.10			(0.02	)		0.16			0.06
Other (B)		(0.01	)		(0.01	)		(0.01	)		(0.02	)
Total Energy Holdings (A)		0.14			(1.50	)		0.40			(1.48	)
Other (C)		(0.06	)		(0.04	)		(0.12	)		(0.09	)
Income from Continuing Operations (A)	$	0.66		$	(1.10	)	$	2.09		$	(0.22	)
Loss from Discontinued Operations, including Loss on Disposal (D)		(0.01	)		(0.18	)		(0.08	)		(0.19	)
Extraordinary Item (E)		(0.08	)		—			(0.08	)		—
Cumulative Effect of a Change in Accounting Principle (F)		—			—			1.64			(0.58	)
PSEG Net Income (A)	$	0.57		$	(1.28	)	$	3.57		$	(0.99	)

Loans to Texas Independent Energy, L.P. (TIE)

~~(A)~~ Global ~~Includes write-down~~ and ~~losses~~its ~~related to Argentine investments of $343 million and $374 million for the quarter and six months ended June 30~~partner, ~~2002,~~TECO ~~respectively. (B) Other activities include non-segment amounts of~~ Energy ~~Holdings~~, ~~PSEG Energy Technologies~~ Inc. ~~(Energy Technologies)~~, ~~Enterprise~~own ~~Group Development Corporation (EGDC)~~ and ~~intercompany~~operate ~~eliminations.~~two ~~Specific~~electric ~~amounts~~generation ~~include~~facilities ~~interest~~in onTexas ~~certain~~through ~~financing~~TIE, ~~transactions~~a ~~and~~50/50 ~~certain~~joint ~~other administrative and general expenses at Energy Holdings~~venture. ~~(C)~~As ~~Other activities include non-segment amounts~~ of ~~PSEG~~March 31, ~~(parent~~2004, ~~company)~~Global ~~and~~had ~~intercompany~~outstanding ~~eliminations.~~approximately ~~Specific~~$68 ~~amounts~~million ~~include~~of ~~preferred~~loans ~~securities~~to ~~dividends~~TIE ~~requirements~~that ~~for~~earn ~~PSE&G and Energy Holdings,~~ interest onat ~~certain~~an ~~financing~~annual ~~transactions~~rate ~~and~~of ~~certain~~12% ~~other administrative~~ and ~~general~~that ~~expenses~~are atscheduled ~~PSEG~~to ~~(parent~~be ~~company).~~repaid ~~(D)~~in ~~Includes~~quarterly ~~Discontinued~~installments ~~Operations~~through of2012. ~~Energy~~The ~~Technologies~~quarterly inloan ~~2003~~installments ~~and~~due ~~2002~~to ~~and~~ Global's ~~Tanir~~are ~~Bavi~~expected ~~facility in 2002. (E) Relates~~ to ~~charge~~be ~~recorded~~repaid inout of the ~~second~~project ~~quarter~~cash offlows ~~2003~~or atadditional ~~PSE&G~~contributions ~~resulting~~ from ~~the~~project ~~oral~~partners ~~decision~~in ~~issued by~~ the ~~BPU~~event inof ~~PSE&G's~~insufficient ~~Electric~~project ~~Base~~cash ~~Rate~~flows. ~~Case~~As inof ~~July~~March 31, ~~2003.~~2004, ~~(F)~~approximately ~~Relates~~$12 tomillion ~~the~~has ~~adoption~~been ofrepaid ~~SFAS~~to ~~143~~Global. inFor ~~2003 and~~ the ~~adoption~~quarters ofended ~~SFAS~~March 31, ~~142~~2004 inand ~~2002.~~2003 ~~See~~Global ~~Note~~recorded 2.approximately ~~New~~$3 ~~Accounting~~million ~~Standards~~ and ~~Note~~$2 million, 3.respectively, ~~Adoption~~ of ~~SFAS~~interest ~~143~~income ofrelated ~~the~~to ~~Notes~~this loan.

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

Income from Continuing Operations increased $14 million and $47 million for the quarter and six month periods ended June 30, 2003, respectively, as compared to the same periods in 2002. PSE&G's Earnings Available to PSEG decreased $4 million or 57% and increased $29 million or 39% for the quarter and six months ended June 30, 2003, respectively, as compared to the same periods in 2002. The increases were primarily due to favorable winter weather and lower Operation and Maintenance expenses, as discussed in Results of Operations. Partially offsetting these amounts were certain charges recognized in accordance with the Electric Base Rate Case as discussed further below. These included a pre-tax charge to Operating Revenues of $18 million relating to the MTC and a $30 million pre-tax, $18 million after-tax, extraordinary charge, discussed below.Other

InAs ~~May 2002,~~of ~~PSE&G~~March ~~filed~~31, an2004, ~~Electric~~Global ~~Base~~had ~~Rate~~loans ~~Case~~outstanding with ~~the~~its ~~BPU~~affiliates ~~requesting~~of ~~an annual~~approximately $~~250~~58 million ~~increase for its electric distribution business. In June 2003~~, aincluding ~~proposed~~$25 ~~settlement~~million ~~was filed with the Administrative Law Judge (ALJ) who subsequently recommended approval~~ of ~~the~~accrued ~~settlement~~interest related to ~~the~~its ~~BPU.~~projects Inin July 2003, PSE&G received an oral decision from the BPU approving the proposed settlement with certain modifications and subsequently received a summary written order which was substantially consistent with the oral decisionItaly.

4742

~~The following~~NOTES isTO aCONDENSED ~~summary~~CONSOLIDATED ofFINANCIAL ~~the significant issues provided for in the oral decision~~STATEMENTS ~~and summary written order.~~(UNAUDITED)

		•		PSE&G will receive a $159.5 million annual increase in its electric distribution rates commencing August 1, 2003.
		•		PSE&G will decrease its electric distribution depreciation rates from 3.52% to 2.49%, effective August 1, 2003. This change will reduce depreciation expense by approximately $40 million per year.
		•		PSE&G recorded a regulatory liability in the second quarter of 2003 by reducing its depreciation reserve for its electric distribution assets by $155 million and will amortize the liability from August 1, 2003 through December 31, 2005. The annual amortization of this liability is $64 million and will result in a reduction of Depreciation and Amortization expense. Subsequent to the amortization of this reserve, the BPU's oral decision allows PSE&G to petition for an additional $64 million annual increase in electric distribution rates effective January 1, 2006, subject to BPU approval, including a review of PSE&G's return on equity and other relevant financial information.
		•		PSE&G will refund approximately $238 million to ratepayers through the Non-Utility Generation Transition Charge (NTC) and Societal Benefits Charge (SBC), which include amounts related to the resolution of various issues relating to the Final Order PSE&G received from the BPU in 1999 relating to PSE&G's rate unbundling, stranded costs and restructuring proceedings. These amounts include a $30 million pre-tax refund related to revenues previously collected through the SBC for nuclear decommissioning. Because this amount reflects the final accounting for PSEG's generation-related business pursuant to the four year transition plan mandated by PSE&G's Final Order received from the BPU in 1999 relating to the New Jersey Electric Discount and Energy Competition Act (EDECA), the adjustment has been recorded as an $18 million, Extraordinary Item in the second quarter of 2003, as required under Accounting Principles Board (APB) No. 30, ''Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions'' (APB 30). Also included in the refund amount is an $18 million, pre-tax, increase in the refund for MTC overcollections which was recorded in the second quarter of 2003 as a reduction to Operating Revenues and a $4 million, pre-tax, reduction in interest capitalized on various deferred balances during the transition period which was recorded as a charge to Interest Expense.
		•		PSE&G will be allowed to recover deferred Repair Allowances and deferred Restructuring Costs over a ten-year period commencing August 1, 2003.
		•		PSE&G will transfer approximately $80 million of assets, at book value, to PSEG Services Corporation (Services) in the third quarter of 2003.

Services

~~The combined effects of the expiration of the electric rate discounts on July 31~~ PSE&G, ~~2003,~~Power ~~which had been phased in beginning in August 1999, the refunds through certain reductions~~ and ~~the~~Energy approved increase in base rates, combined with the effects of the recent BGS auction, will result in rates slightly lower than those in effect prior to the initial electric rate discount on August 1, 1999.Holdings

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

Power's Income from Continuing Operations increased $26 million to $109 million and $83 million to $286 million for the quarter and six months ended June 30, 2003, respectively as compared to the same periods in 2002. The increases were primarily due to higher margins from Power's electric load contracts, which became effective August 1, 2002, and increases in MTC revenues. Power benefited during 2003 from its operation of two generating facilities in Connecticut that were acquired in December 2002. In addition, net gains realized in Power's Nuclear Decommissioning Trust (NDT) Fund were favorable for the periods.

