10-K

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

FORM 10-K

(Mark One)
|X|  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002

OR

|_|  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 Newark, New Jersey 07102-4194 973 456-3581 http://www.pseg.com	22-2983750

Securities registered pursuant to Section 12 (b) of the Act:

Registrant	Title of Each Class		Title of Each Class				Name of Each Exchange On Which Registered
Public Service Enterprise	Common Stock without par value						New York Stock Exchange
Group Incorporated
Public Service Electric and	Cumulative Preferred Stock		First and Refunding Mortgage Bonds:
Gas Company	$100 par value Series:			Series		Due
		4.08%	9 1/8%		BB	2005
		4.18%	9 1/4%		CC	2021
		4.30%	8 7/8%		DD	2003	New York Stock Exchange
		5.05%	6 7/8%		MM	2003
		5.28%	6 1/2%		PP	2004
			7%		SS	2024
			7 3/8%		TT	2014
			6 3/4%		UU	2006
			6 3/4%		VV	2016
			6 1/4%		WW	2007
			6 3/8%		YY	2023
			8%			2037
			5%			2037
PSEG Power LLC	NONE		NONE				NONE
PSEG Energy Holdings LLC	NONE		NONE				NONE

Participating Equity Preference Securities (consisting of a Purchase Contract and a Preferred Trust Security of PSEG Funding Trust I (Registrant) and registered on the New York Stock Exhange.

Trust Originated Preferred Securities (Guaranteed Preferred Beneficial Interest in PSEG’s Debentures), $25 par value at 8.75%, issued by PSEG Funding Trust II (Registrant) and registered on the New York Stock Exchange.

Monthly Income Preferred Securities (Guaranteed Preferred Beneficial Interest in PSE&G’s Subordinated Debenture), $25 par value at 8.00%, issued by Public Service Electric and Gas Capital, L.P. (Registrant) and registered on the New York Stock Exchange.

Quarterly Income Preferred Securities (Guaranteed Preferred Beneficial Interest in PSE&G’s Subordinated Debentures), $25 par value at 8.125%, issued by PSE&G Capital Trust II (Registrant) and registered on the New York Stock Exchange.

Securities registered pursuant to Section 12 (g) of the Act:

Registrant	Title of Class
Public Service Enterprise Group Incorporated	Floating Rate Capital Securities (Guaranteed Preferred Beneficial Interest in
	PSEG’s Debentures), $1,000 par value issued by Enterprise Capital Trust II
	(Registrant), LIBOR plus 1.22%.
	Trust Originated Preferred Securities (Guaranteed Preferred Beneficial
	Interest in PSEG’s Debentures), $25 par value at 7.44%, issued by Enterprise
	Capital Trust I (Registrant).
	Trust Originated Preferred Securities (Guaranteed Preferred Beneficial
	Interest in PSEG’s Debentures), $25 par value at 7.25%, issued by Enterprise
	Capital Trust III (Registrant).
Public Service Electric and Gas Company	6.92% Cumulative Preferred Stock $100 par value
	Medium-Term Notes, Series A
PSEG Power LLC	Limited Liability Company Membership Interest
PSEG Energy Holdings LLC	Limited Liability Company Membership Interest

The aggregate market value of the Common Stock of Public Service Enterprise Group Incorporated as of June 28, 2002 was $8,947,292,512 based upon the New York Stock Exchange Composite Transaction closing price. The aggregate market value of the Common Stock of Public Service Enterprise Group Incorporated held by non-affiliates as of January 31, 2003 was $7,949,509,112 based upon the New York Stock Exchange Composite Transaction closing price.

The number of shares outstanding of Public Service Enterprise Group Incorporated’s sole class of Common Stock, as of the latest practicable date, was as follows:

Class	Outstanding at January 31, 2003
Common Stock, without par value	225,326,222

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 I (1) (a) and (b) of Form 10-K and are filing their respective Annual Reports on Form 10-K with the reduced disclosure format authorized by General Instruction I.

As of January 31, 2003, 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.

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|   No |_|

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X|

Indicate by check mark whether any registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  Yes |X|   No |_|

DOCUMENTS INCORPORATED BY REFERENCE

Part of Form 10-K of Public Service Enterprise Group Incorporated	Documents Incorporated by Reference
III	Portions of the definitive Proxy Statement for the Annual Meeting of Stockholders of Public Service Enterprise Group
	Incorporated to be held April 15, 2003, which definitive Proxy Statement is expected to be filed with the Securities and
	Exchange Commission on or about March 7, 2003, as specified herein.

	TABLE OF CONTENTS
		Page
PART I
Item 1.	Business	1
	General	1
	Competitive Environment	11
	Regulatory Issues	12
	Customers	18
	Employee Relations	19
	Segment Information	19
	Environmental Matters	19
Item 2.	Properties	26
Item 3.	Legal Proceedings	38
Item 4.	Submission of Matters to a Vote of Security Holders	40
PART II
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters	41
Item 6.	Selected Financial Data	42
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	44
	Overview of 2002 and Future Outlook	44
	Results of Operations	51
	Liquidity and Capital Resources	65
	Capital Requirements	72
	Accounting Issues	75
	Forward Looking Statements	82
Item 7A.	Qualitative and Quantitative Disclosures About Market Risk	84
Item 8.	Financial Statements and Supplementary Data	90
	Financial Statement Responsibility	91
	Independent Auditors’ Report	95
	Consolidated Financial Statements	99
	Notes to Consolidated Financial Statements	118
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	193
PART III
Item 10.	Directors and Executive Officers	193
Item 11.	Executive Compensation	197
Item 12.	Security Ownership of Certain Beneficial Owners and Management	202
Item 13.	Certain Relationships and Related Transactions	203
Item 14.	Disclosure Controls and Procedures	204
PART IV
Item 15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K	213
	Schedule II—Valuation and Qualifying Accounts	215
	Signatures	217
	Exhibit Index	221

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PART I

     This combined Form 10-K 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 its subsidiaries and makes no other representations whatsoever as to any other company.

ITEM 1. BUSINESS

GENERAL

PSEG, PSE&G, Power and Energy Holdings

     PSEG, incorporated under the laws of the State of New Jersey on July 25, 1985, with its principal executive offices located at 80 Park Plaza, Newark, New Jersey 07102, is an exempt public utility holding company under the Public Utility Holding Company Act of 1935 (PUHCA).

     PSEG has four principal direct wholly-owned subsidiaries: PSE&G, Power, Energy Holdings and PSEG Services Corporation (Services). The following organization chart shows PSEG and its principal subsidiaries, as well as the principal operating subsidiaries of Power: PSEG Fossil LLC (Fossil), PSEG Nuclear LLC (Nuclear) and PSEG Energy Resources & Trade LLC (ER&T); and of Energy Holdings: PSEG Global Inc. (Global) and PSEG Resources LLC (Resources):

  

     The regulatory structure which has historically governed the electric and gas utility industries in the United States has changed dramatically in recent years and continues to be in transition. Deregulation is essentially complete in New Jersey and is complete or underway in certain other states in the Northeast and across the United States (US). States have acted independently to deregulate the electric and gas utility industries. Experience in deregulating California, with energy shortages, high costs and financial difficulties of utilities and high profile bankruptcies have caused some states to re-evaluate and, in some cases, stop the move toward deregulation. The deregulation and restructuring of the nation’s energy markets, the unbundling of energy and related services, the diverse strategies within the industry related to holding, building, buying or selling generation capacity and the anticipated resulting industry consolidation have had, and are likely to continue to have, a profound effect on PSEG and its subsidiaries, providing it with new opportunities and exposing it to new risks. For further information, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation (MD&A) — Overview of 2002 and Future Outlook.

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     The National Energy Policy Act of 1992 (Energy Policy Act) laid the groundwork for competition in the wholesale electricity markets in the United States. This legislation expanded the Federal Energy Regulatory Commission’s (FERC) authority to order electric utilities to open their transmission systems to allow third-party suppliers to transmit, or “wheel,” electricity over their lines. In 1996, FERC initiated regulatory actions that resulted in expanded access to transmission lines, providing eligible third-party wholesale marketers clear transmission access. These actions have afforded power marketers, merchant generators, Exempt Wholesale Generators (EWGs) and utilities the opportunity to compete actively in wholesale energy markets, and afforded consumers the right to choose their energy suppliers.

     Worldwide energy industry deregulation, restructuring, privatization and consolidation are creating opportunities and risks for PSEG, PSE&G, Power and Energy Holdings. Over recent years, PSEG has realigned its organizational structure to address the competitive environment brought about by the deregulation of the electric generation industry and has transitioned from primarily being a regulated New Jersey utility to operating as a competitive energy company with operations primarily in the Northeastern US and in other select domestic and international markets. As the unregulated portion of the business continues to grow, financial risks and rewards will be greater, financial requirements will change and the volatility of earnings and cash flows will increase. As of December 31, 2002, Power, PSE&G, and Energy Holdings comprised approximately 27%, 48% and 27% of PSEG’s consolidated assets and contributed approximately 60%, 26% and 18% of PSEG’s results, excluding certain charges. For additional information, see Item 7. MD&A — Overview of 2002 and Future Outlook.

PSE&G and Power

     Following the enactment of the New Jersey Electric Discount and Energy Competition Act, as amended (Energy Competition Act), the New Jersey Board of Public Utilities (BPU) rendered its Final Decision and Order (Final Order) in 1999 relating to PSE&G’s rate unbundling, stranded costs and restructuring proceedings providing, among other things, for the transfer to an affiliate of all of PSE&G’s electric generation facilities, plant and equipment for $2.4 billion and all other related property, including materials, supplies and fuel at the net book value thereof, together with associated rights and liabilities. PSE&G, pursuant to the Final Order, transferred its electric generating facilities and wholesale power contracts to Power and its subsidiaries in August 2000 for $2.8 billion.

     Subsequently, Power entered into a BPU approved fixed price requirements contract (Basic Generation Service (BGS) contract) to supply all of PSE&G’s load requirement for its electric customers not choosing an alternative supplier, which terminated on July 31, 2002, under which Power sold energy directly to PSE&G which in turn sold this energy to its customers. Subsequent to July 31, 2002, Power primarily sells its energy and capacity to third parties that supply New Jersey’s electric distribution companies (EDCs) participating in the BPU approved BGS auctions in New Jersey. PSE&G purchases the energy required to meet its customers’ needs from third party suppliers through such auction process.

     BGS Supply

     PSE&G is required to determine BGS suppliers by competitive bid in accordance with BPU requirements. In February 2002, an internet auction was held to determine who would supply BGS to PSE&G and the other three BPU regulated New Jersey electric utility companies for the period August 1, 2002 to July 31, 2003. As conditions of qualification to participate in this auction, energy suppliers agreed to execute the BGS Master Service Agreement and provide required security bonds within two days of BPU Certification of auction results, in addition to satisfying BPU credit worthiness requirements.

     In February 2002 the BPU approved the BGS auction results and PSE&G secured contracts from a number of suppliers for its expected peak load of 9,600 MW through 96 notional tranches of 100 MW each. Under these contracts, the suppliers have the full load serving responsibility and bear the risks of volatility in energy prices due to various factors such as changes in weather, seasonality and transmission constraints. Subsequently, certain BGS suppliers experienced adverse credit issues and therefore, these suppliers assigned contracts to other parties. Under the BPU approved supply contracts, PSE&G is paying $.0511 per kWh to obtain electricity for BGS customers for the period from August 1, 2002 to July 31, 2003. Customers will continue to pay below-market regulated rates (BGS shopping credit) for this one-year period. Under PSE&G’s current rate structure, the difference is being

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deferred and is expected to be recovered with interest through a future securitization. PSE&G estimates that the underrecovery relating to the BGS for the one-year period ending July 31, 2003 will amount to approximately $241 million.

     As a result of the initial New Jersey BGS auction, Power contracted to provide energy to the direct suppliers of New Jersey electric utilities, including PSE&G, commencing August 1, 2002. Subsequently, a portion of the contracts with those bidders was reassigned to Power. Therefore, for a limited portion of the New Jersey retail load, Power will be a direct supplier to one utility, although this utility is not PSE&G.

     New Jersey’s EDCs, including PSE&G, will provide two types of BGS service beginning in August 2003. The BPU authorized two concurrent auctions of New Jersey’s Basic Generation Service which were held in February 2003. The first was a general auction to procure approximately 15,500 MW of supply for ten-month and 34-month periods for smaller commercial and residential customers at seasonally-adjusted fixed prices. The other auction was held to procure approximately 2,600 MW of supply for larger customers for a 10-month period at hourly market prices. In total, the EDCs sought and obtained over 18,000 MW of combined full-requirements electric service. In February 2003, the BPU approved the auction results and PSE&G secured contracts from a number of suppliers to meet its requirements. Under the contracts, PSE&G is paying $.05386 and $.05560 per kWh for the ten-month tranche and 34-month tranche, respectively, to obtain electricity for customers for the periods beginning August 1, 2003.

     Power was a participant in the BGS auction held in February 2003. Power entered into hourly energy price contracts to be a direct supplier of certain large customers for a ten-month period beginning August 1, 2003. Power also entered into contracts with third parties who are direct suppliers of New Jersey’s EDCs. Through these seasonally-adjusted fixed price contracts, Power will indirectly serve New Jersey’s smaller commercial and residential customers for ten-month and 34-month periods beginning August 1, 2003. Power believes that its obligations under these contracts are reasonably balanced by its available supply.

     BGSS

     On April 17, 2002, the BPU issued the Final Order approving the transfer of PSE&G’s gas supply business. Pursuant to such order, in May 2002, PSE&G transferred its gas supply contracts and gas inventory to Power for approximately $183 million and similarly, entered into a requirements contract with Power under which Power sells gas supply services directly to PSE&G needed to meet PSE&G’s Basic Gas Supply Service (BGSS) requirements. The contract term ends March 31, 2004, after which PSE&G has a three-year renewal option. As part of the agreement, PSE&G is providing Power the use of its peak shaving facilities at cost.

     On May 1, 2002, the New Jersey Ratepayer Advocate filed a motion for the reconsideration of the BPU’s approval of the gas contract transfer. On October 31, 2002, the BPU issued an order denying the motion for reconsideration, except for the issue of valuation. The BPU retains the right to review the valuation of the contracts transferred if FERC modifies the capacity release rules prior to the contract expirations.

PSE&G

     PSE&G is a New Jersey corporation, incorporated on July 25, 1924, with its principal executive offices at 80 Park Plaza, Newark, New Jersey 07102. PSE&G is an operating public utility company engaged principally in the transmission and distribution of electric energy and gas service in New Jersey. PSE&G continues to own and operate its electric and gas transmission and distribution business. PSE&G Transition Funding LLC (Transition Funding), a bankruptcy remote subsidiary of PSE&G, was formed solely to issue $2.525 billion principal amount of transition bonds in connection with the securitization of $2.4 billion of PSE&G’s approved stranded costs approved for recovery by the BPU under the Energy Competition Act.

     PSE&G supplies electric and gas service in areas of New Jersey in which approximately 5.5 million people, about 70% of the State’s population, reside. PSE&G’s electric and gas service area is a corridor of approximately 2,600 square miles running diagonally across New Jersey from Bergen County in the northeast to an area below the city of Camden in the southwest. The greater portion of this area is served with both electricity and gas, but some parts are served with electricity only and other parts with gas only. This heavily populated, commercialized and

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industrialized territory encompasses most of New Jersey’s largest municipalities, including its six largest cities—Newark, Jersey City, Paterson, Elizabeth, Trenton and Camden—in addition to approximately 300 suburban and rural communities. This service territory contains a diversified mix of commerce and industry, including major facilities of many corporations of national prominence. PSE&G’s load requirements are almost evenly split among residential, commercial and industrial customers. PSE&G believes that it has all the franchises (including consents) necessary for its electric and gas distribution operations in the territory it serves. Such franchise rights are not exclusive.

     PSE&G distributes electric energy and gas to end-use customers within its designated service territory. All electric and gas customers in New Jersey have the ability to choose an electric energy and/or gas supplier. Pursuant to BPU requirements, PSE&G serves as the supplier of last resort for electric and gas customers within its service territory who do not choose an alternate supplier. PSE&G earns no margin on the commodity portion of its electric and gas sales. PSE&G earns margins through the transmission and distribution of electricity and gas. PSE&G’s revenues are based upon tariffs approved by the BPU and the FERC for these services. The demand for electric energy and gas by PSE&G’s customers is affected by customer conservation, economic conditions, weather and other factors not within its control. Rates for gas sold in interstate commerce are not subject to cost of service ratemaking but are subject to competitive pricing. See Regulatory Issues and Item 7. MD&A, for a further discussion of these matters.

Power

     Power is a Delaware limited liability company, formed on June 16, 1999, with its principal executive offices at 80 Park Plaza, Newark, New Jersey 07102. Power is a multi-regional, independent wholesale energy supply company that integrates its generating asset operations with its wholesale energy, fuel supply, energy trading and marketing and risk management function with three principal direct wholly-owned subsidiaries: Nuclear, which owns and operates nuclear generating stations, Fossil, which develops, owns and operates domestic fossil generating stations and ER&T, which markets the capacity and production of Fossil’s and Nuclear’s stations and manages the commodity price risks or market risks related to generation. Power’s subsidiary, PSEG Power Capital Investment Company (Power Capital), provides certain financing for Power’s subsidiaries.

     Power’s target market, which it refers to as the Super Region, extends from Maine to the Carolinas and from the Atlantic Coast to Indiana, encompassing 36% of the nation’s power consumption. Power is the single largest power supplier in its primary market, the PJM Interconnection area, one of the nation’s largest and most well developed energy markets.

     Power’s generation portfolio consists of 13,055 MW of installed capacity which is diversified by fuel source and market segment. In addition, Power is currently constructing projects which are expected to increase capacity by over 2,900 MW through 2005, net of planned retirements. For additional information, see Item 2. Properties.

     Power participates primarily in the PJM market, where the pricing of energy is based upon the locational marginal price (LMP) set through power providers’ bids. Because of transmission constraints, the LMP tends to be higher in congested areas reflecting the bid prices of the higher cost units that are dispatched to supply demand and alleviate transmission constraints when coordination is sufficient to satisfy demand within PJM. These bids are capped at $1,000 per megawatt-hour (MWh). In the event that available generation within PJM is insufficient to satisfy demand, PJM may institute emergency purchases from adjoining regions for which there is no price cap.

      As Exempt Wholesale Generators (EWGs) under FERC, Power’s subsidiaries do not directly serve any retail customers. Power uses its generation facilities primarily for the production of electricity for sale at the wholesale level. For a discussion of BGS Supply in New Jersey, see PSE&G and Power above.

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Electric Fuel Supply

     The following table indicates MWh output of Power’s generating stations by source of energy in 2002 and the estimated MWh output by source for 2003:

	Actual		Estimated
Source	2002		2003 (A)
Nuclear:
New Jersey facilities	41	%	38%
Pennsylvania facilities	21	%	19%
Fossil:
Coal:
New Jersey facilities	13	%	11%
Pennsylvania facilities	13	%	12%
Connecticut facilities	—		5%
Oil and Natural Gas:
New Jersey facilities	11	%	9%
New York facilities	—		—
Connecticut facilities	—		3%
Mid-West facilities	—		2%
Pumped Storage	1	%	1%
Total	100	%	100%

	(A)	No assurances can be given that actual 2003 output by source will match estimates.
Fossil Fuel Supply
Fossil has an ownership interest in twelve fossil generating stations in New Jersey, one fossil generating station in New York, two fossil generating stations in Connecticut and two fossil generating stations in Pennsylvania. Fossil is also in the process of constructing a fossil generating station in Ohio and another in Indiana. Fossil has an ownership interest in one hydroelectric pumped storage facility in New Jersey. For additional information, see Item 2. Properties — Power — Electric Generation Properties.
Fossil uses coal, natural gas and oil for electric generation. These fuels are purchased through various contracts and in the spot market. The majority of Power’s fossil generating stations obtain their fuel supply from within the US. In order to minimize emissions levels, the Connecticut generating facilities use a specific type of coal which is obtained from Indonesia. Fossil does not anticipate any difficulties in obtaining adequate coal, natural gas and oil supplies for these facilities over the next several years, however, if the supply of coal from Indonesia or equivalent coal from other sources was not available for the Connecticut facilities, additional capital expenditures could be required to modify the existing plants. For additional information, see Item 2. Properties — Power.
Nuclear Fuel Supply
Nuclear has an ownership interest in five nuclear generating units and operates three of them; the Salem Nuclear Generating Station, Units 1 and 2 (Salem 1 and 2) each owned 57.41% by Nuclear and 42.59% by Exelon Generation LLC (Exelon), and the Hope Creek Nuclear Generating Station (Hope Creek), 100% owned by Nuclear. Exelon operates the Peach Bottom Atomic Power Station Units 2 and 3 (Peach Bottom 2 and 3), each of which is 50% owned by Nuclear. For additional information, see Item 2. Properties.
Power has several long-term purchase contracts with uranium suppliers, converters, enrichers and fabricators to meet the currently projected fuel requirements for Salem and Hope Creek. On average, Power has various multi-year requirements-based purchase commitments that total approximately $88 million per year to meet Salem and Hope Creek fuel needs. Power has been advised by Exelon that it has similar purchase contracts to satisfy the fuel requirements for Peach Bottom. Nuclear does not anticipate any difficulties in obtaining adequate fuel supplies for these facilities over the next several years.
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     Gas Supply

     As described above, Power sells gas to PSE&G. About 40% of the peak daily gas requirements are provided through firm transportation which is available every day of the year. The remainder comes from field storage, liquefied natural gas, seasonal purchases, contract peaking supply, propane and refinery/landfill gas. Following the gas contract transfer in May 2002, Power purchased gas for its gas operations directly from natural gas producers and marketers. These supplies were transported to New Jersey by four interstate pipeline suppliers.

     Power has approximately 1.1 billion cubic feet per day of firm transportation capacity under contract to meet the primary needs of the gas consumers of PSE&G. In addition, Power supplements that supply with a total storage capacity of 81 billion cubic feet that provides .94 billion cubic feet per day of gas during the winter season.

     Power expects to meet the energy-related demands of its firm customers during the 2002-2003 and 2003-2004 winter seasons. However, the sufficiency of supply could be affected by several factors not within Power’s control, including curtailments of natural gas by its suppliers, the severity of the winter weather and the availability of feedstocks for the production of supplements to its natural gas supply. The adequacy of supply of all types of gas is affected by the nationwide availability of all sources of fuel for energy production.

     ER&T

     ER&T purchases all of the capacity and energy produced by Fossil and Nuclear. In conjunction with these purchases, ER&T uses commodity and financial instruments designed to cover estimated commitments for BGS and other bilateral contract agreements. ER&T also markets electricity, capacity, ancillary services and natural gas products on a wholesale basis throughout the Super Region. ER&T is a fully integrated wholesale energy marketing and trading organization that is active in the long-term and spot wholesale energy markets.

     ER&T’s principal objectives are to sell and deliver physical power from Power’s generating assets, reduce earnings volatility through hedging activities, manage gas supply and BGSS contracts, procure low cost fuel and natural gas supplies and produce net earnings from trading energy-related products around Power’s physical assets. ER&T does not engage in the practice of simultaneous trading for the purpose of increasing trading volume or revenue (also known as round trips). Consistent with its business objectives, ER&T measures performance based on net earnings and overall team performance, not on volume or gross revenues. These are also the metrics used to measure performance under its incentive compensation programs. For further information, see Note 12. Risk Management of the Notes to the Consolidated Financial Statements (Notes).

Energy Holdings

     Energy Holdings is a New Jersey limited liability company formed on October 31, 2002, which merged wth PSEG Energy Holdings Inc., which was incorporated on June 20, 1989. Energy Holdings principal executive offices are located at 80 Park Plaza, Newark, New Jersey 07102. Energy Holdings has two principal direct wholly-owned subsidiaries; Global and Resources. During the second quarter of 2002, Energy Holdings announced its intention to sell the businesses of PSEG Energy Technologies Inc. (Energy Technologies). See Note 5. Discontinued Operations of the Notes.

     Global and Resources have more than 100 financial and operating investments. Energy Holdings has pursued investment opportunities in the rapidly changing global energy markets, with Global focusing on the operating segments of the electric industries and Resources primarily making financial investments in these industries.

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     Energy Holdings’ portfolio is diversified by number, type and geographic location of investments. As of December 31, 2002, assets were comprised of the following types:

	December 31, 2002
Leveraged Leases (A)	42	%
International Electric Facilities	20	%
International Generation Plants	22	%
Domestic Generation Plants	10	%
Energy Services	3	%
Other Passive Financial Investments	2	%
Other	1	%

     (A) Leveraged Leases are primarily in energy related facilities and are discussed further under Resources.

     The characteristics of each of these investment types are described in more detail below.

     Global

     Global is an independent power producer and distributor which develops, acquires, owns and operates electric generation, transmission and distribution facilities and is engaged in power production and distribution, including wholesale and retail sales of electricity, in selected domestic and international markets.

     Global realized substantial growth prior to 2002, but has been faced with significant challenges as the electricity privatization model has experienced stress. These challenges include the Argentine economic, political and social crisis, recent issues in India, financial and political pressures in Brazil and Venezuela and the soft power market in Texas. A worldwide recession and a series of disruptive events have slowed privitization in many countries. See Item 7. MD&A — Overview of 2002 and Future Outlook for further details.

     Generally, Global has sought to minimize risk in the development and operation of its generation projects by selecting partners with complementary skills, structuring long-term power purchase contracts, arranging financing prior to the commencement of construction and contracting for adequate fuel supply. Historically, Global’s operating affiliates have entered into long-term power purchase contracts, thereby selling the electricity produced for the majority of the project life. However, two plants in Texas and two plants in China operate as merchant plants without long-term power purchase contracts and a plant in Poland will likely do so as well. For a further discussion of the oversupply of energy in the Texas power market, see Item 7. MD&A — Future Outlook.

     Fuel supply arrangements are designed to balance long-term supply needs with price considerations. Global’s project affiliates generally utilize long-term contracts and spot market purchases. Energy Holdings believes that there are adequate fuel supplies for the anticipated needs of its generating projects. Energy Holdings also believes that transmission access and capacity are sufficient at this time for its generation projects.

     Global, to the extent practical, attempts to limit its financial exposure associated with each project and to mitigate development risk, foreign currency exposure, interest rate risk and operating risk, including exposure to fuel costs, through contracts. For a further discussion of these risks, see Item 7A. Qualitative and Quantitative Disclosures About Market Risk. In addition, project loan agreements are generally structured on a non-recourse basis. Further, Global generally structures project financing so that a default under one project’s loan agreement will have no effect on the loan agreements of other projects or Energy Holdings’ debt.

     Global has ownership interests in 34 operating generation projects (excluding those in Argentina which were fully impaired in 2002) totaling 5,384 MW (2,476 MW net) and eight projects totaling 2,329 MW (1,042 MW net) in construction. Of Global’s generation projects in operation or construction, 1,449 MW net or 41% are located in the United States. Global is actively involved, through its joint ventures, in managing the operations of 28 operating generation projects and will be actively involved in managing the operations of 6 projects in construction.

     Global has invested in four distribution companies (excluding those in Argentina which were fully impaired in 2002) which serve approximately 2.9 million customers in Brazil, Chile and Peru. Global is actively involved in

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managing the operations of these distribution companies in accordance with shareholder agreements and/or operating contracts. Rate-regulated distribution assets represented 37% of Global’s assets, or $1.4 billion, as of December 31, 2002.

     As of December 31, 2002, Global’s assets, which include consolidated projects and those accounted for under the equity method, and share of project MW, by region are as follows:

	2002		MW
	(Millions)
Generation
North America	$	647	1,449
Latin America (1)		359	247
Asia Pacific		148	738
Europe (2)		772	856
India (3)		200	228
Distribution
Latin America (1)		1,391	N/A
Other
Other (4)		285	N/A
Total Assets	$	3,802	3,518

	(1)	Investments in Argentina were fully impaired in 2002.
	(2)	Europe and Africa.
	(3)	India and the Middle East. The Tanir Bavi Power Company Ltd. (Tanir Bavi) plant in India was sold in October 2002.
	(4)	Assets not allocated to a specific project, including corporate receivables.
For additional information, see Item 7. MD&A — Future Outlook.
Global’s strategic focus has shifted to one of improving profitability for currently held investments, from one of significant growth. Near-term emphasis will be placed on liquidity and completing current projects. Global has developed or acquired interests in electric generation and/or distribution facilities in the United States, Brazil, Chile, China, India, Italy, Peru, Poland, Tunisia and Venezuela. In addition, projects are in construction in the United States, China, Italy, Oman, Poland, South Korea and Taiwan. While Energy Holdings still expects certain of its investments in Latin America to contribute significantly to its earnings in the future, the political and economic risks associated with this region could have a material adverse impact on its remaining investments in the region. See Item 7. MD&A — Future Outlook for additional information.
For a discussion of the asset impairments due to the Argentine economic, political and social crisis, see Note 13. Commitments and Contingent Liabilities and Note 4. Asset Impairments of the Notes. Also see Note 4. Asset Impairments and Note 5. Discontinued Operations of the Notes for a discussion of Global’s sale of Tanir Bavi located in India.
For additional information on Global’s investments in generation and distribution facilities, see Item 2. Properties. Resources      Resources invests in energy-related financial transactions and manages a diversified portfolio of assets, including leveraged leases, operating leases, leveraged buyout funds, limited partnerships and marketable securities. Also, the Demand Side Management (DSM) business previously managed by Energy Technologies was transferred
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to Resources as of December 31, 2002. Since it was established in 1985, Resources has grown its portfolio to include more than 60 separate investments. Resources expects to curtail its investment activity in the near-term.

     DSM revenues are earned principally from monthly payments received from utilities, which represent shared electricity savings from the installation of the energy efficient equipment. For further discussion of the transfer of DSM to Resources, see Note 22. Related-Party Transactions of the Notes.

     The major components of Resources’ investment portfolio as a percent of its total assets as of December 31, 2002 were:

	As of December 31, 2002
	Amount		% of Resources’ Total Assets
	(Millions)
Leveraged Leases
Energy-Related
Foreign	$	1,181	38	%
Domestic		1,272	41	%
Real Estate – Domestic		192	6	%
Aircraft
Foreign		44	2	%
Domestic		61	2	%
Commuter Railcars – Foreign		86	3	%
Industrial – Domestic		8	—
Total Leveraged Leases, net		2,844	92	%
Limited Partnerships
Leveraged Buyout Funds		93	3	%
Other		25	1	%
Total Limited Partnerships		118	4	%
Marketable Securities		5	—
Other Investments		33	1	%
Owned Property		59	2	%
Current and Other Assets		27	1	%
Total Resources’ Assets	$	3,086	100	%

     As of December 31, 2002, no single investment represented more than 7.5% of Resources’ total assets.

     Leveraged Lease Investments

     Resources seeks a portfolio that provides a fixed rate of return, predictable income and cash flow and depreciation and amortization deductions for federal income tax purposes. Income on leveraged leases is recognized by a method which produces a constant rate of return on the outstanding net investment in the lease, net of the related deferred tax liability, in the years in which the net investment is positive. Any gains or losses incurred as a result of a lease termination are recorded as revenues as these events occur in the ordinary course of business of managing the investment portfolio.

     In a leveraged lease, the lessor acquires an asset by investing equity representing approximately 15% to 20% of the cost and incurring non-recourse lease debt for the balance. The lessor acquires economic and tax ownership of the asset and then leases it to the lessee for a period of time no greater than 80% of its remaining useful life. As the owner, the lessor is entitled to depreciate the asset under applicable federal and state tax guidelines. In addition, the lessor receives income from lease payments made by the lessee during the term of the lease and from tax receipts associated with interest and depreciation deductions with respect to the leased property. Lease rental payments are unconditional obligations of the lessee and are set at levels at least sufficient to service the non-recourse lease debt. The lessor is also entitled to any residual value associated with the leased asset at the end of the

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lease term. An evaluation of the after-tax cash flows to the lessor determines the return on the investment. Under generally accepted accounting principles, the lease investment is recorded on a net basis and income is recognized as a constant return on the net unrecovered investment.

     Resources evaluates lease investment opportunities with respect to specific risk factors. Any future leveraged lease investments are expected to be made in energy-related assets. For further information relating to the curtailment of Energy Holdings’ investments in the near term, see Item 7. MD&A – Overview. The assumed residual value risk, if any, is analyzed and verified by third-parties at the time the investment is made. Credit risk is assessed and, if necessary, mitigated or eliminated through various structuring techniques, such as defeasance mechanisms and letters of credit. Resources does not take currency risk in its cross-border lease investments. Transactions are structured with rental payments denominated and payable in US Dollars. Resources, as a passive lessor or investor, does not take operating risk with respect to the assets it owns, so leases are structured with the lessee having an absolute obligation to make rental payments whether or not the assets operate. The assets subject to lease are an integral element in Resources’ overall security and collateral position. If such assets were to be impaired, the rate of return on a particular transaction could be affected. The operating characteristics and the business environment in which the assets operate are, therefore, important and must be understood and periodically evaluated. For this reason, Resources retains experts to conduct regular appraisals on the assets it owns and leases.

     The ten largest lease investments for Resources as of December 31, 2002 were as follows:

Investment	Description	Gross Investment Balances as of December 31, 2002			% of Resources’ Total Assets
		(Millions)
Reliant	Three generating stations		$	221		7	%
	(Keystone, Conemaugh and
	Shawville)
EME	Collins Electric Generation			185		6	%
	Station
Seminole	Seminole Generation Station			175		6	%
	Unit #2
Dynegy	Two electric generating stations			172		6	%
EME	Two electric generating stations			170		6	%
	(Powerton and Joliet)
ENECO	Gas distribution network			141		5	%
	(Netherlands)
Grand Gulf	Nuclear generating station			131		4	%
Merrill Creek	Merrill Creek Reservoir Project			129		4	%
ESG	Electric distributing system			108		3	%
	(Austria)
EZH	Electric generating station			107		3	%
	(Netherlands)
			$	1,539		50	%

     For further details on leases, see Item 7A. Qualitative and Quantitative Disclosures About Market Risk-Credit Risk-Energy Holdings.

     Energy Technologies

     Energy Technologies is an energy management company whose primary objective was to construct, operate and maintain heating, ventilating and air conditioning (HVAC) systems for and provide energy-related engineering, consulting and mechanical contracting services to industrial and commercial customers in the Northeastern and

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Middle Atlantic United States. In June 2002, Energy Holdings adopted a plan to sell its interests in these HVAC/mechanical operating companies. The sale of these companies is expected to be completed by June 30, 2003. For more details, see Note 5. Discontinued Operations of the Notes and Item 7. MD&A — Results of Operations — Discontinued Operations — Energy Technologies.

     Other Subsidiaries

     Enterprise Group Development Corporation (EGDC), a commercial real estate property management business, has been conducting a controlled exit from the real estate business since 1993. EGDC’s strategy is to preserve the value of its assets to allow for the controlled disposition of its properties as favorable sales opportunities arise. EGDC directly owns a 100% interest in two parcels of land available for development located in New Jersey totaling $19 million. One of these parcels is classified as Assets Held for Sale. EGDC also owns an 80% general partnership interest in four partnerships which own and operate two buildings and land in New Jersey totaling $15 million. EGDC also owns a 100% interest in development land located in Maryland valued at $12 million. Together, the 100% wholly-owned land and the 80% general partnership interests represent 72% of the total assets of EGDC. Additionally, EGDC owns a 50% partnership interest in development land located in Virginia. Total assets of EGDC as of December 31, 2002 and 2001 were $63 million and $65 million, respectively.

     PSEG Capital Corporation (PSEG Capital) has served as the financing vehicle, borrowing on the basis of a minimum net worth maintenance agreement with PSEG. As of December 31, 2002 PSEG Capital had debt outstanding of $252 million, which matures in May 2003, at which time the program will be terminated. For additional information including certain restrictions relating to the BPU Focused Audit, see Item 7. MD&A — Liquidity and Capital Resources.

Services

     Services is a New Jersey Corporation with its principal executive offices at 80 Park Plaza, Newark, New Jersey 07102. Services provides management and administrative services to PSEG and its subsidiaries. These include accounting, legal, communications, human resources, information technology, treasury and financial, investor relations, stockholder services, real estate, insurance, risk management, tax, library and information services, security, corporate secretarial and certain planning, budgeting and forecasting services. Services charges PSEG, PSE&G, Power and Energy Holdings a fair market rate for services provided.

COMPETITIVE ENVIRONMENT

PSE&G

     As a regulated monopoly, PSE&G’s electric and gas transmission and distribution business has minimal risks from competition. Also, there has been minimal financial impact on PSE&G’s transmission and distribution business due to customers choosing alternate electric or gas suppliers.

Power

     Power primarily contracts to provide energy to the direct suppliers of New Jersey electric utilities. In recent years Power has expanded into other areas of its target market, the Super Region, with acquisitions in New York and Connecticut and development in the Midwest. As markets continue to evolve, several types of competitors have or will emerge in Power’s target market. These competitors include merchant generators with or without trading capabilities, other utilities that have formed generation and/or trading affiliates, aggregators, wholesale power marketers or combinations thereof. These participants will compete with Power and one another buying and selling in wholesale power pools, entering into bilateral contracts and/or selling to aggregated retail customers. These participants can also be expected to adapt to changing market conditions, including developing new generating stations where a perceived capacity shortfall may exist. Power believes that its asset size and location, regional market knowledge and integrated functions will allow it to compete effectively in its selected markets. However, actions by developers, including Power, to build new generating stations has lead to an overbuild situation, causing energy and capacity prices to be depressed and possibly making some of its units uneconomical. The Midwest

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market is expected to have excess capacity due to recent additions, which will negatively impact the expected returns of Power’s Lawrenceburg, Indiana and Waterford, Ohio facilities, presently under construction.

     Additional legislation has been introduced within the last few years to further encourage competition at the retail level (often referred to as customer choice or retail access). No legislative proposal exists at the federal level. However, there is also a risk of re-regulation, if states decide to turn away from deregulation and allow regulated utilities to continue to own or reacquire and operate generating stations in a regulated and potentially uneconomical manner.

     Power’s businesses are also under competitive pressure due to technological advances in the power industry and increased efficiency in certain energy markets. It is possible that advances in technology will reduce the cost of alternative methods of producing electricity to a level that is competitive with that of most central station electric production.

Energy Holdings

     Energy Holdings and its subsidiaries are subject to substantial competition in the US as well as in the international markets from independent power producers, domestic and multi-national utility generators, fuel supply companies, energy marketers, engineering companies, equipment manufacturers, well capitalized investment and finance companies and affiliates of other industrial companies. Energy Holdings faces competition from companies of all sizes, having varying levels of experience, financial and human capital and differing strategies. Competition can be based on a number of factors, including price, reliability of service, the ability of Energy Holdings’ customers to utilize other sources of energy and credit quality of lease investments and partners.

     Many states and countries are considering or implementing different types of regulatory and privatization initiatives that are aimed specifically at increasing competition in the power industry. The increased competition that has resulted from some of these initiatives, combined with certain overbuild situations, has contributed to a reduction in electricity prices in some markets, and puts pressure on Energy Holdings and other electric utilities to lower costs. Achieving and maintaining a lower cost of production will be increasingly important to compete effectively in the energy business. In the Texas market, excess capacity has led to uneconomical energy pricing, negatively effecting two generating stations in Texas. For additional information regarding the Texas power market, see Item 7. MD&A — Future Outlook.

     Energy Holdings’ businesses are also under competitive pressure due to technological advances in the power industry and increased efficiency in certain energy markets. It is possible that advances in technology will reduce the cost of alternative methods of producing electricity to a level that is competitive with that of most central station electric production.

REGULATORY ISSUES

State Regulation

     PSEG, PSE&G, Power and Energy Holdings

     Focused Audit

     In 1992, the BPU conducted a Focused Audit of the impact of PSEG’s non-utility businesses, owned by Energy Holdings, on PSE&G. Among other things, the BPU ordered that PSEG not permit Energy Holdings’ investments to exceed 20% of PSEG’s consolidated assets without prior notice to the BPU. In the Final Order issued in 1999, the BPU noted that, due to significant changes in the industry and, in particular PSEG’s corporate structure as a result of the Final Order, modifications to or relief from the BPU’s Focused Audit order might be warranted. PSE&G has notified the BPU that PSEG will eliminate PSEG Capital debt by the end of the second quarter of 2003 and that it believes that the Final Order otherwise supercedes the requirements of the Focused Audit. While, PSE&G and Energy Holdings believe that this issue will be satisfactorily resolved, no assurances can be given.

     Affiliate Standards

     In February 2000, the BPU approved affiliate standards and fair competition standards which apply to transactions between a public utility and those of its affiliates that provide competitive services to retail customers in New Jersey. In March 2000, the BPU issued a written order related to these matters. PSE&G filed a compliance plan in June 2000 to describe the internal policy and procedures necessary to ensure compliance with such Affiliate Standards. On February 8, 2002 and March 7, 2002, the BPU issued orders adopting the Competitive Service Audit reports on New Jersey’s electric and gas utilities. The audit report generally concluded that PSE&G was in compliance with the BPU’s affiliate standards. On July 1, 2002, PSE&G filed its Affiliate Standards compliance plan in accord with the BPU’s regulations. Also in July 2002, the BPU commenced its next regular audit of the state’s electric and gas utilities’ competitive activities. The objectives of these audits are to assure that neither the utilities nor their related competitive business segments enjoy an unfair competitive advantage over their competitors and to assure that there is no form of cross-subsidization of competitive services by utility operations or affiliates with which they are associated. The audits will be guided by the BPU’s Affiliate Standards requirements. A report is expected to be issued in the first quarter of 2003. The outcome cannot be determined at this time.

     PSEG, Power and Energy Holdings

     PSEG, Power and Energy Holdings’ affiliates are not subject to direct regulation by the BPU, except potentially with respect to certain asset sales, transfers of control, reporting requirements and affiliate standards.

     PSE&G

     As a New Jersey public utility, PSE&G is subject to comprehensive regulation by the BPU including, among other matters, regulation of intrastate rates and service and the issuance and sale of securities. As a participant in the ownership of certain transmission facilities in Pennsylvania, PSE&G is subject to regulation by the Pennsylvania Public Utility Commission (PPUC) in limited respects in regard to such facilities.

     Electric Base Rate Case

     On May 24, 2002, PSE&G filed an electric rate case with the BPU requesting an annual $250 million rate increase for its electric distribution business. The proposed rate increase includes $187 million of increased revenues relating to a $1.7 billion increase in PSE&G’s rate base, which is primarily due to the investment that PSE&G has made in its electric distribution facilities since its last rate case in 1992; $18 million in higher depreciation rates and $45 million to recover various other expenses, such as wages, fringe benefits and enhancements to security and reliability. The requested increase proposes a return on equity of 11.75% for PSE&G’s electric distribution business.

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     The proposed rate increase would significantly impact PSE&G’s earnings and operating cash flows. The non-depreciation portion of the noticed rate increase ($232 million) would have a positive effect on PSE&G’s earnings and operating cash flows. The depreciation portion of the rate increase ($18 million) would have no impact on PSE&G’s earnings, as the increased operating cash flows would be offset by higher depreciation charges.

     In October 2002, the New Jersey Ratepayer Advocate and other parties filed testimony, with the Ratepayer Advocate recommending rate relief of approximately $87 million. Included in the Ratepayer Advocate’s position is a 9.50% return on equity compared to PSE&G’s requested 11.75% (approximately $45 million), a reduction in electric distribution depreciation expenses (approximately $100 million), and numerous other adjustments to PSE&G’s filing. The BPU has consolidated PSE&G’s service company filing relating to the transfer of certain assets from PSE&G to Services and its Street Lighting Tariff filing, which adjusts tariff levels for electricity for certain street lights, into the base rate proceeding for disposition.

     In accordance with BPU’s Final Order implementing parts of the Energy Competition Act, PSE&G was required to provide temporary billing discounts in four steps totaling 13.9% during the four-year transition period ending July 31, 2003. The last step, a 4.9% decrease, took effect August 1, 2002. The combined effects of base rate relief, the BGS auction and amortization of various deferral balances, discussed below, is expected to yield rates comparable to those in effect at the beginning of the deregulation process.Neither PSEG nor PSE&G can predict the outcome of these rate proceedings at the current time. Discussions are continuing and hearings were held with an initial decision scheduled to be issued by May 1, 2003. The new rates are proposed to be effective August 1, 2003, consistent with the Final Order.

     Non-Utility Generation (NUG) Contract Amendments

     In June 2002, PSE&G announced that it had amended its NUG power purchase agreements with El Paso Corporation (El Paso) for its Camden, Bayonne and Eagle Point cogeneration facilities. El Paso paid PSE&G $167 million for the amendment and agreed to provide specified amounts of electric energy and capacity to PSE&G at a fixed price and obtain this energy and capacity either from existing plants or in the open market. The amended agreement has been approved by the BPU.

     Deferral Proceeding

     In August 2002, PSE&G filed a petition proposing changes to two components of its rates, the Societal Benefits Clause (SBC) and the Non-Utility Generation Transition Charge (NTC). The proposed result, if adopted, will result in an annual reduction of revenues of approximately $122 million or approximately a 3.4% reduction in amounts paid by customers effective on August 1, 2003. The case has been transferred to the Office of Administrative Law and a pre-hearing conference was held October 24, 2002. PSE&G cannot predict the outcome of this matter.

     Deferral Audit

     In September 2002, the BPU retained the services of two outside firms to conduct a review of New Jersey’s electric utilities’ deferred costs for compliance with BPU mandates. Audit work has been completed and a final draft report was filed with the BPU on December 16, 2002, with PSEG responding on December 30, 2002. Formal comments on the final report are to be incorporated in the Deferral Proceedings, discussed above.

     PSE&G believes that the final report will support its current practices and not impact its financial position or results of operations.

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     Gas Base Rate Case and Commodity Charges

     In January 2002, the BPU issued an order approving a settlement of PSE&G’s Gas Base Rate case under which PSE&G is receiving an additional $90 million of gas base rate revenues, approximately $8 million of which results from gas depreciation rate changes. This occurred simultaneously with PSE&G’s implementation of its previously approved Gas Cost Underrecovery Adjustment (GCUA) surcharge to recover the October 31, 2001 gas cost underrecovery balance of approximately $130 million over a three-year period with interest and with PSE&G’s reduction of its 2001-2003 Commodity Charges (formerly LGAC) by approximately $140 million. As a result of the settlement, PSE&G agreed not to request another gas base rate increase that would take effect prior to September 1, 2004.

     The $130 million rate increase relating to the recovery of the GCUA over three years has no impact on earnings, however it will increase operating cash flows in a normal business environment. The reduction in PSE&G’s 2001–2003 commodity charges relates to its residential customers and will have no impact on earnings and will decrease operating cash flows assuming current cost levels and a normal business environment.

     BGSS Filing

     In September 2002, PSE&G filed to increase its Residential BGSS Commodity Charge on November 1, 2002 to recover approximately $89 million in additional revenues ($82 million of which is associated with an underrecovered balance) or a 7.4% rate increase for the typical residential gas heating customer. On January 8, 2003, the BPU approved the increase on a provisional basis, to be effective immediately and the case has been transferred to the Office of Administrative Law for hearings.

     BGSS Design

     On December 18, 2002, the BPU approved BGSS Commodity filing procedure changes based upon the form of generic settlement negotiated by the parties. An annual filing will be made each year by June 1 for rate relief expected by October 1. That rate relief may be supplemented by two potential self-implementing rate increases to the maximum of 5% of the residential customer’s bill on December 1st and February 1st. All increases will be reconciled in the annual filing. As a result of the delay in the implementation of the BGSS increase discussed above, PSE&G has filed for a 5% self-implementing rate increase to be effective on March 1, 2003 which would reduce the expected underrecovery from $61 million to $37 million. PSE&G cannot predict the outcome of this matter.

Federal Regulation

     PSEG, PSE&G, Power and Energy Holdings

     Public Utility Holding Company Act of 1935 (PUHCA)

     PSEG has claimed an exemption from regulation by the Securities and Exchange Commission (SEC) as a registered holding company under the PUHCA, except for Section 9(a)(2), which relates to the acquisition of 5% or more of the voting securities of an electric or gas utility company. Fossil and Nuclear are (EWGs) and Global’s

14

investments include EWGs and foreign utility companies (FUCOs) under PUHCA. Failure to maintain status of these plants as EWGs or FUCOs could subject PSEG and its subsidiaries to regulation by the SEC under PUHCA.

     If PSEG were no longer exempt under PUHCA, PSEG and its subsidiaries would be subject to additional regulation by the SEC with respect to their financing and investing activities, including the amount and type of non-utility investments. PSEG does not believe, however, that this would have a material adverse effect on it and its subsidiaries.

     Other

     PSE&G’s, Power’s and Energy Holdings’ domestic operations are subject to regulation by FERC with respect to certain matters, including interstate sales and exchanges of electric transmission, capacity and energy. PSE&G, Fossil, Nuclear and Global are also subject to the rules and regulations of the US Environmental Protection Agency (EPA), the US Department of Transportation (DOT) and the US Department of Energy (DOE). For information on environmental regulation, see Environmental Matters.

     FERC

     Regional Transmission Organization (RTO) Orders

     In July 2002, the United States Court of Appeals, D.C. Circuit, issued an opinion in favor of PSE&G and certain other utility petitioners, reversing a previous order of the FERC relating to the restructuring of PJM into an Independent System Operator (ISO). The court ruled that FERC lacked authority to require the utility owners to give up certain statutory rights and should not have required a modification to the PJM ISO Agreement eliminating utility owners rights to file changes to rate design. The Court further noted that FERC lacked authority to require the utility owners to obtain approval of their withdrawal from the PJM ISO, finding that FERC had no jurisdiction to eliminate the withdrawal rights to which the utilities had agreed. Further, in ruling on a specific argument raised by PSE&G, the Court held that PSE&G did not have to modify a contract with Old Dominion Electric Cooperative to accommodate the PJM restructuring. See Note 13. Commitments and Contingent Liabilities of the Notes for additional information.

     On remand, in December 2002, FERC refused to disclaim jurisdiction over a transmission owner’s withdrawal from an ISO. In January 2003, PSE&G together with several of the transmission owners filed for rehearing of the FERC decision. The potential outcome of this rehearing could have implications for FERC’s jurisdiction and authority to implement its standard market design, discussed below.

     In January 2002, PJM and the Midwest ISO (MISO) announced that it had entered into negotiations to create a virtual uniform seamless market encompassing these two RTOs, shortly after the FERC granted RTO status to the MISO. PSE&G also is participating in a rate investigation by FERC into whether the “regional through-and-out rates” between MISO and PJM should be eliminated. The proceeding could result in lower rates paid by transmission customers. The impact of these developments on PSE&G, Power and Energy Holdings is uncertain because specific rules will not be known for some time and are subject to FERC approval, which cannot be assured.

     In April 2002, PJM successfully implemented its “PJM West” expansion. Also, in December 2002, several major utilities in the Midwest and mid-atlantic area petitioned FERC to become transmission owners within PJM. Implementation of this filing would more than double the size of the current PJM region and would result in a market encompassing more than 153,000 MW of generation capacity and more than 128,000 MW of peak load. Portions of this expansion could become effective as early as Spring 2003 although a date for implementation cannot be determined with certainty even if the filing is accepted by FERC.

     In December 2002, FERC granted full RTO status to PJM.

     Standard Market Design

     In July 2002, FERC issued a Notice of Proposed Rulemaking (NOPR) to create a Standard Market Design for the wholesale electricity markets in the United States. The NOPR seeks to improve the consistency of market rules

15

throughout the country, including issues related to reliability, market power concerns, transmission, pricing, congestion, governance and other issues. If adopted, standard market design could significantly affect transmission and generation operations in the various markets in which PSE&G, Power and Energy Holdings operate.

     Other

     FERC issued an advance NOPR seeking comments to help form the basis for a proposed rule to standardize power-plant interconnection requirements to ease market entry for new generation facilities. As part of the rulemaking, FERC also will reconsider its policy addressing how transmission owners treat the cost of system upgrades necessary to accommodate new generation, potentially resulting in a new methodology. The ultimate outcome of this rulemaking and its impact upon PSEG, PSE&G, Power and Energy Holdings cannot be predicted.

     PJM also filed an alternative proposal to standardize its generator interconnection agreement and procedures within PJM. FERC accepted this proposal, which is currently in effect in PJM.

     In January 2003, FERC also proposed a new transmission pricing policy that would give rate incentives to engage in certain transactions, including transfer of control of transmission facilities to a FERC-approved RTO; and joining an RTO but maintaining independence from market participants. FERC also proposed to award an incentive for new transmission facilities that are found appropriate pursuant to an RTO transmission planning process. The ultimate outcome of this proposal and its impact upon PSEG, PSE&G, Power and Energy Holdings cannot be predicted.

     Power

     Nuclear Regulatory Commission (NRC)

     Operation of nuclear generating units involves continuous close regulation by the NRC. Such regulation involves testing, evaluation and modification of all aspects of plant operation in light of NRC safety and environmental requirements. Continuous demonstrations to the NRC that plant operations meet requirements are also necessary. The NRC has the ultimate authority to determine whether any nuclear generating unit may operate.

     The NRC has issued orders to all nuclear power plants to implement compensatory security measures. Some of the requirements formalize a series of security measures that licensees had taken in response to advisories issued by the NRC in the aftermath of the September 11, 2001 terrorist attacks. Power has evaluated these orders for the Salem and Hope Creek facilities and does not expect the cost of implementation of the NRC measures to be material.

     In accordance with NRC requirements, nuclear plants utilize various fire barrier systems to protect equipment necessary for the safe shutdown of the plant in the event of a fire. The NRC has identified certain issues at Salem and Power has made the majority of the necessary modifications to comply with these requirements, the cost of which was approximately $26 million for Power. Minor completion activities remain, the costs of which are not expected to be material.

     Exelon has informed Power that, on July 3, 2001, an application was submitted to the NRC to renew the operating licenses for Peach Bottom 2 and 3. If approved, the current licenses would be extended by 20 years, to 2033 and 2034 for Peach Bottom 2 and 3, respectively. NRC review of the application is expected to take approximately two years.

     In August 2002, the NRC issued a bulletin requiring that all operators of pressurized water reactor (PWR) nuclear unit submit certain information related to potential degradation of reactor vessel heads. In September 2002, Power provided the requested information for Salem. The response stated that a bare metal visual examination will be performed on the Salem reactor vessel heads during each unit’s next refueling outage, in compliance with the bulletin. If repairs are determined to be necessary, it is estimated that the repair would extend the outage by approximately four weeks. Bare metal visual inspections for Salem 1 and 2 were completed during 2002 and no degradation of the reactor heads was observed. On February 11, 2003 the NRC issued an order to all operators of PWR units concerning reactor vessel head inspections. The order confirms the previous bulletin’s

16

requirements of more intrusive and frequent future inspections, which apply to Salem 1 and 2. Power’s Hope Creek nuclear unit and the Peach Bottom 2 and 3 are unaffected as they are Boiling Water Reactor nuclear units. Power cannot predict what other actions the NRC may take on this issue.

Foreign Regulation

     Energy Holdings

Global

     Global’s electric distribution facilities in Latin America are rate-regulated enterprises. Rates charged to customers are established by governmental authorities and, excluding those rates at facilities in Argentina, which were fully impaired during 2002, are currently sufficient to cover all operating costs and provide a fair return in local currency terms. Global can give no assurances that future rates will be established at levels sufficient to cover such costs, provide a return on its investments or generate adequate cash flow to pay principal and interest on its debt or to enable it to comply with the terms of its debt agreements.

Brazil

     Rio Grande Energia S.A. (RGE) is regulated by Agencia Nacional de Energia Eletrica (ANEEL), the national regulatory authority. ANEEL’s functions include granting and supervising electric utility concessions, approving electricity tariffs, issuing regulations and auditing distribution systems’ performance. The rate setting process for Brazilian distribution companies has two components, an annual adjustment which RGE applies for every April and which is embedded in the concession contract, and a rate revision which will be calculated for RGE in 2003 and every subsequent fifth year anniversary.

     The current regulatory regime adjusts consumer electric tariffs based on a multiple-factor formula that includes recovery of wholesale inflation for previous periods, as well as an additional entitlement to pass through deferred US Dollar costs. This current regulatory structure would result in an increase of approximately 40% in the tariffs RGE would charge its customers starting in April 2003. ANEEL has issued a resolution indicating that new distribution tariffs will be calculated based on the replacement value of the electric utility companies’ assets, but has not yet determined the rate of return to be allowed on this asset base. In addition, current electric regulation also allows ANEEL to apply an additional upward or downward adjustment (known as the “X Factor”) to final tariff determinations in order to adjust expected financial returns on the replacement values of utility companies’ assets. The combination of these factors results in considerable uncertainty regarding future revenue and cash flow levels associated with Global’s investment in RGE. No assurances can be given that 2003 tariff increases will be approved on a timely basis or at a sufficient level to support planned levels of revenues and cash flows. For additional information, see Item 7. MD&A — Future Outlook.

     ANEEL also monitors service quality by auditing the duration and frequency of outages, as well as several other performance measures. Global is implementing capital improvement budgets which attempt to meet the quality of service standards. Failure to meet required standards would result in penalties which, if assessed, would not be expected to have a material negative impact on RGE’s results of operations, although no assurances can be given.

     RGE is currently engaged in a dispute with ANEEL which is seeking to mandate a reduction in RGE’s fixed asset base due to a pre-privatization review of Companhia Estadual de Energia’s (CEEE) asset base. This pre-privatization review was not brought to the attention of the bidders during the RGE privatization process. The result of such a decrease in RGE’s fixed asset base would be a likely reduction in RGE’s tariff of approximately $8 million during the next rate case as RGE’s return on fixed assets would be above the accepted level. RGE is currently contesting the matter.

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     Chile

     Distribution companies in Chile, including Chilquinta Energia S.A. (Chilquinta) and Sociedad Austral de Electricidad S.A. (SAESA), are subject to rate regulation by the Comision Nacional de Energia (CNE), a national governmental regulatory authority. The Chilean regulatory framework has been in existence since 1982, with rates set every four years based on a model company. The tariff which distribution companies charge to regulated customers consists of two components: the actual cost of energy purchased plus an additional amount to compensate for the value added in distribution (DVA tariff). The DVA tariff considers allowed losses incurred in the distribution of electricity, administrative costs of providing service to customers, costs of maintaining and operating the distribution systems and an annual real return on investment of 6% to 14%, based on the replacement cost of distribution assets. Changes in electricity distribution companies’ cost of energy are passed through to customers, with no impact on the distributors’ margins (equal to the DVA tariff). Therefore, distributors, including SAESA and Chilquinta, are not affected by changes in the generation sector which affect prices.

     The most recent tariff adjustments for SAESA and Chilquinta occurred in 2000. The next tariff review is scheduled for 2004. The DVA tariff index provides for monthly adjustments based on variations in certain economic indicators whenever the component costs increase by more than 3% over prior levels. This index provides inflation adjustments and indirect partial devaluation protection. The CNE concluded a profitability review of Chilean distribution companies in January 2002, with no resulting adverse effects to SAESA or Chilquinta’s tariff rates. The CNE is in the process of conducting its annual profitability reviews (similar to the one recently completed) which may result in material adverse effects on tariffs for SAESA and/or Chilquinta.

     Chile has implemented service quality standards and penalties; however, specific regulations have not yet been published. Quality of service limits were published in Peru and distribution companies are subject to penalties if these standards are not met. Global is implementing capital improvement budgets which attempt to meet these quality of service standards. Failure to meet required standards could result in penalties, which, if assessed, are not expected to have a material impact on the distribution system, although no assurances can be given.

     Peru

     Distribution companies in Peru, including Global’s facility, Luz del Sur, are subject to rate regulation by a national governmental regulatory authority. The Peruvian rate setting mechanism was established in 1992 and is similar to the Chilean system described above, except rates of return are between 8% and 16%. Rates are set every four years. The latest rate case was completed in 2001. The next regularly scheduled rate setting for Luz del Sur is in 2005.

CUSTOMERS

PSE&G

     As of December 31, 2002, PSE&G provided service to approximately 2.0 million electric customers and approximately 1.6 million gas customers. PSE&G’s service territory contains a diversified mix of commerce and industry, including major facilities of many corporations of national prominence. PSE&G’s load requirements are almost evenly split among residential, commercial and industrial customers.

Power

     Power sells energy to the wholesale market in the Super Region, primarily in PJM. In the recent New Jersey BGS auction, Power entered into hourly energy price contracts to be a direct supplier of certain large customers and entered into contracts with third parties who are direct suppliers of New Jersey’s EDCs.

     Power currently has over 177 active trading counterparties, which have passed a rigorous credit analysis and contracting process. These include investor owned utilities, retail aggregators and marketers.

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Energy Holdings

     Global

     Global has ownership interests in four distribution companies (excluding those in Argentina which were fully impaired during 2002) which serve approximately 2.9 million customers and has developed or acquired interests in electric generation facilities which sell energy, capacity and ancillary services to numerous customers through power purchase agreements (PPAs) as well as into the wholesale market. For additional information on distribution customers, see Item 2. Properties—Energy Holdings—Electric Distribution Facilities.

EMPLOYEE RELATIONS

     PSE&G, Power, Energy Holdings and Services believe that they maintain satisfactory relationships with their employees. For information concerning employee pension plans and other postretirement benefits, see Note 17. Pension, Other Postretirement Benefit and Savings Plans of the Notes.

PSE&G

     As of December 31, 2002, PSE&G had 6,376 employees. PSE&G has three-year collective bargaining agreements in place with four unions, representing 4,927 employees, which expire on April 30, 2005.

Power

     As of December 31, 2002, Power had 3,398 employees. Power has collective bargaining agreements, which expire on April 30, 2005, in place with three unions, representing 1,722 employees (901 employees, or approximately 68% of the workforce in Fossil and 821 employees, or approximately 44% of the workforce in Nuclear).

Energy Holdings

     As of December 31, 2002, Energy Holdings had 2,109 employees. Energy Holdings had a total of 1,863 employees who are represented by various construction trade unions. Energy Technologies and its operating subsidiaries are parties to agreements with various trade unions through multi-employer associations.

Services

     As of December 31, 2002, Services had 1,028 employees, none of which are unionized.

SEGMENT INFORMATION

     Financial information with respect to the business segments of PSEG, PSE&G, Power and Energy Holdings is set forth in Note 19. Financial Information by Business Segments of the Notes.

ENVIRONMENTAL MATTERS

PSEG, PSE&G, Power and Energy Holdings

     Federal, regional, state and local authorities regulate the environmental impacts of PSEG’s operations within the United States. Environmental impacts associated with PSEG’s operations in foreign countries are governed by laws and regulations particular to the region, country, or locality where these operations are located. For both domestic and foreign operations, areas of regulation may include air quality, water quality, site remediation, land use, waste disposal, aesthetics, impact on global climate, and other matters.

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Power and Energy Holdings

     Air Pollution Control

     Federal air pollution laws, such as the Federal Clean Air Act (CAA) and the regulations implementing those laws, require controls of emissions from sources of air pollution and also impose record keeping, reporting and permit requirements. Facilities in the US that Power and Energy Holdings operate or in which they have an ownership interest are subject to these Federal requirements, as well as requirements established under state and local air pollution laws applicable where those facilities are located. Except as noted below, capital costs of complying with air pollution control requirements through 2004 are included in Power’s estimate of construction expenditures in Item 7. MD&A.

     Sulfur Dioxide (SO₂)/Nitrogen Oxide (NOx)

To reduce emissions of SO₂, the CAA sets a cap on total SO₂emissions from affected units and allocates SO₂ “allowances” (each allowance authorizes the emission of one ton of SO₂) to those units. Generation units with emissions greater than their allocations can buy allowances from sources that have excess allowances. Similarly, to reduce emissions of NOx, Northeastern states and the District of Columbia have set a cap on total emissions of NOx from affected units and allocated NOx allowances (with each allowance authorizing the emission of one ton of NOx) to those units. The cap applies from May through September. The NOx allowances can be bought and sold through a regional trading program. In 2003, the cap will be reduced to limit NOx emissions further.

     The EPA has issued regulations (commonly known as the SIP Call) requiring the 22 states in the eastern half of the United States to make significant NOx emission reductions from utility and industrial sources and subsequently cap these emissions. The EPA has delayed the implementation until May 31, 2004. The NOx reduction requirements are consistent with requirements already in place in New Jersey, New York, Connecticut and Pennsylvania, and therefore are not likely to have an additional impact on or change the capacity available from Power’s existing facilities. New facilities that Power is developing in Ohio and Indiana will be subject to rules that those states are expected to promulgate to comply with the SIP Call.

     To comply with the SO₂ and NOx requirements, affected units may choose one or more strategies, including installing air pollution control technologies, changing or limiting operations, changing fuels or obtaining additional allowances. At this time, Power does not expect to incur material expenditures to continue complying with the SO₂ program. Beginning in 2003, the NOx cap will be reduced in New Jersey, New York, Pennsylvania, and other Northeastern states, which is expected to materially increase the cost of complying with the NOx program in those states. The extent of the increase across the region will depend upon a number of factors that may increase or decrease total NOx emissions from affected units, thus increasing or decreasing demand for a fixed supply of allowances. Power has been implementing measures to reduce NOx emissions at several of its units, which will reduce the impact of anticipated increases to the costs of allowances. For additional information regarding the costs of these credits, see Item 7. MD&A — Future Outlook.

     In 1997, the EPA adopted a new air quality standard for fine particulate matter and a revised air quality standard for ozone. To attain the fine particulate matter standard, states may require further reductions in NOx and SO₂. In 2002, the EPA announced that it would move forward with the process for identifying and designating areas of the United States that fail to meet the revised federal health standard for ozone or the new federal health standard for fine particulates. Designation of these areas is expected in 2004, with states expected to develop regulatory measures necessary to achieve and maintain the health standards thereafter. Additionally, similar NOx and SO₂ reductions may be required to satisfy requirements of an EPA rule protecting visibility in many of the nation’s scenic areas, including some areas near Power’s facilities. States or the federal government may require additional reductions in NOx emissions from electric generating facilities as part of an effort to achieve the revised ozone standard.

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     CO₂ Emissions

In 2003, it is expected that the Kyoto Protocol will become effective. This treaty will require substantial reductions of CO₂ and certain other greenhouse gases between 2008 and 2012. Although the US does not intend to ratify the treaty, Energy Holdings’ assets in Europe will be affected by implementation of the Kyoto Protocol, although the specific impacts will depend upon the regulations adopted by the European Union (EU) and nations looking to accede to the EU, such as Poland. At this juncture, costs or benefits to Energy Holdings’ investments in Europe cannot be quantified with certainty.

      On January 11, 2002, Power announced a voluntary agreement that calls for a goal of reducing by December 31, 2005 the annual average CO₂ emission rate of its fossil fuel fired electric generating units by 15% below the 1990 average annual CO₂ emission rate of its New Jersey fossil fuel fired electric generating units. Fossil also made a $1.5 million grant to the New Jersey Department of Environmental Protection (NJDEP) to assist in the development of landfill gas projects and has pledged to make an additional grant equal to $1 per ton of CO₂ emitted greater than the 15% goal, up to $1.5 million, if that reduction is not achieved.

     There continues to be a debate within the US over the direction of domestic climate change policy. Congress is currently considering several bills that would impose mandatory limitation of CO₂emissions for the domestic power generation sector, and several other states, primarily in the Northeastern US, are considering state-specific or regional legislation initiatives to stimulate CO₂ emission reductions in the electric utility industry.

     Other Air Pollutants

     The CAA directed the EPA to study potential public health impacts of hazardous air pollutants (HAPs) emitted from electric utility steam generating units. In December 2000, the EPA announced its intent to regulate HAP emissions from coal-fired and oil-fired steam units and to develop “Maximum Achievable Control Technology” (MACT) standards for these units. The EPA plans to propose the MACT standards by December 2003 and promulgate a final rule by December 2004, with compliance to be required by December 2007.

     Emissions of mercury appear to be a focus of EPA rule-making for regulating HAP’s from coal and oil-fired steam units. Several northeastern states also have expressed an interest in regulating these emissions, including those states in which Power owns and operates generation units. The impact on Power’s operations of federal or state regulation of these emissions is still unknown.

     The EPA missed the May 2002 deadline for proposing HAP’s regulations for combustion turbines, triggering a provision of the CAA that requires states to set HAP’s limits on a case-by-case basis. In November 2002, the EPA proposed regulations for combustion turbines, with the stated goal of adopting final standards before companies would be required to fully engage the case-by-case standard setting process with their state environmental agencies. Power and Energy Holdings are currently assessing the impact of this rule proposal on their respective combustion turbines.

     Power

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

     In November 1999, the federal government announced the filing of lawsuits by several states against seven companies operating power plants in the Midwest and Southeast US, charging that 32 coal-fired plants in ten states violated the PSD/NSR requirements of the CAA. Generally, these regulations require major sources of certain air pollutants to obtain permits, install pollution control technology and obtain offsets in some circumstances when those sources undergo a “major modification,” as defined in the regulations. Various environmental and public interest organizations have given notice of their intent to file similar lawsuits. The Federal government is seeking to order these companies to install the best available air pollution control technology at the affected plants and to pay monetary penalties of up to $27,500 for each day of continued violation.

     The EPA and the NJDEP issued a demand in March 2000 under the CAA requiring information to assess whether projects completed since 1978 at the Hudson and Mercer coal-fired units were implemented in accordance

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with applicable PSD/NSR regulations. Power completed its response to the information request in November 2000. In January 2002, Power reached an agreement with New Jersey and the federal governments to resolve allegations of noncompliance with federal and State of 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 NOx, 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. Power also paid a $1.4 million civil penalty and has agreed to spend up to $6 million on supplemental environmental projects. The agreement resolving the NSR allegations concerning the Hudson and Mercer coal-fired units also resolved the dispute over Bergen 2 regarding the applicability of PSD requirements and allowed construction of the unit to be completed and operation to commence.

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

     As previously noted, future environmental initiatives are expected to require reduced emissions of NOx, SO₂, mercury, and possibly CO₂ from electric generating facilities. The emission reductions to be achieved at the Hudson and Mercer coal units are expected to assist in complying with such future requirements.