	Services Billings for the Quarter Ended March 31,				Payable to Services as of
	2004		2003		March 31, 2004		December 31, 2003
	(Millions)
PSE&G	$	47	$	48	$	15	$	21
Power	$	34	$	30	$	13	$	14
Energy Holdings	$	3	$	4	$	1	$	2

~~Earnings~~These ~~Available~~transactions ~~to PSEG~~ were ~~$109~~properly ~~million~~recognized ~~and~~on ~~$656~~each ~~million~~company's ~~for~~stand-alone ~~the~~financial ~~quarter~~statements and ~~six~~were ~~months~~eliminated ~~ended~~when ~~June~~preparing ~~30,~~PSEG's ~~2003,~~Condensed ~~respectively,~~Consolidated asFinancial ~~compared~~Statements. toPSEG, ~~$83~~PSE&G, ~~million~~Power and ~~$203~~Energy ~~million~~Holdings ~~for~~each ~~the~~believes ~~same~~that ~~periods in 2002. Included in~~ the ~~six~~costs ~~months~~of ~~ended~~services ~~June~~provided ~~30,~~by ~~2003~~Services ~~was~~approximates ~~the~~market ~~adoption~~value offor ~~SFAS~~these ~~143 resulting in an~~ services.

48 Power

~~after-tax~~ During ~~benefit~~the ofquarter ~~$370~~ended ~~million.~~March ~~The~~31, ~~benefit~~2004, isPower ~~related~~sold tocertain ~~the~~maintenance ~~required~~facilities ~~remeasurement~~to ofServices ~~Power's~~at ~~asset~~net ~~retirement~~book ~~obligations~~value, ~~mainly~~resulting ~~nuclear~~in ~~decommissioning,~~proceeds ~~within~~of ~~its~~approximately ~~businesses~~$4 million.

~~Energy~~Tax ~~Holdings~~Sharing Agreement

~~Energy Holdings' Income from Continuing Operations was $33 million and $92 million for the quarter and six months ended June 30~~PSEG, ~~2003~~PSE&G, ~~respectively.~~Power ~~Losses from Continuing Operations for the quarter~~ and ~~six~~Energy months ended June 30, 2002 were $310 million and $304 million, respectively, which included losses of $343 million and $374 million for the quarter and six months ended June 30, 2002, respectively, related to Global's abandoned investments in Argentina. In addition, contributing to the increase for the quarter and six months ended June 30, 2003 was a decrease in other than temporary impairments of non-publicly traded equity securities held within Resources' KKR leveraged buyout funds. Partially offsetting the increase for the quarter ended June 30, 2003 was lower gains recorded due to the timing of a partnership installment payment from EPCP, which was recorded in the first quarter of 2003 as compared to the second quarter of 2002.Holdings

~~Earnings~~PSEG ~~Available~~files toa ~~PSEG~~consolidated ~~was~~Federal ~~$26~~income ~~million~~tax ~~and~~return ~~$64~~with ~~million~~its ~~for~~affiliated ~~the~~companies. ~~quarter~~A ~~and~~tax ~~six~~allocation ~~months~~agreement ~~ended~~exists ~~June~~between ~~30,~~PSEG ~~2003,~~and ~~respectively~~each of PSE&G, asPower ~~compared~~and toEnergy ~~Losses~~Holdings. ~~Available~~The togeneral ~~PSEG~~operation of ~~$352~~these ~~million~~agreements ~~and~~is ~~$473~~that ~~million~~the insubsidiary ~~the~~company ~~same~~will ~~periods~~compute inits ~~2002~~taxable income on a stand-alone basis. ~~The~~If ~~change~~the result is ~~largely~~a ~~attributable~~net totax ~~losses~~liability, ~~related~~such amount shall be paid to ~~Global's~~PSEG. ~~investments~~If inthere ~~Argentina~~are ~~discussed~~net ~~above,~~operating losses and/or ~~higher~~tax ~~losses~~credits, inthe ~~2002~~subsidiary ~~from~~shall ~~Discontinued~~receive ~~Operations.~~payment ~~The~~for ~~adoption~~the oftax ~~SFAS~~savings ~~142~~from inPSEG to the ~~first~~extent ~~quarter~~that PSEG is able to utilize those benefits. As of ~~2002~~March 31, ~~which~~2004, ~~resulted~~PSE&G, inPower anand ~~after-tax~~Energy ~~charge~~Holdings had a net (payable to) receivable from PSEG of approximately $~~120~~(156) million, ~~also~~$(40) ~~contributed~~million and $100 million, respectively. As of December 31, 2003, PSE&G, Power and Energy Holdings had a net (payable to) ~~the~~receivable ~~increase~~from ~~for~~PSEG ~~the~~of ~~six~~approximately ~~months~~$(105) ~~ended~~million, ~~June~~$(17) 30million and $173 million, ~~2003~~respectively.

~~RESULTS~~Note OF15. ~~OPERATIONS~~Guarantees of Debt

~~PSEG~~ All of Power's Senior Notes and pollution control bonds, aggregating a total of $3.3 billion, are fully and unconditionally and jointly and severally guaranteed by Fossil, Nuclear and ER&T. The following table presents condensed financial information for the guarantor subsidiaries, as well as Power's non-guarantor subsidiaries.

~~Operating Revenues~~43

~~For~~NOTES ~~the~~TO ~~quarter~~CONDENSED ~~ended~~CONSOLIDATED ~~June~~FINANCIAL 30, 2003, Operating Revenues increased by $1.0 billion or 71% as compared to the same period in 2002. This was primarily due to a change in the BGS contracing process, discussed below. Also contributing to the increase were PSEG's operating companies including a $270 million increase from Power related to the revenues from new load contracts with third-party wholesale electric suppliers which went into effect August 1, 2002 and increased energy sales into the New England Power Pool resulting from Power's operation of two generation facilities in Connecticut that were acquired in December 2002, a $112 million increase in PSE&G's operating revenues due primarily to increased sales volumes due to weather and price increases mostly due to the rising cost of natural gas as explained below underSTATEMENTS PSE&G and a $55 million increase in Energy Holdings' operating revenues relating to Global's generation projects going into operation during the fourth quarter of 2002 and higher investment earnings at Resources, as detailed below under Energy Holdings.(UNAUDITED)

For the six months ended June 30, 2003, Operating Revenues increased by $2.4 billion or 74%. This was due primarily to a change in the BGS contracting process, discussed below. Also contributing to the increase were PSEG's operating companies including a $690 million increase from Power related to the new load contracts mentioned above and increased revenues from the two generation facilities in Connecticut, a $601 million increase in PSE&G's operating revenues due primarily to increased weather-related demand in the first quarter of 2003 as explained below under PSE&G and a $128 million increase in Energy Holdings' operating revenues relating to Global's generation projects going into operation as discussed above and increased revenues at Resources.

	Power			Guarantor Subsidiaries			Other Subsidiaries			Consolidating Adjustments			Consolidated Total
	(Millions)
For the Quarter Ended March 31, 2004:
Operating Revenues	$	—		$	1,903		$	22		$	(233	)	$	1,692
Operating Expenses		—			1,687			27			(233	)		1,481

Operating Income (Loss)		—			216			(5	)		—			211
Other Income		14			35			—			(14	)		35
Other Deductions		—			(13	)		(7	)		—			(20	)
Equity Earnings (Losses) of Subsidiaries		120			(14	)		—			(106	)		—
Interest Expense		(33	)		(9	)		(14	)		15			(41	)
Income Taxes		8			(93	)		10			(1	)		(76	)

Net Income (Loss)	$	109		$	122		$	(16	)	$	(106	)	$	109

For the Quarter Ended March 31, 2004:
Net Cash (Used In) Provided By OperatingActivities	$	(38	)	$	468		$	(69	)	$	209		$	570
Net Cash Provided By (Used In) Investing Activities	$	338		$	(513	)	$	(31	)	$	(52	)	$	(258	)
Net Cash (Used In) Provided By Financing Activities	$	(300	)	$	6		$	100		$	(118	)	$	(312	)
For the Quarter Ended March 31, 2003:
Operating Revenues	$	—		$	2,060		$	68		$	(298	)	$	1,830
Operating Expenses		—			1,746			67			(297	)		1,516

Operating Income (Loss)		—			314			1			(1	)		314
Other Income		—			44			—			—			44
Other Deductions		—			(30	)		—			—			(30	)
Equity Earnings (Losses) of Subsidiaries		571			(1	)		—			(570	)		—
Interest Expense		(41	)		(18	)		31			—			(28	)
Income Taxes		17			(129	)		(12	)		1			(123	)
Cumulative Change in Accounting Principle, net of tax		—			370			—			—			370