Water Pollution Control

     Power and Energy Holdings

     The Federal Water Pollution Control Act (FWPCA) prohibits the discharge of pollutants to waters of the United States from point sources, except pursuant to a National Pollutant Discharge Elimination System (NPDES) permit issued by the EPA or by a state under a federally authorized state program. The FWPCA authorizes the imposition of technology-based and water quality-based effluent limits to regulate the discharge of pollutants into surface waters and ground waters. The EPA has delegated authority to a number of state agencies, including the NJDEP, to administer the NPDES program through state acts. The New Jersey Water Pollution Control Act (NJWPCA) authorizes the NJDEP to implement regulations and to administer the NPDES program with EPA oversight, and to issue and enforce New Jersey Pollutant Discharge Elimination System (NJPDES) permits. PSEG also has ownership interests in domestic facilities in other jurisdictions that have their own laws and implement regulations to regulate discharges to their surface waters and ground waters that directly regulate Power’s facilities in these jurisdictions.

      The EPA is conducting a rulemaking under FWPCA Section 316(b), which requires that cooling water intake structures reflect the best technology available (BTA) for minimizing “adverse environmental impact.” Phase I of the rule became effective on January 17, 2002. None of the projects that Power currently has under construction or in development is subject to the Phase I rule.

      EPA published for public comment on April 9, 2002 proposed draft Phase II rules covering large existing power plants and is expected to issue final rules by February 16, 2004. The draft regulations propose to establish three means of demonstrating that a facility has the best technology available at an intake. The content of the final Phase II rules cannot be predicted at this time, although it is reasonable to expect that the rule will apply to all of Power’s steam electric and combined cycle units that use surface waters for cooling purposes. If the Phase II rules require retrofitting of cooling water intake structures at Power’s existing facilities to meet the specific or performance criteria, identified as an option under the draft rule, the retrofit would result in material costs of compliance.

     Power

Permit Renewals

     In June 2001, the NJDEP issued a renewal permit for Salem, expiring in July 2006, allowing for the continued operation of Salem with its existing cooling water system. Relating to the implementation of the renewal permit,

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Power has also reached a settlement with the Delaware Department of Natural Resources and Environmental Control (DNREC). As part of this agreement, Power deposited approximately $6 million into an escrow account to be used for future costs related to this settlement.

     The NJDEP is in the process of reviewing the NJPDES permit renewal application for Power’s Hudson Station. The consultant hired by NJDEP recommended that the Hudson Station be retrofitted to operate with closed cycle cooling to address alleged adverse impacts associated with the thermal discharge and intake structure. Power prepared updated 316(a) and 316(b) demonstrations which proposed certain modifications to the intake structure and resubmitted these demonstrations to the NJDEP in 1998. Power believes that these demonstrations address the issues identified by the NJDEP’s consultant and provide an adequate basis for favorable determinations under the FWPCA without the imposition of closed cycle cooling, although no assurances can be given.

     The NJDEP has advised Power that it is reviewing a NJPDES permit renewal application for the Mercer Station and, in connection with that renewal, will be reexamining the effects of the Mercer Station’s cooling water system pursuant to FWPCA. Power has submitted updated 316(a) and 316(b) demonstrations to the NJDEP.

     It is impossible to predict the timing and/or outcome of the review of these applications in respect of the Hudson and Mercer Generation Stations. An unfavorable outcome could have a material adverse effect on Power’s financial position, results of operations and net cash flows. Power believes that the current operations of its stations are in compliance with FWPCA and will vigorously prosecute its applications to continue operations of its generating stations with present cooling water intake structures.

     Capital costs of complying with water pollution control requirements through 2004 are included in Power’s estimate of construction expenditures in Item 7. MD&A — Capital Requirements.

Control of Hazardous Substances

     PSEG, PSE&G, Power and Energy Holdings

     Generators of hazardous substances potentially face joint and several liability, without regard to fault, when they fail to manage these materials properly and when they are required to clean up property affected by the production and discharge of such substances. Certain Federal and state laws authorize the EPA and the NJDEP, among other agencies, to issue orders and bring enforcement actions to compel responsible parties to investigate and take remedial actions at any site that is determined to present an actual or potential threat to human health or the environment because of an actual or threatened release of one or more hazardous substances.

     PSE&G and Power

     Other liabilities associated with environmental remediation include natural resource damages. The Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA) and the New Jersey Spill Compensation and Control Act (Spill Act) authorize Federal and state trustees for natural resources to assess “damages” against persons who have discharged a hazardous substance, causing an “injury” to natural resources. Pursuant to the Spill Act, the NJDEP requires all persons conducting remediation to characterize “injuries” to natural resources and to address those injuries through restoration or damages. PSE&G and Power cannot assess the magnitude of the potential impact of this regulatory change. Although not currently estimable, these costs could be material.

     Because of the nature of PSE&G’s and Power’s businesses, including the production of electricity, the distribution of gas and, formerly, the manufacture of gas, various by-products and substances are or were produced or handled that contain constituents classified by Federal and state authorities as hazardous. For discussions of these hazardous substance issues and a discussion of potential liability for remedial action regarding the Passaic River, see Note 13. Commitments and Contingent Liabilities of the Notes. For a discussion of remediation/clean-up actions involving PSE&G and Power, see Item 3. Legal Proceedings.

Passaic River Site

     The EPA 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 CERCLA and that, to date, at least thirteen corporations, including

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PSE&G, may be potentially liable for performing required remedial actions to address potential environmental pollution in the Passaic River facility.

     In a separate matter, PSE&G and certain of its predecessors conducted industrial operations at properties within the Passaic River facility. The operations included one operating electric generating station, one former generating station, and four former MGPs. PSE&G’s costs to clean up former MGPs are recoverable from utility customers through the SBC. PSE&G has sold the site and obtained releases and indemnities for liabilities arising out of the site in connection with the sale. PSE&G cannot predict what action, if any, the EPA or any third party may take against PSE&G with respect to this matter, or in such event, what costs may be incurred to address any such claims. However, such costs may be material.

     PSE&G

Spill Prevention Control and Countermeasure (SPCC)

     In 1998, PSE&G evaluated SPCC Plan compliance at all of its SPCC substations and identified deficiencies. The necessary upgrades are now in the process of being made, the costs of which are not expected to be material. It is anticipated that these upgrades will take several years to complete. In July 2002, the EPA amended its SPCC regulations to, among other things, confirm the regulations’ applicability to oil-filled electrical equipment.

Manufactured Gas Plant Remediation Program (MGP)

     For information regarding PSE&G’s MGP, see Note 13. Commitments and Contingent Liabilities of the Notes.

     Power

Hudson and Mercer Generation Stations

     Approximately 150,000 tons of fly ash generated by the Hudson and Mercer Generating Stations was taken by the ash marketer, that PSEG then worked with, and sold to the owner and operator of a clay mine. The operator of the clay mine used the fly ash as fill material to return the mine site to grade, without obtaining the necessary approvals from the NJDEP. Upon discovery of this use, PSEG terminated the services of this ash marketer and initiated discussions with NJDEP for the appropriate regulatory approvals to allow this material to remain at the site. Power expects that the NJDEP will likely require a clay cap and other engineering controls to ensure that the ash is isolated from the environment if the ash is left in place. The cost of resolving this matter will depend upon the results of the negotiations with the NJDEP and the property owner. Although the precise extent of liability is not currently estimable, it is not expected to be material.

Kearny Generation Station

     A preliminary review of possible mercury contamination at the Kearny Station concluded that additional study and investigations are required. A Remedial Investigation (RI) was conducted and a report was submitted to the NJDEP in 1997. This report is currently under technical review. As currently issued, the RI Report found that the mercury at the site is stable and immobile and should be addressed at the time the Kearny Station is retired, which is expected in the next five years, dependent upon market conditions.

Uranium Enrichment Decontamination and Decommissioning Fund

     In accordance with the Energy Policy Act (EPAct), domestic entities that own nuclear generating stations are required to pay into a decontamination and decommissioning fund, based on their past purchases of US government enrichment services. Since these amounts are being collected from PSE&G’s customers over a period of 15 years, this obligation remained with PSE&G following the generation asset transfer to Power in 2000. PSE&G’s obligation for the nuclear generating stations in which it had an interest is $80 million (adjusted for inflation). As of December 31, 2002, PSE&G had paid $58 million, resulting in a balance due of $22 million. As of December 31, 2002, Power had a balance due of approximately $5 million, which related to interests in certain nuclear units Power purchased from Atlantic City Electric Company (ACE) and Delmarva Power and Light Company (DP&L).

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PSE&G and Power believe that they should not be subject to collection of any such fund payments under the EPAct. A number of nuclear generator owners filed in the US Court of Claims and in the US District Court, Southern District of New York to recover these costs. In July 2002, Power and PSE&G withdrew from the lawsuit without prejudice, due to an unfavorable decision against another nuclear generator owner in the lawsuit.

     Power

Nuclear Fuel Disposal

     After spent fuel is removed from a nuclear reactor, it is placed in temporary storage for cooling in a spent fuel pool at the nuclear station site. Under the Nuclear Waste Policy Act of 1982 (NWPA), as amended, the Federal government has entered into contracts with the operators of nuclear power plants for transportation and ultimate disposal of the spent nuclear fuel. To pay for this service, the nuclear plant owners were required to contribute to a Nuclear Waste Fund at a rate of one mil ($0.001) per kWh of nuclear generation ($21 million for 2002), subject to such escalation as may be required to assure full cost recovery by the Federal government. Payments made to the DOE for disposal costs are based on nuclear generation and are included in Energy Costs in the Consolidated Statements of Operations.

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

     Under the NWPA, the DOE was required to begin taking possession of the spent nuclear fuel by no later than 1998. The DOE has announced that it does not expect a facility to be available earlier than 2010. Exelon has advised Power that it had signed an agreement with the DOE applicable to Peach Bottom under which Exelon would be reimbursed for costs incurred resulting from the DOE’s delay in accepting spent nuclear fuel. The agreement allows Exelon to reduce the charges paid to the Nuclear Waste Fund to reflect costs reasonably incurred due to the DOE’s delay. Past and future expenditures associated with Peach Bottom’s recently completed on-site dry storage facility would be eligible for this reduction in DOE fees. 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 group of eight utilities filed a petition against the DOE in the US Court of Appeal, for the Eleventh Circuit, seeking to set aside the receipt of credits by Exelon out of the Nuclear Waste Fund, as stipulated in the Peach Bottom agreement. On September 24, 2002, the US Court of Appeal, for the Eleventh Circuit, issued an opinion upholding the challenge by the petitioners regarding the settlement agreement’s compensation provisions. Under the terms of the agreement, DOE and Exelon Generation are required to meet and discuss alternative funding sources for the settlement credits. Initial meetings have occurred. The Eleventh Circuit’s opinion suggests that the federal judgment fund should be available as an alternate source. The agreement provides that if such negotiations are unsuccessful, the agreement will be null and void. Any payments required by us resulting from a disallowance of the previously reduced fees would be included in Energy Costs in the Consolidated Statements of Operations.

     In September 2001, 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.

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     In October 2001, Nuclear filed a complaint in the US Court of Federal Claims, along with a number of other plaintiffs, seeking $28.2 million in relief from past overcharges by the DOE for enrichment services. No assurances can be given as to any claimed damage recovery.

     In February 2002, President Bush announced that Yucca Mountain in Nevada would be the permanent disposal facility for nuclear wastes. On April 8, 2002, the Governor of Nevada submitted his veto to the siting decision. On July 9, 2002, Congress affirmed the President’s decision. The DOE must still license and construct the facility. No assurances can be given regarding the final outcome of this matter, however it may be several years before a permanent disposal facility is available.

Low Level Radioactive Waste (LLRW)

     As a by-product of their operations, nuclear generation units produce LLRW. Such wastes include paper, plastics, protective clothing, water purification materials and other materials. LLRW materials are accumulated on site and disposed of at licensed permanent disposal facilities. New Jersey, Connecticut and South Carolina have formed the Atlantic Compact, which gives New Jersey nuclear generators, including Power, continued access to the Barnwell LLRW disposal facility which is owned by South Carolina. Power believes that the Atlantic Compact will provide for adequate LLRW disposal for Salem and Hope Creek through the end of their current licenses, although no assurances can be given. Both Power and Exelon have on-site LLRW storage facilities for Peach Bottom, Salem and Hope Creek which have the capacity for at least five years of temporary storage for each facility.

Other

     Power has reported to NRC and the NJDEP that it has detected the presence of tritium in three on-site groundwater monitoring wells in excess of the applicable analytical method’s detection limit. Power is continuing to investigate the source as well as the extent of the contamination. At this time, it is not possible to determine whether the costs associated with the investigation and/or remediation, if any, would be material.

ITEM 2. PROPERTIES

PSEG

     PSEG does not own any property. All property is owned by its subsidiaries.

PSE&G

     PSE&G’s First and Refunding Mortgage (Mortgage), securing the bonds issued thereunder, constitutes a direct first mortgage lien on substantially all of PSE&G’s property.

     The electric lines and gas mains of PSE&G are located over or under public highways, streets, alleys or lands, except where they are located over or under property owned by PSE&G or occupied by it under easements or other rights. These easements and rights are deemed by PSE&G to be adequate for the purposes for which they are being used.

     PSE&G believes that it maintains adequate insurance coverage against loss or damage to its principal properties, subject to certain exceptions, to the extent such property is usually insured and insurance is available at a reasonable cost.

     Electric Transmission and Distribution Properties

     As of December 31, 2002, PSE&G’s transmission and distribution system included approximately 21,873 circuit miles, of which approximately 7,518 circuit miles were underground, and approximately 781,041 poles, of which approximately 536,260 poles were jointly owned. Approximately 99% of this property is located in New Jersey.

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     In addition, as of December 31, 2002, PSE&G owned five electric distribution headquarters and four subheadquarters in four operating divisions, all located in New Jersey.

     Gas Distribution Properties

     As of December 31, 2002, the daily gas capacity of PSE&G’s 100%-owned peaking facilities (the maximum daily gas delivery available during the three peak winter months) consisted of liquid petroleum air gas (LPG) and liquefied natural gas (LNG) and aggregated 2,973,000 therms (approximately 2,886,000 cubic feet on an equivalent basis of 1,030 Btu/cubic foot) as shown in the following table:

Plant	Location	Daily Capacity (Therms)
Burlington LNG	Burlington, NJ	773,000
Camden LPG	Camden, NJ	280,000
Central LPG	Edison Twp., NJ	960,000
Harrison LPG	Harrison, NJ	960,000
Total		2,973,000

     As of December 31, 2002, PSE&G owned and operated approximately 17,019 miles of gas mains, owned 11 gas distribution headquarters and two subheadquarters, all in two operating regions located in New Jersey and owned one meter shop in New Jersey serving all such areas. In addition, PSE&G operated 61 natural gas metering or regulating stations, all located in New Jersey, of which 28 were located on land owned by customers or natural gas pipeline companies supplying PSE&G with natural gas and were operated under lease, easement or other similar arrangement. In some instances, the pipeline companies owned portions of the metering and regulating facilities.

     Office Buildings and Facilities

     PSE&G leases substantially all of a 26-story office tower for its corporate headquarters at 80 Park Plaza, Newark, New Jersey, together with an adjoining three-story building. PSE&G also leases other office space at various locations throughout New Jersey for district offices and offices for various corporate groups and services. PSE&G also owns various other sites for training, testing, parking, records storage, research, repair and maintenance, warehouse facilities and for other purposes related to its business.

     In addition to the facilities discussed above, as of December 31, 2002, PSE&G owned 41 switching stations in New Jersey with an aggregate installed capacity of 20,934 megavolt-amperes and 241 substations with an aggregate installed capacity of 7,503 megavolt-amperes. In addition, 5 substations in New Jersey having an aggregate installed capacity of 127 megavolt-amperes were operated on leased property.

Power

     Power rents approximately 137,000 square feet of office space from PSE&G at its headquarters in Newark, New Jersey. Other leased properties include office, warehouse, classroom and storage space, primarily in New Jersey, used for system maintenance, procurement and materials management staff, training and storage.

     Through a subsidiary, Power owns a 57.41% interest in approximately 12,000 acres of restored wetlands and conservation facilities in the Delaware River Estuary that was formed to acquire and own lands and other conservation facilities required to satisfy the condition of the NJPDES permit issued for Salem. Power also owns several other facilities, including the on-site Nuclear Administration and Processing Center buildings.

     Power has an 13.91% ownership interest in the 650-acre Merrill Creek Reservoir in Warren County, New Jersey. The reservoir was constructed to store water for release to the Delaware River during periods of low flow. Merrill Creek is jointly owned by seven companies that have generation facilities along the Delaware River or its tributaries and use the river water in their operations. Power also owns the Maplewood Test Services in Maplewood, New Jersey and the Central Maintenance Shop at Sewaren, New Jersey.

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     Power believes that it maintains adequate insurance coverage against loss or damage to its principal plants and properties, subject to certain exceptions, to the extent such property is usually insured and insurance is available at a reasonable cost. For a discussion of nuclear insurance, see Note 13. Commitments and Contingent Liabilities of the Notes.

     As of December 31, 2002, Power’s share of installed generating capacity was 13,055 MW, as shown in the following table:

OPERATING POWER PLANTS
Name	Location	Total Capacity (MW)	% Owned	Owned Capacity (MW)	Principle Fuels Used	Mission
Steam:
Hudson, Jersey City	NJ	991	100%	991	Coal/Gas	Load Following
Mercer, Hamilton	NJ	648	100%	648	Coal/Gas	Load Following
Sewaren, Woodbridge Twp.	NJ	453	100%	453	Gas/Oil	Load Following
Linden, Linden (E)	NJ	430	100%	430	Oil	Load Following
Keystone, Shelocta (A)	PA	1,700	22.84%	388	Coal	Base Load
Conemaugh, New Florence (A)	PA	1,700	22.50%	382	Coal	Base Load
Kearny, Kearny (E)	NJ	300	100%	300	Oil	Load Following
Bethlehem, Albany (E)	NY	376	100%	376	Oil	Load Following
Bridgeport Harbor, Bridgeport	CT	534	100%	534	Coal/Oil	Base Load/Load
						Following
New Haven Harbor, New Haven	CT	466	100%	466	Oil/Gas	Load Following
Total Steam		7,598		4,968
Nuclear:
Hope Creek, Lower Alloways Creek	NJ	1,049	100%	1,049	Nuclear	Base Load
Salem 1 & 2, Lower Alloways Creek	NJ	2,221	57.41%	1,275	Nuclear	Base Load
Peach Bottom 2 & 3, Peach Bottom (B)	PA	2,186	50%	1,093	Nuclear	Base Load
Total Nuclear		5,456		3,417
Combined Cycle:
Bergen, Ridgefield	NJ	1,221	100%	1,221	Gas	Load Following
Burlington, Burlington	NJ	245	100%	245	Gas	Load Following
Total Combined Cycle		1,466		1,466
Combustion Turbine:
Essex, Newark	NJ	617	100%	617	Gas/Oil	Peaking
Edison, Edison Township	NJ	504	100%	504	Gas/Oil	Peaking
Kearny, Kearny	NJ	443	100%	443	Gas/Oil	Peaking
Burlington, Burlington	NJ	557	100%	557	Oil	Peaking
Linden, Linden	NJ	324	100%	324	Gas/Oil	Peaking
Hudson, Jersey City	NJ	129	100%	129	Oil	Peaking
Mercer, Hamilton	NJ	129	100%	129	Oil	Peaking
Sewaren, Woodbridge Township	NJ	129	100%	129	Oil	Peaking
Bayonne, Bayonne	NJ	42	100%	42	Oil	Peaking
Bergen, Ridgefield	NJ	21	100%	21	Gas	Peaking
National Park, National Park	NJ	21	100%	21	Oil	Peaking
Kearny, Kearny	NJ	21	100%	21	Gas	Peaking
Linden, Linden (E)	NJ	21	100%	21	Gas/Oil	Peaking
Salem, Lower Alloways Creek	NJ	38	57.41%	22	Oil	Peaking
Bridgeport Harbor, Bridgeport	CT	19	100%	19	Oil	Peaking
Total Combustion Turbine		3,015		2,999
Internal Combustion:
Conemaugh, New Florence (A)	PA	11	22.50%	2	Oil	Peaking
Keystone, Shelocta (A)	PA	11	22.84%	3	Oil	Peaking
Total Internal Combustion		22		5
Pumped Storage:
Yards Creek, Blairstown (C)(D)	NJ	400	50%	200		Peaking
Total Operating Generation Plants		17,957		13,055

(A)	Operated by Reliant Resources
(B)	Operated by Exelon Generation LLC
(C)	Operated by Jersey Central Power & Light Company
(D)	Excludes energy for pumping and synchronous condensers.
(E)	These assets are scheduled for retirement within the next three years, partially dependent upon new generation going into service discussed below.
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     As of December 31, 2002, Power had 4,037 MW of generating capacity in construction or advanced development, as shown in the following table:

POWER PLANTS IN CONSTRUCTION OR ADVANCED DEVELOPMENT
Name	Location	Total Capacity (MW)	% Owned	Owned Capacity (MW)	Principle Fuels Used	Scheduled In Service Date
Combined Cycle:
Bethlehem	NY	763	100%	763	Gas	June 2005
Lawrenceburg	IN	1,096	100%	1,096	Gas	November 2003
Waterford	OH	821	100%	821	Gas	June 2003
Linden	NJ	1,218	100%	1,218	Gas	March 2005
Total Construction		3,898		3,898
Nuclear Uprates	NJ/PA	139	100%	139	Nuclear	2003-2005
Total Advanced Development		139		139

Projected Capacity (2002-2005)	Total Capacity (MW)
Total Owned Operating Generating Plants	13,055
Under Construction	3,898
Advanced Development	139
Less: Planned Retirements	(1,127	)
Projected Capacity	15,965

Energy Holdings

     Energy Holdings rents office space for its corporate headquarters at 80 Park Plaza, Newark, New Jersey from PSE&G. Energy Holdings’ subsidiaries also lease office space at various locations throughout the world to support business activities. Energy Holdings believes that it maintains adequate insurance coverage for properties in which its subsidiaries have an equity interest, subject to certain exceptions, to the extent such property is usually insured and insurance is available at a reasonable cost.

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     Global has invested in the following generation facilities, which are in operation or under construction as of December 31, 2002:

OPERATING POWER PLANTS
Name	Location	Total Capacity (MW)	% Owned	Owned Capacity (MW)	Principle Fuels Used
United States (A)
Texas Independent Energy
Guadalupe	TX	1,000	50%	500	Natural gas
Odessa	TX	1,000	50%	500	Natural gas
Kalaeloa	HI	180	50%	90	Oil
GWF
Bay Area I	CA	21	50%	10	Petroleum coke
Bay Area II	CA	21	50%	10	Petroleum coke
Bay Area III	CA	21	50%	10	Petroleum coke
Bay Area IV	CA	21	50%	10	Petroleum coke
Bay Area V	CA	21	50%	10	Petroleum coke
Hanford	CA	27	50%	14	Petroleum coke
GWF Energy:
Hanford – Peaker Plant	CA	94	76%	71	Natural gas
Henrietta – Peaker Plant	CA	96	76%	73	Natural gas
SEGS III	CA	30	9%	3	Solar
Tracy	CA	21	35%	7	Biomass
Bridgewater	NH	16	40%	6	Biomass
Conemaugh	PA	15	50%	8	Hydro
Total United States:		2,584		1,322
International(B)
MPC
Jingyuan – Units 5 and 6	China	600	15%	90	Coal
Tongzhou	China	30	40%	12	Coal
Nantong	China	30	46%	14	Coal
Jinqiao (Thermal Energy)	China	N/A	30%	N/A	Coal/Oil
Zuojiang – Units 1, 2 and 3	China	72	30%	22	Hydro
Fushi – Units 1, 2 and 3	China	54	35%	19	Hydro
Shanghai BFG	China	50	33%	16	Blast furnace gas
Haian (Thermal Energy)	China	N/A	100%	N/A	Coal
Huangshi Unit I	China	100	25%	25	Coal
PPN	India	330	20%	66	Naphtha/Natural gas
Prisma (C)
Crotone	Italy	20	25%	5	Biomass
Bando D’Argenta I	Italy	10	50%	5	Biomass
Electroandes	Peru	183	100%	183	Hydro
Chorzow (Existing Facility)	Poland	100	55%	55	Coal
Skawina CHP	Poland	590	50%	295	Coal
Turboven
Maracay	Venezuela	60	50%	30	Natural gas
Cagua	Venezuela	60	50%	30	Natural gas
TGM	Venezuela	40	9%	4	Natural gas
Rades	Tunisia	471	60%	283	Natural gas
Total International:		2,800		1,154
Total Operating Power Plants:		5,384		2,476

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     Global has invested in the following generation facilities which are under construction as of December 31, 2002:

POWER PLANTS IN CONSTRUCTION
Name	Location	Total Capacity (MW)	% Owned	Owned Capacity (MW)	Principle Fuels Used	Scheduled In Service Date
United States
GWF Energy
Tracy – Peaker Plant	CA	167	76%	127	Natural gas	2003
International
MPC
Huangshi Unit II	China	600	25%	150	Coal	2006
Yulchon	South Korea	612	50%	306	Natural Gas	2004
Kuo Kuang	Taiwan	480	18%	84	Natural gas	2003
Prisma (C)
Strongoli	Italy	40	25%	10	Biomass	2003
Bando D’Argenta II	Italy	10	50%	5	Biomass	2003
Salalah	Oman	200	81%	162	Natural gas	2003
Chorzow	Poland	220	90%	198	Coal	2003
Total Construction:		2,329		1,042
TOTAL GENERATION FACILITIES:		7,713		3,518

(A)	In November 2002, Global sold its interest in the generating station, Kennebec (Maine) to United American Energy Corp.
(B)	Tanir Bavi (India) was sold in October 2002 to GMR Vasavi Group. Also during 2002, assets in Argentina were fully impaired. See Note 4. Asset Impairments and Note 5. Discontinued Operations of the Notes.
(C)	All Prisma assets are currently held for sale.
Domestic Generation In Operation      Texas Independent Energy, L.P. (TIE)
In April 1999, Global and its partner, Panda Energy International, Inc., established TIE, a 50/50 joint venture, which owns and operates electric generation facilities in Guadalupe County in south central Texas (Guadalupe) and Odessa in western Texas (Odessa).
Approximately 37.5% of the Guadalupe plant’s total output for 2003 has been sold via bilateral power purchase agreements and the remainder will be sold in the Texas spot market. In 2002, the plant generated approximately $145 million of gross revenue.
Approximately 9.6% of the Odessa plant’s total output for 2003 has been sold via bilateral power purchase agreements. The balance of the output will be sold on a spot or short-term basis into the Texas power market. In 2002, the plant generated approximately $161 million of gross revenue. For a discussion of the Texas power market, see Item 7. MD&A — Future Outlook.
Kalaeloa      Global’s partner in Kalaeloa is a power fund managed by Harbert Power. All of the electricity generated by the Kalaeloa power plant is sold to the Hawaiian Electric Company under a power purchase contract terminating in May 2016. Under a steam purchase and sale agreement expiring in May 2016, the Kalaeloa power plant supplies steam to Hawaiian Independent Refinery, Inc. In 2002, the plant generated approximately $108 million of gross revenue. The plant availability factor in 2002 was 99%.
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     GWF Power Systems LP (GWF) and Hanford LP (Hanford)

     Global and Harbert Power each own 50% of the GWF plants. Power purchase contracts for the plants’ net output are in place with Pacific Gas and Electric Company (PG&E) ending in 2020 and 2021. In 2002, the plants generated approximately $62 million of gross revenue. The average availability factor of the five plants in 2002 was 95%.

     Global and Harbert Power each own 50% of Hanford. A power purchase contract for the plant’s net output is in place with PG&E through 2011. The Hanford plant generated approximately $16 million of gross revenue in 2002 and had an availability factor of 97%.

     In July 2001, GWF, Hanford and the Tracy biomass plant entered into an agreement with PG&E and amendments to their power purchase agreements with PG&E that contained the Public Utilities Commission of the State of California approved pricing for a term of five years commencing July 16, 2001.

Hanford and Henrietta Peaker Plants

     In May 2001 GWF Energy LLC (GWF Energy), a 50/50 joint venture between Global and Harbinger GWF LLC (an affiliate of Harbert Power), entered into a 10-year power purchase agreement with the California Department of Water Resources (DWR) to provide 340 MW of electric capacity to California from three new natural gas-fired peaking plants. As of December 31, 2002, Global’s ownership interest in this project was 76%. Energy and capacity not scheduled by the DWR is available for sale by GWF Energy. Two of the plants, the Hanford and Henrietta Peaking plants, have commenced commercial operation, and had approximately $25 million and $22 million in gross revenue, respectively, during 2002.

     For further information, see Note 13. Commitments and Contingent Liabilities of the Notes.

International Generation in Operation

     Global owns interests in operating generation facilities in China, India, Italy, Peru, Poland, Tunisia and Venezuela. In October 2002, a settlement was reached between AES Corporation (AES) and Global under which Global will transfer its minority ownership interests in certain Argentine assets to AES. For more details, see Note 4. Asset Impairments of the Notes.

     China

     Meiya Power Company Limited (MPC)

     Global’s activities in China and surrounding countries are conducted through MPC, a joint venture with the Asian Infrastructure Fund (AIF) and Hydro Quebec International (HQI).

     MPC is focused on developing, acquiring, owning and operating electric and thermal heat generation facilities in China, South Korea and Taiwan. MPC seeks to structure long-term power purchase contracts with its customers and to incorporate take-or-pay and minimum take provisions to support debt service and a specified equity return. Pricing terms for energy from its facilities generally include a base price and indexed adjustments to compensate for changes in inflation, foreign currency exchange rates up to the minimum equity return and laws affecting taxes, fees and required reserves. For cogeneration facilities, instead of selling the electricity through long-term power purchase contracts, MPC sells its output through an annually determined quota fixed in accordance with a predetermined formula which essentially determines the amount of electricity to be sold by reference to the amount of steam generated by the cogeneration facilities. The two cogeneration plants in Tongzhou and Nantong operate under this system. MPC’s projects, either under construction or in operation, have obtained all the required approvals to enable issuance of a business license in their respective localities.

     Minority investments held by Global in nine generation facilities located in China generated 2% of Global’s total gross revenues in 2002.

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     India

     PPN Power Generating Company Limited (PPN)

     Global owns a 20% interest in PPN located in Tamil Nadu, India. Global’s partners include Marubeni Corporation, with a 26% interest, El Paso Energy Corporation, with a 26% interest and the Reddy Group, with a 28% interest. PPN has entered into a power purchase contract for the sale of 100% of the output to the State Electricity Board of Tamil Nadu (TNEB) for 30 years, with an agreement to take-or-pay to a plant load factor (PLF) of 85%.

     Peru

     Empresa de Electricidad de los Andes S.A. (Electroandes)

     Electroandes’ main assets include four hydroelectric facilities with a combined installed capacity of 183 MW and 460 miles of transmission lines located in the central Andean region (northeast of Lima). In addition, Electroandes has a temporary concession to develop two greenfield hydroelectric facilities totaling 180 MW and expansion projects on existing stations totaling 100 MW. These concessions expire in March 2003, but are renewable for two additional years. In 2002, 91% of Electroandes revenues were obtained through power purchase agreements with mining companies in the region. Electroandes generated approximately $45 million of gross revenue in 2002.     

     Venezuela

Turbogeneradores de Maracay (TGM)

     Global, with a 9% interest, is in partnership with Corporacion Industrial de Energia (CIE), to own TGM. TGM sells all of the energy produced under contract to Manufacturas del Papel (MANPA), a paper manufacturing concern located in Maracay. MANPA and CIE have common controlling shareholders.

Turboven

     The facilities in Cagua and Maracay are owned and operated by Turboven, an entity which is jointly owned by Global and CIE. To date, power purchase contracts have been entered into for the sale of approximately 70% of the output of Maracay and Cagua, to various industrial customers. The power purchase contracts are structured to provide energy only with minimum take provisions. Fuel costs are passed through directly to customers and the energy tariffs are calculated in US Dollars and paid in local currency. In 2002, the plants in Maracay and Cagua generated $20 million of gross revenue.

     Poland

Elcho

     In October 2000, Global acquired a 55% economic interest in a combined thermal energy and power generation plant in Chorzow, in the Upper Silesia region of Poland, with Elektrownia Chorzow holding the remaining interest. As a part of the acquisition of the existing plant, Global obtained the rights to construct, and is constructing, a 220 MW electrical and 500 MW thermal combined thermal energy and power plant in Chorzow. Global currently holds a 55% economic interest in Elektrocieplownia Chorzow Sp. z.o.o. (ELCHO), including both the old plant and the plant under construction, with the anticipation of expanding such interest to approximately 90% by 2003. Global intends to operate the existing plant until the new plant comes on line in late 2003. Polskie Sieci Elektroenergetyczne SA (PSE), the Polish power grid company, has signed a long-term power purchase agreement with ELCHO and it is planned for all of the power to be delivered into the local distribution system. During 2002, the existing plant generated approximately $21 million of gross revenue. As of December 31, 2002, Energy Holdings’ investment exposure, including contingencies, was $80 million.

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Skawina CHP Plant (Skawina)

     During 2002, Global acquired a 50% interest in Skawina, a combined thermal energy and power generation, for $31 million and will purchase additional shares in 2003 that will bring Global’s aggregate interest in Skawina to approximately 65%. In addition, Global has an obligation to offer to purchase an additional 10% ownership from Skawina’s employees in 2004 for a total potential ownership in Skawina of 75%. Skawina supplies electricity to three local distribution companies and heat mainly to the city of Krakow, under one-year contracts consistent with current practice in Poland. The sale is part of the Polish Government’s energy privatization program. During 2002, the plant generated approximately $49 million of gross revenue. As of December 31, 2002, Energy Holdings, investment exposure, including contingencies, was $90 million.

     Tunisia

Rades

     Global and its partner Marubeni Corporation own 60% and 40%, respectively, of the Carthage Power facility in Rades, Tunisia for which Global is the operator. A 20-year power purchase contract has been entered into for the sale of 100% of the output to Societe Tunisienne d’Electricite et du Gaz, the national utility. The tariff in the power purchase contract consists of a fixed capacity charge to cover debt and equity return as well as fixed and variable charges to cover fuel, operations and maintenance costs. Each tariff component will be paid in local currency (Dinars). Rades commenced operation in May 2002 and generated approximately $57 million of gross revenue in 2002.

Power Plants Under Construction

     Global has eight projects in construction located in the United States, China, Italy, Oman, Poland, South Korea and Taiwan. All of these plants have obtained power purchase contracts for their output. The two projects under construction in Italy are currently held for sale.

     United States

Tracy Peaker Plant

     The Tracy Peaker Plant is under construction with a commercial operation date deadline of July 1, 2003. Total project cost is expected to be $146 million. For additional information, see Note 13. Commitments and Contingent Liabilities of the Notes.

     Oman

Salalah

     In March 2001, Global, through Dhofar Power Company (DPCO), signed a 20-year concession with the government of Oman to privatize the electric system of Salalah. A consortium led by Global (81% ownership) and several major Omani investment groups owns DPCO. The project is expected to achieve commercial operation by April 2003. Total project cost is estimated at $256 million. Global’s equity investment, including contingencies and equity guarantees, is expected to be approximately $97 million. As of December 31, 2002, Energy Holdings’ investment exposure, including contingencies, was $39 million.