Net Income (Loss)	$	547		$	550		$	20		$	(570	)	$	547

For the Quarter Ended March 31, 2003:
Net Cash Provided By (Used In) Operating Activities	$	391		$	657		$	(262	)	$	(171	)	$	615
Net Cash (Used In) Provided By Investing Activities	$	(202	)	$	(586	)	$	291		$	132		$	(365	)
Net Cash (Used In) Provided By Financing Activities	$	(181	)	$	(50	)	$	(27	)	$	19		$	(239	)
As of March 31, 2004:
Current Assets	$	1,718		$	2,321		$	123		$	(2,545	)	$	1,617
Property, Plant and Equipment, net		42			2,769			1,858			(1	)		4,668
Investment in Subsidiaries		3,324			754			—			(4,078	)		—
Noncurrent Assets		1,268			1,189			52			(1,103	)		1,406

Total Assets	$	6,352		$	7,033		$	2,033		$	(7,727	)	$	7,691

Current Liabilities	$	402		$	3,212		$	212		$	(2,637	)	$	1,189
Noncurrent Liabilities		46			542			11			—			599
Note Payable—Affiliated Company		—			—			1,100			(1,100	)		—
Long-Term Debt		3,316			—			—			—			3,316
Member's Equity		2,588			3,279			710			(3,990	)		2,587

Total Liabilities and Member's Equity	$	6,352		$	7,033		$	2,033		$	(7,727	)	$	7,691

In addition, a portion of the increase was due to the fact that Power's electric revenues are not being eliminated in consolidation subsequent to July 2002 by PSEG. Under the prior BGS contract, which terminated on July 31, 2002, Power sold energy directly to PSE&G, which in turn sold this energy to its customers. These revenues were properly recognized on each company's stand-alone financial statements and were eliminated when preparing PSEG's Consolidated Financial Statements. For the BGS contract period beginning August 1, 2002, Power entered into contracts with third parties who are direct suppliers of New Jersey's Electric Distribution Companies (EDCs) and PSE&G purchases the energy for its customers' needs from direct third party suppliers. Due to this change in the BGS model, 44

49NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

these revenues are no longer intercompany revenues and therefore are not eliminated in consolidation. For the quarter and six months ended June 30, 2003, PSEG's elimination related to intercompany BGS and MTC revenues decreased by approximately $435 million and $847 million, respectively, as compared to the comparable prior year due primarily to this change. Also related to this change in the BGS model, PSE&G, in August 2002, began selling energy purchased under non-utility generation (NUG) contracts, which it had previously sold to Power, to PJM, with the capacity purchased under these contracts being provided to the BGS suppliers on a pro-rata basis. As a result, for the quarter and six months ended June 30, 2003, PSEG's revenues related to NUG contracts increased by approximately $35 million and $63 million, respectively.

	Power		Guarantor Subsidiaries		Other Subsidiaries		Consolidating Adjustments			Consolidated Total
	(Millions)
As of December 31, 2003:
Current Assets	$	2,004	$	1,909	$	102	$	(2,236	)	$	1,779
Property, Plant and Equipment, net		46		2,723		1,812		—			4,581
Investment in Subsidiaries		3,330		733		—		(4,063	)		—
Noncurrent Assets		456		1,113		91		(289	)		1,371

Total Assets	$	5,836	$	6,478	$	2,005	$	(6,588	)	$	7,731

Current Liabilities	$	370	$	2,832	$	192	$	(2,329	)	$	1,065
Noncurrent Liabilities		44		373		11		17			445
Note Payable—Affiliated Company		—		—		300		(300	)		—
Long-Term Debt		2,816		—		800		—			3,616
Member's Equity		2,606		3,273		702		(3,976	)		2,605

Total Liabilities and Member's Equity	$	5,836	$	6,478	$	2,005	$	(6,588	)	$	7,731

~~Operating~~Note ~~Expenses~~16. Subsequent Events

~~Energy Costs~~PSE&G

~~For~~Electric ~~the~~Base ~~quarter~~Rate ended June 30, 2003 as compared to the quarter ended June 30, 2002, Energy Costs increased approximately $963 million or 214% due primarily to the fact that PSE&G no longer purchases electric energy directly from Power, as discussed above in Operating Revenues. Amounts attributable to this change totaled $470 million between the quarters ended June 30, 2003 and 2002. Also contributing to the increase were a $101 million net increase in natural gas costs, a $250 million increase at Power primarily related to increased energy purchases and third-party wholesale electric supply contracts, discussed further below under Power, a $21 million increase in electric energy costs at PSE&G discussed further below under PSE&G and a $24 million increase at Energy Holdings, relating to projects going into operation at Global, discussed further below under Energy Holdings.Case

~~For~~In ~~the~~July ~~six months ended June 30,~~ 2003 ~~as compared to the six months ended June 30~~, ~~2002,~~a ~~Energy~~summary ~~Costs~~written ~~increased~~order ~~approximately~~was ~~$2.2~~issued ~~billion~~by ~~or 184% due primarily to~~ the ~~fact~~BPU ~~that~~in PSE&G's noElectric ~~longer~~Base ~~purchases~~Rate ~~electric energy directly from Power, as discussed above in Operating Revenues~~Case. ~~Amounts~~In ~~attributable~~April ~~to this change totaled $910 million between the six months ended June 30~~2004, 2003 and 2002. Also contributing to the increase were a $501 million net increase in natural gas costs, a $554 million increase at Power primarily related to increased power purchases and third-party wholesale electric supply contracts, discussed further below under Power, a $83 million increase in electric energy costs at PSE&G ~~discussed~~received ~~further below under PSE&G and~~ a ~~$41~~final ~~million~~order ~~increase~~that atwas ~~Energy~~substantially ~~Holdings,~~consistent ~~relating~~with tothe ~~projects~~summary ~~going into~~written ~~operation at Global, discussed further below under Energy Holdings~~order.

~~Operation~~Energy ~~and Maintenance~~Holdings

~~For~~RGE ~~the~~Rate quarter ended June 30, 2003, Operation and Maintenance expense increased $30 million or 7% as compared to the quarter ended June 30, 2002 due to a $39 million increase at Power primarily due to the acquisition of the generating facilities in Connecticut in December 2002 and higher nuclear refueling outage costs at Power and an increase at Energy Holdings of $4 million, due mainly to costs associated with projects going into operation, offset by a $15 million decrease at PSE&G due primarily to a reduction in real estate tax expense and the reversal of a reserve associated with a regulatory asset, discussed further below under PSE&G.Case

~~For~~In ~~the~~April ~~six months ended June 30~~2004, ~~2003, Operation and Maintenance expense increased $87 million or 9% as compared to~~ the ~~six~~Agencia ~~months~~Nacional ~~ended~~de ~~June~~Energia ~~30,~~Eletrica ~~2002~~(ANEEL) ~~due~~granted toRGE aan ~~$55~~annual ~~million~~tariff increase ~~at Power primarily due to the acquisition~~ of ~~the~~approximately generating facilities in Connecticut in December 2002 and a planned refueling outages at Power, an increase at Energy Holdings of $12 million, due mainly to costs associated with projects going into operation and a $17 million increase at PSE&G due primarily to higher Demand Side Management (DSM) amortization and higher pension costs offset by a reduction in real estate tax expense, discussed further below under PSE&G15%.

~~Depreciation and Amortization~~ LDS

~~For~~In ~~the~~April ~~quarter~~2004, ~~and~~Global ~~six~~sold ~~months~~6% ~~ended~~of ~~June~~its ~~30,~~shares ~~2003,~~in ~~Depreciation~~LDS and ~~Amortization~~received ~~decreased~~cash byof approximately $3228 million. ~~and~~It ~~$63~~is ~~million,~~expected ~~respectively,~~that asGlobal ~~compared~~will torealize a gain of approximately $5 million in the second quarter ~~and~~of ~~six~~2004 ~~months~~related ~~ended~~to ~~June~~the ~~30,~~LDS sale.

50 Repurchase of Senior Notes

~~2002.~~ In ~~The~~April 2004, ~~decrease~~Energy ~~was~~Holdings ~~primarily~~repurchased ~~due~~approximately to$25 anmillion ~~increase~~of inits ~~the~~outstanding 7.75% ~~amortization~~Senior ofNotes ~~the~~due ~~excess~~in ~~depreciation~~April ~~reserve~~2007, ~~discussed~~reducing ~~further~~the ~~below~~amount ~~under~~outstanding ~~PSE&G~~to $325 million.