     Poland

Elcho

     Global’s 220 MW (electrical) and 500 MW (thermal) facility will replace an existing 100 MW thermal energy and power generation facility. Global’s economic interest in the project is currently 55%, with the anticipation of expanding such interest to approximately 90% by the end of 2003, with the balance held by a local Polish company. Total project cost is estimated at $324 million. Global’s equity investment, including contingencies, is not expected to exceed $105 million. The plant has a targeted commercial operation date in late 2003. PSE, the Polish power grid company, has entered into a 20-year power purchase agreement with ELCHO for 100% of the electrical output. All

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of the thermal energy will be sold to Przedsiebiorstwo Energetyki Cieplnej, the district heating company for a term of 20 years.

     Taiwan

Kuo Kuang

     Through MPC, Global owns a 17.5% indirect interest in a gas-fired combined-cycle electric generation facility under construction in Kuo Kuang, Taiwan. MPC has a 35% interest in Kuo Kuang and partners with two local Taiwanese companies, Chinese Petroleum Corporation and CTCI Corporation. Kuo Kuang has entered into a 25-year power purchase contract for the sale of 100% of its electric output to Taiwan Power Company, the national utility. The power purchase contract payments consist of a fixed capacity charge to cover debt and equity return as well as fixed and variable charges to cover fuel, operations and maintenance costs. The tariff will be paid in local currency. Kuo Kuang is expected to be in operation in 2003, with a total cost of approximately $320 million. Global’s equity investment, including contingencies, is expected to be approximately $20 million.

     South Korea

Yulchon

     Through MPC, Global owns a 50% indirect interest in Yulchon Generation Company, a gas-fired combined-cycle plant under construction in South Korea. Open cycle operation of the plant is scheduled for mid-2004, with conversion to combined-cycle operation scheduled for mid-2005. The power will be purchased by state-owned Korea Electric Power Company under a long-term power purchase contract. The total cost of the project is expected to be $301 million, and will be provided by debt funds from project finance sources and equity funds from MPC.

Electric Distribution Facilities

     Global has invested in the following distribution facilities:

Name	Location	Number of Customers	Global’s Ownership Interest
Rio Grande Energia	Brazil	1,020,000	32%
Chilquinta Energia	Chile	480,000	50%
SAESA	Chile	660,000	100%
Luz del Sur	Peru	720,000	44%
Total		2,880,000

     Brazil

Rio Grande Energia (RGE)

     Together with VBC Energia, a consortium of Brazilian companies formed to invest in electric privatization, and Previ, the largest pension fund in Brazil, Global acquired RGE in 1997. Global is the named operator for the system. A shareholders’ agreement establishes corporate governance, voting rights and key financial provisions. Global has veto rights over certain actions, including approval of the annual budget and financing plan, executive officers, significant investments or acquisitions, sale or encumbrance of assets, establishment of guarantees, amendment of the concession agreement and dividend policies. Day-to-day operations are the responsibility of RGE, subject to partnership oversight. During 2001, VBC Energia and Previ transferred their shares to Companhia Paulista de Forcae Luz (CPFL), an electric distribution company in which each of VBC Energia and Previ have an interest.

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     RGE operates under a non-exclusive territorial concession agreement ending in 2027. The concession is non-exclusive in that the distribution system must provide large consumers the right to choose another provider of energy or to self-generate. Global does not believe this represents a substantial threat to the profitability of the distribution system in Brazil since the tariff structure provides the distribution system the opportunity to recover all costs associated with distribution service plus a return. RGE secures its energy supply through contractual agreements expiring between 2007 and 2020. RGE will also purchase 20% of its energy requirements through 2013 under the terms of contracts, which are denominated in US Dollars. During 2002, RGE generated $430 million in gross revenue.

     See Note 4. Asset Impairments of the Notes for a discussion of the goodwill impairment recorded for RGE. For a discussion of the Brazilian regulatory environment, see Item 1. Business — Regulatory Issues and Item 7. MD&A — Future Outlook.

     Chile

Chilquinta Energia S.A. (Chilquinta) and Luz del Sur (LDS)

     Global together with its partner, Sempra, jointly own 99.99% of the shares of Chilquinta, an energy distribution company with numerous energy holdings, based in Valparaiso, Chile. In addition, Global and Sempra jointly own 87.9% of LDS, which owns electric distribution facilities in Peru.

     As equal partners, Global and Sempra share in the management of Chilquinta, however, Sempra has assumed lead operational responsibilities at Chilquinta, while Global has assumed lead operational responsibilities at LDS. The shareholders’ agreement gives Global important veto rights over major partnership decisions including dividend policy, budget approvals, management appointments and indebtedness.

     In 2002, Chilquinta generated approximately $132 million in gross revenues. Chilquinta operates under a non-exclusive perpetual franchise within Chile’s Region V which is located just north and west of Santiago. Global believes that direct competition for distribution customers would be uneconomical for potential competitors. LDS operates under an exclusive, perpetual franchise in the southern portion of the city of Lima and in an area just south of the city along the coast serving a population of approximately 3.2 million. In 2002, LDS generated gross revenues of approximately $312 million. Both Chilquinta and LDS purchase energy for distribution from generators in their respective markets on a contract basis.

     For a discussion of the regulatory environment in Chile and Peru, see Item 1. Business — Regulatory Issues.

Sociedad Austral de Electricidad S.A. (SAESA)

     In 2001, Global purchased a 99.9% equity in SAESA and its subsidiaries from Compañia de Petróleos de Chile S.A. (COPEC). The SAESA group of companies consists of four distribution companies and one transmission company that provide electric service to 390 cities and towns over 900 miles between Bulnes in the VIII Region and Cochrane in the XI Region of southern Chile. Additionally, Global purchased from COPEC approximately 14% of Empresa Eléctrica de la Frontera S.A. (Frontel), not already owned by SAESA, to bring Global’s total interest in Frontel to 95.5%.

     Through its affiliated company Sistema de Transmission del Sur S.A. (STS), SAESA provides transmission services to electrical generation facilities that have power purchase arrangements with distributors in Regions VIII, IX and X and has current capacity of 673 MVA.

     SAESA also owns a 50% interest in an Argentine distribution company, Empresa de Energia Rio Negro S.A. (EDERSA) which provides generation, transmission and distribution services to 66 communities in the Province of Rio Negro, which is located close to Argentina’s principal oil and gas reserves and has more than 600,000 residents.

     SAESA and its Chilean affiliates are organized and administered according to a centralized administrative structure designed to maximize operational synergies. In Argentina, EDERSA has its own independent administrative structure.

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     During 2002, SAESA’s generated revenues of approximately $146 million, serving 660,000 customers.

     Argentina

EDEN, EDES and EDELAP

     In October 2002, a settlement was reached under which Global will transfer its minority interest in the assets of Empresa Distribuidora de Energia Norte S.A. (EDEN), Empresa Distribuidora de Energia Norte S.A. (EDES) Empresa Distribuidora La Plata S.A. (EDELAP) and other investments to Global’s partner, AES. For more details, see Note 4. Asset Impairments of the Notes.

EDEERSA

     Global has an ownership interest in Empresa Distribuidora de Electricidad de Entre Rios S.A. (EDEERSA). As of June 30, 2002, Global determined that its investment in EDEERSA was completely impaired under Statement of Financial Accounting Standards (SFAS) No. 144. For a detailed discussion, see Note 4. Asset Impairments and Note 13. Commitments and Contingent Liabilities of the Notes.

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ITEM 3.   LEGAL PROCEEDINGS
PSE&G
On November 15, 2001, Consolidated Edison, Inc. (Con Edison) filed a complaint against PSE&G with the Federal Energy Regulatory Commission (FERC) pursuant to Section 206 of the Federal Power Act asserting that PSE&G had breached agreements covering 1,000 MW of transmission by curtailing service and failing to maintain sufficient system capacity to satisfy all of its service obligations. PSE&G denied the allegations set forth in the complaint. While finding that Con Edison’s presentation of evidence failed to demonstrate several of the allegations, on April 26, 2002, FERC found sufficient reason to set the complaint for hearing. An initial decision issued by an administrative law judge in April 2002 upheld PSE&G’s claim that the contracts do not require the provision of “firm” transmission service to Con Edison but also accepted Con Edison’s contentions that PSE&G was obligated to provide service to Con Edison utilizing all the facilities comprising its electrical system including generation facilities and that PSE&G was financially responsible for “out-of-merit,” i.e., above-market, generation costs needed to effectuate the desired power flows. Following the Initial Decision, PSE&G and Con Edison engaged in extensive settlement discussions in an attempt to settle their differences. This attempt was unsuccessful. On December 9, 2002, FERC issued a decision modifying the Initial Decision by finding that only 600 MW of the total 1,000 MW power transfers is required to be supported by out-of-merit generation. FERC also made a number of other findings, on a preliminary basis, including favorable findings to PSE&G that power transfers should be measured on a “net” basis that considers the impacts of third party transactions and that PSE&G’s obligations should be reduced to the extent that Con Edison has impaired PSE&G’s ability to perform under the contracts. FERC remanded a number of issues to the administrative law judge for additional hearings, mainly related to the development of protocols to implement the findings of the December 9, 2002 order. In addition, issues related to Phase 2 of the complaint involving the past administration of the contracts and a claim that PSE&G improperly benefited from the purchase of hedging contracts in New York, is also pending before the administrative law judge. Hearings are scheduled to commence on March 5, 2003 and an initial decision by the administrative law judge is required by April 29, 2003. The nature and cost of any remedy, which is expected to be prospective only, cannot be predicted, but is not expected to be material. Docket No. EL02-23-000.
Energy Holdings
The Brazilian Consumer Association of Water and Energy has filed a lawsuit against RGE, the Brazilian distribution company of which Global is a 32% owner, and two other utilities, claiming that certain value added taxes and the residential tariffs that are being charged by such utilities to their respective customers are illegal. The plaintiff is seeking damages of approximately $505 million. In August 2002 the Public Treasury Court in Porto Alegre dismissed the case. The plaintiff filed a Notice of Appeal with the State Court of Appeals in November 2002. RGE believes that its collection of the tariffs and value added taxes are in compliance with applicable tax and utility laws and regulations. While it is the contention of RGE that the claims are without merit, and that it has valid defenses and potential third party claims, an adverse determination could have a material adverse effect on PSEG’s and Energy Holdings’ financial condition, results of operations and net cash flows. Assobraee-Associacao Brasileira de Consumidores de Agua e Energia Eletrica v. Rio Grande Energia S/A –RGE, CEEE and AES Sul, First Public Treasury Court/City of Porto Alegre. Proceeding No. 101214451.
See information on the following proceedings at the pages indicated for PSEG and each of PSE&G, Power and Energy Holdings as noted:
(1)	Pages 2 and 136. (PSE&G and Power) Proceedings before the BPU in the matter of the Energy Master Plan Phase II Proceeding to investigate the future structure of the Electric Power Industry, Docket Nos. EX94120585Y, EO97070461, EO97070462, EO97070463, and EX01050303.
(2)	Page 3. (PSE&G and Power) Gas Contract transfer filing with the BPU.
(3)	Page 12. (PSE&G) PSE&G electric rate case filed with the BPU.
(4)	Page 13. Affiliate standards audit at the BPU.
(5)	Page 14. (PSE&G) Deferal Proceeding and Deferral Audit at the BPU.
(6)	Page 14. (PSE&G) PSE&G’s Gas Base Rate Filings, Docket Nos. GR01050328 and GR01050297.
(7)	Page 14. (PSE&G) BGSS filing with the BPU.
(8)	Page 14. (PSE&G) BGSS Design filing with BPU.
(9)	Page 15. (PSEG, PSE&G, Power and Energy Holdings) FERC proceeding related to PJM Restructuring.
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(10)	Pages 15. (PSE&G) FERC proceeding related to MISO and PJM
(11)	Pages 17, 36 and 50. (Energy Holdings) Global’s rate case in Brazil.
(12)	Pages 22 and 23. (Power and Energy Holdings) Administrative proceedings before the NJDEP under the FWPCA for certain electric generating stations.
(13)	Pages 25, 26 and 163. (Power) DOE not taking possession of spent nuclear fuel, Docket No. 01-551C.
(14)	Pages 48 and 133. (Energy Holdings) AES termination of the Stock Purchase Agreement, relating to the sale of certain Argentine assets. New York State Supreme Court for New York County (Docket No. 60155/2002) PSEG Global, et al vs. The AES Corporation, et al.
(15)	Page 161. (PSE&G) PSE&G’s MGP Remediation Program.
(16)	Page 161. (PSE&G) Investigation and additional investigation by the EPA regarding the Passaic River site. Docket No. EX93060255.
(17)	Page 164. (Energy Holdings) Complaint filed with the FERC addressing contract terms of certain Sellers of Energy and Capacity under Long-Term Contracts with the California Department of Water Resources. Public Utilities Commission of the State of California v. Sellers of Long Term Contracts to the California Department of Water Resources FERC Docket No. EL02-60-000. California Electricity Oversight Board v. Sellers of Energy and Capacity Under Long-Term Contracts with the California Department of Water Resources FERC Docket No. EL02-62-000.
PSE&G and Power
In addition, see the following environmental related matters involving governmental authorities. Based on current information, PSE&G and Power do not expect expenditures for any such site, individually or all such current sites in the aggregate, to have a material effect on their respective financial condition, results of operations and net cash flows.
	(1)	Claim made in 1985 by US Department of the Interior under CERCLA with respect to the Pennsylvania Avenue and Fountain Avenue municipal landfills in Brooklyn, New York, for damages to natural resources. The US Government alleges damages of approximately $200 million. To PSE&G’s knowledge there has been no action on this matter since 1988.
	(2)	Duane Marine Salvage Corporation Superfund Site is in Perth Amboy, Middlesex County, New Jersey. The EPA had named PSE&G as one of several potentially responsible parties (PRPs) through a series of administrative orders between December 1984 and March 1985. Following work performed by the PRPs, the EPA declared on May 20, 1987 that all of its administrative orders had been satisfied. The NJDEP, however, named PSE&G as a PRP and issued its own directive dated October 21, 1987. Remediation is currently ongoing.
	(3)	Various Spill Act directives were issued by NJDEP to PRPs, including PSE&G with respect to the PJP Landfill in Jersey City, Hudson County, New Jersey, ordering payment of costs associated with operating and maintenance expenses, interim remedial measures and a Remedial Investigation and Feasibility Study (RI/FS) in excess of $25 million. The directives also sought reimbursement of NJDEP’s past and future oversight costs and the costs of any future remedial action.
	(4)	Claim by the EPA, Region III, under CERCLA with respect to a Cottman Avenue Superfund Site, a former non-ferrous scrap reclamation facility located in Philadelphia, Pennsylvania, owned and formerly operated by Metal Bank of America, Inc. PSE&G, other utilities and other companies are alleged to be liable for contamination at the site and PSE&G has been named as a PRP. A Final Remedial Design
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		Report was submitted to the EPA in September of 2002. This document presents the design details that will implement the EPA selected remediation remedy. The costs of remedy implementation are estimated to range from $14 million to $24 million. PSE&G’s share of the remedy implementation costs are estimated between $4 million and $8 million. The remedy itself and responsibility for the costs of its implementation are the subject of litigation currently venued in the United States District Court for the Eastern District of Pennsylvania entitled United States of America, et. al., v. Union Corporation, et. al., Civil Action No. 80-1589.
	(5)	The Klockner Road site is located in Hamilton Township, Mercer County, New Jersey, and occupies approximately two acres on PSE&G’s Trenton Switching Station property. PSE&G has entered into a memorandum of agreement (MOA) with the NJDEP for the Klockner Road site pursuant to which PSE&G will conduct an RI/FS and remedial action, if warranted, of the site. Preliminary investigations indicated the potential presence of soil and groundwater contamination at the site.
	(6)	The NJDEP issued Directives to various entities, including PSE&G, seeking payment of NJDEP’s anticipated costs of remedial action and of administrative oversight at the Combe Fill South Sanitary Landfill in Washington and Chester Townships, Morris County, New Jersey (Combe Site) and directing the respondents to arrange for the operation, maintenance and monitoring of the implemented remedial action or pay the NJDEP’s future costs of these activities, estimated to be $39 million and prepare a work plan for the development and implementation of a Natural Resource Damage Restoration Plan. The NJDEP and The United States of America filed separate cost recovery actions pursuant to CERCLA and/or the Spill Act seeking recovery of site investigation and remediation response and administrative oversight costs. PSE&G was named defendant in the NJDEP cost recovery action and a named third party defendant in the contribution action filed in the United States’ lawsuit. All of the foregoing claims against PSE&G were resolved by settlement in 2002.
	(7)	The NJDEP assumed control of a former petroleum products blending and mixing operation and waste oil recycling facility in Elizabeth, Union County, New Jersey (Borne Chemical Co. site) and issued various directives to a number of entities including PSE&G requiring performance of various remedial actions. PSE&G’s nexus to the site is based upon the shipment of certain waste oils to the site for recycling. PSE&G and certain of the other entities named in NJDEP directives are members of a PRP group that have been working together to satisfy NJDEP requirements including: funding of the site security program; containerized waste removal; and a site remedial investigation program.
	(8)	The New York State Department of Environmental Conservation (NYSDEC) has named PSE&G as one of many potentially responsible parties for contamination existing at the former Quanta Resources Site in Long Island City, New York. Waste oil storage, processing, management and disposal activities were conducted at the site from approximately 1960 to 1981. It is believed that waste oil from PSE&G’s facilities were taken to the Quanta Resources Site. NYSDEC has requested that the potentially responsible parties reimburse the state for the costs NYSDEC has expended at the site and to conduct an investigation and remediation of the site. Power, PSE&G and the other PRPs have executed an Order on Consent with NYSDEC for the investigation of the site and have entered an agreement among the PRPs for the sharing of the associated costs.
ITEM 4.		SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PSEG — None.
PSE&G — None.
Power — None.
Energy Holdings — None.
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PART II

ITEM 5.    MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

PSEG

     PSEG’s Common Stock is listed on the New York Stock Exchange, Inc. As of December 31, 2002, there were 114,473 holders of record.

      The following table indicates the high and low sale prices for PSEG’s Common Stock and dividends paid for the periods indicated:

Common Stock	High		Low		Dividend Per Share
2002:
First Quarter	$	46.80	$	40.46	$	0.54
Second Quarter		47.25		41.30		0.54
Third Quarter		43.50		28.00		0.54
Fourth Quarter		32.38		20.00		0.54
2001:
First Quarter	$	48.50	$	36.88	$	0.54
Second Quarter		51.55		41.80		0.54
Third Quarter		50.00		40.21		0.54
Fourth Quarter		44.20		38.70		0.54

     For additional information concerning dividend history, policy and potential preferred voting rights, restrictions on payment and common stock repurchase programs, see Item 7. MD&A — Liquidity and Capital Resources and Note 10. Schedule of Consolidated Capital Stock and Other Securities of the Notes.

PSE&G

     All of the common stock of PSE&G is owned by PSEG.

Power

     All of Power’s outstanding limited liability company membership interests are owned by PSEG.

Energy Holdings

     All of Energy Holdings’ outstanding limited liability company membership interests are owned by PSEG.

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ITEM 6.  SELECTED FINANCIAL DATA

PSEG

     The information presented below should be read in conjunction with PSEG’s Consolidated Financial Statements and Notes thereto.

	Years Ended December 31,
	2002			2001		2000		1999			1998
	(Millions, where applicable)
Total Operating Revenues	$	8,390		$	7,055	$	6,521	$	6,339		$	5,947
Income Before Discontinued Operations,
Extraordinary Item and Cumulative
Effect of a Change in Accounting Principle and Excluding
Losses from Argentine Investments	$	786	(A)	$	776	$	776	$	736		$	656
Income Before Discontinued Operations,
Extraordinary Item and Cumulative
Effect of a Change in Accounting Principle	$	416		$	776	$	776	$	736		$	656
Net Income (Loss)	$	245		$	770	$	764	$	(81	)	$	644
Earnings per Share (Basic and Diluted):
Before Discontinued Operations,
Extraordinary Item and Cumulative
Effect of a Change in Accounting Principle and Excluding
Losses from Argentine Investments	$	3.76	(A)	$	3.73	$	3.61	$	3.35		$	2.84
Before Discontinued Operations,
Extraordinary Item and Cumulative
Effect of a Change in Accounting Principle	$	1.99		$	3.73	$	3.61	$	3.35		$	2.84
Net Income (Loss)	$	1.17		$	3.70	$	3.55	$	(0.37	)	$	2.79
Dividends Declared per Share	$	2.16		$	2.16	$	2.16	$	2.16		$	2.16
As of December 31:
Total Assets	$25,742			$25,156		$	21,084	$	19,061		$	17,991
Long-Term Obligations (B)	$11,044			$10,234		$	5,340	$	4,625		$	4,813
Preferred Stock With Mandatory Redemption	$	460		$	—	$	75	$	75		$	75
Monthly Guaranteed Preferred Beneficial Interest       in PSE&G’s Subordinated Debentures	$	60		$	60	$	210	$	210		$	210
Quarterly Guaranteed Preferred Beneficial Interest       in PSE&G’s Subordinated Debentures	$	95		$	95	$	303	$	303		$	303
Quarterly Guaranteed Preferred Beneficial Interest       in PSEG’s Subordinated Debentures	$	705		$	525	$	525	$	525		$	525

(A)	2002 results exclude after-tax charges of $370 million, or $1.77 per share, related to losses from Energy Holdings’ Argentine investments. See MD&A – Results of Operations and Note 4. Asset Impairments of the Notes for further discussion.
(B)	Includes amounts for capital lease obligations. Increase in debt partially related to $2.5 billion securitization transaction in 2001 and consolidation of non-recourse debt.
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PSE&G

     The information presented below should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) and the Consolidated Financial Statements and Notes to the Consolidated Financial Statements.

	Years Ended December 31,
	2002		2001		2000		1999			1998
	(Millions, where applicable)
Total Operating Revenues	$	5,919	$	6,091	$	5,887	$	5,840		$	5,568
Income Before Extraordinary Item	$	205	$	235	$	587	$	653		$	602
Net Income (Loss)	$	205	$	235	$	587	$	(151	)	$	602
As of December 31:
Total Assets	$	12,429	$	12,927	$	15,267	$	14,724		$	14,669
Long-Term Obligations (A)	$	4,890	$	5,020	$	3,634	$	3,149		$	4,095
Preferred Stock With Mandatory Redemption	$	—	$	—	$	75	$	75		$	75
Monthly Guaranteed Preferred Beneficial Interest in    PSE&G’s Subordinated Debentures	$	60	$	60	$	210	$	210		$	210
Quarterly Guaranteed Preferred Beneficial Interest in    PSE&G’s Subordinated Debentures	$	95	$	95	$	303	$	303		$	303

(A) Includes amounts for capital lease obligations. Increase in debt related to the $2.5 billion securitization transaction in 2001.

POWER

     Omitted pursuant to conditions set forth in General Instruction I of Form 10K.

ENERGY HOLDINGS

     Omitted pursuant to conditions set forth in General Instruction I of Form 10K.

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ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(MD&A)

     This combined MD&A 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 make no other representations whatsoever as to any other company.

OVERVIEW OF 2002 AND FUTURE OUTLOOK

Overview

     PSEG

     PSEG’s subsidiaries consist of a mix of energy-related businesses that together are designed to produce a balanced energy market strategy. Because the nature and risks of these businesses are different, and because they operate in different geographic locations, the combined entity is intended to produce consistent earnings growth in a manner that will mitigate the adverse financial effects of business losses or an economic downturn in any one sector or geographic region.

     During 2002, PSEG’s strategy to maintain a diverse portfolio of energy-related businesses helped it to achieve results from its ongoing operations that were well within the revised earnings guidance of $3.70 to $3.90 per share provided to investors in July 2002, and within 6% of the original earnings guidance provided at the beginning of 2002. Management believes that this portfolio approach will help to balance changes in the earnings profiles for PSEG’s individual subsidiaries, providing a foundation for PSEG’s earnings in 2003 and supporting PSEG’s attempt to achieve its targeted long-term 7% annual growth rate as market conditions improve. However, even with this portfolio approach to the business, greater volatility in earnings and cash flows will occur due to the continuing evolution of the energy industry, both in the United States (US) and internationally.

     Over recent years, PSEG has realigned its organizational structure to address the competitive environment brought about by the deregulation of the electric generation industry and has transitioned from primarily being a regulated New Jersey utility to operating as a competitive energy company with operations primarily in the Northeastern US and in other select domestic and international markets. As the unregulated portion of the business continues to grow, financial risks and rewards will be greater, financial requirements will change and the volatility of earnings and cash flows will increase. As of December 31, 2002, Power, PSE&G, and Energy Holdings comprised approximately 27%, 48% and 27% of PSEG’s consolidated assets and contributed approximately 60%, 26% and 18% of PSEG’s results for the year ended December 31, 2002, excluding the charges discussed below.

     During 2002, the financial markets experienced significant pressures, particularly relating to increased credit and liquidity concerns in the energy industry. In response, PSEG took significant steps to strengthen its balance sheet. Early in 2002, PSEG began issuing approximately $80 million of common stock on an annual basis through its dividend reinvestment program. In September 2002, PSEG issued $460 million of participating units. In the fourth quarter, PSEG issued $458 million of common stock and $180 million of preferred securities. Altogether, PSEG issued over $1.1 billion in equity and equity-linked securities since September 2002 and used the proceeds primarily to reduce short-term debt. For further information regarding the issuances of these equity and equity-linked securities, see Note 10. Schedule of Consolidated Capital Stock and Other Securities.

     In addition to these equity issuances, PSEG took steps to significantly reduce its capital expenditures, which were at a peak in 2002. Early in 2002, PSEG announced that Energy Holdings is limiting future investments to contractual commitments, primarily those needed to complete the development of generating plants currently under construction, and recently revised the timeline for the completion of several of Power’s generating station construction projects.

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     The equity issuances and revised capital expenditure program discussed above enabled PSEG to accelerate its planned reduction of its leverage ratio in the fourth quarter. Going into 2003, PSEG’s leverage ratio was 0.61 to 1 as calculated under its credit agreements. This ratio included an after-tax charge in Other Comprehensive Income (OCI) of approximately $297 million related to its pension plan, the result of the accumulated benefit obligation of the pension exceeding the value of its pension assets.

     PSE&G

     PSE&G operates as an electric and gas public utility in New Jersey under cost-based regulation by the New Jersey Board of Public Utilities (BPU) for its distribution operations and by the Federal Energy Regulatory Commission (FERC) for its electric transmission operations. As such, the earnings of PSE&G are largely determined by the regulation of its rates. PSE&G expects stable earnings and cash flows in the future as it continues its transmission and distribution and sale of electric energy and gas service in New Jersey.

     PSE&G’s success will be determined by its ability to maintain system reliability and safety, effectively manage costs and obtain timely and adequate rate relief. The risks from this business generally relate to the regulatory treatment of the various rate and other issues by the BPU and the FERC. In 2002, PSE&G obtained a successful outcome to its gas base rate case, its first in ten years, transferred its gas supply contracts and gas inventory to Power and filed for an increase in electric rates to be effective August 1, 2003. That will mark the end of PSE&G’s four-year transition period, completing its transition to a transmission and distribution business.

     Power

     Power is focused on a generation market extending from Maine to the Carolinas and the Atlantic Coast to Indiana (Super Region). Power’s strategy is to continue to market its capacity through Basic Generation Service (BGS) related contracts and other bilateral contracts in New Jersey and its target market. Utilizing a generation portfolio diversified by fuel source, technology and market segment, 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 continued strong nuclear operations and pursue modest growth based on market conditions. Power integrates its electric generation production with its wholesale energy marketing and trading activities and risk management function.

     During 2002, record capacity factors at its nuclear facilities, coupled with Power’s ability to use energy trading to manage the risk of its obligations, enabled Power to meet its fixed price demands under the BGS related contracts with economic supply. Power also added to its generating capacity in the Northeast and established a foothold in the New England Independent System Operator (ISO) through its acquisition of two power plants totaling approximately 1,000 MW. Also, Power enhanced its portfolio by becoming a gas commodity supplier to PSE&G under a Basic Gas Supply Service (BGSS) contract.

     In response to low energy prices, Power has scaled back its new project anticipated growth, shifting its emphasis more towards potential acquisitions, and has adjusted its generating station construction schedules to better align with anticipated market prices.

     Power entered into contracts for the period beginning August 1, 2002 and ending July 31, 2003 with various successful bidders in the New Jersey Basic Generation Service (BGS) Auction. Power was also a participant in the recent BGS auction held in February 2003. Power entered into hourly energy price contracts to be a direct supplier of certain large customers for a ten-month period beginning August 1, 2003 and expiring May 30, 2004. Power also entered into contracts with third parties who are direct suppliers of New Jersey’s Electric Distribution Companies (EDCs). Through these seasonally-adjusted fixed price contracts, Power will indirectly serve New Jersey’s smaller commercial and residential customers for ten-month and 34-month periods beginning August 1, 2003 and expiring on May 30, 2004 and May 30, 2006, respectively. Power believes that its obligations under these contracts are reasonably balanced by its available supply.

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     Energy Holdings

     During 2002, a merger was consummated at Energy Holdings to change the form of the business from a corporation to a limited liability company. Energy Holdings succeeded to all the assets and liabilities of PSEG Energy Holdings Inc. in accordance with the New Jersey Limited Liability Company Act. As part of the reorganization, PSEG Resources Inc. became a wholly-owned subsidiary of PSEG Resources LLC (Resources), a newly formed New Jersey limited liability company. This reorganization was completed to further improve efficiencies within the tax reporting process.

     Energy Holdings, through PSEG Global Inc. (Global), invests in, owns and operates generation and distribution facilities in select international and US markets. The generation plants sell power under long-term agreements as well as on a merchant basis while the distribution companies are rate-regulated enterprises. Through Resources, Energy Holdings invests in energy-related financial transactions, including leveraged leases, which are designed to produce predictable earnings at reasonable levels.

     As a result of the worldwide economic downturn and the adverse development of several risks at certain of its investments, in 2002 Energy Holdings refocused its strategy from one of accelerated growth to one that places emphasis on increasing the efficiency and returns of its existing assets, and, going forward, intends to limit its spending to contractual commitments. In 2002, Energy Holdings recorded the financial impact of these events as it wrote-down its investment in Argentina, discontinued the operations of PSEG Energy Technologies Inc. (Energy Technologies) and a generating facility in India, and recorded goodwill impairment charges. Global will also selectively review its portfolio and seek to monetize, at reasonable values, investments which may no longer have a strategic fit. Resources has shifted its focus from new investments to monitoring its current investment portfolio, primarily energy-related leveraged leases. In 2002, the credit profile of several of the lessees deteriorated. In November 2002, Resources terminated its two lease transactions with affiliates of TXU-Europe, recovered its invested capital and recorded a modest gain on the termination. See Item 7A. Qualitative and Quantitative Disclosures About Market Risk — Credit Risk for further discussion.

Future Outlook

     PSEG

     PSEG develops a long-range growth target by building business plans and financial forecasts for each major business (PSE&G, Power, Global and Resources). These plans and forecasts incorporate specific, rather than generic, project investments. Key factors which influence the performance of each business, such as fuel input 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 the key variables and updates the financial projections to reflect changes in the energy markets, the economy and global conditions. Management believes this monitoring and forecasting process enables it to alter operating and investment plans adequately and appropriately as conditions change.

     Looking ahead, PSEG forecasts 2003 results of $3.70 to $3.90 per share for continuing operations, comparable to results for 2002, excluding losses from Argentine investments. This earnings per share guidance is expected to be achieved through results from PSEG’s ongoing operations which is expected to offset the effects of the common equity issuance in November 2002 and the use of a more conservative financing structure as PSEG issued more costly common and preferred equity and fixed-rate debt to replace low cost commercial paper, discussed above. Subsequent to 2003, PSEG seeks to attain its 7% long-term annual growth rate target in earnings per share.

     Several key assumptions in PSEG’s 2003 business plan are: Power will continue to be successful in securing BGS-related contracts and managing its obligations under such contracts with available supply; PSE&G will have a successful outcome to its recently filed electric rate case seeking an approximately $250 million increase in electric rates beginning in August 2003 and benefit from more normal weather; Global, with significant cost-cutting measures in place and limited spending planned over the five year planning horizon, will experience improvements in earnings through its focus on increasing the return on its existing assets; and Resources, with less exposure to its investment in the KKR Associates L.P. (KKR) leveraged buyout funds, will continue to be a steady contributor to

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earnings and cash flows. In the later years of the business plan, PSEG expects energy and capacity prices to increase as the current overbuild situation dissipates and reserve margins in the Pennsylvania – New Jersey – Maryland power pool (PJM), the Midwest and Texas return to more reasonable levels.

     During 2002, the energy segment of the financial markets experienced significant volatility and, in the third quarter, the fair value of Power's and Energy Holdings' long term debt decreased significantly. The fair value of Power's and Energy Holdings' long-term debt rebounded in the fourth quarter of 2002, returning to more reasonable levels. PSEG's business plan assumes that the fair value of its securities and the securities of its subsidiaries will continue to be valued at reasonable levels, enabling PSEG continued access to capital over the long-term. However, even if volatility returns to the marketplace and the value of PSEG's securities or its subsidiaries' securities are negatively affected, PSEG believes that it has sufficient liquidity to continue meet its business plans. PSEG's business plan also assumes a stable financial marketplace and a reasonable return on its pension plan funds and Nuclear Decommissioning Trust (NDT) Funds which have total investments of approximately $3 billion. Changes in the value of these funds will affect PSEG’s earnings, equity balance and the required amount of funding.

     As a result of PSEG’s forecasted operating cash flows and the changes in future capital expenditures, PSEG expects to have funds available to maintain its current dividend policy and have positive cash flow for each of the next five years. PSEG expects to use this free cash flow to continue to enhance its financial profile by reducing leverage. PSEG anticipates that its leverage ratio will decline modestly by the end of the year due capital expenditures being primarily funded with cash from operations, earnings for 2003 exceeding dividend requirements and also the required adoption of SFAS 143, “Accounting for Asset Retirement Obligations” (SFAS 143), which will benefit earnings, and therefore equity. The impact of SFAS 143 is not reflected in PSEG’s 2003 earnings guidance and is expected to more than offset the pension related charge to equity discussed above in Overview.

     Dividend payments on common stock for the year ended December 31, 2002 were $2.16 per share and totaled approximately $456 million. Although PSEG presently believes it will have adequate earnings and cash flow in the future from its subsidiaries to maintain common stock dividends at the current level, earnings and cash flows required to support the dividend will become more uncertain as its business continues to evolve. Future dividends declared will necessarily be dependent upon PSEG’s future earnings, cash flows, financial requirements, alternate investment opportunities and other factors. PSEG’s payout ratios were 58% in 2002 and 2001, excluding charges discussed above. PSEG would consider increasing the dividend if the payout ratio fell below 50% and could be sustained at that level.

     PSE&G

     PSE&G’s success will be dependent, in part, on its ability to obtain a reasonable and timely outcome to its recently filed electric rate case, as well as its ability to continue to recover the regulatory assets it has deferred and the investments it plans to make in its electric and gas transmission and distribution systems. The proposed rate increase would significantly impact PSE&G’s earnings and operating cash flows. The non-depreciation portion of the requested rate increase ($232 million) would have a positive effect on PSE&G’s earnings and operating cash flows. The depreciation portion of the requested rate increase ($18 million) would have no impact on PSE&G’s earnings, as the increased operating cash flows would be offset by higher depreciation charges. The outcome of these matters cannot be predicted, but are expected to be material to PSE&G results of operations, financial condition and net cash flows.