~~Taxes~~ Lease ~~Other Than Income Taxes~~Termination

~~Taxes~~In ~~Other~~March ~~Than~~2004, ~~Income~~Resources ~~Taxes~~entered isan ~~comprised~~agreement ofin ~~the~~principle ~~Transitional~~with ~~Energy~~Midwest ~~Facility~~Generation ~~Assessment~~LLC, ~~(TEFA)~~an ~~tax~~indirect atsubsidiary ~~PSE&G.~~of ~~Taxes~~Edison ~~Other~~Mission ~~Than~~Energy ~~Income~~(EME) ~~Taxes~~to ~~increased~~terminate $2its ~~million~~lease ~~and~~investment $8in ~~million for~~ the ~~quarter~~Collins ~~and~~generating ~~six~~facility ~~months~~in ~~ended~~Illinois. ~~June~~In ~~30,~~April ~~2003~~2004, ~~respectively,~~Resources asclosed ~~compared~~on tothe termination of the ~~quarter~~lease agreement and ~~six~~received ~~months~~gross ~~ended~~proceeds ~~June~~of ~~30,~~approximately ~~2002.~~$184 ~~The~~million ~~increase~~(approximately ~~was~~$84 ~~the~~million, ~~result~~after-tax) of ~~higher~~cash ~~TEFA~~that ~~due~~allowed it to ~~higher~~substantially ~~taxable~~recover ~~sales~~its investment in ~~2003~~this lease. ~~Legislation~~In ~~enacted~~connection inwith ~~January~~the ~~2002~~agreement, ~~freezes~~in the ~~TEFA~~first ~~unit~~quarter ~~rate~~of ~~surcharges~~2004 atResources ~~the~~recorded ~~2001~~a ~~levels~~pre-tax ~~through~~charge ~~2004~~of ~~and~~$17 ~~then~~million ~~reduces~~($16 ~~the~~million, ~~rates~~after-tax) ~~over~~to ~~the~~reduce ~~next~~its ~~three~~carrying ~~years,~~value ~~phasing~~in ~~out~~ the ~~TEFA~~Collins ~~by 2007~~lease.

~~Income from Equity Method Investments~~45

~~For~~ITEM ~~the quarter ended June 30, 2003, Income from Equity Method Investments decreased by $~~2 ~~million or 6% to $31 million from $33 million for the quarter ended June 30, 2002~~. ~~For~~MANAGEMENT'S ~~the~~DISCUSSION ~~six~~AND ~~months~~ANALYSIS ~~ended~~OF ~~June~~FINANCIAL ~~30,~~CONDITION ~~2003~~AND ~~Income~~RESULTS ~~from~~OF ~~Equity~~OPERATIONS Method Investments decreased $15 million or 24% to $48 million from $63 million for the six months ended June 30, 2002. These decreases were primarily due to lower earnings in 2003 from Rio Grande Energia (~~RGE~~MD&A), an electric distribution company in Brazil, offset by a change in accounting for GWF Energy which had a loss in 2002 when it was accounted for under the equity method and is now recorded as a consolidated entity due to Energy Holdings' increased ownership percentage.

~~Other~~ Following ~~Income~~are the significant changes in or additions to information reported in the 2003 Annual Report on Form 10-K affecting the consolidated financial condition and the results of operations. This discussion refers to the Condensed Consolidated Financial Statements (Statements) and the related Notes to Condensed Consolidated Financial Statements (Notes) and should be read in conjunction with such Statements and Notes.

~~For~~This ~~the~~combined ~~quarter~~MD&A ~~ended~~is ~~June~~separately ~~30,~~filed ~~2003,~~by ~~Other~~Public ~~Income~~Service ~~increased~~Enterprise byGroup ~~$23~~Incorporated ~~million~~(PSEG), asPublic ~~compared~~Service toElectric ~~the~~and ~~quarter~~Gas ~~ended~~Company ~~June 30~~(PSE&G), ~~2002~~PSEG Power LLC (Power), ~~due~~and ~~primarily~~PSEG Energy Holdings LLC (Energy Holdings). Information contained herein relating to aany ~~$27~~individual ~~million~~company ~~increase~~is atfiled ~~Power.~~by ~~Power's~~such ~~increase~~company ~~was~~on ~~due~~its ~~primarily~~own tobehalf. ~~realized~~PSE&G, ~~gains~~Power and ~~the~~Energy ~~recognition~~Holdings ofeach ~~interest~~make representations only as to itself and ~~dividend~~make ~~income~~no inrepresentations ~~its~~as ~~NDT~~to ~~Fund~~any other company.

~~For~~As ~~the~~discussed ~~six~~in ~~months~~Note ~~ended~~2. ~~June~~Restatement ~~30,~~of ~~2003,~~Financial ~~Other~~Statements ~~Income~~of ~~increased~~the ~~by $79 million~~Notes, ~~as compared to~~ the ~~six~~Condensed ~~months~~Consolidated ~~ended~~Financial ~~June~~Statements ~~30,~~of ~~2002,~~PSEG ~~due primarily to a $74 million increase at Power~~ and anEnergy ~~$11~~Holdings ~~million~~have ~~increase~~been atrestated ~~PSE&G.~~for ~~Power's increase was due to realized gains and~~ the ~~recognition~~quarter ofended ~~interest~~March 31, ~~and dividend income in its NDT Fund~~2003. The ~~increase~~following atdiscussion ~~PSE&G~~gives ~~was~~effect ~~primarily due~~ to ~~gains~~this ~~on the disposal of various electric transmission properties and gains from short-term investments~~restatement.

~~Other Deductions~~OVERVIEW

For the quarter ended June 30, 2003, Other Deductions decreased by $6 million, as compared to the quarter ended June 30, 2002, due primarily to $15 million less in foreign currency transaction losses and $3 million less in net derivative losses primarily related to the embedded derivative in the Rades Power Purchase Agreement (PPA). This was partially offset by the recognition of $12 million of realized losses in Power's NDT Fund.PSEG

~~For~~PSEG's ~~the~~business ~~six~~consists ~~months~~of ~~ended~~four ~~June~~reportable 30segments, ~~2003,~~which ~~Other~~are ~~Deductions~~PSE&G, ~~decreased~~Power byand $6the ~~million~~two asdirect ~~compared~~subsidiaries toof ~~the~~Energy ~~six~~Holdings: ~~months~~PSEG ~~ended~~Global ~~June~~LLC ~~30,~~(Global) ~~2002,~~and ~~due~~PSEG ~~primarily~~Resources toLLC ~~$69~~(Resources). ~~million~~PSEG's ~~less~~results inof ~~foreign~~operations ~~currency~~are ~~transaction losses,~~ primarily ~~related~~comprised toof ~~US Dollar debt in Argentina recorded in 2002. This was partially offset by~~ the ~~recognition~~results of ~~$45~~operations ~~million~~ of ~~realized~~its ~~losses~~operating insubsidiaries, PSE&G, Power's ~~NDT Fund~~ and ~~$12~~Energy ~~million in net derivative losses of which $8 million is related to the embedded derivative in the Rades PPA~~Holdings.

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

~~For~~In ~~the~~January ~~quarter~~2004, ~~ended~~PSEG's ~~June~~Board ~~30,~~of ~~2003,~~Directors ~~Interest~~approved ~~Expense~~an ~~increased~~increase in the quarterly dividend by $20.01 ~~million~~per orshare, 1%from as$0.54 ~~compared~~ to $0.55, for the first quarter ~~ended~~of ~~June~~2004. ~~30,~~In ~~2002~~April 2004, ~~primarily~~PSEG's ~~due~~Board toof anDirectors declared a quarterly dividend for the second quarter of $80.55 ~~million~~per share. The quarterly increase atreflects ~~PSEG~~an ~~related~~indicated toannual ~~higher~~dividend ~~levels~~rate of ~~debt~~$2.20 ~~outstanding,~~per ~~partially~~share. ~~offset~~Dividend bypayments aon $6common ~~million~~stock ~~decrease~~for atthe ~~PSE&G~~quarter ~~discussed~~ended ~~below~~March 31, 2004 totaled approximately $130 million.

~~For~~PSEG has an average targeted range of 4%-6% for its earnings per share growth rate over the ~~six~~next ~~months~~five ~~ended~~years. ~~June~~This ~~30,~~target ~~2003~~is dependent upon various assumptions, ~~Interest~~including an ~~Expense~~increase ~~decreased~~in $2capacity ~~million~~prices, aswhich ~~compared~~is not expected to occur until the ~~six~~latter part ~~months~~of ~~ended~~the ~~June~~planning ~~30,~~period. ~~2002~~As a result, ~~primarily~~a ~~due~~substantial portion of the targeted earnings growth is expected to aoccur in the later years of the planning period. PSEG expects earnings for 2004 of $123.60 ~~million~~to ~~decrease~~$3.80 atper ~~PSE&G~~share from continuing operations. Additionally, PSEG expects earnings to be flat in the near-term given the competitiveness of the wholesale markets and current historically low capacity prices. PSEG foresees a $4return ~~million~~to reasonable earnings growth in the future as capacity prices are expected to improve in the latter part of the planning period. However, given the volatility of the power sector and the uncertainty of investment opportunities, it has become more difficult to accurately predict future results.

51 PSEG has implemented steps to reduce business risk at each of the operating companies. The PSE&G electric base rate case was completed in July 2003 and marked the end of the electric deregulation restructuring period. In February 2004, the New Jersey Board of Public Utilities (BPU) approved the results of the State's third annual Basic Generation Service (BGS) auction process and PSE&G secured the electricity requirements for its customers. Additionally, PSE&G's capital expenditures have remained stable at levels needed to continue safe and reliable operations.

~~decrease at Energy Holdings, partially offset by a $14 million increase at PSEG, related to higher levels of debt outstanding.~~46

~~Preferred~~ Power ~~Securities~~participated ~~Dividends~~as a direct bidder in the February 2004 New Jersey BGS auction. The auction process continues to help Power reduce volatility of earnings and cash flow by achieving its objective of entering into load serving contracts and trading positions for at least 75% of its anticipated output over an 18-month to 24-month horizon. An overview of recent events at Power is discussed further below.

~~For~~As a direct bidder in the ~~quarter~~February ~~and~~2004 ~~six~~New ~~months~~Jersey ~~ended~~BGS auction, Power has contracted to directly supply PSE&G with a portion of PSE&G's BGS requirements commencing June 1, 302004. Since the Operating Revenues at Power, ~~2003~~or Energy Costs at PSE&G, ~~Preferred~~related ~~Securities~~to ~~Dividends~~these ~~increased~~intercompany ~~approximately~~transactions $4will ~~million~~be ~~and~~eliminated $8in ~~million~~consolidation, ~~respectively,~~PSEG's asfuture ~~compared~~Operating Revenues are expected to ~~the~~decrease, ~~same~~with ~~periods~~a corresponding decrease in ~~2002~~Energy Costs, ~~primarily~~as ~~due~~compared to prior periods when the ~~issuance~~majority of ~~preferred~~these ~~securities~~sales inand ~~September~~purchases ~~2002~~were contracted through third party suppliers and ~~December~~therefore ~~2002~~not eliminated in consolidation.

~~Income~~ Energy ~~Taxes~~Holdings continues to limit future investments to existing contractual commitments and seeks to opportunistically monetize investments that may no longer have a strategic fit. An overview of recent events at Energy Holdings is discussed below.

~~For~~PSEG ~~the~~continued ~~quarter~~to take steps to strengthen its balance sheet and ~~six~~enhance ~~months~~its ~~ended~~liquidity ~~June~~and ~~30,~~credit ~~2003,~~quality. ~~Income~~Power ~~Taxes~~issued ~~increased~~a total of $~~191~~500 million of Senior Notes and repaid $~~261~~800 million, ~~respectively~~of its subsidiaries' non-recourse debt. PSEG closed on two senior unsecured revolving credit facilities—a $450 million four-year facility for PSEG and a $600 million three-year joint facility for PSEG and Power. The new facilities replaced two 364-day facilities at PSEG and Power thereby increasing PSEG's liquidity and extending their maturities. PSEG expects sufficient future operating cash flows to fund its investments and meet dividend requirements. Over the next five years, asPSEG ~~compared~~expects to be in an excess cash position and may employ this excess cash to reduce debt over the ~~same~~near ~~periods~~term, invest in ~~2002~~its businesses, ~~primarily~~increase ~~due~~dividends toor ~~higher~~repurchase ~~pre-tax~~stock ~~income~~over the long-term.

~~Losses From Discontinued Operations~~ PSE&G

~~Operating~~PSE&G ~~results~~operates ofas ~~Energy~~an ~~Technologies'~~electric ~~heating~~and gas public utility, ~~ventilating~~or ~~and~~Electric ~~air~~Distribution ~~conditioning~~Company (~~HVAC~~EDC)~~/mechanical operating companies~~, ~~less~~in ~~certain~~New ~~allocated~~Jersey ~~costs~~under ~~from~~cost-based ~~Energy~~regulation ~~Holdings,~~by ~~have~~the ~~been~~BPU ~~reclassified~~for ~~into~~its ~~Discontinued~~distribution ~~Operations~~operations inand by the ~~Consolidated~~Federal ~~Statements~~Energy ofRegulatory ~~Operations.~~Commission ~~The~~(FERC) ~~results~~for ofits ~~operations~~electric oftransmission ~~these discontinued~~ operations. ~~for~~As such, the ~~quarter~~earnings ~~ended~~of ~~June~~PSE&G ~~30,~~are ~~2003~~largely ~~and~~determined ~~2002~~by ~~yielded~~the ~~after-tax~~regulation ~~losses~~ of $2its ~~million~~rates ~~and~~by $5those ~~million, respectively~~agencies. ~~The~~In ~~results~~July of2003, ~~operations~~PSE&G ofreceived ~~these~~a ~~discontinued~~summary ~~operations~~order ~~for~~from the ~~six~~BPU ~~months~~in ~~ended~~its ~~June~~electric ~~30,~~base ~~2003~~rate ~~and~~case. ~~2002~~In ~~yielded~~April ~~after-tax~~2004, ~~losses~~PSE&G ofreceived $8a ~~million~~final ~~and~~order $9from ~~million,~~the ~~respectively.~~BPU ~~Due~~which towas ~~market~~substantially ~~conditions,~~consistent ~~Energy~~with ~~Holdings re-evaluated~~ the ~~carrying~~summary ~~value~~order. ofThe ~~Energy~~electric ~~Technologies~~rate ~~and~~case ~~has~~decision ~~determined~~marked ~~that~~the ~~additional~~completion ~~adjustments~~of tothe ~~fair~~four-year ~~value~~transition ~~less~~period ~~cost~~in toNew ~~sell~~Jersey's ~~were~~energy ~~required~~market inrestructuring. The ~~the~~cost ~~first quarter~~ of ~~2003~~energy ~~and~~supply, for ~~the~~both ~~six~~gas ~~months~~and ~~ended June 30~~electricity, ~~2003,~~is ~~Energy~~passed ~~Technologies~~through ~~recorded~~from anPSE&G ~~after-tax~~to ~~loss~~its ~~of $9 million~~customers.

InPSE&G's ~~addition,~~expected ~~Tanir~~Income ~~Bavi,~~from aContinuing ~~220~~Operations MWfor ~~barge~~2004 ~~mounted,~~ranges ~~combined-cycle~~from ~~generating~~$320 ~~facility~~million into ~~India~~$340 ~~which~~million. ~~was~~To ~~sold~~achieve inthis, ~~the~~PSE&G's ~~fourth~~goal ~~quarter~~is ofto ~~2002,~~maintain ~~met~~a ~~the~~reasonable ~~criteria~~rate ~~for~~of ~~classification~~return asunder aits ~~component~~regulated ofrate ~~discontinued~~structure, ~~operations.~~continue ~~The~~cost ~~operating~~containment ~~results~~initiatives ofand ~~Tanir~~continue ~~Bavi~~recovery ~~for~~of the ~~quarter~~regulatory ~~and~~assets ~~six~~it ~~months~~has ~~ended~~deferred. ~~June~~PSE&G's ~~30,~~focus ~~2002~~is ~~yielded~~to ~~after-tax~~maintain ~~income~~system ofreliability $2and ~~million~~safety ~~and~~levels $5while ~~million,~~it ~~respectively.~~enhances ~~For~~the ~~additional~~operations ~~information,~~of ~~see~~its ~~Note~~electric 5.and ~~Discontinued~~gas ~~Operations~~transmission ofand ~~the~~distribution ~~Notes~~systems.