     Power

     A major risk of Power’s business is that the competitive wholesale power prices that it is able to obtain are sufficient to provide a profit and sustain the value of its assets. It is also subject to credit risk of the counterparties to whom it sells energy products, the successful operation of its generating facilities, fluctuations in market prices of energy and imbalances between obligations and available supply. Power is currently constructing projects, which will increase capacity from approximately 13,000 MW to 16,000 MW, net of planned retirements through 2005.

     Power’s success as a BGS provider will depend, in part, on its ability to meet its obligations under its full requirements contracts with the BGS suppliers profitably. Power expects to accomplish this by producing energy from its own generation and/or energy purchases in the market. Power also enters into trading positions related to its generation assets and supply obligations. To the extent it does not hedge its obligations, whether long or short, Power will be subject to the risk of price fluctuations that could affect its future results, such as changes in the expected price of energy and capacity that Power sells into the market, increases in the price of energy purchased to meet its supply obligations, the cost of fuel to generate electricity, the cost of emission credits needed for environmental compliance, and the cost of congestion credits which are used by Power to transmit electricity and other factors. In addition, Power is subject to the risk of substandard operating performance of its fossil and nuclear generating units. To the extent there are unexpected outages at Power’s generating facilities, changes in environmental or nuclear regulations or other factors that impact the production by such units or the ability to generate and transmit electricity in a cost effective manner, it may cost Power more to acquire or produce electricity. These risks can be exacerbated by, among other things, changes in demand in electricity usage, such as those due to extreme weather and economic conditions.

     Power’s future revenue stream is uncertain because Power cannot accurately predict revenues beyond the termination of the ten-month BGS contracts. However, this uncertainty has been partially mitigated by a portion of the BGS demand being contracted for a 34-month period. Also, certain of Power’s new projects, such as its

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investments in the Lawrenceburg and Waterford projects under construction in Indiana and Ohio, the plants Power acquired in 2002 from Wisvest Corporation in Connecticut and its development of the Bethlehem Energy Center in New York are also subject to the risk of changes in future energy prices as Power has not entered into forward sale contracts for the majority of the expected generation capacity of these facilities. Power also expects that capacity prices will increase over its five year planning horizon as the overbuild situation in the Super Region dissipates as older, less efficient units are retired in the region. Also, since the majority of Power’s generation facilities are concentrated in the Northeast region, changes in future energy supply and demand and energy-related prices in this region could materially affect Power’s results. Also, changes in the rules and regulation of these markets by FERC, particularly changes in the rules in the power pools in which Power conducts business and ability to maintain market based rates, could have an adverse impact on Power’s results. Lastly, in accordance with the Final Decision and Order (Final Order), issued by the BPU in 1999 relating to PSE&G’s rate unbundling, stranded costs and restructuring proceedings, Power will cease collection of Market Transition Charge (MTC) revenues at the end of the transition period in 2003. Power expects MTC revenues will amount to approximately $115 million in 2003. As a result of these variables and risks, Power cannot predict the impact of these potential future changes on its forecasted results of operations, financial position or net cash flows; however, such impact could be material.

     In addition, Power’s earnings projections assume that it will continue to optimize the value of its portfolio of generating assets and supply obligations through its energy trading operations. This will depend, in part, on Power’s, as well as its counterparties’, ability to maintain sufficient creditworthiness and to display a willingness to participate in energy trading activities at anticipated volumes. Potential changes in the mechanisms of conducting trading activity could positively or negatively affect trading volumes and liquidity in these energy trading markets compared to the assumptions of these factors embedded in Power’s business plans. Power marks to market derivative instruments designated as trading activities and includes the resulting unrealized gains and losses in earnings. The vast majority of these contracts have terms of less than two years and are valued using market exchange prices and broker quotes. Energy trading provides the opportunity for greater returns, but it also is more risky than a regulated business and can be adversely impacted by fluctuating energy market prices and other factors. Power utilizes what it believes to be a conservative risk management strategy to minimize exposure to market and credit risk. For further information, see MD&A — Accounting Issues, Note 1. Organization and Summary of Significant Accounting Policies and Note 12. Risk Management of the Notes. As a result of these variables, Power cannot predict the impact of these potential future changes on its forecasted results of operations, financial position or net cash flows; however, such impact could be material.

     Energy Holdings

     Global will focus on improving the profitability of its generation and distribution investments. Resources, with recent investments and less exposure to its investment in the KKR leveraged buyout funds, expects to continue to be a steady contributor to earnings and cash flows.

     Global

     While Global realized substantial growth prior to 2002, significant challenges began developing during the fourth quarter of 2001 and continued into 2002. These challenges include the Argentine economic, political and social crisis, the soft power market in Texas, recent developments in India and the worldwide economic downturn. The financial effects of several of these challenges are behind Energy Holdings as a result of the charges recorded in 2002. Global has recently reached a settlement with The AES Corporation (AES) related to certain of Global’s investments held for sale in Argentina. Similarly, Global has completed the sale of its investment in Tanir Bavi Power Company Private Ltd. (Tanir Bavi) in India at its reduced carrying value, receiving proceeds of approximately $45 million in October 2002. Global has refocused its strategy from one of accelerated growth to one that places emphasis on increasing the efficiency and returns of its existing assets and intends to limit its spending to contractual commitments. Global is also selectively reviewing its portfolio and will seek to monetize, at reasonable values, investments which may no longer have a strategic fit. As part of this review, Global recently entered into a memorandum of understanding to sell its interest in Prisma, a generation business in Italy, to its partners for approximately $69 million. The sale is expected to close in the first half of 2003, contingent upon successful project financing.

     Energy Holdings’ success will be dependent, in part, on its ability to mitigate risks presented by its international strategy. The economic and political conditions in certain countries where Global has investments present risks that may be different than those found in the US including: unilateral renegotiation or nullification of existing contracts, changes in law or tax policy, interruption of business, risks of nationalization, expropriation, war and other factors.

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Operations in foreign countries also present risks associated with currency exchange and convertibility, inflation and repatriation of earnings. In some countries in which Global has interests, economic, political and monetary conditions and other factors could affect Global’s ability to convert its cash distributions to US Dollars or other freely convertible currencies. Although Global generally seeks to structure power purchase contracts and other project revenue agreements to provide for payments to be made in, or indexed to, US Dollars or a currency freely convertible into US Dollars, its ability to do so in all cases may be limited.

     The international risks discussed above can potentially be magnified due to the volatility of foreign currencies. The foreign exchange rates of the Venezuelan Bolivar and Brazilian Real materially weakened in 2002 due to various political and economic factors. This resulted in a reduction in Global’s investment and equity balances and resulted in comparatively lower contributions from Global’s distribution investments in US Dollar terms. While Energy Holdings still expects certain of its investments in Latin America to contribute favorably to its earnings in the future, the political and economic risks associated with this region could have a material adverse impact on its remaining investments in the region.

     The table below reflects Energy Holdings’ investment exposure in Latin American countries:

	Investment Exposure				Equity Exposure
	December 31,				December 31,
	2002		2001		2002		2001
	(Millions)
Argentina	$	—	$	632	$	—	$	632
Brazil		436		467		234		298
Chile		578		542		475		465
Peru		454		387		455		388
Venezuela		51		53		51		53

     The investment exposure consists of Global’s invested equity plus equity commitment guarantees. Equity exposure is equal to Global’s investment net of foreign currency translation adjustments, reflected in OCI.

     Venezuela

     As of December 31, 2002, Global had $49 million, or less than 1%, of its assets invested in the Turboven generation facilities in Maracay and Cagua, Venezuela. This project was fully funded by equity. Venezuela is undergoing a period of significant political instability, as participation in prolonged work stoppages and violent street protests have caused a drastic reduction in economic activity. Following its 45% decline against the US Dollar in 2002, the Venezuelan currency, the Bolivar, has declined further in value in 2003, and additional declines are possible. Turboven’s earnings and cash flows are expected to be affected by the prospects of reduced economic activity and increased exchange rate volatility. Although Turboven’s power purchase contracts are indexed to the US Dollar, the sharp decline in economic activity and in the exchange rate make the local sales price of Turboven’s energy supplies less attractive to local manufacturers. Turboven’s revenues have already declined and are expected to remain below previous levels due to weakening demand for the products manufactured by Turboven’s customers, which includes a utility and certain industrial companies.

Brazil

     As of December 31, 2002, Global owns a 32% interest in Rio Grande Energia (RGE), a distribution company in Brazil. The carrying value of this investment as of December 31, 2002 was $211 million, net of pre-tax cumulative translation adjustments of $225 million. For a discussion of the impairment of a portion of the goodwill balance at RGE due to the adoption of SFAS No. 142 "Goodwill and Other Intangible Assets" (SFAS 142), see Note 2. New Accounting Standards of the Notes.

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     The Brazilian economy is in a period of slowed growth that has resulted from the high public and private sector debt levels, as well as increased interest rates used by the Central Bank of Brazil to control rising inflation and to support the value of the Brazilian Real following its 34% decline in 2002.

     In January 2003, a new government administration assumed office and has a stated goal of reducing the effect of currency devaluations and wholesale prices as inputs to final consumer prices for electricity. Additionally, the new administration’s energy industry policy is to cancel future privatizations of state-owned energy companies and increase federal government control and coordination of energy industry policies previously controlled by state and regional entities.

     The current regulatory regime adjusts consumer electric tariffs based on a multiple-factor formula that includes recovery of wholesale inflation for previous periods, as well as an additional entitlement to pass through deferred US Dollar costs. This current regulatory structure would result in an increase of approximately 40% in the tariffs RGE would charge its customers starting in April 2003. Failure to receive a reasonable tariff increase, unfavorable developments relating to potential changes in the regulatory structure and/or greater exertion of price controls by the Brazilian government could have a materially adverse impact on Energy Holdings’ ability to earn a reasonable return on its investment and could materially impact its ability to recover its investment balance, including a potential impairment. Other risk factors that could affect future revenues and cash flows from Energy Holdings’ investment in RGE are continued high interest rate levels, currency devaluation, extended recession and slow economic growth.

     Texas

     As of December 31, 2002, Global had $222 million, net of derivative valuations, invested in a 50/50 joint venture which operates two 1,000 MW gas-fired combined-cycle electric generating facilities in Texas, including approximately $73 million of loans earning an annual interest rate of 12%. The loan structure was put in place to provide Global with a preferential cash and earnings flow from the projects after third-party debt service. Losses from Texas Independent Energy L.P. (TIE) were greater than expected due to lower energy prices resulting from over-supply of energy in the Texas power market for the year ended December 31, 2002. Global expects this trend of lower energy prices to continue until the 2004-2005 time frame when market prices are expected to increase, as older less efficient plants in the Texas power market are expected to be retired and the demand for electricity is expected to increase. However, no assurances can be given as to the accuracy of these estimates.

     Continued weakness in the Texas power market will put pressure on TIE’s ability to meet financial covenants in its loan documents. Discussions are underway with the projects’ lenders to improve flexibility in meeting these covenants. Potential remedies may include modest additional equity investments by Global in the Texas facilities. Total project level non-recourse debt of $527 million at the Texas facilities is due over the next five years. These debt maturities include $210 million in 2006 and $213 million in 2007. In the event the project-level debt cannot be repaid or refinanced at the project level, Global may consider certain alternatives including additional equity investments.

     Resources

     Over the longer term, Resources’ earnings and cash flow streams are dependent upon the availability of suitable transactions and its ability to continue to enter into these transactions. Based on current market conditions and Energy Holdings intent to limit capital expenditures, it is unlikely that Resources will make significant investments in the near term. Resources faces risks with regard to the creditworthiness of its counterparties, as well as the risk of a change in the current tax treatment of its investments in leveraged leases. The manifestation of either of these risks could cause a materially adverse effect on Energy Holdings’ strategy and its forecasted results of operations, financial position, and net cash flows. For discussion of the five counterparties to these leases, including Resources’ aggregate gross investment of $749 million, or $455 million, net of deferred taxes of $294 million, as of December 31, 2002, with those who have been downgraded to below investment grade by at least one of the rating agencies, see Item 7A. Qualitative and Quantitative Disclosures about Market Risk.

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     Energy Technologies is a business that principally constructs, installs, and maintains heating, ventilating and air conditioning (HVAC) equipment and related services. Energy Technologies is comprised of 11 HVAC and mechanical operating companies. In June 2002, Energy Holdings adopted a plan to sell its interests in the HVAC/mechanical operating companies which is expected to be completed by June 30, 2003. Also, the Demand Side Management (DSM) business previously conducted by Energy Technologies and which Energy Holdings decided to retain during the third quarter of 2002, was transferred to Resources as of December 31, 2002.

RESULTS OF OPERATIONS

     PSEG

     PSEG’s business consists of four reportable segments, which are Power, PSE&G, Global and Resources. The following is a discussion of the major year-to-year financial statement variances and follows the financial statement presentation as it relates to each of its segments.

     PSEG’s results of operations are primarily comprised of the results of operations of its operating subsidiaries, PSE&G, Power and Energy Holdings. For a more detailed discussion of the changes referenced for PSEG, see the applicable results of operations discussion for each respective subsidiary registrant.

     Net income for the period ended December 31, 2002 was $245 million or $1.17 per share of common stock, both basic and diluted, based on approximately 209 million average shares outstanding. Excluding certain after-tax charges of $541 million or $2.59 per share for the year ending December 31, 2002, results were $786 million or $3.76 per share. The charges relate to the asset impairment of investments in Argentina and losses from operations of those impaired assets, discontinued operations of Energy Technologies, and a generating facility in India, and goodwill impairment charges related to the adoption of SFAS 142.

	Earnings (Losses)
	Year Ended December 31,
	2002			2001			2000
				(Millions)
Power	$	468		$	394		$	313
PSE&G		201			230			369
Energy Holdings:
Resources		78			71			75
Global	(302		)		100			40
Other (A)		(8	)		(4	)		(13	)
Other (B)		(21	)		(15	)		(8	)
Subtotal		416			776			776
Loss from Discontinued Operations,    including Loss on Disposal		(51	)		(15	)		(12	)
Cumulative Effect of a Change in    Accounting Principle (C)	(120		)		9			—
Total PSEG Net Income	$	245		$	770		$	764
Total PSEG Excluding Charges (D)	$	786		$	776		$	776

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	Contribution to Earnings Per Share (Basic and Diluted)
	Year Ended December 31,
	2002			2001			2000
Power	$	2.24		$	1.89		$	1.46
PSE&G		0.96			1.11			1.71
Energy Holdings:
Resources		0.37			0.34			0.35
Global	(1.44		)		0.48			0.19
Other (A)	(0.04		)	(0.02		)	(0.06		)
Other (B)	(0.10		)	(0.07		)	(0.04		)
Subtotal		1.99			3.73			3.61
Loss from Discontinued Operations,    including Loss on Disposal	(0.24		)	(0.07		)	(0.06		)
Cumulative Effect of a Change in    Accounting Principle (C)	(0.58		)		0.04			—
Total PSEG Net Income	$	1.17		$	3.70		$	3.55
Total PSEG Excluding Charges (D)	$	3.76		$	3.73		$	3.61

(A)	Other activities include amounts specific to Energy Holdings, Energy Technologies, Enterprise Group Development Corporation (EGDC) and intercompany eliminations. Specific amounts include interest on certain financing transactions and certain other administrative and general expenses at Energy Holdings.
(B)	Other activities include amounts specific to PSEG and intercompany eliminations. Specific amounts include interest on certain financing transactions and certain other administrative and general expenses at PSEG (parent company).
(C)	Relates to the adoption of SFAS 142 in 2002 and the adoption of SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133) in 2001.
(D)	Amount for 2002 excludes after-tax charges presented in the summary table below of $541 million or $2.59 per share for the year ended December 31, 2002. For 2001 and 2000, these amounts reflect Income Before Discontinued Operations and Cumulative Effects of Changes in Accounting Principle.
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The after-tax charges relating to the items discussed above are summarized in the following table:

	Year Ended December 31, 2002
	(Millions)			Per Share Impact
Global
Argentina – EDEERSA (A) and Assets Held for Sale to AES
Write-down of Project Investments		$	370	$	1.77
Goodwill impairment			36		0.18
Total Argentina			406		1.95
India – Tanir Bavi
Discontinued Operations			9		0.04
Goodwill impairment			18		0.09
Total Tanir Bavi			27		0.13
Brazil – RGE
Goodwill impairment			34		0.16
Subtotal for Global			467		2.24
Energy Technologies
Discontinued Operations			42		0.20
Goodwill impairment			32		0.15
Subtotal Energy Technologies			74		0.35
Total		$	541	$	2.59

(A)	Empresa Distribuidora de Electricidad de Entre Rios S.A. (EDEERSA)
Excluding the charges discussed above, earnings for the year ended December 31, 2002 were largely consistent with the prior year. This is primarily due to higher margins at Power due to its successful participation as an indirect supplier of energy to New Jersey’s utilities resulting from the recent BGS auction. The BGS-related contracts, which went into effect on August 1, 2002 had a meaningful effect on PSEG’s earnings, particularly during the fourth quarter when Power served its contractual obligations with low cost energy during the colder months. The strong performance of Power’s nuclear generation facilities, which operated at a combined capacity factor of 94% during 2002, accounted for 60% of Power’s generation output, providing low cost energy to meet its demand and delivering solid margins. PSE&G also improved earnings, due to stronger margins from gas rate relief, more favorable weather effects as compared to the prior year and a cost containment effort which reduced operating expenses during 2002. These positive factors were offset by higher interest costs at PSEG, Power and Energy Holdings, the absence of certain tax benefits realized by PSE&G in 2001 and comparatively lower contributions from investments at Energy Holdings, particularly the loss of earnings from Energy Holdings’ Argentine investments, continued weakness in the Texas markets and a lower gain from the Eagle Point Cogeneration Partnership (Eagle Point) transactions.
Basic and diluted earnings per share of PSEG’s common stock (Common Stock) was $3.70 for the year ended December 31, 2001, an increase of $0.15 per share, or 4.2% from the comparable 2000 period, including $0.12 of accretion as a result of PSEG’s stock repurchase program, discussed in Liquidity and Capital Resources. In addition, PSEG’s increased earnings for 2001 as compared to 2000 resulted from improved energy trading margins from Power, Global’s withdrawal and sale of its interest in Eagle Point, acquisitions and expanded operations at Global, new leveraged lease investments at Resources and strong performance of Power’s nuclear facilities. These increases more than offset the effects of unfavorable weather conditions at PSE&G, two BPU mandated 2% rate reductions effective in February 2001 and August 2001, which reduced Power’s revenues and the effects of the securitization transaction that occurred on January 31, 2001.
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PSEG

     Operating Revenues

     For the year ended December 31, 2002, Operating Revenues increased by $1.3 billion or 19%, due primarily to Power’s BGS or commodity revenues subsequent to July 2002 not being eliminated in consolidation by PSEG. Under the 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 new BGS contract period which began on August 1, 2002, Power entered into contracts with third parties who are direct suppliers of New Jersey’s EDCs and PSE&G purchases the energy for its customers’ needs from such direct suppliers. Due to this change in the BGS model, these revenues are no longer intercompany revenues and therefore are not eliminated in consolidation. For the year ended December 31, 2002, PSEG’s elimination related to intercompany BGS and MTC revenues decreased by approximately $798 million as compared to 2001 due to this change. Also related to this change in the BGS model, PSE&G, in 2002, began selling energy purchased under non-utility generation (NUG) contracts, which it had previously sold to Power, to third parties. As a result, for the year ended December 31, 2002, PSEG’s revenues related to NUG contracts increased by approximately $82 million.

     The remaining increase was due primarily to a $516 million increase from Power primarily related to the new BGS related revenues from third party wholesale electric suppliers which went into effect August 1, 2002 and revenues from off-system gas sales, partially offset by lower MTC revenues and lower net trading revenues as discussed further under the Power segment discussion. Also contributing to the increase was a $111 million increase at Energy Holdings driven by higher electric revenues at Global, relating to acquisitions and projects going into operation and higher leveraged lease income at Resources, partially offset by lower investment earnings, as discussed below under Energy Holdings’ segment discussion. Additionally, increases were partially offset by a $172 million decrease in revenues from PSE&G primarily due to a decrease in gas distribution revenues, resulting partially from an average cost reduction of more than 10% in the cost of gas, in addition to other items discussed below under the PSE&G segment discussion.

     Operating Revenues increased by $534 million or 8% for the year ended December 31, 2001 as compared to 2000 due to a $204 million increase at PSE&G, primarily due to increased gas distribution revenues due to higher gas costs experienced in 2001, discussed further below in PSE&G, a $177 million increase at Power, primarily due to increased BGS revenue which resulted from customers returning to PSE&G in 2001, discussed further below in the Power segment discussion, and a $166 million increase at Energy Holdings primarily due to revenues related to various majority-owned acquisitions and plants going into operation in 2001 at Global, the gain on the withdrawal and sale of Global’s interest in Eagle Point and improved revenues from higher leveraged lease income from new leveraged lease transactions at Resources, partially offset by lower net investment gains at Resources and lower energy supply revenues, discussed further below under the Energy Holdings segment discussion.

     Operating Expenses

     Energy Costs

     For the year ended December 31, 2002, as compared to the prior year, Energy Costs increased approximately $1.1 billion or 41% due primarily to the fact that PSE&G no longer purchases electric energy directly from Power, as discussed above in Operating Revenues, but rather from third party wholesalers. In 2001, and through July 31, 2002, PSE&G incurred energy costs related to electric energy transactions between it and Power. Accordingly, these costs were properly recognized on each company’s stand-alone financial statements and were eliminated when preparing PSEG’s consolidated financial statements. Amounts attributable to this change totaled $880 million between the years ended December 31, 2002 and 2001.

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     The remaining increase was due to a $352 million increase at Power primarily related to increased energy purchases and third party wholesale electric supplier contracts, discussed further below in Power, and a $92 million increase at Energy Holdings, relating to acquisitions and projects going into operation at Global, discussed further below in Energy Holdings. These increases were partially offset by a $229 million decrease at PSE&G due primarily to decreased gas costs which resulted from lower demand, discussed further below in PSE&G.

     Energy Costs increased $251 million or 10% in 2001 as compared to 2000 due to a $91 million increase at Power, largely due to increased volumes under the BGS-related contracts, discussed further below in Power, and increases at PSE&G, primarily due to a $167 million increase in gas costs related to increased demand and higher prices for gas, as discussed further below in PSE&G. These increases were partially offset by an $11 million decrease at Energy Holdings due to a decision to exit the energy supply business, partially offset by higher costs relating to acquisitions.

     Operations and Maintenance

     For the year ended December 31, 2002, Operations and Maintenance expense increased $55 million or 3% as compared to 2001 due primarily to increases caused by scheduled outages at certain of Power’s electric generating stations, and an increase at Energy Holdings of $46 million, primarily due to costs associated with acquisitions and projects going into operation. This increase was partially offset by a $14 million decrease at PSE&G primarily due to decreased labor and professional service costs and partially offset by higher DSM amortization, discussed further below in PSE&G, and other charges of $12 million at PSEG.

     Operation and Maintenance expense increased $135 million or 8% in 2001 as compared to 2000 due primarily to increases of $56 million at PSE&G, partially relating to the deferral of costs incurred during 2000 in connection with deregulation that PSE&G expects to recover in future rates, $52 million of higher expenses at Power, primarily relating to projects going into operation during the second quarter of 2000, and a $29 million increase at Energy Holdings, primarily related to costs associated with acquisitions late in 2000 and during 2001.

     Depreciation and Amortization

     For the year ended December 31, 2002, Depreciation and Amortization increased $75 million or 15% as compared to 2001, primarily due to increases of $39 million at PSE&G, mainly due to a full period’s recognition of amortization of the regulatory asset related to stranded costs for securitization, $13 million at Power, primarily due to increases from Bergen 2 being placed into service in 2002 and the absence of a prior year reversal of cost of removal reserves in 2002, and $19 million at Energy Holdings, primarily related to costs associated with acquisitions and projects going into operation.

     For the year ended December 31, 2001, Depreciation and Amortization increased $146 million or 42% as compared to 2000 primarily due to the amortization of the regulatory asset recorded for stranded costs, which commenced with the issuance of the transition bonds on January 31, 2001, and $10 million at Energy Holdings related to costs associated with acquisitions late in 2000 and during 2001. These increases were partially offset by a $41 million decrease at Power, primarily due to a reduction in the accrual for the estimated cost of removal of Power’s generating stations. There was an additional increase of $13 million at PSEG primarily due to asset additions made in 2001.

     Taxes Other Than Income Taxes

     Taxes Other Than Income Taxes is comprised of the Transitional Energy Facility Assessment (TEFA) at PSE&G. Taxes Other Than Income Taxes increased $10 million or 8% in 2002 as compared to 2001. This increase was primarily due to a reduction of $7 million in the prior year’s TEFA recorded in 2001 and an increase of $3 million in the 2002 TEFA due to increased sales. Legislation enacted in January 2002 freezes the TEFA unit rate surcharges at the 2001 levels through 2004 and then reduces the rates over the next three years, phasing out the TEFA by 2007.

     Taxes Other Than Income Taxes decreased $14 million or 10% in 2001 as compared to 2000. This decrease was due primarily to a reduction of $7 million in the prior year’s TEFA recorded in 2001 and a reduction of $7 million from lower net taxable sales subject to the TEFA combined with a reduction in the TEFA rate.

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     Other Deductions

     For the year ended December 31, 2002, Other Deductions increased by $64 million as compared to 2001, primarily due to a $61 million increase in foreign currency transaction losses at Energy Holdings.

     For the year ended December 31, 2001, Other Deductions increased by $12 million as compared to 2001, primarily due to a $9 million increase in foreign currency transaction losses at Energy Holdings.

     Interest Expense

     For the year ended December 31, 2002, Interest Expense increased $61 million or 8% as compared to 2001 primarily due to higher amounts of debt outstanding at PSEG, Power and Energy Holdings used to support various projects and acquisitions and for other general corporate purposes, partially offset by decreases at PSE&G due to lower debt levels.

     For the year ended December 31, 2001, Interest Expense increased $151 million or 26% as compared to 2000 due primarily to the securitization debt issued in January 2001 at PSE&G. The increases in Interest Expense were also due to generally higher levels of debt at PSEG, Power and Energy Holdings used to support various projects and acquisitions and for other general corporate purposes.

     Preferred Securities Dividends

     For the year ended December 31, 2002, Preferred Securities Dividends decreased approximately $15 million primarily due to PSE&G’s redemptions of $448 million of preferred securities in March and June of 2001, partially offset by the issuance of $460 million of participating units and $180 million of trust preferred securities at PSEG in September 2002 and December 2002, respectively.

     For the year ended December 31, 2001, Preferred Securities Dividends decreased approximately $22 million primarily due to PSE&G’s redemptions of $448 million of preferred securities in March and June of 2001.

     Income Taxes

     For the year ended December 31, 2002, Income Taxes decreased $133 million or 35% as compared to 2001 primarily due to lower pre-tax income partially offset by adjustments in 2001 reflecting the conclusion of the 1994-96 IRS audit settlement and the actual filing of the 2000 tax return.

     For the year ended December 31, 2001, Income Taxes decreased $115 million or 23% as compared to 2000. The decrease was primarily due to lower pre-tax income, adjustments in 2001 as a result of closing the audit for the 1994-1996 tax years and the actual filing of the tax return for 2000.

PSE&G

     Operating Revenues

     For the year ended December 31, 2002, PSE&G’s Operating Revenues decreased $172 million or 3%, primarily due to a decrease of $155 million in gas distribution revenues. This decrease was due to lower commodity revenues resulting from an average cost reduction of more than 10% in the cost of gas (approximately $125 million). Also contributing to the decrease were lower sales to interruptible customers resulting from the lower cost of gas (approximately $88 million) and lower off-system sales revenues (approximately $26 million). These decreases were partially offset by increased gas base rates and increased volumes, primarily due to residential usage driven by favorable weather conditions (approximately $75 million) and increased appliance service revenues (approximately $14 million). In addition, electric transmission and distribution revenues decreased $17 million, primarily due to a 4.9% rate reduction implemented in August 2002 under the Final Order and rate reductions in February and August 2001 totaling 4%, (approximately $123 million) which were recorded as reductions in MTC

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revenues. Also affecting 2002 performance were decreases in NUG sales at market prices (approximately $15 million), lower DSM sales due to revenue adjustments in 2001 (approximately $19 million) and lower fiber optic revenues due to unfavorable market conditions (approximately $7 million). These were offset by increased BGS revenues, primarily due to customers returning to PSE&G from third party suppliers (approximately $104 million), and higher distribution volumes for residential and commercial customers (approximately $37 million) due to favorable weather conditions.

     For the year ended December 31, 2001, PSE&G’s Operating Revenues increased $204 million or 3%, primarily due to increased gas distribution revenues of $153 million due to higher gas costs experienced in 2001. Customer rates in all classes of business had increased in 2001 to recover a portion of the higher natural gas costs. The commercial and industrial classes fuel recovery rates vary monthly according to the market price of gas. The BPU also approved increases in the fuel component of the residential class rates of 16% in November 2000 and 2% for each month from December 2000 through July 2001. These increased revenues were partially offset by lower sales volumes in the fourth quarter of 2001 than the comparable period in 2000, primarily resulting from warmer weather. Also contributing to the higher revenues were increases in electric distribution and appliance service revenue (approximately $39 million) and increased electric commodity sales volumes (approximately $17 million) offset by rate reductions. The MTC tariff rate decreased 2% in February 2001, effective with the implementation of securitization. Effective August 1, 2001, PSE&G implemented another 2% rate reduction as required by the Final Order, which brought, at that time, the total rate decrease to 9% since August 1, 1999. These rate reductions amounted to approximately $100 million in 2001, an increase of approximately $40 million as compared to 2000, and were funded through the MTC component of rates, which, along with BGS revenues, was remitted to Power through Energy Costs.

     Under the BGSS, BGS and Levelized Gas Adjustment Clause (LGAC in 2001), PSE&G’s electric and gas costs in excess of (or below) the amount included in current commodity rates, are probable of being recovered from (returned to) customers through future commodity rates. PSE&G defers (records) costs in excess of (or below) the amount included in current commodity rates. Therefore any increase or decrease in PSE&G’s electric and gas commodity revenue is offset by a corresponding increase or decrease in gas costs on the Consolidated Statements of Operations. PSE&G’s electric and gas commodity revenues consist of BGS revenues, MTC revenues, NUG revenues, gas firm commodity revenues and gas interruptible revenues.

     Operating Expenses

     Energy Costs

     For the year ended December 31, 2002, PSE&G’s Energy Costs decreased $229 million or 6% due primarily to a decrease in gas costs of approximately $230 million which resulted from lower commodity sales volumes (approximately $125 million), lower volumes from interruptible customers due to lower rates (approximately $88 million) and lower off-system sales volumes (approximately $18 million). Also contributing to the decrease were lower electric costs due to the MTC rate reductions discussed above in Operating Revenues (approximately $123 million) and decreased NUG energy sales due to lower rates (approximately $15 million). Offsetting these decreases were increased electric energy costs due to higher commodity sales volumes from customers returning from third party suppliers and a scheduled increase in the shopping credit (approximately $104 million) and higher amounts paid to Power relating to the amortization of the excess electric distribution depreciation reserve, a component of MTC (approximately $30 million).

     For the year ended December 31, 2001, Energy Costs increased $1.0 billion as compared to 2000 primarily due to higher electric energy costs (approximately $845 million) resulting from higher sales volumes and from PSE&G purchasing electricity from Power subsequent to August 2000. Also contributing to the increased Energy Costs were increased gas costs primarily due to higher natural gas costs (approximately $167 million). The increase was partially offset by lower natural gas purchases due to lower sales volumes resulting from warmer weather in the fourth quarter of 2001 as compared to the same period in 2000. Due to the LGAC, gas costs are increased or decreased to offset a corresponding increase or decrease in fuel revenues with no impact on income.

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     Operations and Maintenance

     Operations and Maintenance expense decreased $14 million or 1% in 2002 as compared to 2001 primarily comprised of decreased labor costs (approximately $9 million), decreased use of professional and contract services (approximately $7 million), lower charges for administrative and general services (approximately $7 million) and lower equipment rental (approximately $8 million). These decreases were offset by increased DSM amortization (approximately $14 million) and increased miscellaneous accounts receivable reserves (approximately $3 million).

     Operations and Maintenance expense decreased $301 million or 23% in 2001 as compared to 2000 primarily due to the elimination of $357 million in Operations and Maintenance expenses resulting from the transfer of the generation business to Power in August 2000. The decrease was partially offset by the deferral of costs incurred during 2000 in connection with deregulation that PSE&G expects to recover in future rates.

     Depreciation and Amortization

     Depreciation and Amortization expense increased $39 million or 11% in 2002 as compared to 2001 primarily due to a full period’s recognition of amortization of the regulatory asset related to stranded costs for securitization (approximately $37 million). Also contributing was an increase in depreciable fixed assets (approximately $13 million) and higher depreciation expense recorded in accordance with increased gas base rates for plant assets (approximately $7 million). The increases were partially offset by higher amortization of the excess electric distribution depreciation reserve (approximately $22 million).

     Depreciation and Amortization expense increased $84 million or 29% in 2001 as compared to 2000 primarily due to approximately $180 million of amortization of the regulatory asset recorded for stranded costs, which commenced with the issuance of the transition bonds on January 31, 2001. This increase was partially offset by the elimination of $77 million of Depreciation and Amortization expense resulting from the transfer of the generation business to Power in August 2000.

     Taxes Other Than Income Taxes

     Taxes Other Than Income Taxes increased $10 million or 8% in 2002 as compared to 2001. This increase was primarily due to a reduction of $7 million in the prior year’s TEFA recorded in 2001 and an increase of $3 million in the 2002 TEFA due to increased sales. Legislation enacted in January 2002 freezes the TEFA unit rate surcharges at the 2001 levels through 2004 and then reduces the rates over the next three years, phasing out the TEFA by 2007.

     Taxes Other Than Income Taxes decreased $14 million or 10% in 2001 as compared to 2000. This decrease was due primarily to a reduction of $7 million in the prior year’s TEFA recorded in 2001 and a reduction of $7 million from lower net taxable sales subject to the TEFA combined with a reduction in the TEFA rate.

Other Income

     Other Income decreased $83 million or 75% in 2002 as compared to 2001, due primarily to PSEG’s settlement of an intercompany loan from PSE&G in 2001 (approximately $65 million) and lower interest income on investments (approximately $16 million). This was offset by a gain on disposal of properties (approximately $6 million).

     Other Income decreased $62 million or 36% in 2001 as compared to 2000, due primarily to PSE&G’s intercompany loans to PSEG and Power in 2001 (approximately $65 million) and decreased interest income (approximately $125 million). The intercompany loan was a step in PSE&G’s recapitalization as a result of the transfer of its generation business to Power. This was offset by lower gains on disposal of properties (approximately $3 million).