~~Extraordinary~~ In ~~Item~~February 2004, the BPU approved the results of the State's third annual BGS auction process and PSE&G successfully secured the electricity requirements for its customer's needs. The process involved two concurrent auctions. One, the Commercial and Industrial Energy Price (CIEP) or Hourly Energy Price (HEP) auction, was to secure sufficient electricity to serve approximately 1,850 large business customers statewide, representing about 2,460 megawatts of load, for a one-year period. PSE&G's tranches were priced at $52.01 per megawatt day. The other, a general Fixed-Price (FP) auction in tranches of one- and three-year periods, was to secure electricity to serve smaller business and all residential customers, representing about 15,500 megawatts of load. All periods begin on June 1, 2004. PSE&G's clearing price for the one-year tranche was $0.05479 per kilowatt-hour. For the three-year tranche, it was $0.05515 per kilowatt-hour.

As discussed above, the oral decision issued by the BPU in connection with the Electric Base Rate Case included a $30 million refund related to revenues collected through the SBC for nuclear decommissioning. Because this amount reflects the final accounting for PSEG's generation-related business pursuant to the four-year transition plan mandated by PSE&G's Final Order received from the BPU in 1999 relating to EDECA, it has been recorded as an $18 million, after-tax, Extraordinary Item as required under APB 30. For additional information, see Note 16. Subsequent Events of the Notes.Power

~~Cumulative~~ Power ~~Effect~~is ofan electric generation and wholesale energy marketing and trading company that is focused on a ~~Change~~generation inmarket ~~Accounting~~extending ~~Principle~~from Maine to the Carolinas and the Atlantic Coast to

For the six months ended June 30, 2003, Power recorded a $370 million after-tax benefit to Net Income relating to the adoption of SFAS 143 as detailed further below under Power. For the six months ended June 30, 2002, Energy Holdings recorded a $120 million after-tax charge to Net Income due to goodwill impairments relating to the adoption of SFAS 142 as detailed further below under Energy Holdings.47

~~PSE~~Indiana (Super Region). Power's subsidiaries, PSEG Fossil LLC (Fossil), PSEG Nuclear LLC (Nuclear) and PSEG Energy Resources &G Trade LLC (ER&T) are FERC regulated public utilities. Through its subsidiaries, Power seeks to balance its generating capacity, fuel requirements and supply obligations through integrated energy marketing and trading, enhance its ability to produce low cost energy through efficient nuclear operations and pursue modest growth in its target market based on market conditions.

~~Operating~~ During ~~Revenues~~the first quarter of 2004, Power continued to take steps to strengthen its balance sheet and enhance its credit quality. In March 2004, Power and PSEG closed on a three-year joint senior unsecured revolving credit facility for $600 million. This new facility replaced a $250 million facility and will provide support for commercial paper and other funding needs. In March 2004, Power issued $250 million of 3.75% Senior Notes due 2009 and $250 million of 5.00% Senior Notes due 2014. The net proceeds from the sale of the Senior Notes were added to Power's general funds and used, along with operating funds, to repay $800 million of Power's non-recourse variable-rate debt of certain of Power's subsidiaries.

~~PSE&G~~Power's ~~Operating~~expected ~~Revenues~~Income ~~increased~~from byContinuing Operations for 2004 ranges from $~~112~~400 million orto 9%$450 ~~for~~million. ~~the~~Power's ~~quarter~~ability ~~ended~~to ~~June~~meet ~~30,~~its ~~2003~~forecasts aswill ~~compared~~be toimpacted by the ~~quarter~~oversupply ~~ended~~of ~~June~~electric 30generation capacity and the resulting competition combined with volatile energy prices, ~~2002.~~increasing ~~The~~coal ~~primary~~costs ~~reason~~and ~~for~~market ~~the~~conditions. ~~increase~~Power's ~~was~~future asuccess ~~$172~~as ~~million~~an orenergy ~~56%~~provider ~~increase~~depends, in ~~gas revenues~~part, ~~which~~on ~~was~~its ~~offset~~ability byto ameet ~~decrease~~its obligations under its full requirements contracts efficiently and profitably and the continued efficient operation of ~~$60~~its ~~million~~low incost ~~electric~~nuclear ~~revenues~~and coal generation facilities.

52 Power's objective is to enter into load serving contracts and trading positions for at least 75% of its anticipated output over an 18-month to 24-month horizon. To achieve its objective, Power, as a result of the New Jersey BGS auction in February 2004 contracted to directly supply PSE&G and two other New Jersey EDC with a portion of their BGS requirements commencing June 1, 2004. In addition to the contracts entered into resulting from the BGS auction, Power has entered into firm contracts in Pennsylvania, Connecticut, Maryland and other firm sales and trading positions and commitments, including 10-month and 34-month contracts ending May 31, 2004 and 2006, respectively, to supply energy and capacity to direct suppliers of New Jersey EDCs. Power expects to take advantage of similar opportunities elsewhere in the Super Region.

~~Total~~Energy gas sales volumes increased by 17% for the quarter ended June 30, 2003 due primarily to favorable weather conditions resulting in added revenues of $68 million. Higher commodity prices added $99 million to revenues for the quarter. The price of gas for commercial and industrial customers, which varies monthly with market changes, increased $54 million. Gas price changes for residential customers, which must be approved by the BPU, increased by $39 million. In addition, revenues increased $5 million due to an SBC clause increase in November 2002 to recover additional DSM program charges which are offset in Operation and Maintenance expense.Holdings

~~Electric~~Energy ~~revenues decreased primarily due to the impact of the final rate decrease~~Holdings, ~~effective~~through ~~August 2002~~Global, ~~which~~owns ~~reduced~~and ~~revenues~~operates bygeneration ~~$44 million,~~ and isdistribution ~~offset~~facilities byin ~~lower~~international ~~Energy~~and ~~Costs,~~U.S. ~~discussed below~~markets. ~~Also~~The ~~contributing~~generation toplants ~~the~~sell ~~decrease~~power ~~was~~under ~~the~~long-term ~~MTC~~agreements, ~~overcollection~~as ~~adjustment~~well ofas ~~$18~~on ~~million~~a ~~resulting~~merchant ~~from~~basis, while the ~~Electric~~distribution ~~Base~~companies ~~Rate~~are ~~Case~~rate-regulated ~~settlement~~enterprises. ~~and~~Through ~~decreases~~Resources, inEnergy ~~sales~~Holdings ~~volumes which resulted~~ in aan ~~$15~~investor ~~million decrease~~ in ~~revenues.~~energy-related ~~Offsetting~~financial ~~the~~transactions, ~~decreases~~including ~~were~~leveraged ~~increased revenues from sales of NUG power of $15 million~~leases, ~~primarily~~which ~~due~~are expected to ~~higher~~produce ~~locational~~predictable ~~marginal pricing in PJM~~earnings.

~~PSE&G~~Energy Holdings continues to limit its capital spending during 2004 to existing contractual commitments and place an emphasis on improved performance of existing businesses. Energy Holdings's ~~Operating~~expected ~~Revenues~~Income ~~increased~~from byContinuing Operations for 2004 ranges from $~~601~~130 million orto ~~21%~~$150 ~~for~~million. ~~the~~Global's ~~six~~success ~~months~~depends, ~~ended~~in ~~June~~part, 30on its ability to mitigate risks presented by its international strategy, ~~2003~~such as ~~compared~~the economic and political conditions in certain countries where Global has investments. Global is in a process of an ongoing review of its portfolio and is seeking to ~~the~~opportunistically ~~six~~monetize ~~months~~investments ~~ended~~which ~~June~~may 30no longer have a strategic fit. In keeping with this strategy, ~~2002~~Global committed to a plan to sell its investment in Carthage Power Company (CPC), a generating facility in Rades, Tunisia in December 2003. ~~The~~Global ~~increase~~expects ~~was~~the ~~driven~~sale byto be completed in mid-2004. In addition, in April 2004, Global sold a portion of its shares in Luz del Sur (LDS), a power distribution company in Peru, reducing its ownership from 44% to 38%, and received cash proceeds of approximately $~~631~~28 million. ~~increase~~It inis ~~gas~~expected ~~revenues~~that ~~offset~~Global bywill ~~lower~~realize ~~electric~~a ~~revenues~~gain of approximately $305 million in the second quarter of 2004 related to the LDS sale.

~~Total~~In ~~gas~~February ~~sales~~2004, ~~volumes~~Global's ~~increased~~partner, byHarbinger ~~23%~~GWF ~~for~~LLC ~~the six months ended June 30~~(Harbinger), ~~2003~~repurchased ~~due~~a ~~primarily to favorable weather conditions resulting in added revenues of $278 million~~14.9% ~~Increases~~interest in ~~commodity~~GWF ~~prices~~Energy ~~added~~LLC ~~$356~~(GWF ~~million to revenues for the six months ended June 30~~Energy), ~~2003.~~which ~~The~~owns ~~price of gas for commercial~~ and ~~industrial~~operates ~~customers,~~three ~~which~~peaker ~~varies~~plants ~~monthly~~in ~~with market changes~~California, ~~increased $243 million. Gas price changes~~ for ~~residential~~approximately ~~customers, which must be approved by the BPU, increased by~~ $9514 million. Inin ~~addition~~cash, ~~revenues~~decreasing ~~increased~~Global's ~~$18~~interest ~~million due~~ to an60%. ~~SBC~~The ~~clause~~repurchase ~~increase~~resulted in ~~November~~Global ~~2002~~realizing toan ~~recover~~immaterial ~~additional~~gain ~~DSM~~on ~~program~~the ~~charges which are offset in Operation and Maintenance expense~~transaction.

Electric revenues decreased by $30 million for the six months ended, June 30, 2003. The impact of the 4.9% rate decrease, effective August 2002, which reduced revenues by $88 million, was the primary driver of the decrease, offset by lower Energy Costs, discussed below. The Electric Base Rate Case settlement MTC over-collection adjustment of $18 million also contributed to the decrease. Offsetting the decreases were higher electric sales volumes of 2.6%, primarily due to favorable weather conditions, which resulted in an increase of approximately $43 million and an increase of $34 million for revenues from sales of NUG power, primarily due to increased market prices.48

~~Operating~~ Global's ~~Expenses~~investment in India, PPN Power Generating Company Limited's (PPN) output is sold under a long-term Power Purchase Agreement (PPA) with the Tamil Nadu Electricity Board (TNEB). TNEB has not made full payment to PPN for the purchase of energy under the PPA and the past due receivable as of March 31, 2004 was approximately $92 million, of which Global's share is approximately $8 million, net of an $11 million reserve. If TNEB continues to fail to make required payments under the PPA, PPN may have further liquidity problems. On March 26, 2004, PSEG and one of its partners in PPN, El Paso Energy Company, filed a notice of arbitration on behalf of PPN against TNEB under the arbitration clause of the PPA which allows the minority shareholders to protect the rights of PPN where PPN has failed to exercise those rights itself. An adverse outcome to the continuing negotiations could potentially result in an impairment of this investment, which could be material to PSEG's and Energy Holdings' respective results of operations. As of March 31, 2004, Global's total investment exposure in PPN was approximately $41 million.

Resources has shifted its focus from new investments to maintaining its current investment portfolio to produce predictable cash flows, earnings and related tax benefits while monitoring credit concerns with respect to certain lessees in its portfolio. In March 2004, Resources entered an agreement in principle with Midwest Generation LLC, an indirect subsidiary of Edison Mission Energy ~~Costs~~(EME) to terminate its lease investment in the Collins generating facility in Illinois. In April 2004, Resources closed on the termination of the lease agreement and received gross proceeds of approximately $184 million (approximately $84 million, after-tax) of cash that allowed it to substantially recover its investment in this lease. Recovered amounts are not expected to be reinvested within Resources. In connection with the agreement, in the first quarter of 2004 Resources recorded a pre-tax charge of $17 million ($16 million, after-tax) to reduce its carrying value in the Collins lease. This transaction also strengthens the credit quality of Resources' remaining exposure to EME, with which it has a lease investment involving Powerton and Joliet, two other Illinois generating facilities also operated by Midwest Generation LLC.

~~Energy Costs~~RESULTS ~~increased~~OF by $161 million, or 21% for the quarter ended June 30, 2003 as compared to the same period in 2002. This was primarily due to an increase in gas costs of $140 million for the second quarter of 2003 as compared to the second quarter of 2002. The cost of gas purchased increased $51 million due to a 19% increase in the price of gas and $52 million due to an increase in commodity sales volume due primarily to favorable weather conditions. Additionally, gas costs increased by $35 million for the current deferral of BGSS-RSG costs to match current commodity revenues. In addition, electric costs increased $21 million. BGS purchases increased $55 million due to a 13% increase in prices effective August 1, 2002 and decreased by $12 million due to lower sales volumes. Net MTC payments to Power increased by $14 million. The MTC payment to Power includes an increase of $52 million due to higher amortization of the excess depreciation reserve offset by the impact of the rate reduction. The impact of the amortization of the excess depreciation reserve was offset in amortization and tax expenses on the Consolidated Statements of Operations. In addition, electric costs decreased by $37 million due to the deferral of energy costs in excess of the amount included in revenues.OPERATIONS

~~Energy~~The ~~Costs~~results ~~increased $609 million, or 34%~~ for ~~the six months ended June 30~~PSEG, ~~2003~~PSE&G, asPower compared to the six months ended June 30, 2002. This was primarily due to an increase in gas costs of $526 million. The cost of gas purchased increased $223 million due to a 23% increase in the price of gas and ~~$182~~Energy ~~million~~Holdings ~~due to an increase in commodity sales volume due primarily to favorable weather conditions this year. Additionally, gas costs increased by $110 million~~ for the ~~current~~quarter ~~deferral~~ended ofMarch 31, ~~BGSS-RSG~~2004 ~~costs to match current commodity revenues~~ and ~~$10~~2003 ~~million~~are ~~for~~presented ~~amortization of previous deferrals.~~ below:

	Earnings (Losses)						Contribution to Earnings Per Share (Diluted)
	Quarters Ended March 31,						Quarters Ended March 31,
	2004			2003			2004			2003
	(Millions)
Power	$	109		$	177		$	0.46		$	0.78
PSE&G		125			101			0.52			0.44
Energy Holdings:
Resources		1			13			—			0.05
Global		49			50			0.21			0.20
Other (A)		(2	)		(2	)		—			—
Other (B)		(11	)		(15	)		(0.05	)		(0.04	)

Income from Continuing Operations		271			324			1.14			1.43
Loss from Discontinued Operations, including Loss on Disposal (C)		—			(13	)		—			(0.06	)
Cumulative Effect of a Change in Accounting Principle (D)		—			370			—			1.64

PSEG Net Income	$	271		$	681		$	1.14		$	3.01

~~Also,~~(A) ~~electric~~Other ~~costs~~activities ~~increased~~include ~~$83~~non-segment ~~million. BGS~~amounts ~~purchases~~of ~~increased~~Energy ~~$122~~Holdings ~~million~~and ~~due~~its tosubsidiaries ~~a 14% increase in prices effective August 1, 2002~~ and ~~increased~~intercompany ~~by $19 million due to higher sales volumes~~eliminations. ~~Net MTC~~Specific ~~payments~~amounts toinclude ~~Power~~interest ~~increased~~on bycertain ~~$20~~financing ~~million.~~transactions ~~The~~and ~~MTC~~certain ~~payment~~other toadministrative Power includes an increase of $103 million due to higher amortization of the excess depreciation reserve offset by the impact of the rate reduction. The impact of the amortization of the excess depreciation reserve was offset in amortization and ~~tax~~general expenses on ~~the~~at ~~Consolidated~~Energy ~~Statements of Operations~~Holdings. ~~NUG~~(footnotes ~~energy~~continued ~~purchases~~on ~~decreased by~~next $3 million as a result of a $21 million decrease in volumes purchased offset by a higher average price of $18 million. In addition, electric costs decreased by $74 million due to the deferral of energy costs in excess of the amount included in revenues.page)

~~Operation and Maintenance~~49

Operation and Maintenance expense decreased $15 million or 6% for the second quarter of 2003 as compared to the second quarter of 2002. The primary reason for the decrease was a reduction in real estate tax expense of $18 million and the reversal of a $10 million reserve against a regulatory asset that is now being recovered. Partially offsetting the decrease was a $7 million increase in DSM program amortization driven by higher sales and a rate increase for gas DSM recovery in November 2002. The gas increase is included in the delivery volume revenue increase discussed above. DSM costs are deferred when incurred and amortized to Operations and Maintenance expense when recovered in revenues. Also offsetting the decreases were higher labor related costs of $6 million, almost half of which was attributable to higher pension costs.

(footnotes continued from previous page)
(B)		Other activities include non-segment amounts of PSEG (as parent company) and intercompany eliminations. Specific amounts include preferred securities dividends requirements for PSE&G and Energy Holdings, interest on certain financing transactions and certain other administrative and general expenses at PSEG (as parent company).
(C)		Includes Discontinued Operations of CPC and PSEG Energy Technologies Inc. (Energy Technologies) in 2003. See Note 5. Discontinued Operations of the Notes.
(D)		Relates to the adoption of Statement of Financial Accounting Standard (SFAS) No. 143, “Asset Retirement Obligations” (SFAS 143) in 2003. See Note 3. Recent Accounting Standards and Note 4. Adoption of SFAS 143 of the Notes.