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Interest Expense

     Interest Expense decreased $44 million or 10% for the year ended December 31, 2002 as compared to 2001, due to the redemption of short-term debt in the third quarter of 2001 and lower interest rates in 2002 (approximately $14 million), the redemption of a floating rate note in 2001 (approximately $8 million), the maturity of long-term debt (approximately $14 million), the repurchase of Pollution Control Bonds (approximately $3 million), the carrying costs on the deferred repair allowance (approximately $7 million) and NJ state accrued tax interest adjustments (approximately $2 million). These decreases were partially offset by higher securitization bond interest expense (approximately $7 million) related to Transition Funding’s securitization bonds.

     Interest Expense increased $53 million or 13% in 2001 as compared to 2000 primarily due to interest of approximately $176 million on the bonds issued by Transition Funding on January 31, 2001. These were partially offset by $118 million in lower interest resulting from the reduction of short-term and long-term debt with the proceeds from the securitization bonds and the transfer of generation-related assets to Power.

Income Taxes

     Income taxes increased $26 million or 29% for the year ended December 31, 2002 as compared to 2001 primarily due to prior period tax adjustments recorded in 2001 reflecting the conclusion of the 1994-96 IRS audit settlement and the actual filing of the 2000 tax return.

     Income taxes decreased $318 million or 78% in 2001 as compared to 2000. These decreases were primarily due to lower operating income due to the transfer of the generation business in 2000. In addition, taxes decreased due to normal adjustments as a result of closing the 1994-96 IRS audit and upon filing the actual tax return for the year 2000.

Power

Operating Revenues

     For the year ended December 31, 2002, Power’s Operating Revenues increased $1.2 billion or 50% primarily due to the inclusion of $804 million of gas revenues relating to its BGSS contract and off-system gas sales resulting from the operations under the Gas Contracts transferred from PSE&G in May 2002. Also contributing to the increase was a $560 million increase in BGS related revenues, primarily due to the new BGS related revenues from third party wholesale electric suppliers which went into effect August 1, 2002 which was partially offset by lower MTC revenues of $98 million mostly due to a 4.9% rate reduction in August 2002 and two 2% rate reductions in August 2001 and February 2001. Also offsetting the increases were lower net trading revenues of approximately $83 million due to lower trading volumes and prices during 2002 as compared to 2001.

     For the year ended December 31, 2001, Power’s Operating Revenues increased $177 million or 8% primarily due to an increase of $180 million in BGS revenue which resulted from customers returning to PSE&G in 2001 from third party suppliers as wholesale market prices exceeded fixed BGS rates. At December 31, 2001, third party suppliers were serving less than 1% of the customer load traditionally served by PSE&G as compared to the December 31, 2000 level of 10.5%. Also, net revenues from energy trading increased by $57 million or 78% for the year ended December 31, 2001. Partially offsetting this increase was a net $40 million decrease in MTC revenues, relating to two 2% rate reductions, discussed above, offset by a pre-tax charge to income related to the recognition of MTC revenues in 2000.

Operating Expenses

     Energy Costs

     For the year ended December 31, 2002, Power’s energy costs increased $1.1 billion or 127% compared to 2001 primarily due to increased energy purchase volumes and third party wholesale electric supplier contracts of approximately $297 million and $738 million of increased gas purchases to satisfy Power’s BGSS contract with

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PSE&G. Also contributing to the increase were higher network transmission expenses of $102 million. These higher expenses were partially offset by a $67 million decrease in NUG purchases. Additionally, the record capacity factor of its nuclear units enabled Power to produce low cost generation for much of its supply needs.

     For the year ended December 31, 2001, energy costs increased $91 million over the 2000 period. The increase was largely due to increased volumes under the BGS-related contracts. The higher volumes produced, coupled with increased fuel costs, mainly natural gas, contributed to the increase. These increases were partially offset by low cost generation from the continued strong performance of Power’s nuclear generation facilities.

     Operations and Maintenance

     For the period ended December 31, 2002, Operations and Maintenance expense increased $35 million or 5% as compared to the same period in 2001 due primarily to increases caused by scheduled outage work at electric generating stations.

     Operation and Maintenance expense increased $52 million or 8% in 2001 as compared to 2000. Contributing to the increase were higher expenses relating to projects going into operation during the second quarter of 2000.

     Depreciation and Amortization

     For the period ended December 31, 2002, Depreciation and Amortization expense increased $13 million or 14% as compared to the same period in 2001 due primarily to increases from Bergen 2 being placed into service in 2002 and the absence of a prior year reversal of cost of removal reserves in 2002.

     Depreciation and Amortization expense decreased $41 million or 30% in 2001 as compared to 2000. The decrease was primarily due to a reduction in the accrual for the estimated cost of removal of Power’s generating stations.

     Interest Expense

     Interest Expense decreased $21 million or 15% for the year ended December 31, 2002 from the comparable period in 2001 primarily due to improved financing rates and the repayment of intercompany notes, which resulted in a decrease in expense of $83 million. Offsetting these reductions were $94 million of increased interest expense associated with the issuance of the $2.4 billion of senior notes including $600 million issued in 2002, $124 million of pollution control bonds and increased non-recourse financing associated with Lawrenceburg and Waterford, offset by capitalized interest relating to various construction projects of $32 million.

     Interest Expense decreased $55 million or 28% for the year ended December 31, 2001 from the comparable period in 2000 primarily due to the repayment of the $2.8 billion 14.2% promissory note to PSE&G, issued to finance the acquisition of PSE&G’s generation business.

     Income Taxes

     Income Taxes increased $63 million or 25% for the year ended December 31, 2002 as compared to 2001, and increased $42 million or 20% for the year ended December 31, 2001 as compared to 2000. The increases for both years were due primarily to increases in pre-tax income.

Energy Holdings

     Operating Revenues

     Energy Holdings’ revenues increased $111 million, or 17%, to $749 million in 2002 from $638 million in 2001. This increase was driven by higher electric revenues at Global and higher leveraged lease income at Resources, partially offset by lower investment earnings, as discussed below.

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     Energy Holdings’ revenues increased $166 million, or 35%, to $638 million in 2001 from $472 million in 2000. Increases totaling $235 million at Global and Resources, described below, were partially offset by $67 million of lower Energy Supply Revenues, as Energy Holdings exited that business in 2000.

     Global

     For the year ended December 31, 2002, the operating revenues increase of $105 million or 27% at Global was due primarily to the acquisitions in the second half of 2001 of Sociedad Austral de Electricidad S.A. (SAESA) ($79 million), a Chilean distribution company and Empresa de Electricidad de los Andes S.A. (Electroandes) ($46 million), a Peruvian hydroelectric generation and transmission company. Global’s operating revenues also increased $57 million due to the generation facility located in Rades, Tunisia commencing operation in the second quarter of 2002. Also contributing $49 million to the increase in revenues was Skawina CHP Plan (Skawina), a generation facility in Poland, in which Global purchased a majority ownership in the second quarter of 2002. Revenues increased at the GWF Power System LP (GWF) energy peaking plants by $20 million as the Hanford and Henrietta Peaking Plants became operational in the second quarter of 2001 and 2002, respectively. Revenues further increased by $12 million due to improved earnings from RGE as new regulatory changes allowed RGE to recover from customers prior tariff charges previously expensed. Partially offsetting these increases was a decrease of $43 million at Empresa Distribuidora de Electricidad de Entre Rios S.A. (EDEERSA) due to the economic crisis in Argentina. Reduced earnings of $21 million at the GWF San Francisco Bay Area facilities and of $26 million at TIE, both as a result of lower energy prices in those markets, partially offset the revenue increases as well. Also partially offsetting the increase in revenues at Global were $31 million of losses at Prisma, including operational losses and an impairment to reduce the investment to its net realizable value, net of $11 million of interest income on a Euro-denominated loan owed by the project. Prisma is currently held for sale to Global’s partner in this joint venture, and the sale is expected to be completed in the first half of 2003. In addition, in 2001, Global recorded $75 million for the gain on the sale and withdrawal from the Eagle Point facility compared to the $47 million recorded for the withdrawal in 2002, resulting in a reduction of approximately $28 million.

     For the year ended December 31, 2001, revenues in the Global segment increased $227 million primarily due to $128 million of revenues related to various majority-owned acquisitions and plants going into operation in 2001. Global’s revenues also increased from the gain of $75 million on the withdrawal and sale of Global’s interest in Eagle Point and was partially offset by a loss in equity earnings of $17 million, which was recorded in 2000 and not recorded in 2001, as a result of the withdrawal. In addition, revenues benefited from an increase of $45 million in interest income related to certain loans and notes, and approximately $29 million of increased revenues relating primarily to improved earnings of certain non-consolidated projects. These increases were partially offset by lower revenues due to a reduction in earnings related to the adverse effect of foreign currency exchange rate movements between the US Dollar and Brazilian Real.

     Resources

     Resources’ operating revenues increased $6 million for the year ended December 31, 2002, as compared to 2001, primarily due to an increase of $44 million from higher leveraged lease income. The increase was mostly offset by lower net investment gains (losses) of $39 million, of which $37 million resulted from other than temporary impairments of non-publicly traded equity securities within certain leveraged buyout funds and other investments, and $8 million resulted from a net decrease in the gains on the sale of properties subject to leveraged leases. For further discussion of other than temporary impairments, see Note 12. Risk Management – Equity Securities. There was also a net increase of $6 million associated with the change in the carrying value of publicly traded equity securities in certain leveraged buyout funds. The decreases in the values of the publicly traded equity securities in 2002 and 2001 were $10 million and $16 million, respectively.

     Of the $44 million increase in leveraged lease income in 2002, $29 million resulted from a gain due to a recalculation of certain leveraged leases. A change in an essential assumption which affects the estimated total net income over the life of a leveraged lease requires a recalculation of the leveraged lease, from inception, using the revised information. The change in the net investment in the leveraged leases is recognized as a gain or loss in the year the assumption is changed. The change in assumption which occurred was related to a change in New Jersey tax rates applied in the leveraged lease calculations. This was due to the restructuring of Resources from a corporation to an LLC, which resulted in the ability to more efficiently match state tax expenses of an affiliate company with the state tax benefits associated with Resources’ lease portfolio. The remaining $15 million increase in leveraged lease income was due to additional investments in leveraged lease transactions in 2002 and 2001.

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     Revenues in the Resources segment increased by $8 million in 2001 compared to 2000 primarily due to improved revenues of $45 million from higher leveraged lease income from new leveraged lease transactions that was partially offset by lower net investment gains of $37 million.

     Operating Expenses

     Operating expenses increased $647 million for the year ended December 31, 2002 as compared to the same period in 2001. These operating expenses include a $497 million charge associated with the write-down of all Argentine investments and certain loss contingencies.

     Operating expenses, less expenses associated with the $497 million impairment of Global’s Argentine investments, increased $141 million for the year-ended 2002 versus 2001 primarily due to operating expenses incurred at SAESA and Electroandes, two acquisitions that occurred in the second half of 2001.

     For the year ended December 31, 2001, operating expenses increased $35 million as compared to the same period in 2000, primarily due to costs at Global increasing by $103 million due to energy costs of $55 million for plant acquisitions and other projects commencing operation in 2001, partially offsetting a decrease in the cost of energy sales as Energy Holdings exited the energy supply business in 2000.

     Other Income

     Other Income increased $19 million in 2002, as compared to 2001 primarily driven by $12 million of net derivative gains resulting from a gain at SAESA of $11 million, with no comparable amount in 2001, and a $13 million gain on the Early Retirement of Debt.

     Other Income increased $3 million in 2001, as compared to 2000.

     Other Deductions

     Other Deductions increased $61 million in 2002, as compared to 2001 primarily due to the re-measuring of the US Dollar denominated debt at EDEERSA to the devaluing Argentine Peso, which resulted in a loss of $68 million. Foreign exchange currency transaction losses were also impacted by a loss of $7 million related to the Chilean Peso at SAESA and a gain of $9 million related to a Euro-denominated loan. Such loan is expected to be repaid in connection with the sale of Prisma. These net increases were partially offset by a $3 million loss on the Early Retirement of Debt in 2001, with no comparable amount in 2002.

     Other Deductions increased by $9 million in 2001, as compared to 2000 as a result of higher foreign exchange currency transaction losses related to the Brazilian Real at Global’s investment in RGE and a loss on the early Retirement of Debt of $3 million in 2001.

     Interest Expense

     Interest Expense increased $34 million or 19% from $180 million in 2001 to $214 million in 2002. The increase was the result of selling $135 million of 8.625% Senior Notes in July 2002 and an increase in project level debt at Global of $273 million. The increase was partially offset by a decrease in interest expense from the repayments of borrowings under the revolving credit facilities.

     Interest Expense increased $46 million or 34% from $134 million to $180 million in 2001 as compared to 2000. Interest Expense associated with recourse financing activities increased $45 million primarily due to additional borrowings incurred as a result of equity investments in distribution and generation facilities.

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     Income Taxes

     Income taxes were a benefit of $150 million for the year-ended December 31, 2002, a decrease of $215 million as compared to 2001. This is primarily a result of the write-downs and asset impairments recorded during 2002, which resulted in a pre-tax loss, thereby creating a tax benefit.

     Income taxes increased $14 million or 27% from $51 million to $65 million in 2001 as compared to 2000, primarily attributable to increased pre-tax income.

     Losses From Discontinued Operations

     Energy Technologies

     Energy Holdings reduced the carrying value of the investments in the 11 HVAC/mechanical operating companies to their fair value less costs to sell, and recorded a loss on disposal for the year ended December 31, 2002 of $21 million, net of $11 million in taxes. Energy Holdings’ remaining investment position in Energy Technologies is approximately $56 million, of which approximately $32 million relates to deferred tax assets from discontinued operations, and $12 million relates to certain intercompany payables included in the current liabilities of Discontinued Operations. Although Energy Holdings believes that it will be able to sell the HVAC/mechanical companies, it can give no assurances that it will be able to realize their total carrying values.

     Operating results of Energy Technologies’ HVAC/mechanical operating companies, less certain allocated costs from Energy Holdings, have been reclassified into discontinued operations in the Consolidated Statements of Operations. The results of operations of these discontinued operations for the years ended December 31, 2002, 2001 and 2000 yielded additional losses of $21 million (after-tax), $22 million (after-tax) and $12 million (after-tax), respectively.

     Tanir Bavi

     In the fourth quarter of 2002, Global sold its 74% interest in Tanir Bavi, a 220 MW barge mounted, combined-cycle generating facility in India. Tanir Bavi meets the criteria for classification as a component of discontinued operations and all prior periods have been reclassified to conform to the current year’s presentation. Global reduced the carrying value of Tanir Bavi to the contracted sales price of $45 million and recorded a loss on disposal of $14 million (after-tax) for the year ended December 31, 2002. The operating results of Tanir Bavi for the year ended December 31, 2002 yielded income of $5 million (after-tax). See Note 5. Discontinued Operations of the Notes.

     Cumulative Effect of Change in Accounting Principle

     In 2002, Energy Holding finalized the evaluation of the effect of adopting SFAS 142 on the recorded amount of goodwill. Under this standard, PSEG was required to complete an impairment analysis of its recorded goodwill and record any resulting impairment. The total amount of goodwill impairments was $120 million, net of tax of $66 million and was comprised of $36 million (after-tax) at EDEERSA, $34 million (after-tax) at RGE, $32 million (after-tax) at Energy Technologies and $18 million (after-tax) at Tanir Bavi. All of the goodwill on these companies, other than RGE, was fully impaired. In accordance with SFAS 142, this impairment charge was recorded as of January 1, 2002 as a component of the Cumulative Effect of a Change in Accounting Principle and is reflected in the Consolidated Statements of Operations for the year ended December 31, 2002. See Note 2. New Accounting Standards of the Notes.

     In 2001, Energy Holdings adopted SFAS 133, which established accounting and reporting standards for derivative instruments. Energy Holdings recorded an after-tax gain of $9 million as a result of adopting SFAS 133.

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     Other

     Global

     The following summarizes the net contribution to Operating Income and Other Income and Other Deductions by Global’s projects in the following regions for the years ended December 31, 2002, 2001 and 2000. Certain of these amounts include results from Global’s equity method subsidiaries which are recorded net of taxes and financing costs.

	Years Ended December 31,
Operating Income and Other Income (Deductions) (A)	2002			2001			2000
	(Millions)
North America	$	108		$	159		$	91
Chile		61			39			14
Peru		54			31			26
Brazil		20			1			21
Asia Pacific		6			9			6
All Other		16			6			1
Global Unallocated Administrative and General
Expenses (B)		(58	)		(58	)		(50	)

(A)	Operating Income plus Other Income and Deductions in Argentina for the years ended December 31, 2002, 2001 and 2000 was $(558) million, $45 million and $14 million, respectively.
(B)	Includes $9 million of Loss Contingencies and Other expenses recorded in 2002 related to Energy Holdings’ investment in EDEERSA.

     Resources

     The following summarizes Resources’ lease revenue for the years ended December 31, 2002, 2001 and 2000 by credit quality of lease counterparties:

	Years Ended December 31
	2002		2001		2000
	(Millions)
Lease Revenue-Investment Grade(1)	$	164	$	199	$	155
Lease Revenue-Non-Investment Grade or not rated		96		16		15
Total (2)	$	260	$	215	$	170
Cash Flow Available From Leveraged Leases (3) (4)	$	215	$	209	$	244
Proceeds from Sale of Capital Leases (5)		183		104		89
Gross Cash Flow from Leveraged Leases	$	398	$	313	$	333

(1)	Investment Grade means rated investment grade by both S&P and Moody’s. For S&P, the minimum investment grade rating is BBB–. For Moody’s, the equivalent minimum investment grade rating is Baa3.
(2)	Operating lease income does not reflect operating lease expense.
(3)	Over 80% of lease cash flow is provided by tax payments from PSEG pursuant to a tax allocation agreement between PSEG and Energy Holdings.
(4)	The amounts are equal to Income from Capital and Operating Leases from the Consolidated Statements of Operations plus Leveraged Lease Income, Adjusted for Rents Received from the Consolidated Statements of Cash Flows.
(5)	In 2002, Resources received $183 million of cash proceeds associated with the termination of two lease transactions with affiliates of TXU-Europe. As a result of these terminations, Resources will pay income taxes of $115 million in 2003.
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LIQUIDITY AND CAPITAL RESOURCES

     The following discussion of liquidity and capital resources is on a consolidated basis for PSEG, noting the uses and contributions of PSEG’s three direct operating subsidiaries, PSE&G, Power and Energy Holdings.

Financing Methodology

     PSEG, PSE&G, Power and Energy Holdings

     Capital requirements are met through liquidity provided by internally generated cash flow and external financings. PSEG, Power and Energy Holdings from time to time make equity contributions or otherwise provide credit support to their respective direct and indirect subsidiaries to provide for part of their capital and cash requirements, generally relating to long-term investments.

     At times, PSEG utilizes intercompany dividends and intercompany loans (except that PSE&G may not make loans to its parent or to affiliates that are not its direct subsidiaries) to satisfy various subsidiary needs and efficiently manage short-term cash needs. Any excess funds are invested in accordance with guidelines adopted by PSEG’s Board of Directors.

     External funding to meet PSEG’s and PSE&G’s needs, the majority of the requirements of Power and a substantial portion of the requirements of Energy Holdings, is comprised of corporate finance transactions. The debt incurred is the direct obligation of those respective entities. Some of the proceeds of these debt transactions are used by the respective obligor to make equity investments in its subsidiaries.

     As discussed below, depending on the particular company, external financing may consist of public and private capital market debt and equity transactions, bank revolving credit and term loans, commercial paper and/or project financings. Some of these transactions involve special purpose entities (SPEs), formed in accordance with applicable tax and legal requirements in order to achieve specified beneficial financial advantages, such as favorable tax and legal liability treatment. All SPEs are consolidated where PSEG has controlling interest.

     The availability and cost of external capital could be affected by each subsidiary’s performance, as well as by the performance of their respective subsidiaries and affiliates. This could include the degree of structural separation between PSEG and its subsidiaries and the potential impact of affiliate ratings on consolidated and unconsolidated credit quality. Additionally, compliance with applicable financial covenants will depend upon future financial position and levels of earnings and net cash flows, as to which no assurances can be given.

     Over the next several years, PSEG, PSE&G, Power and Energy Holdings will be required to refinance maturing debt and expect to incur additional debt and provide equity to fund investment activities. Any inability to obtain required additional external capital or to extend or replace maturing debt and/or existing agreements at current levels and reasonable interest rates may adversely affect PSEG’s financial condition, results of operations and net cash flows.

     From time to time, PSEG, PSE&G, Power and Energy Holdings may repurchase portions of their respective debt securities using funds from operations, asset sales, commercial paper, debt issuances, equity issuances and other sources of funding and may make exchanges of new securities, including common stock, for outstanding securities. Such repurchases may be at variable prices below, at or above prevailing market prices and may be conducted by way of privately negotiated transactions, open-market purchases, tender or exchange offers or other means. PSEG, PSE&G, Power and Energy Holdings may utilize brokers or dealers or effect such repurchases directly. Any such repurchases may be commenced or discontinued at any time without notice.

     Power and Energy Holdings

     A portion of the financing for Global’s projects and investments is generally provided by non-recourse project financing transactions. These consist of loans from banks and other lenders that are typically secured by project and SPE assets and/or cash flows. Two of Power’s projects currently under construction have similar financing.

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Nonrecourse transactions generally impose no material obligation on the parent-level investor to repay any debt incurred by the project borrower. However, in some cases, certain obligations relating to the investment being financed, including additional equity commitments, are guaranteed by Global, Energy Holdings and/or Power for their respective subsidiaries. The consequences of permitting a project-level default include loss of any invested equity by the parent. PSEG has not currently provided any guarantees or credit support to PSE&G, Power or Energy Holdings, except for the minimum net worth maintenance support agreement to PSEG Capital Corporation (PSEG Capital), a subsidiary of Energy Holdings, which is planned to be eliminated upon maturity of PSEG Capital Corporation’s debt in May 2003.

     Cross Default Provisions

     PSEG

     The PSEG credit agreements contain default provisions under which a default by it, PSE&G, Power or Energy Holdings in an aggregate amount of $50 million would result in a default and the potential acceleration of payment under those agreements. The $350 million PSEG Credit Agreement which expires in December 2005 contains provisions that will eliminate the cross-default to Energy Holdings, once the $495 million Energy Holdings Credit Agreement expires in May 2004, or is renewed prior to that time. PSEG expects to negotiate similar provisions in PSEG’s other credit agreements.

     PSE&G

     PSE&G’s First and Refunding Mortgage (Mortgage) and its credit agreements have no cross-defaults. The PSE&G Medium-Term Note Indenture has a cross-default to the PSE&G Mortgage. The credit agreements have cross-defaults under which a default by PSE&G in the aggregate of $50 million would result in a default and the potential acceleration of payment under the credit agreements.

     Power

     The Power Senior Debt Indenture contains a default provision under which a default by it, Nuclear, Fossil or PSEG Energy Resources & Trade LLC (ER&T) in an aggregate amount of $50 million would result in a default and the potential acceleration of payment under the indenture. There are no cross-defaults within Power’s indenture from PSEG, Energy Holdings or PSE&G.

     Energy Holdings

     Energy Holdings’ credit agreements contain default provisions under which a default by it, Resources or Global in an aggregate amount of $5 million, or a default by PSEG in an aggregate amount of $75 million would result in an event of default and the potential acceleration of payment under those agreements. The Energy Holdings Senior Note Indenture contains cross-default provisions under which a default by it, Resources or Global in an aggregate amount of $25 million would result in a default and the potential acceleration of payment under the indenture.

     Debt Covenants

     PSEG, PSE&G, Power and Energy Holdings

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

     As explained in detail below, some of these credit agreements also contain maximum debt-to-equity ratios, minimum cash flow tests and other restrictive covenants and conditions to borrowing. Compliance with applicable financial covenants will depend upon PSEG’s future financial position and the level of earnings and cash flow, as to which no assurances can be given.

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     PSEG

     Financial covenants contained in PSEG’s credit facilities include a ratio of debt (excluding non-recourse project financings and securitization debt and including commercial paper and loans, certain letters of credit and similar instruments) to total capitalization covenant. This covenant requires that at the end of any quarterly financial period, such ratio not be more than 0.70 to 1. As of December 31, 2002, PSEG’s ratio of debt to capitalization was 0.61 to 1. PSEG’s expects that this ratio will decrease slightly later in 2003 due to earnings exceeding dividends and a onetime benefit due to the adoption of SFAS 143. See Note 2. New Accounting Standards of the Notes.

     PSEG has issued Deferrable Interest Subordinated Debentures in connection with the issuance of tax deductible preferred securities. If payments on those Deferrable Interest Subordinated Debentures are deferred, in accordance with their terms, PSEG may not pay any dividends on its common stock until such default is cured. Currently, there has been no deferral or default.

     PSE&G

     Financial covenants contained in PSE&G’s credit facilities include a ratio of Long-Term Debt (excluding Long-Term Debt Maturing within 1 Year) to Total Capitalization covenant. This covenant requires that at the end of any quarterly financial period, such ratio will not be more than 0.65 to 1. As of December 31, 2002, PSE&G’s ratio of Long-Term Debt to Total Capitalization was 0.53 to 1.

      Under its Mortgage, PSE&G may issue new First and Refunding Mortgage Bonds against previous additions and improvements, provided that its ratio of earnings to fixed charges calculated in accordance with its Mortgage is at least 2:1, and/or against retired Mortgage Bonds. At December 31, 2002, PSE&G’s Mortgage coverage ratio was 3.6:1. As of December 31, 2002, the Mortgage would permit up to approximately $1 billion aggregate principal amount of new Mortgage Bonds to be issued against previous additions and improvements.

     PSE&G has issued Deferrable Interest Subordinated Debentures in connection with the issuance of tax deductible preferred securities. If payments on those Deferrable Interest Subordinated Debentures are deferred, in accordance with their terms, PSE&G may not pay any dividends on its common or preferred stock until such default is cured. Currently, there has been no deferral or default.

     Energy Holdings

     Financial covenants contained in Energy Holdings’ credit facilities include the ratio of cash flow available for debt service (CFADS) to fixed charges. At the end of any quarterly financial period such ratio shall not be less than 1.50x for the 12-month period then ending. As a condition of borrowing, the pro-forma CFADS to fixed charges ratio shall not be less than 1.75x as of the quarterly financial period ending immediately following the first anniversary of each borrowing or letter of credit issuance. CFADS includes, but is not limited to, operating cash before interest and taxes, pre-tax cash distributions from all asset liquidations and equity capital contributions from PSEG to the extent not used to fund investing activity. As of December 31, 2002, Energy Holdings ratio of CFADS to fixed charges was 5.5x. In addition, the ratio of consolidated recourse indebtedness to recourse capitalization, as at the end of any quarterly financial period, shall not be greater than 0.60 to 1.00. This ratio is calculated by dividing the total recourse indebtedness of Energy Holdings by the total recourse capitalization. This ratio excludes the debt of PSEG Capital, which is supported by PSEG. As of December 31, 2002, Energy Holdings’ ratio of consolidated recourse indebtedness to recourse capitalization was 0.43 to 1.00.

     PSEG Capital has a Medium-Term Note program which provides for the private placement of Medium-Term Notes. Medium-Term Notes are debt instruments, which may be issued with a maturity of 1 to 30 years. This Medium-Term Note program is supported by a minimum net worth maintenance agreement between PSEG Capital and PSEG which provides, among other things, that PSEG (1) maintain its ownership, directly or indirectly, of all outstanding common stock of PSEG Capital, (2) cause PSEG Capital to have at all times a positive tangible net worth of at least $100,000 and (3) make sufficient contributions of liquid assets to PSEG Capital in order to permit it to pay its debt obligations. PSEG will eliminate its support of PSEG Capital debt by May 2003 at which time the total debt outstanding of $252 million will be repaid and the program will terminate.

Ratings Triggers

     PSEG, PSE&G, Power and Energy Holdings

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

     Power

     In connection with its energy marketing and trading activities, Power must meet certain credit quality standards as are required by counterparties. If Power loses its investment grade credit rating, ER&T would have to provide credit support (letters of credit or cash), which would significantly impact the cost of the energy trading activities. Power’s Master Agreements and other supply contracts contain margin and/or other collateral requirements that, as of December 31, 2002, could require Power to post additional collateral of approximately $320

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million if Power were to lose its investment grade credit rating. These same contracts provide reciprocal benefits to Power. Providing this credit support would increase Power’s costs of doing business and limit Power’s ability to successfully conduct its energy trading operations.

     In addition, Power may be required by its counterparties to meet margin or other security requirements that may include cash payments. Power may also have to provide credit support for certain of its equity commitments if Power loses its investment grade rating.

     Energy Holdings

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

Credit Ratings

     The current ratings of securities of PSEG and its subsidiaries are shown below and reflect the respective views of the rating agencies, from whom an explanation of the significance of their ratings may be obtained. There is no assurance that these ratings will continue for any given period of time or that they will not be revised by the rating agencies, if, in their respective judgments, circumstances so warrant. Any downward revision or withdrawal may adversely effect the market price of PSEG’s, Energy Holdings’, Power’s and PSE&G’s securities and serve to increase those companies’ cost of capital and access to capital.

	Moody’s(1)	Standard & Poor’s(2)	Fitch(3)
PSEG:
Preferred Securities	Baa3	BB+	BBB
Commercial Paper	P2	A2	Not Rated
PSE&G:
Mortgage Bonds	A3	A–	A
Preferred Securities	Baa2	BB+	BBB+
Commercial Paper	P2	A2	F1
Power:
Senior Notes	Baa1	BBB	BBB+
Energy Holdings:
Senior Notes	Baa3	BBB-	BBB-
PSEG Capital:
Medium-Term Notes	Baa2	BBB-	BBB+

	(1)	On October 11, 2002 Moody’s reaffirmed these credit ratings but changed the outlook from stable to negative for PSEG, Power and Energy Holdings.
	(2)	Affirmed in the second quarter of 2002 and noted an outlook of stable. Standard and Poor’s has established an overall corporate credit rating of BBB for PSEG and each of its subsidiaries listed above.
	(3)	Affirmed in the second quarter of 2002 and noted an outlook of stable, except for PSE&G Mortgage Bonds, which was noted as negative.
Short-Term Liquidity
PSEG, PSE&G, Power and Energy Holdings
In order to support its short-term financing requirements as well as those of Power, PSEG has revolving credit facilities that are used both as a source of short-term funding and to provide backup liquidity for its $1.0 billion commercial paper program. As of December 31, 2002, PSEG’s consolidated total short-term debt outstanding was $762 million consisting of $300 million of commercial paper and $101 million in loans outstanding under its uncommitted bilateral agreement and the amounts discussed below in PSE&G, Energy Holdings and Power. See Note 11. Schedule of Consolidated Debt of the Notes for a table illustrating the credit facilities, amounts outstanding and available liquidity as of December 31, 2002.
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     PSE&G

     PSE&G maintains credit facilities to provide backup for its $400 million commercial paper program. As of December 31, 2002, PSE&G had $183 million in commercial paper and $41 million in loans outstanding under its uncommitted bilateral agreement. See Note 11. Schedule of Consolidated Debt of the Notes for a table illustrating the credit facilities, amounts outstanding and available liquidity as of December 31, 2002.

     Power

     Power has a $50 million credit facility, but primarily relies on PSEG for its short-term financing needs. As of December 31, 2002, there was $6 million outstanding in letters of credit under the credit facility of Power. See Note 11. Schedule of Consolidated Debt of the Notes for a table illustrating the credit facilities, amounts outstanding and available liquidity as of December 31, 2002.

     Energy Holdings

     Energy Holdings has credit facilities that are used both as a source of short-term funding and to issue letters of credit. As of December 31, 2002, there was $74 million outstanding in letters of credit under the credit facilities of Energy Holdings and $137 million of non-recourse short-term financing at Global. See Note 11. Schedule of Consolidated Debt of the Notes for a table illustrating the credit facilities, amounts outstanding and available liquidity as of December 31, 2002. For information regarding the refinancing of maturing non-recourse short-term financing at SAESA, see Note 13. Commitments and Contingent Liabilities of the Notes.

External Financings

     PSEG

     In 2002, PSEG began issuing new shares of its common stock under its Dividend Reinvestment Program (DRASPP) and its Employee Stock Purchase Plan (ESPP), rather than purchasing them on the open market. For the year ended December 31, 2002 PSEG issued approximately 2.2 million shares for approximately $78 million pursuant to these plans.

     On May 21, 2002, $275 million of Floating Rate Notes matured.

     In September 2002, PSEG issued 9.2 million Participating Units with a stated amount of $50 per unit. Each unit consists of a 6.25% trust preferred security of PSEG Funding Trust I due 2007 having a liquidation value of $50, and a stock purchase contract obligating the purchasers to purchase shares of PSEG common stock in an amount equal to $50 on November 16, 2005. In exchange for the obligations under the purchase contract, the purchasers will receive quarterly contract adjustment payments at the annual rate of 4% until such date. The number of new shares issued on November 16, 2005 will depend upon the average closing price per share of PSEG common stock for the 20 consecutive trading days ending the third trading day immediately preceding November 16, 2005. Based on the formula described in the purchase contract, at that time PSEG will issue between 11,429,139 and 13,714,967 shares of its common stock based on a range of closing prices from $33.54 to $40.25 per share. The net proceeds from the sale of the Participating Units were $446 million and were used primarily to reduce short-term debt.

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     In October 2002, PSEG closed on a $245 million private placement debt transaction with a five-year average life and seven-year final maturity. The coupon rate was 6.89% and the proceeds were used to reduce short-term debt.

     In November 2002, PSEG issued 17.25 million shares of common stock pursuant to an underwritten public offering at a price of $26.55 per share. The net proceeds from the sale of common stock were $443 million and were used to reduce short-term debt.

     In December 2002, PSEG Funding Trust II issued 7.2 million shares of $25 par value trust preferred securities. The net proceeds of $174 million were used to reduce short-term debt.

     During 2002, PSEG contributed $400 million of equity to Energy Holdings, $200 million to Power and on January 21, 2003, PSEG contributed $170 million of equity to PSE&G.

     PSE&G

     PSE&G is required to obtain BPU authorization to issue any financing necessary for its capital program, including refunding of maturing debt and opportunistic refinancing. PSE&G has authorization from the BPU to issue up to an aggregate of $1 billion of long-term debt through December 31, 2003 for the refunding of maturing debt and opportunistic refinancing of debt. PSE&G currently has authority to issue up to $750 million of short-term debt through January 4, 2005. In addition, PSE&G expects to securitize approximately $250 million of deferred BGS costs.

     In August 2002, $257 million of 6.125% Series RR Mortgage Bonds matured.

     In September 2002, PSE&G issued $300 million of 5.125% Medium-Term Notes due 2012, the proceeds of which were used to repay $290 million of 7.19% Medium-Term Notes that matured.

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

     Also in January 2003, PSEG contributed $170 million to PSE&G to offset a minimum pension liability charge to OCI in order to maintain its targeted regulated equity ratio at approximately 42%.

     During 2002, PSE&G Transition Funding LLC (Transition Funding), a wholly-owned subsidiary of PSE&G, repaid $121 million of securitization bonds.

     Since 1986, PSE&G has made regular cash payments to PSEG in the form of dividends on outstanding shares of its common stock. PSE&G paid common stock dividends of $305 million and $112 million to PSEG for the years ended December 31, 2002 and 2001, respectively.

     Power

     Power’s short-term financing needs are substantially met using PSEG’s commercial paper program or lines of credit discussed above.

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     In June 2002, Power issued $600 million of 6.95% Senior Unsecured Notes due 2012. The proceeds were used to repay short-term funding from PSEG, including amounts related to the gas contract transfer from PSE&G in May 2002.

     Energy Holdings

     In June 2002, Energy Holdings issued an additional $135 million of its 8.625% Series of Senior Notes due February 2008.

     In June 2002, July 2002 and October 2002, $98 million, $100 million and $30 million of PSEG Capital medium-term notes (MTNs) with average borrowing rates of 3.12%, 6.95% and 6.80% matured, respectively. These MTNs were refunded with funds from operations and proceeds from borrowings under Energy Holdings’ credit facilities. The remaining maturity under the PSEG Capital Corporation program is $252 million, which matures in May 2003 and is expected to be refinanced through operating cash flows and existing short-term credit facilities.

     During 2002, Energy Holdings repurchased approximately $54 million of its outstanding Senior Notes at prices below par value.

OCI Charge for Pension Liability

     PSEG, PSE&G, Power and Energy Holdings

     Due to the weak financial markets over the past few years, PSEG’s, PSE&G’s, Power’s and Energy Holdings’ pension plan assets have not experienced the returns necessary to outpace the growth of the related pension liabilities. In accordance with SFAS No. 87, “Employers Accounting for Pensions” (SFAS 87), PSEG, PSE&G, Power and Energy Holdings were required to record a minimum pension liability on their respective Consolidated Balance Sheets as of December 31, 2002. As calculated under SFAS 87, a minimum pension liability exists and must be recorded when the accumulated benefit obligation (ABO) of the plan exceeds the fair value of the plan assets. The excess of the ABO over the fair value of the plan assets is recorded as a charge to OCI within the equity section of the Consolidated Balance Sheets. The offsetting adjustment is recorded as a pension liability or as a reduction of certain pension plan intangible assets as applicable. The minimum pension liability is reduced or reversed when cash funding occurs, or when the fair value of the pension plan assets grow to a level above that of the ABO.

     As of December 31, 2002, PSEG, PSE&G, Power and Energy Holdings recorded after-tax charges to OCI as follows:

	(Millions)
PSE&G		$	172
Power			84
Energy Holdings			6
Services			35
Total PSEG		$	297

      PSEG funded the pension plan by $250 million in 2002 and plans on contributing $175 million in 2003, but will consider increasing this planned contribution to remove the OCI charge based on market conditions. For additional information, see Note 17. Pension, Other Postretirement Benefit (OPEB) and Savings Plans of the Notes.

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CAPITAL REQUIREMENTS

Forecasted Expenditures

     PSEG, PSE&G, Power and Energy Holdings

     PSEG, Power and Energy Holdings have substantially reduced their respective capital expenditure forecasts in response to tightening market conditions resulting from market and lender concerns regarding the overall economy and the industry in particular, including an investor and rating agency focus on leverage ratios.

     It is expected that the majority of each subsidiary’s capital requirements over the next five years will come from internally generated funds, with the balance to be provided by the issuance of debt at the subsidiary or project level and equity contributions from PSEG. Projected construction and investment expenditures, excluding nuclear fuel purchases for Power, for PSEG’s subsidiaries for the next five years are as follows:

	2003			2004			2005		2006		2007
	(Millions)
PSE&G		$	450		$	450	$	450	$	450	$	500
Power			500			675		250		75		50
Energy Holdings			100			—		50		50		50
Total PSEG	$	1,050		$	1,125		$	750	$	575	$	600

     PSE&G

     PSE&G projects future capital needs in order to maintain continuous additions to its transmission and distribution systems to manage reliability. In 2002, PSE&G had net plant additions of $472 million related to improvements in its transmission and distribution system, gas system and common facilities.

     Power

     Power’s capital needs will be dictated by its strategy to continue to develop as a profitable, growth-oriented supplier in the wholesale power market. Power has revised its schedule for completion of several projects under development to provide better sequencing of its construction program with anticipated market demand. This should allow Power to conserve capital in 2003 and will allow it to take advantage of the expected recovery of the electric markets and its anticipated need for capacity in 2005. Power’s subsidiaries have substantial commitments as part of their ongoing construction programs. Power will continue to evaluate its development and construction requirements in relation to the energy and financial markets.

     In 2002, Power made approximately $1.3 billion of capital expenditures, primarily related to developing the Lawrenceburg, Indiana, Waterford, Ohio and Bethlehem, New York (Albany) sites and adding capacity to the Bergen and Linden stations in New Jersey.

     Energy Holdings

     Energy Holdings’ capital needs in 2003 are limited to fulfilling existing contractual commitments. All of the forecasted expenditures in 2005 through 2007 related to Energy Holdings are discretionary.

     In 2002, Energy Holdings’ subsidiaries made net investments totaling approximately $237 million. These investments include a majority interest in a coal-fired generation facility in Poland, additional investments in existing generation and distribution facilities and projects by Global and investments in capital leases by Resources. Partially offsetting these investments was a loan repayment from TIE and proceeds from the termination of two lease transactions with affiliates of TXU-Europe. For further discussion of the loans to TIE and the termination of the two lease transactions, see Note 22. Related-Party Transactions and Note 8. Long-Term Investments of the Notes.

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Disclosures about Long-Term Maturities, Contractual and Commercial Obligations and Certain Investments

     The following table summarizes anticipated recourse and non-recourse debt maturities for the years shown. Payments for Transition Funding are based on expected payment dates rather than final maturity dates.

Long-Term Debt Maturities:	2003		2004		2005		2006		Thereafter
	(Millions)
PSEG	$	—	$	—	$	—	$	—	$	248
PSE&G		300		286		125	147			2,069
Transition Funding (PSE&G)		129		138		146	155			1,783
Power		—		—		—	500			2,016
Energy Holdings(A)		252		276		—		—		1,449
Non-recourse project financing
Power		—		—		800		—		—
Energy Holdings		68		42		48		53		710
Total	$	749	$	742	$	1,119	$	855	$	8,275

(A) The $252 million in 2003 for Energy Holdings represents the total remaining maturities under the PSEG Capital Corporation program.

     The following tables, reflect PSEG and its subsidiaries’ contractual cash obligations and other commercial commitments in the respective periods in which they are due.

Contractual Cash Obligations	Total Amounts Committed		Less Than 1 Year		2 - 3 years		4 - 5 years		Over 5 years
	(Millions)
Short - Term Debt Maturities
PSEG	$	401	$	401	$	—	$	—	$	—
PSE&G		224	224			—		—		—
Energy Holdings		137	137			—		—		—
Long - Term Debt Maturities
PSEG		248		—		—		—		248
PSE&G		2,927	300			411		260		1,956
Transition Funding (PSE&G)		2,351	129			284		317		1,621
Power		3,316		—		800		500		2,016
Energy Holdings		2,898	320			366		106		2,106
Preferred Securities Redemptions
PSEG		705		—		—		—		705
PSE&G		155		—		—		—		155
Capital Lease Obligations
PSE&G		80		6		12		12		50
Power		19		1		2		4		12
Operating Leases
PSE&G		13		3		6		4		—
Energy Holdings		37		6		9		8		14
Services		8		1		2		2		3
Fuel Purchase Commitments:
Power		545		163		140		101		141
Total Contractual Cash Obligations	$	14,064	$	1,691	$	2,032	$	1,314	$	9,027

     Power

     As of December 31, 2002, Power had guaranteed equity contribution commitments with respect to its subsidiaries of $134 million. Power also issued guarantees with respect to certain energy trading contracts, see Note 13. Commitments and Contingent Liabilities of the Notes for further discussion.

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     Energy Holdings

     As of December 31, 2002, Energy Holdings had guaranteed equity contribution commitments of $141 million and other guarantees of $167 million.

     In the normal course of business, Energy Technologies secures construction obligations with performance bonds issued by insurance companies. As of December 31, 2002, Energy Technologies had performance bonds outstanding of $228 million which were supported by Energy Holdings and of which $45 million was at risk for projects currently under construction. This amount is expected to decrease as Energy Technologies’ construction projects are completed. The performance bonds are not included in the table below. See Note 13. Commitments and Contingent Liabilities of the Notes for further discussion.

Other Commercial Commitments:		Total Amounts Committed		Less Than 1 year		2 - 3 years			4 - 5 years			Over 5 years
	(Millions)
Standby Letters of Credit
Power		$	73	$	28		$	2		$	—		$	43
Energy Holdings			74		70			—			4			—
Guarantees and Equity Commitments
Power			134		134			—			—			—
Energy Holdings			265		123			—			55			87
Total Commercial Commitments		$	546	$	355		$	2		$	59		$	130

Off Balance Sheet Arrangements

     Energy Holdings

     Global has certain investments that are accounted for under the equity method in accordance with generally accepted accounting principles (GAAP). Accordingly, amounts recorded on the Consolidated Balance Sheets for such investments represents Global’s equity investment which is increased for Global’s pro-rata share of earnings less any dividend distribution from such investments. The companies in which PSEG invest that are accounted for under the equity method have an aggregate $1.7 billion of debt on their combined, consolidated financial statements. PSEG’s pro-rata share of such debt is $700 million. This debt is non-recourse to PSEG, Energy Holdings, and Global. PSEG is generally not required to support the debt service obligations of these companies. However, default with respect to this nonrecourse debt could result in a loss of invested equity.

     Resources has investments in leveraged leases that are accounted for in accordance with SFAS No. 13 “Accounting for Leases.” Leveraged lease investments generally involve three parties: an owner/lessor, a creditor and a lessee. In a typical leveraged lease financing, the lessor purchases an asset to be leased. The purchase price is typically financed 80% with debt provided by the creditor and the balance comes from equity funds provided by Resources, as the lessor. The creditor provides long-term financing to the transaction, and is secured by the property subject to the lease. Such long-term financing is non-recourse to Resources. As such, in the event of default, the creditor may only look to the leased asset as security for its loan. As a lessor, Resources has ownership rights to the property and rents the property to the lessee for use in its business operation. As of December 31, 2002, Resources’ equity investment in leased assets was approximately $1.5 billion, net of deferred taxes of approximately $1.3 billion. For additional information, see Note 8. Long-Term Investments of the Notes.

     In the event that collectibility of the minimum lease payments to be received by the lessor is no longer reasonably predictable, the accounting treatment for some of the leases may change. In such cases, Resources may deem that a lessee has a high probability of defaulting on the lease obligation. In many instances, Resources has protected its equity investment in such transactions by providing for the direct right to assume the debt obligation under certain circumstances. Debt assumption would be at Resources’ sole discretion and normally only would occur if an appraisal of the leased property yielded a value that exceeds the present value of the debt outstanding.

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Should Resources ever directly assume a debt obligation, the fair value of the underlying asset and the associated debt would be recorded on the Consolidated Balance Sheets instead of the net equity investment in the lease. In 2000, Resources reclassified an investment in a real estate leveraged lease due to the unpredictability of future rent collections, and assumed a debt obligation of $24 million.

ACCOUNTING ISSUES

New Accounting Standards

     SFAS No. 142, “Goodwill and Other Intangible Assets” (SFAS 142)

PSEG, PSE&G, Power and Energy Holdings

     On January 1, 2002, PSEG, PSE&G, Power and Energy Holdings adopted SFAS 142. Under this standard, PSEG was required to complete an impairment analysis of goodwill by June 30, 2002 and record any required impairment retroactive to January 1, 2002. Under SFAS 142, goodwill is considered a nonamortizable asset and is subject to an annual review for impairment and an interim review when certain events or changes in circumstances occur. The effect of no longer amortizing goodwill on an annual basis was not material to PSEG’s, PSE&G’s, or Power’s financial position and results of operations upon adoption.

Power and Energy Holdings

     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. As a result of adopting this new standard, in 2002 Energy Holdings recorded after-tax charges to reflect the goodwill impairment of $120 million and such amount has been recognized as a Cumulative Effect of a Change in Accounting Principle in accordance with the new standard. All of these charges related to investments of Energy Holdings. See Note 2. New Accounting Standards of the Notes for additional discussion on the adoption of this standard.

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

PSEG, PSE&G, Power and Energy Holdings

     Effective January 1, 2003, PSEG, PSE&G, Power and Energy Holdings will adopt SFAS 143. SFAS 143 addresses accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset. A legal obligation is a liability that a party is required to settle as a result of an existing or enacted law, statute, ordinance or contract.

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

PSE&G and Power

     Power has performed a review of its potential obligations under SFAS 143 and believes that its quantifiable obligations are primarily related to the decommissioning of its nuclear power plants. Amounts collected from PSE&G customers are remitted to Power and deposited into the Nuclear Decommissioning Trust (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

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the liability. As of December 31, 2002, Power had a $766 million asset and liability recorded on its Consolidated Balance Sheets for nuclear decommissioning.

     In addition to the quantifiable obligations, Power identified certain legal obligations that meet the criteria of SFAS 143 which at this time are not quantifiable. These obligations relate to certain industrial establishments subject to the Industrial Site Recovery Act, underground storage tanks subject to the Spill Compensation and Control Act, permits and authorizations, the restoration of an area occupied by a reservoir when the reservoir is no longer needed, an obligation to retire certain plants from operation, prior to the initial burning of fuel from a new plant and the demolition of certain plants and the restoration of the sites on which reside when the plants are no longer in service.

     In August 2002, PSE&G filed a petition requesting clarification from the BPU regarding the future cost responsibility for nuclear decommissioning and whether: (a) PSE&G’s customers will continue to pay for such costs; or (b) such customer responsibility will terminate at the end of the four-year transition period on July 31, 2003 and become the sole responsibility of Power. The outcome of this petition will affect the treatment of a material portion of the liability recorded for Power’s nuclear decommissioning obligation. If the BPU determines that PSE&G’s customers will continue to pay for these costs, the majority of the difference between the previously recorded amount of the liability and the liability calculated under SFAS 143 will continue to be deferred on the balance sheet. If the BPU determines that such customer responsibility terminates at the end of the transition period, then the net effect of implementation will be recorded as a one-time benefit as a Cumulative Effect of a Change in Accounting Principle. A decision is expected as part of PSE&G’s electric base rate case, which is expected to be completed prior to July 2003. Although the outcome of this petition cannot be predicted, management believes that the net effect of adopting this accounting standard should be recorded in earnings. Power also has $131 million of liabilities, $7 million of which relates to legal obligations, recorded on its Consolidated Balance Sheets at December 31, 2002 related to the Cost of Removal associated with its fossil generating stations. These potential obligations are required to be reversed upon implementation of SFAS 143.

     Therefore, upon adoption of this standard on January 1, 2003, PSEG and Power will record an adjustment for a Cumulative Effect of a Change in Accounting Principle in the Consolidated Statements of Earnings by reducing the existing liabilities to their present value. It is anticipated that the result will be a benefit to net income, and therefore equity, in a range of $300 million to $400 million. Of this amount, $200 million to $300 million relates to interests in certain nuclear units Power purchased from PSE&G which are subject to the BPU issue discussed above, approximately $55 million relates to interests in certain nuclear units Power purchased from Atlantic City Electric Company (ACE) and Delmarva Power and Light Company (DP&L) which are not subject to BPU approval and approximately $70 million relates to the cost of removal liabilities for the fossil units being reversed.

     The BPU could decide that the future cost for decommissioning the nuclear units rests with PSE&G’s customers. If that is the case, the portion of the benefit recorded to equity related to the nuclear units Power purchased from PSE&G would be reversed and a regulatory liability would be established. The $55 million related to the nuclear units purchased from ACE and DP&L and the $70 million related to the cost of removal liabilities for the fossil units would be unaffected.

PSE&G

     As of December 31, 2002, PSE&G had no legal liabilities, as contemplated under SFAS 143, recorded on the Consolidated Balance Sheets and therefore the effect of adoption will not result in an adjustment to the Consolidated Statement of Operations. PSE&G does, however, have cost of removal liabilities embedded within Accumulated Depreciation pursuant to SFAS 71. Since PSE&G is a regulated enterprise, these amounts will continue to be recorded and presented in Accumulated Depreciation and will be disclosed in accordance with SFAS 143.

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

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Energy Holdings

     Energy Holdings identified certain legal obligations that met the criteria of SFAS 143 and are not expected to be material to the Consolidated Statement of Operations.

     SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144)

PSEG, PSE&G, Power and Energy Holdings

     On January 1, 2002, SFAS 144 which provides guidance on the accounting for the impairment or disposal of long-lived assets, became effective. For long-lived assets to be held and used, the new rules are similar to previous guidance which required the recognition of an impairment when the undiscounted cash flows will not recover its carrying amount. The impairment to be recognized will continue to be measured as the difference between the carrying amount and fair value of the asset. The computation of fair value now removes goodwill from consideration and incorporates a probability-weighted cash flow estimation approach if fair value is not readily determinable. The previous guidance provided in SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of”, (SFAS 121) is to be applied to assets that are to be disposed of by sale. Additionally, assets qualifying for discontinued operations treatment have been expanded beyond the former major line of business or class of customer approach. Long-lived assets to be disposed of by other than sale will now recognize impairment at the date of disposal, but will be considered assets to be held and used until that time. There was no impact on the Consolidated Financial Statements due to adoption of these rules.

     SFAS No. 145, “Rescission of FASB Statements Nos. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (SFAS 145)

PSEG, PSE&G, Power and Energy Holdings

     Effective January 1, 2002, PSEG, PSE&G, Power and Energy Holdings adopted SFAS 145. This Statement rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishments of Debt,” (SFAS 4) and an amendment of that Statement, SFAS No. 64, “Extinguishments of Debt Made to Satisfy Sinking Fund Requirements” (SFAS 64). SFAS 4 required that gains and losses from extinguishments of debt that were included in the determination of net income be aggregated, and if material, classified as an extraordinary item. Since the issuance of SFAS 4, the use of debt extinguishments has become part of the risk management strategy of many companies, representing a type of debt extinguishment that does not meet the criteria for classification as an extraordinary item. Based on this trend, the FASB issued this rescission of SFAS 4 and SFAS 64. Accordingly, under SFAS 145, PSEG, PSE&G, Power and Energy Holdings now record these gains and losses in Other Income and Other Deductions, respectively.

Energy Holdings

     Energy Holdings recorded pre-tax gains of $13 million ($8 million after-tax) from the early retirement of debt as a component of Other Income for the period ended December 31, 2002. Also, Energy Holdings reclassified a pre-tax loss of $3 million ($2 million after-tax) from the early retirement of debt to a component of Other Deductions for the period ended December 31, 2001.

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

PSEG, PSE&G and Power

     EITF 02-3 requires all gains and losses on energy trading contracts to be reported on a net basis. Also, energy trading contracts that do not qualify as derivatives will no longer be marked to market. Instead, accrual accounting will be used. The consensus was effective for all new contracts executed after October 25, 2002, and requires a cumulative effect adjustment to income in the first quarter of 2003 for all contracts executed prior to October 25, 2002. The vast majority of PSEG’s energy contracts qualify as derivatives under SFAS 133 and will therefore continue to be marked to market. Management believes the impact of adopting this consensus will not be material to the Consolidated Financial Statements.

     Pursuant to EITF Issue No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent” (EITF 99-19), PSE&G and Power had been recording trading revenues and trading related costs on a gross basis for physical energy and capacity sales and purchases. In accordance with EITF 02-3, beginning in the third quarter of 2002,

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Power started reporting energy trading revenues and energy trading costs on a net basis and have reclassified prior periods to conform with this net presentation. As a result, both Operating Revenues and Energy Costs were reduced by approximately $1.9 billion, $2.3 billion and $2.6 billion for the years ended December 31, 2002, 2001 and 2000, respectively. This change in presentation did not have an effect on trading margins, net income or cash flows.

     Financial Interpretation (FIN) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN 45)

PSEG, PSE&G, Power and Energy Holdings

     FIN 45 enhances the disclosures to be made by a guarantor in its interim and annual Financial Statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee, although PSEG does not anticipate the recording of such liabilities will be material to the Consolidated Financial Statements. The initial recognition and initial measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. For further information regarding Power’s and Energy Holdings’ respective guarantees, refer to Note 13. Commitments and Contingent Liabilities of the Notes.

     FIN No. 46, “Consolidation of Variable Interest Entities (VIE)” (FIN 46)

PSEG, PSE&G, Power and Energy Holdings

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

     Other

PSE&G, Power and Energy Holdings

     In connection with the January 2003 EITF meeting, the FASB was requested to reconsider an interpretation of SFAS 133. The interpretation, which is contained in the Derivatives Implementation Group’s C-11 guidance, relates to the pricing of contracts that include broad market indices. In particular, that guidance discusses whether the pricing in a contract that contains broad market indices (e.g., Consumer Price Index) could qualify as a normal purchase or sale under SFAS 133. PSEG, PSE&G, Power and Energy Holdings are currently reevaluating which contracts, if any, that have previously been designated as normal purchases or sales, would now not qualify for this exception. PSEG, PSE&G, Power and Energy Holdings are currently evaluating the effects that this guidance will have on their respective results of operations, financial position and net cash flows.

Critical Accounting Estimates

     PSEG, PSE&G, Power and Energy Holdings

     Under GAAP, there are many accounting standards that require the use of estimates, variable inputs and assumptions (collectively referred to as estimates) that are subjective in nature. Because of this, differences between the actual measure realized versus the estimate can have a material impact on results of operations, financial position and cash flows. The management of PSEG, PSE&G, Power and Energy

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Holdings has each, respectively, determined that the following estimates are considered critical to the application of rules that relate to its business.

Accounting for Pensions

     PSEG, PSE&G, Power and Energy Holdings account for pensions under SFAS 87. Under these rules, certain assumptions which are subjective by nature are made. There are many subjective assumptions involved in determining an entity’s pension liabilities and costs each period including demographic information such as life expectancy and pay increases, and financial metrics, such as discount rates used to determine the pension liability and assumed rate of return on the pension assets which affects annual pension costs. PSEG’s assumptions are supported by historical data and reasonable projections and are reviewed with an outside actuary firm and investment advisors. As of December 31, 2002, PSEG used a 6.75% discount rate and a 9% annual rate of return. In selecting an assumed discount rate, PSEG uses a rate based on a blend of the Aa Moody’s Corporate and Utility Indices. The 9% annual rate of return is consistent with PSEG’s cumulative returns on the pension funds since inception and with a study performed late in 2002 of projected returns for PSEG’s pension funds based on their asset allocation, maturities and an active investment manager.

     The following chart reflects the sensitivities associated with a change in certain actuarial assumptions by the indicated percentage. While the chart below reflects an increase or decrease in the percentage for each assumption, PSEG, PSE&G, Power and Energy Holdings and its actuaries expect that the inverse of this change would impact the projected benefit obligation (PBO), the reported pension liability on the Consolidated Balance Sheets and the reported annual pension cost on the Consolidated Statements of Operations by a similar amount in the opposite direction. Each sensitivity below reflects an evaluation of the change based solely on a change in that assumption only.

Actuarial Assumption	Current		Change/ (Decrease)		Impact on PBO			Increase to Pension Expense
	(Millions)
Discount Rate	6.75	%	(1	%)		$	350	$	26
Rate of Return on Plan Assets	9.0	%	(1	%)			—	$	22

Accounting for Derivative Instruments and Hedging Activities

     SFAS 133 requires an entity to recognize the fair value of derivative instruments held as assets or liabilities on the balance sheet. In accordance with SFAS 133, the effective portion of the change in the fair value of a derivative instrument designated as a cash flow hedge is reported in OCI, net of tax, or as a regulatory asset (liability). Amounts in accumulated OCI are ultimately recognized in earnings when the related hedged forecasted transaction occurs. The change in the fair value of the ineffective portion of the derivative instrument designated as a cash flow hedge is recorded in earnings. Derivative instruments that have not been designated as hedges, such as energy trading contracts, are adjusted to fair value through earnings. PSEG, PSE&G, Power and Energy Holdings have entered into various derivative instruments, including hedges of anticipated electric and gas purchases, interest rate swaps and foreign currency hedges which have been designated as cash flow hedges. Management may choose to designate these contracts as hedges based on its business practices, if such derivatives meet the effectiveness test under SFAS 133.

     The fair value of the derivative instruments is determined by reference to quoted market prices, listed contracts, published quotations or quotations from counterparties. In the absence thereof, PSEG, PSE&G, Power and Energy Holdings utilize mathematical models

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based on current and historical data. The fair value of most of PSEG’s derivatives is determined based upon quoted market prices.

     For additional information regarding Derivative Financial Instruments, see Note 12. Risk Management of the Notes.

     Accounting for Deferred Taxes

     PSEG, PSE&G, Power and Energy Holdings provide for income taxes based on the asset and liability method required by SFAS No. 109, “Accounting for Income Taxes”. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as net operating loss and credit carryforwards.

     PSEG, PSE&G, Power and Energy Holdings evaluate the need for a valuation allowance of their respective deferred tax assets based on the likelihood of expected future taxable benefits. PSEG, PSE&G, Power and Energy Holdings do not believe a valuation allowance is necessary; however, if the expected level of future taxable income changes or certain tax planning strategies become unavailable, PSEG, PSE&G, Power and Energy Holdings would record a valuation allowance through income tax expense in the period the valuation allowance is deemed necessary.

     Accounting for Long-Lived Assets

     SFAS 144, a new standard related to testing long-lived assets for impairment, was adopted on January 1, 2002. Testing under SFAS 144 is essentially the same as the asset impairment tests PSEG, PSE&G, Power and Energy Holdings performed under SFAS 121. This test consisted of an undiscounted cash flow analysis to determine if an impairment existed, and, if an impairment existed, a discounted cash flow test would be performed to quantify it. The new standard is broader in that it includes discontinued operations as part of its scope. This test requires the same judgment to be employed by management in building assumptions related to future earnings of individual assets or an investment as was required in determining potential impairments of goodwill as discussed above.

     These tests are required whenever events or circumstances indicate an impairment may exist. Examples of potential events which could require an impairment test are when power prices become depressed for a prolonged period in a market, when a foreign currency significantly devalues, or when an investment generates negative operating cash flows. Any potential impairment of investments under these circumstances is recorded as a component of operating expenses.

     PSE&G

     Unbilled Revenues

     Electric and gas revenues are recorded based on services rendered to customers during each accounting period. PSE&G records unbilled revenues for the estimated amount customers will be billed for services rendered from the time meters were last read to the end of the respective accounting period. Unbilled usage is calculated in two steps. The initial step is to apply a base usage per day to the number of unbilled days in the period. The second step estimates seasonal loads based upon the time of year and the variance of actual degree-days and temperature-humidity-index hours of the unbilled period from expected norms. The resulting usage is priced at current rate levels and recorded as revenue. A calculation of the associated energy cost for the unbilled usage is recorded as well. Each month the prior month’s unbilled amounts are reversed and the current month’s amounts are accrued. The resulting revenue and expense reflect the billed data less the portion booked in the prior month plus the unbilled portion of the current month.

     SFAS 71 - Accounting for the Effects of Certain Types of Regulation

     PSE&G prepares its Consolidated Financial Statements in accordance with the provisions of SFAS 71, which differs in certain respects from the application of GAAP by non-regulated businesses. In general, SFAS 71 recognizes that accounting for rate-regulated enterprises should reflect the economic effects of regulation. As a result, a regulated

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utility is required to defer the recognition of costs (a regulatory asset) or the recognition of obligations (a regulatory liability) if it is probable that, through the rate-making process, there will be a corresponding increase or decrease in future rates. Accordingly, PSE&G has deferred certain costs, which will be amortized over various future periods. To the extent that collection of such costs or payment of liabilities is no longer probable as a result of changes in regulation and/or PSE&G’s competitive position, the associated regulatory asset or liability is charged or credited to income. See Note 7. Regulatory Assets and Liabilities of the Notes for further discussion of these and other regulatory issues.

     Power and Energy Holdings

     Accounting for Goodwill

     SFAS 142 requires an entity to evaluate its goodwill for impairment at least annually or when indications of impairment exist. An impairment may exist when the carrying amount of goodwill exceeds its implied fair value.

     Accounting estimates related to goodwill fair value are highly susceptible to change from period to period because they require management to make cash flow assumptions about future sales, operating costs, economic conditions and discount rates over an indefinite life and the impact of recognizing an impairment could have a material impact on financial position and results of operations.

     Power and Energy Holdings perform annual goodwill impairment tests and continuously monitor the business environment in which they operate for any impairment issues that may arise. As indicated above, certain assumptions are used to arrive at a fair value for goodwill testing. Such assumptions are consistently employed and include, but are not limited to, free cash flow projections, interest rates, tariff adjustments, economic conditions prevalent in the geographic regions in which Power and Energy Holdings do business, local spot market prices for energy, foreign exchange rates and the credit worthiness of customers. If an adverse event were to occur, such an event could materially change the assumptions used to value goodwill and could result in impairments of goodwill. For further information, see Note 2. New Accounting Standards of the Notes.

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

     In addition to the risks identified in MD&A — Overview and Future Outlook and 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, could have an adverse impact;
• liquidity and the ability to access capital and credit markets, could have an adverse impact;
• acquisitions, divestitures, mergers, restructurings or strategic initiatives that change PSEG, PSE&G, Power and Energy Holdings’ structure; business combinations among competitors and major customers could change financial position, results of operations or net cash flows;
• general economic conditions including inflation;
• changes to accounting standards or generally accepted accounting principles, which may require adjustments to financial statements and may affect future results;
• changes in tax laws and regulations which could affect cash flows and business prospects;
• energy obligations, available supply and trading risks may have an adverse impact;
• changes in the electric industry including changes to power pools could have an adverse impact;
• regulation and availability of power transmission facilities may impact ability to deliver output to customers;
• growth in costs and expenses could have an adverse impact;
• environmental regulation significantly impacts operations;
• changes in rates of return on overall debt and equity markets could have an adverse impact on the value of pension assets and the NDT fund;
• changes in political conditions, recession, acts of war or terrorism could have an adverse impact;
• insurance coverage may not be sufficient;
• involvement in lawsuits, including liability claims and commercial disputes, could affect profits or ability to sell and market products;
• inability to attract and retain management and other key employees could have an adverse impact;
• ability to service debt as a result of any of the aforementioned events could have an adverse impact;

PSE&G & Energy Holdings

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

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Power and Energy Holdings

• low energy prices could adversely affect revenues and cash flows;
• excess supply due to overbuild in the industry may have adverse effects;
• generation operating performance may fall below projected levels;
• the operations are subject to substantial competition from well capitalized participants in the worldwide energy markets;
• inability to effectively manage trading risk could have an adverse impact;
• margin posting requirements could have an adverse effect on cash flows;
• availabililty of fuel at reasonable prices;
• competitive position could be adversely affected by actions involving competitors or major customers;
• changes in product or sourcing mix could have an adverse impact;
• acquisition, construction and development may not be timely or successful;
• changes in technology may make power generation assets less competitive;

Energy Holdings

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

     Consequently, all of the forward-looking statements made in this report are qualified by these cautionary statements and 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 its 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 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, PSE&G, Power and Energy Holdings’ securities, PSEG, PSE&G, Power and Energy Holdings is not making, and you should not infer, any representation about the likely existence of any particular future set of facts or circumstances. The forward-looking statements contained in this report are intended to qualify for the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

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ITEM 7A.   QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

PSEG, PSE&G, Power and Energy Holdings

     The market risk inherent in PSEG’s, PSE&G’s, Power’s and Energy Holdings’ market risk sensitive instruments and positions is the potential loss arising from adverse changes in foreign currency exchange rates, commodity prices, equity security prices and interest rates as discussed in the Notes to the Consolidated Financial Statements. Each of PSEG, PSE&G, Power and Energy Holdings’ policy is to use derivatives to manage risk consistent with its respective business plans and prudent practices. PSEG, PSE&G, Power and Energy Holdings utilize the PSEG Risk Management Committee (RMC) comprised of executive officers which utilizes an independent risk oversight function to ensure compliance with corporate policies and prudent risk management practices.

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

Foreign Exchange Rate Risk Energy Holdings

     Global is exposed to foreign currency risk and other foreign operations risk that arise from investments in foreign subsidiaries and affiliates. A key component of this risk is that some of its foreign subsidiaries and affiliates utilize currencies other than the consolidated reporting currency, the US Dollar. Additionally, certain of Global’s foreign subsidiaries and affiliates have entered into monetary obligations and maintain receipts/receivables in US Dollars or currencies other than their own functional currencies. Primarily, Global is exposed to changes in the US Dollar to Brazilian Real exchange rate, the US Dollar to Euro exchange rate, the US Dollar to Polish Zloty exchange rate and the US Dollar to Chilean Peso exchange rate. 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 to changes in foreign exchange rates. Global also uses foreign currency forward, swap and option agreements, wherever possible, to manage risk related to certain foreign currency fluctuations.

     As of December 31, 2002, the devaluing Brazilian Real has resulted in a cumulative $225 million loss of value which is recorded as a $202 million after-tax charge to Other Comprehensive Income related to Global’s equity method investments in RGE, a Brazilian distribution company. An additional devaluation in the December 31, 2002 Brazilian Real to the US Dollar exchange rate of 10% would result in a $3 million change in the value of the investment in RGE and an after-tax $3 million impact to Other Comprehensive Income.

     Additionally, Global has $52 million of monetary receivables in Euros subject to fluctuations in the US Dollar to Euro exchange rate. If the December 31, 2002 Euro to US Dollar exchange rate were to change by 10%, Global would record a $4 million after-tax foreign currency transaction gain or loss.

     Global also has net monetary positions in the Polish Zloty related to its consolidated investments in ELCHO and Skawina, Polish generation companies. If the December 31, 2002 Polish Zloty to US Dollar exchange rate were to change by 10%, Global would record a $4 million after-tax foreign currency transaction gain or loss.

     An additional exposure related to foreign currency risk includes the $157 million of monetary obligations in US Dollars subject to fluctuations in the US Dollar to Chilean Peso exchange rate. If the December 31, 2002 exchange rate of the Chilean Peso to the US Dollar were to change by 10%, Energy Holdings would record an after-tax $9 million foreign currency transaction gain or loss. Such gain or loss should be materially offset by gains or

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losses on the Chilean Peso forward exchange contract hedging such exposure. See Note 12. Risk Management of the Notes.

     With respect to any other monetary assets or liabilities subject to foreign currency risk, a 10% change in any individual US Dollar to local currency exchange rate would not be material.

Commodity Contracts

Power and Energy Holdings

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

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

Power

     VaR Model

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

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

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

     The model is an augmented variance/covariance model adjusted for the delta of positions with a 95% two-tailed confidence level for a one-week holding period. The model is augmented to incorporate, the non-log-normality of energy-related commodity prices, especially emissions and capacity and the non-stationary nature of energy volatility. The model also assumes no hedging activity throughout the holding period whereas Power actively manages its portfolio.

     As of December 31, 2002, VaR was approximately $7 million, compared to the December 31, 2001, level of $18 million. Previous to 2002, Power’s load was considered an indefinite obligation; therefore, for consistency purposes Power decided to model both the cost to serve its load obligation and the value of its generation assets on a rolling 12-month basis. At present, Power’s load obligation is determined by the results of the annual BGS auction. In February 2003, the BPU held two simultaneous auctions for load obligations covering overlapping time periods. Two-thirds of New Jersey’s fixed-price BGS load was auctioned for the 10 months from August 2003 through May 2004 and the remaining one-third was auctioned for the 34 months from August 2003 through May 2006. The combined result is that all of New Jersey’s fixed-price BGS load is auctioned through May 2004, while only one-third is auctioned for the 24 months from June 2004 through May 2006. To maintain an actionable VaR, generation

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and load (based on an assumed success rate in the auction) are both modeled at 100% of their assumed value through May 2004 and at one-third of the assumed value of each from June 2004 through May 2006.