~~Operation~~The ~~and~~decrease ~~Maintenance~~in ~~expense~~Income ~~increased~~from ~~$17~~Continuing ~~million~~Operations ~~or 3%~~ for the ~~six~~quarter ~~months~~ ended ~~June~~March 31, 302004, ~~2003~~ as compared to the ~~six~~same ~~months~~period ~~ended~~in ~~June~~2003 ~~30, 2002. The primary reason for the change~~ was aprimarily ~~$25~~due ~~million~~to ~~increase~~lower inearnings ~~DSM~~at ~~program~~Power ~~amortization,~~and asResources ~~discussed~~resulting ~~above.~~from ~~Other~~reduced ~~contributors~~revenues toin the ~~Operation~~current ~~and~~period, ~~Maintenance~~partially ~~expense~~offset ~~increase~~by ~~were~~improved ~~higher~~earnings ~~labor~~at ~~related~~PSE&G ~~costs~~relating ~~of $22 million, almost half of which was attributable~~ to ~~higher~~increased ~~pension~~electric ~~costs.~~base ~~Offsetting~~rates ~~these~~and ~~increases~~seasonality ~~was~~in ~~$28~~those ~~million~~rates ~~relating~~as to a ~~reduction~~result inof ~~real estate tax expense and~~ the ~~reversal~~electric ofbase arate ~~reserve, discussed above~~case.

~~Depreciation~~ Included in PSEG's Net Income for the quarter ended March 31, 2003 was an after-tax benefit in the amount of $370 million related to the adoption of SFAS 143 on January 1, 2003. This benefit was due mainly to the required remeasurement of Power's nuclear and ~~Amortization~~fossil decommissioning obligations.

~~Depreciation~~Also ~~and~~contributing ~~Amortization decreased $34 million or 35% for the second quarter of 2003 as compared~~ to the ~~second~~change ~~quarter~~in ofNet ~~2002.~~Income ~~The~~was ~~primary~~a ~~reason for the~~ decrease isin aEnergy ~~reduction~~Holdings' ofLoss ~~$37~~from ~~million,~~Discontinued ~~which~~Operations ~~relates to increased amortization~~ of ~~an excess electric distribution depreciation reserve. Based on the Final Order, approximately~~ $~~148~~13 million ~~was amortized on a straight~~after-~~line~~tax ~~basis~~for ~~during~~the ~~2002~~quarter ~~and~~ended ~~approximately $171 million is being amortized on a straight-line basis from January 1, 2003 to July~~ March 31, ~~2003~~2004, ~~the~~as ~~end~~compared ofto the ~~transition~~same period ~~under EDECA. Offsetting this decrease was a $3 million increase~~ in ~~depreciation expense due to increased plant in service~~ 2003.

Depreciation and Amortization decreased $63 million or 33% for the six months ended June 30, 2003 as compared to the six months ended June 30, 2002. The primary reason for the decrease is a reduction of $73 million relating to the amortization of an excess electric distribution depreciation reserve. Offsetting this decrease was a $6 million increase in depreciation expense due to increased plant in service and a $6 million increase in the amortization of the regulatory asset related to securitization, which was caused primarily by an increase in Securitization Transition Charge (STC) revenues.PSEG

~~Taxes~~ Operating ~~Other Than Income Taxes~~Revenues

~~Taxes~~For ~~Other~~the ~~Than~~quarter ~~Income~~ended ~~Taxes~~March 31, ~~increased~~2004, Operating Revenues decreased by $267 million or 82%, ~~and~~as compared to the same period in 2003, due to a decrease in Operating Revenues from Power of $8138 million ormainly ~~13%~~related ~~for~~to lower generating revenues resulting from the ~~quarter~~loss ~~and~~of ~~six~~Market ~~months~~Transition ~~ended~~Charge ~~June~~(MTC) ~~30,~~revenues ~~2003,~~and ~~respectively,~~decreased asload ~~compared~~being toserved under the ~~same~~fixed-priced ~~periods~~BGS incontracts ~~2002.~~combined ~~The~~with ~~increases~~decreases ~~were~~related ~~the~~to ~~result~~its oftrading ~~higher~~activities ~~TEFA~~offset by an increase in gas supply revenues due primarily to higher ~~taxable~~gas ~~sales~~prices inprimarily ~~2003~~related to the Basic Gas Supply Service (BGSS) contract. ~~Legislation~~The ~~enacted~~decrease inwas ~~January~~partially ~~2002~~offset ~~freezes~~by ~~the~~a ~~TEFA~~$34 ~~unit~~million ~~rate~~increase ~~surcharges~~in atPSE&G's ~~the~~Operating ~~2001~~Revenues ~~levels~~due ~~through~~primarily ~~2004~~to ~~and~~increased ~~then~~prices ~~reduces~~relating ~~the~~to increased electric base rates ~~over~~and ~~the~~a ~~next~~$23 ~~three~~million ~~years,~~increase ~~phasing~~in ~~out~~Energy ~~the~~Holdings' ~~TEFA~~Operating byRevenues ~~2007~~relating to higher revenues from Global's generation projects.

54 Operating Expenses

~~Other~~ Energy ~~Income~~Costs

~~Other~~For ~~Income~~the ~~increased~~quarter $1ended ~~million~~March 31, or2004, ~~50%~~Energy ~~for~~Costs ~~the~~decreased ~~second~~approximately ~~quarter~~$130 ofmillion ~~2003~~or 7%, as compared to the ~~second~~same ~~quarter~~period ofin ~~2002~~2003, due primarily to ~~gains~~decreases ~~from~~at ~~short-term~~PSE&G ~~investments~~and Power discussed further below.

~~Other~~Operation Income increased $11 million for the six months ended June 30, 2003 as compared to the six months ended June 30, 2002, due primarily to gains on the disposal of various electric transmission properties and ~~gains from short-term investments.~~Maintenance

~~Interest~~ For ~~Expense~~the quarter ended March 31, 2004, Operation and Maintenance expense increased $27 million or 5%, as compared to the same period in 2003, due primarily to a $28 million increase at Power resulting from scheduled outage work at electric generation stations of $20 million and increased co-owner billings of $8 million at certain of its jointly-owned facilities.

~~Interest~~Depreciation ~~Expense decreased by $6 million or 6% for the quarter ended June 30, 2003 as compared to the same period in 2002. Interest on long-term debt decreased $7 million, due to various maturities~~ and issuances of Medium-Term Notes subsequent to the second quarter of 2002, and $2 million due to the payment of Securitization Bonds subsequent to the second quarter of 2002. The decreases were partially offset by $4 million of increased interest on restructuring costs as a result of the settlement of the Electric Base Rate Case.Amortization

~~Interest~~For ~~Expense~~the ~~decreased~~quarter byended ~~$12~~March 31, ~~million~~2004, orDepreciation 6%and ~~for~~Amortization ~~the~~increased ~~six~~by ~~months~~$73 ~~ended~~million ~~June~~or 3074%, ~~2003~~ as compared to the same period in ~~2002~~2003. ~~Interest~~The onincrease ~~long-term~~was ~~debt~~primarily ~~decreased $13 million,~~ due to ~~various~~a ~~maturities and issuances of Medium-Term Notes subsequent to the second quarter of 2002, and~~ $461 million ~~due~~increase toat ~~the~~PSE&G, ~~payment of Securitization Bonds subsequent to the second quarter of 2002. The decreases were partially offset by $4 million of increased interest on restructuring costs~~ as adiscussed ~~result~~further ~~of the settlement of the Electric Base Rate Case~~below.

~~Income Taxes~~50

Income ~~Taxes~~ ~~decreased~~from byEquity $8Method million for the quarter ended June 30, 2003, as compared to the same period in 2002, due primarily to increased amortization of the excess depreciation reserve for financial statement purposes on which full deferred taxes are not provided, offset by an increase in pre-tax income.Investments

~~Income Taxes~~For ~~increased by $6 million for~~ the ~~six~~quarter ~~months~~ ended ~~June 30~~March 31, ~~2003~~2004, asIncome ~~compared to~~from ~~the~~Equity ~~same~~Method ~~period~~Investments inincreased ~~2002,~~by ~~due~~$8 ~~primarily~~million toor an40% ~~increase~~from inthe ~~pre-tax~~comparable ~~income~~period ~~offset by~~in ~~increased~~2003, ~~amortization~~all of ~~the~~which ~~excess~~related ~~depreciation~~to ~~reserve~~Energy ~~for~~Holdings, ~~financial~~as ~~statement purposes~~discussed onfurther ~~which full deferred taxes are not provided~~below.

~~Extraordinary~~ Other ~~Item~~Income

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