     Power’s VaR Associated with Generating Assets and Commodity Contracts

For the Year Ended December 31, 2002	Total VaR
	(Millions)
95% Confidence Level, Five-Day Holding Period, Two-Tailed:
Period End	$	7.5
Average for the Period	$	18.1
High	$	33.8
Low	$	7.5
99% Confidence Level, One-Day Holding Period, Two-Tailed:
Period End	$	4.4
Average for the Period	$	10.7
High	$	19.9
Low	$	4.4

     Energy Holdings

     VaR Model

     In general, Energy Holdings manages its commodity exposure through power purchase agreements. One notable exception is its partial ownership of TIE, which owns two merchant energy plants that manage their risk through short-term energy sales.

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

     As of December 31, 2002 and December 31, 2001, VaR was approximately $4 million.

     Energy Holdings’ VaR Associated with Generating Assets and Commodity Contracts

For the Year Ended December 31, 2002	Total VaR
	(Millions)
95% Confidence Level, Five-Day Holding Period, Two-Tailed:
Period End	$	4.2
Average for the Period	$	4.9
High	$	8.1
Low	$	2.5
99% Confidence Level, One-Day Holding Period, Two-Tailed:
Period End	$	2.5
Average for the Period	$	2.9
High	$	4.8
Low	$	1.5

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Interest Rates

PSEG, PSE&G, Power and Energy Holdings

     PSEG, PSE&G, Power and Energy Holdings are subject to the risk of fluctuating interest rates in the normal course of business. PSEG’s, PSE&G, Power & Energy Holdings’ policy is to manage interest rate risk through the use of fixed rate debt, floating rate debt, interest rate swaps and interest rate lock agreements. PSEG, PSE&G, Power & Energy Holdings’ manages its interest rate exposure by maintaining a targeted ratio of fixed and floating rate debt. As of December 31, 2002, a hypothetical 10% change in market interest rates would result in a $1 million, $4 million, $2 million, and $2 million, change in annual interest costs related to debt at PSEG, PSE&G, Power and Energy Holdings, respectively. In addition, as of December 31, 2002, a hypothetical 10% change in market interest rates would result in a $8 million, $216 million, $122 million, and $50 million change in the fair value of the debt of PSEG, PSE&G, Power and Energy Holdings, respectively.

Debt and Equity Securities

PSEG

     PSEG has approximately $2.1 billion invested in its pension plan. Although fluctuations in market prices of securities within this portfolio do not directly affect PSEG’s earnings in the current period, changes in the value of these investments could affect PSEG’s future contributions to these plans, its financial position if the accumulated benefit obligation under its pension plan exceeds the fair value of its pension funds and future earnings as PSEG would earn a lower return on the fund balance and could be required to adjust its assumed rate of return.

Power

     Power’s Nuclear Decommissioning Trust (NDT) fund is comprised of both fixed income and equity securities totaling $766 million at December 31, 2002. The equity securities are independently marked-to-market each month by the Trustee. As of December 31, 2002, the portfolio was comprised of approximately $445 million of equity securities and approximately $321 million in fixed income securities. The fair market value of the NDT assets will fluctuate depending on the performance of equity markets. As of December 31, 2002, a hypothetical 10% change in the equity market would impact the value of Power’s equity securities by approximately $45 million.

     Power uses duration to measure the interest rate sensitivity of the fixed income portfolio. Duration is a summary statistic of the effective average maturity of the fixed income portfolio. Also, it is an essential tool in immunizing portfolios from interest rate risk. The benchmark for the fixed income component of the NDT Fund is the Lehman Brothers Aggregate Bond Index which currently has a duration of 3.79 years and a yield of 3.66%. The portfolio’s value will appreciate or depreciate by the duration with a 1% change in interest rates. As of December 31, 2002, a hypothetical 1% increase in interest rates would result in a decline in the market value for the fixed income portfolio of approximately $12 million.

Energy Holdings

     Resources has investments in equity securities and limited partnerships. Resources carries its investments in equity securities at their approximate fair value as of the reporting date. Consequently, the carrying value of these investments is affected by changes in the fair value of the underlying securities. Fair value is determined by adjusting the market value of the securities for liquidity and market volatility factors, where appropriate.

     As of December 31, 2002, Resources had investments in leveraged buyout funds of approximately $93 million, of which $24 million was comprised of public securities with available market prices and $69 million was comprised of non-publicly traded securities. The

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potential change in fair value resulting from a hypothetical 10% change in quoted market prices of the publicly traded investments amounted to $2 million as of December 31, 2002.

Credit Risk

PSEG, PSE&G, Power and Energy Holdings

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

Power

     Counterparties expose Power to credit losses in the event of non-performance or non-payment. Power has a credit management process which is used to assess, monitor and mitigate counterparty exposure for Power and its subsidiaries. In the event of non-performance or non-payment by a major counterparty, there may be a material adverse impact on Power and its subsidiaries’ financial condition, results of operations or net cash flows. As of December 31, 2002 over 89% of the credit exposure (mark-to-market plus net receivables and payables, less cash collateral) for Power’s trading operations was with investment grade counterparties. The majority of the credit exposure with non-investment grade counterparties is with certain companies that supply fuel to Power. Therefore, this exposure relates to the risk of a counterparty performing under its obligations rather than payment risk. As of December 31, 2002, Power’s trading operations had over 177 active counterparties.

     As a result of the New Jersey BGS auction, Power contracted to provide energy to the direct suppliers of New Jersey electric utilities, including PSE&G, commencing August 1, 2002. Subsequently certain bidders failed to meet the credit standards required under the BGS auction process and a portion of the contracts with those bidders was reassigned to Power. Therefore, for a limited portion of the New Jersey retail load, Power is a direct supplier to one utility, although this utility is not PSE&G. Power sells electricity to nine direct supplier-counterparties that serve the load of the utilities, and one utility directly. Four of these supplier-counterparties pay Power directly, and one of the four prepays its purchases. The revenue from the remaining five counterparties is paid directly from the utilities that those suppliers serve, and the related margin due to the counterparties is recorded as a liability and will be remitted to those counterparties separately. These bilateral contracts are subject to credit risk. This risk is substantially higher than the risk that was associated with potential nonpayment by PSE&G or any other electric distribution company (EDC) making direct payment under the BGS contract which expired on July 31, 2002, since the EDCs are rate-regulated entities. This credit risk relates to the ability of counterparties to meet their payment obligations for the power delivered under each BGS-related contract. Any failure to collect these payments under the BGS-related contracts could have a material impact on Power’s results of operations, cash flows and financial position. Power expects the credit risk and risk mitigation measures to be similar under the BGS-related contracts commencing August 1, 2003.

     In December 2001, Enron Corp. (Enron) and its subsidiaries filed for reorganization under Chapter 11 of the US Bankruptcy Code. Power had entered into a variety of energy trading contracts with Enron and its affiliates as part of its energy trading activities. Enron has guaranteed the obligations of its subsidiaries. Power undertook various measures to mitigate its exposure to Enron and its subsidiaries and other counterparties which could have been affected by the Enron bankruptcy. As of December 31, 2002, Enron has claimed that Power owes Enron North America approximately $52 million and has asserted that payment obligations of Enron Power Marketing to Power in the amount of $14 million may not be offset against this amount. The parties have engaged in settlement discussions. Power believes that it has valid claims and defenses against Enron and its subsidiaries, which it will vigorously pursue. Based on these discussions, rulings in the bankruptcy proceeding and its evaluations of its legal rights and obligations, Power believes the net amount payable in this matter may approximate $30 million.

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Energy Holdings

     Leveraged Leases

     Resources has credit risk related to its investments in leveraged leases, totaling $1.5 billion, which is net of deferred taxes of $1.3 billion, as of December 31, 2002. These investments are significantly concentrated in the energy related industry and have some exposure to the airline industry. Resources is the lessor of various aircraft to several domestic and foreign airlines. Resources leases a Boeing B767 aircraft to United Airlines (UAL). In December 2002, UAL filed for Chapter 11 bankruptcy protection. UAL has stated that it intends to retain B767 aircraft and use them in place of the Boeing 747. UAL has an additional debt obligation of $53 million associated with this aircraft. Resources will work constructively with UAL to keep the leveraged lease in place. However, if UAL is unable to meet the lease requirements, Energy Holdings could realize an adverse impact to its Consolidated Statements of Operations and net cash flows. The gross invested balance of this investment as of December 31, 2002 was $21 million.

     Resources is the lessor of domestic generating facilities in several US energy markets. As a result of recent actions of the rating agencies due to concerns over forward energy prices, the credit of some of the transaction lessees, or ultimate guarantors of the lease obligations, was downgraded. As of December 31, 2002, 65% of counterparties in the lease portfolio were rated investment grade by both S&P and Moody’s. Specifically, the lessees in the following transactions were downgraded below investment grade during 2002 by these rating agencies. Resources’ investment in such transactions was approximately $455 million, net of deferred taxes of $294 million as of December 31, 2002.

     Resources leases 1,173 MW of coal-fired generation to Reliant Energy Mid Atlantic Power Holdings LLC (REMA), an indirect wholly-owned subsidiary of Reliant Resources Incorporated (RRI). The leased assets are the Keystone, Conemaugh and Shawville generating facilities located in the PJM West market in Pennsylvania. In addition to the leased assets, REMA also owns and operates another 2,830 MW located within PJM. REMA is capitalized with over $1 billion of equity from RRI and has no debt obligations senior to the lease obligations. REMA is currently rated B– by S&P and B3 by Moody’s. As the lessor/equity participant in the lease, Resources is protected with significant lease covenants that restrict the flow of dividends from REMA to its parent, and by over-collateralization of REMA with an additional 2,830 MWs of non-leased assets, transfer of which is restricted by the financing documents. Restrictive covenants include historical and forward cash flow coverage tests that prohibit discretionary capital expenditures and dividend payments to the parent/lessee if stated minimum coverages are not met, and similar cash flow restrictions if ratings are not maintained at stated levels. The covenants are designed to maintain cash reserves in the transaction entity for the benefit of the non-recourse lenders and the lessor/equity participants in the event of a market downturn or degradation in operating performance of the leased assets. The lease capitalization includes approximately $578 million of non-recourse debt. Resources’ investment in the REMA transaction was $128 million, net of deferred taxes of $92 million as of December 31, 2002.

     Resources is the lessor of the Collins facility to Midwest Generation LLC (Midwest), an indirect subsidiary of Edison Mission Energy (EME). Collins is comprised of 2,698 MWs of oil and natural gas-fired assets located in the Mid-American Interconnected Network (MAIN) power market located in the mid-western region of the US. Midwest has a contract with Exelon to supply capacity and energy for 1,078 MWs for Collins through December 2003 with an option to extend. Both Midwest and EME are rated BB- by S&P and Ba3 by Moody’s. In addition to the leased assets, Midwest owns and operates an additional 4,459 MWs of generation assets, excluding the Powerton and Joliet generating stations discussed below. The restrictive covenants protecting Resources are similar to those noted above in the REMA transaction. Midwest has a debt obligation of approximately $1.5 billion at a holding company above Midwest. The Collins lease is pari-passu with this debt obligation. The lease capitalization includes approximately $774 million of non-recourse debt. Resources’ investment in the Collins facility was $107 million, net of deferred taxes of $78 million as of December 31, 2002.

     Resources also leases the Powerton and Joliet generating stations located in the MAIN market to Midwest. Both Powerton and Joliet are coal-fired stations comprising 2,896 MWs of gross generating capacity. The lease obligations are guaranteed by EME. The guarantee contains certain restrictive covenants including, but not limited to, additional investment, liens and sales of non-leased collateral. In addition, EME is required to maintain a minimum net worth equal to $400 million plus cumulative, consolidated net income earned by it and its subsidiaries since 1992 (without subtracting losses). The lease capitalization includes

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approximately $733 million of non-recourse debt. Resources’ investment in the Powerton and Joliet transaction was $90 million, net of deferred taxes of $80 million as of December 31, 2002.

     Resources is the lessor of the 370 MW coal-fired Danskammer plant to Dynegy Danskammer LLC (Danskammer) and the 1,200 MW natural gas/oil fired Roseton plant to Dynegy Roseton LLC (Roseton). Both Danskammer and Roseton are indirect subsidiaries of Dynegy Holdings Inc (DHI). The lease obligations are guaranteed by DHI which is currently rated B by S&P and Caa2 by Moody’s. The lease capitalization includes approximately $800 million of non-recourse debt. Resources’ investment in the Danskammer and Roseton transaction was $129 million, net of deferred taxes of $43 million as of December 31, 2002. The non-recourse debt and Resources’ equity investment in this transaction represented the full acquisition price of the underlying plants.

     In the domestic lease transactions described above, Resources has protected its equity investment by providing for the right to assume the debt obligation at its discretion in the event of default by the lessee with the condition that the lease debt is rated at least equal to the rating that existed at the date of the original transaction. If Resources were pursuing a debt assumption, it would first seek to renegotiate all relevant terms of the agreement with the lenders. Debt assumption normally only would occur if an appraisal of the leased property yielded a value that exceeds the present value of the debt outstanding. Should Resources ever directly assume a debt obligation, the fair value of the underlying asset and the associated debt would be recorded on the Consolidated Balance Sheets instead of the net equity investment in the lease. As of December 31, 2002, Resources determined that the collectibility of the minimum lease payments under its leveraged lease investments is still reasonably predictable and therefore continues to account for these investments as leveraged leases.

     Other

     In 2000, Global withdrew from its interest in the Eagle Point Cogeneration Partnership (EPCP) with El Paso Corp. in exchange for a series of contingent payments over five years. These payments are expected to total $290 million, subject to certain subsequent annual facility performance factors. When such factors are met on an annual basis the earnings are recorded and the payments are ordinarily received in the same period. The payments to date have been received in accordance with the terms of the agreement, including a payment of $44 million in January 2003. Currently under the withdrawal agreement Global is owed in a form of a note from EPCP approximately $81 million, with the last payment anticipated in January 2005. In the event that EPCP operating cash flows are insufficient to make payment, mandatory capital contributions are required from the partners to pay the note to PSEG Global as amounts become due. Additional covenants in the note security package include mandatory restrictions on cash distributions to the partners and performance guaranties of EPCP’s obligations are required. El Paso Corp indirectly owns in excess of 85% of the partnership interests of EPCP. In February 2003, S&P downgraded El Paso Corp long-term corporate credit rating to B+ from BB and Moody’s reduced El Paso Corp. debt rating to Caa1 from Ba2. If El Paso Corp or its subsidiaries or affiliates is required to fulfill an obligation in accordance with the terms of the agreement and is unable to perform, the impact would adversely effect Energy Holdings’ statements of operations and net cash flows in the years 2004 and 2005.

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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FINANCIAL STATEMENT RESPONSIBILITY – (PSEG)

     PSEG’s management is responsible for the preparation, integrity and objectivity of its consolidated financial statements and related notes. The consolidated financial statements and related notes are prepared in accordance with generally accepted accounting principles. The financial statements reflect estimates based upon the judgment of management where appropriate. Management believes that the consolidated financial statements and related notes present fairly PSEG’s financial position and results of operations. Information in other parts of this Annual Report is also the responsibility of management and is consistent with these consolidated financial statements and related notes.

     The firm of Deloitte & Touche LLP, independent auditors, is engaged to audit PSEG’s consolidated financial statements and related notes and issue a report thereon. Deloitte & Touche’s audit is conducted in accordance with generally accepted auditing standards. Management has made available to Deloitte & Touche all of PSEG’s financial records and related data, as well as the minutes of directors’ meetings. Furthermore, management believes that all representations made to Deloitte & Touche during its audit were valid and appropriate.

     Management has established and maintains a system of internal accounting controls to provide reasonable assurance that assets are safeguarded, and that transactions are executed in accordance with management’s authorization and recorded properly for the prevention and detection of fraudulent financial reporting, so as to maintain the integrity and reliability of the financial statements. The system is designed to permit preparation of consolidated financial statements and related notes in accordance with generally accepted accounting principles. The concept of reasonable assurance recognizes that the costs of a system of internal accounting controls should not exceed the related benefits. Management believes the effectiveness of this system is enhanced by an ongoing program of continuous and selective training of employees. In addition, management has communicated to all employees its policies on business conduct, safeguarding assets and internal controls. Management also maintains a system of disclosure controls and procedures to provide reasonable assurance that PSEG is able to collect, process and disclose, within the time periods specified by the Securities and Exchange Commission, the information required to be disclosed in reports under the Securities Exchange Act of 1934.

     The Internal Auditing Department of Services conducts audits and appraisals of accounting and other operations of PSEG and its subsidiaries and evaluates the effectiveness of cost and other controls and, where appropriate, recommends to management improvements thereto. Management considers the internal auditors’ and Deloitte & Touche’s recommendations concerning PSEG’s system of internal accounting controls and has taken actions that, in its opinion, are cost-effective in the circumstances to respond appropriately to these recommendations. Management believes that, as of December 31, 2002, PSEG’s system of internal accounting controls was adequate to accomplish the objectives discussed herein.

     The Board of Directors carries out its responsibility of financial overview through its Audit Committee, which presently consists of six directors who are not PSEG employees or any employees of its affiliates. The Audit Committee meets periodically with management as well as with representatives of the internal auditors and Deloitte & Touche. The Audit Committee reviews the work of each to ensure that its respective responsibilities are being carried out and discusses related matters. Both the internal auditors and Deloitte & Touche periodically meet alone with the Audit Committee and have free access to the Audit Committee and its individual members at all times.

E. JAMES FERLAND	THOMAS M. O’FLYNN
Chairman of the Board,	Executive Vice President and
President and Chief Executive Officer	Chief Financial Officer
PATRICIA A. RADO
Vice President and Controller
(Principal Accounting Officer)

February 25, 2003

91

FINANCIAL STATEMENT RESPONSIBILITY – (PSE&G)

     PSE&G’s management is responsible for the preparation, integrity and objectivity of its consolidated financial statements and related notes. The consolidated financial statements and related notes are prepared in accordance with generally accepted accounting principles. The financial statements reflect estimates based upon the judgment of management where appropriate. Management believes that the consolidated financial statements and related notes present fairly PSE&G’s financial position and results of operations. Information in other parts of this Annual Report is also the responsibility of management and is consistent with these consolidated financial statements and related notes.

      The firm of Deloitte & Touche LLP, independent auditors, is engaged to audit PSE&G’s consolidated financial statements and related notes and issue a report thereon. Deloitte & Touche’s audit is conducted in accordance with generally accepted auditing standards. Management has made available to Deloitte & Touche all of PSE&G’s financial records and related data, as well as the minutes of directors’ meetings. Furthermore, management believes that all representations made to Deloitte & Touche during its audit were valid and appropriate.

     Management has established and maintains a system of internal accounting controls to provide reasonable assurance that assets are safeguarded, and that transactions are executed in accordance with management’s authorization and recorded properly for the prevention and detection of fraudulent financial reporting, so as to maintain the integrity and reliability of the financial statements. The system is designed to permit preparation of consolidated financial statements and related notes in accordance with generally accepted accounting principles. The concept of reasonable assurance recognizes that the costs of a system of internal accounting controls should not exceed the related benefits. Management believes the effectiveness of this system is enhanced by an ongoing program of continuous and selective training of employees. In addition, management has communicated to all employees its policies on business conduct, safeguarding assets and internal controls. Management also maintains a system of disclosure controls and procedures to provide reasonable assurance that PSE&G is able to collect, process and disclose, within the time periods specified by the Securities and Exchange Commission, the information required to be disclosed in reports under the Securities Exchange Act of 1934.

     The Internal Auditing Department of Services conducts audits and appraisals of accounting and other operations and evaluates the effectiveness of cost and other controls and, where appropriate, recommends to management improvements thereto. Management has considered the internal auditors’ and Deloitte & Touche’s recommendations concerning PSE&G’s system of internal accounting controls and has taken actions that are cost-effective in the circumstances to respond appropriately to these recommendations. Management believes that, as of December 31, 2002, the PSE&G’s system of internal accounting controls was adequate to accomplish the objectives discussed herein.

     The Board of Directors carries out its responsibility of financial overview through the Audit Committee of PSEG, which presently consists of six directors who are not PSEG nor PSE&G employees of or employees of any of their affiliates. The PSEG Audit Committee meets periodically with management as well as with representatives of the internal auditors and Deloitte & Touche. The Audit Committee reviews the work of each to ensure that their respective responsibilities are being carried out and discusses related matters. Both the internal auditors and Deloitte & Touche, periodically meet alone with the Audit Committee and have free access to the Audit Committee and its individual members at all times.

E. JAMES FERLAND	ALFRED C. KOEPPE
Chairman of the Board and	President
Chief Executive Officer	and Chief Operating Officer
ROBERT E. BUSCH	PATRICIA A. RADO
Senior Vice President – Finance	Vice President and Controller
and Chief Financial Officer	(Principal Accounting Officer)

February 25, 2003

92

FINANCIAL STATEMENT RESPONSIBILITY — (Power)

     Power’s management is responsible for the preparation, integrity and objectivity of its consolidated financial statements and related notes. The consolidated financial statements and related notes are prepared in accordance with generally accepted accounting principles. The financial statements reflect estimates based upon the judgment of management where appropriate. Management believes that the consolidated financial statements and related notes present fairly Power’s financial position and results of operations. Information in other parts of this Annual Report is also the responsibility of management and is consistent with these consolidated financial statements and related notes.

     The firm of Deloitte & Touche LLP, independent auditors, is engaged to audit Power’s consolidated financial statements and related notes and issue a report thereon. Deloitte & Touche’s audit is conducted in accordance with generally accepted auditing standards. Management has made available to Deloitte & Touche all of Power’s financial records and related data, as well as the minutes of directors’ meetings. Furthermore, management believes that all representations made to Deloitte & Touche during its audit were valid and appropriate.

     Management has established and maintains a system of internal accounting controls to provide reasonable assurance that assets are safeguarded, and that transactions are executed in accordance with management’s authorization and recorded properly for the prevention and detection of fraudulent financial reporting, so as to maintain the integrity and reliability of the financial statements. The system is designed to permit preparation of consolidated financial statements and related notes in accordance with generally accepted accounting principles. The concept of reasonable assurance recognizes that the costs of a system of internal accounting controls should not exceed the related benefits. Management believes the effectiveness of this system is enhanced by an ongoing program of continuous and selective training of employees. In addition, management has communicated to all employees its policies on business conduct, safeguarding assets and internal controls. Management also maintains a system of disclosure controls and procedures to provide reasonable assurance that Power is able to collect, process and disclose, within the time periods specified by the Securities and Exchange Commission, the information required to be disclosed in reports under the Securities Exchange Act of 1934.

     The Internal Auditing Department of Services conducts audits and appraisals of accounting and other operations and evaluates the effectiveness of cost and other controls and, where appropriate, recommends to management improvements thereto. Management has considered the internal auditors’ and Deloitte & Touche’s recommendations concerning Power’s system of internal accounting controls and has taken actions that are cost-effective in the circumstances to respond appropriately to these recommendations. Management believes that, as of December 31, 2002, Power’s system of internal accounting controls was adequate to accomplish the objectives discussed herein.

     The Board of Directors carries out its responsibility of financial overview through the Audit Committee of PSEG, which presently consists of six directors who are not PSEG nor Power employees of or employees of any of their affiliates. The PSEG Audit Committee meets periodically with management as well as with representatives of the internal auditors and Deloitte & Touche. The Audit Committee reviews the work of each to ensure that their respective responsibilities are being carried out and discusses related matters. Both the internal auditors and Deloitte & Touche, periodically meet alone with the Audit Committee and have free access to the Audit Committee and its individual members at all times.

E. JAMES FERLAND	FRANK CASSIDY
Chairman of the Board and	President
Chief Executive Officer	and Chief Operating Officer
THOMAS M. O’FLYNN	PATRICIA A. RADO
Executive Vice President	Vice President and Controller
and Chief Financial Officer	(Chief Accounting Officer)

February 25, 2003

93

FINANCIAL STATEMENT RESPONSIBILITY — (Energy Holdings)

     Energy Holdings’ management is responsible for the preparation, integrity and objectivity of its consolidated financial statements and related notes. The consolidated financial statements and related notes are prepared in accordance with generally accepted accounting principles. The financial statements reflect estimates based upon the judgment of management where appropriate. Management believes that the consolidated financial statements and related notes present fairly Energy Holdings’ financial position and results of operations. Information in other parts of this Annual Report is also the responsibility of management and is consistent with these consolidated financial statements and related notes.

     The firm of Deloitte & Touche LLP, independent auditors, is engaged to audit Energy Holdings’ consolidated financial statements and related notes and issue a report thereon. Deloitte & Touche’s audit is conducted in accordance with generally accepted auditing standards. Management has made available to Deloitte & Touche all of Energy Holdings’ financial records and related data, as well as the minutes of directors’ meetings. Furthermore, management believes that all representations made to Deloitte & Touche during its audit were valid and appropriate.

     Management has established and maintains a system of internal accounting controls to provide reasonable assurance that assets are safeguarded, and that transactions are executed in accordance with management’s authorization and recorded properly for the prevention and detection of fraudulent financial reporting, so as to maintain the integrity and reliability of the financial statements. The system is designed to permit preparation of consolidated financial statements and related notes in accordance with generally accepted accounting principles. The concept of reasonable assurance recognizes that the costs of a system of internal accounting controls should not exceed the related benefits. Management believes the effectiveness of this system is enhanced by an ongoing program of continuous and selective training of employees. In addition, management has communicated to all employees its policies on business conduct, safeguarding assets and internal controls. Management also maintains a system of disclosure controls and procedures to provide reasonable assurance that Energy Holdings is able to collect, process and disclose, within the time periods specified by the Securities and Exchange Commission, the information required to be disclosed in reports under the Securities Exchange Act of 1934.

     The Internal Auditing Department of Services conducts audits and appraisals of accounting and other operations and evaluates the effectiveness of cost and other controls and, where appropriate, recommends to management improvements thereto. Management has considered the internal auditors’ and Deloitte & Touche’s recommendations concerning Energy Holdings’ system of internal accounting controls and has taken actions that are cost-effective in the circumstances to respond appropriately to these recommendations. Management believes that, as of December 31, 2002, Energy Holdings’ system of internal accounting controls was adequate to accomplish the objectives discussed herein.

     The Board of Directors carries out its responsibility of financial overview through the Audit Committee of PSEG, which presently consists of six directors who are not PSEG nor Energy Holdings’ employees or employees of any of their affiliates. The PSEG Audit Committee meets periodically with management as well as with representatives of the internal auditors and Deloitte & Touche. The Audit Committee reviews the work of each to ensure that their respective responsibilities are being carried out and discusses related matters. Both the internal auditors and Deloitte & Touche, periodically meet alone with the Audit Committee and have free access to the Audit Committee and its individual members at all times.

E. JAMES FERLAND	ROBERT J. DOUGHERTY, JR.
Chairman of the Board and	President
Chief Executive Officer	and Chief Operating Officer
THOMAS M. O’FLYNN	DEREK M. DIRISIO
Executive Vice President	Vice President and Controller
and Chief Financial Officer	(Principal Accounting Officer)

February 25, 2003

94

INDEPENDENT AUDITORS’ REPORT

To the Stockholders and Board of Directors of
Public Service Enterprise Group Incorporated:

We have audited the consolidated balance sheets of Public Service Enterprise Group Incorporated and its subsidiaries (the “Company”) as of December 31, 2002 and 2001, and the related consolidated statements of operations, common stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2002. Our audits also included the consolidated financial statement schedule listed in the Index in Item 15. These consolidated financial statements and the consolidated financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and consolidated financial statement schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects, the information set forth therein.

We have also previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheets of the Company as of December 31, 2000, 1999, and 1998, and the related consolidated statements of operations, common stockholders’ equity and cash flows for the years ended December 31, 1999 and 1998 (none of which are presented herein) and we expressed unqualified opinions on those consolidated financial statements.

In our opinion, the information set forth in the Selected Financial Data for each of the five years in the period ended December 31, 2002 for the Company, presented in Item 6, is fairly stated in all material respects, in relation to the consolidated financial statements from which it has been derived.

As discussed in Note 2 to the consolidated financial statements, on January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended.

As discussed in Note 2 to the consolidated financial statements, on January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”.

DELOITTE & TOUCHE

Parsippany, New Jersey
February 7, 2003

95

INDEPENDENT AUDITORS’ REPORT

To the Sole Stockholder and Board of Directors of
Public Service Electric and Gas Company:

We have audited the consolidated balance sheets of Public Service Electric and Gas Company and its subsidiaries (the “Company”) as of December 31, 2002 and 2001, and the related consolidated statements of operations, common stockholder’s equity and cash flows for each of the three years in the period ended December 31, 2002. Our audits also included the consolidated financial statement schedule listed in the Index in Item 15. These consolidated financial statements and the consolidated financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and consolidated financial statement schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects, the information set forth therein.

We have also previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheets of the Company as of December 31, 2000, 1999, and 1998, and the related consolidated statements of operations, common stockholder’s equity and cash flows for the years ended December 31, 1999 and 1998 (none of which are presented herein) and we expressed unqualified opinions on those consolidated financial statements.

In our opinion, the information set forth in the Selected Financial Data for each of the five years in the period ended December 31, 2002 for the Company, presented in Item 6, is fairly stated in all material respects, in relation to the consolidated financial statements from which it has been derived.

DELOITTE & TOUCHE

Parsippany, New Jersey
February 7, 2003

96

INDEPENDENT AUDITORS’ REPORT

To the Sole Member and Board of Directors of
PSEG Power LLC:

We have audited the consolidated balance sheets of PSEG Power LLC and its subsidiaries (the “Company”) as of December 31, 2002 and 2001, and the related consolidated statements of operations, member’s equity and cash flows for each of the three years in the period ended December 31, 2002. Our audits also included the consolidated financial statement schedule listed in the Index in Item 15. These consolidated financial statements and the consolidated financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and consolidated financial statement schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects, the information set forth therein.

DELOITTE & TOUCHE

Parsippany, New Jersey
February 7, 2003

97

INDEPENDENT AUDITORS’ REPORT

To the Sole Member and Board of Directors of
PSEG Energy Holdings LLC:

We have audited the consolidated balance sheets of PSEG Energy Holdings LLC and its subsidiaries (the “Company”) as of December 31, 2002 and 2001, and the related consolidated statements of operations, member’s equity and cash flows for each of the three years in the period ended December 31, 2002. Our audits also included the consolidated financial statement schedule listed in the Index in Item 15. These consolidated financial statements and the consolidated financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and consolidated financial statement schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects, the information set forth therein.

As discussed in Note 2 to the consolidated financial statements, on January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended.

As discussed in Note 2 to the consolidated financial statements, on January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”.

DELOITTE & TOUCHE

Parsippany, New Jersey
February 7, 2003

98

PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Millions, except for Share Data)

                                                                        For The Years Ended December 31,
                                                                      -----------------------------------
                                                                         2002         2001         2000
                                                                      ---------    ---------    ---------

OPERATING REVENUES                                                    $   8,390    $   7,055    $   6,521

OPERATING EXPENSES
  Energy Costs                                                            3,769        2,674        2,423
  Operation and Maintenance                                               1,896        1,841        1,706
  Write-down of Project Investments                                         497            7           --
  Depreciation and Amortization                                             571          496          350
  Taxes Other Than Income Taxes                                             131          121          135
                                                                      ---------    ---------    ---------
       Total Operating Expenses                                           6,864        5,139        4,614
                                                                      ---------    ---------    ---------
OPERATING INCOME                                                          1,526        1,916        1,907
  Other Income                                                               57           50           33
  Other Deductions                                                          (79)         (15)          (3)
  Interest Expense                                                         (783)        (722)        (571)
  Preferred Securities Dividends                                            (57)         (72)         (94)
                                                                      ---------    ---------    ---------
INCOME BEFORE INCOME TAXES,
  DISCONTINUED OPERATIONS AND
  CUMULATIVE EFFECT OF A CHANGE
  IN ACCOUNTING PRINCIPLE                                                   664        1,157        1,272
Income Taxes                                                               (248)        (381)        (496)
                                                                      ---------    ---------    ---------
INCOME BEFORE DISCONTINUED OPERATIONS
  AND CUMULATIVE EFFECT OF A CHANGE IN
  ACCOUNTING PRINCIPLE                                                      416          776          776
  Loss from Discontinued Operations,
     net of tax of $9, $8 and $5 in 2002, 2001 and 2000,respectively
     (including $35 Loss on Disposal, net of tax of $18 in 2002)            (51)         (15)         (12)
                                                                      ---------    ---------    ---------
INCOME BEFORE CUMULATIVE EFFECT OF
  A CHANGE IN ACCOUNTING PRINCIPLE                                          365          761          764
Cumulative Effect of a Change in Accounting Principle,
  net of tax of $66 and $8 in 2002 and 2001, respectively                  (120)           9           --
                                                                      ---------    ---------    ---------
NET INCOME                                                            $     245    $     770    $     764
                                                                      =========    =========    =========
WEIGHTED AVERAGE COMMON SHARES
    OUTSTANDING (000s)                                                  208,813      208,226      215,121
                                                                      =========    =========    =========
EARNINGS PER SHARE (BASIC AND DILUTED):
INCOME BEFORE DISCONTINUED  OPERATIONS
  AND CUMULATIVE EFFECT OF A CHANGE IN
  ACCOUNTING PRINCIPLE                                                $    1.99    $    3.73    $    3.61
Loss from Discontinued Operations, net of tax                             (0.24)       (0.07)       (0.06)
     (including Loss on Disposal, net of tax)
Cumulative Effect of a Change in Accounting Principle, net of tax         (0.58)        0.04           --
                                                                      ---------    ---------    ---------
NET INCOME                                                            $    1.17    $    3.70    $    3.55
                                                                      =========    =========    =========
DIVIDENDS PAID PER SHARE OF COMMON STOCK                              $    2.16    $    2.16    $    2.16
                                                                      =========    =========    =========

See Notes to Consolidated Financial Statements.

99

PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED BALANCE SHEETS ASSETS
(Millions)

                                                           December 31,
                                                       --------------------
                                                         2002        2001
                                                       --------    --------
CURRENT ASSETS
  Cash and Cash Equivalents                            $    165    $    167
  Accounts Receivable                                     1,404       1,032
  Allowance for Doubtful Accounts                           (34)        (40)
  Unbilled Electric and Gas Revenues                        275         291
  Fuel                                                      412         506
  Materials and Supplies                                    208         175
  Energy Trading Contracts                                  179         148
  Restricted Cash                                            32          12
  Assets Held for Sale                                       83         422
  Current Assets of Discontinued Operations                 107         483
  Other                                                     135          93
                                                       --------    --------
       Total Current Assets                               2,966       3,289
                                                       --------    --------
PROPERTY, PLANT AND EQUIPMENT                            16,562      14,700
     Less: Accumulated Depreciation and Amortization     (5,113)     (4,789)
                                                       --------    --------
       Net Property, Plant and Equipment                 11,449       9,911
                                                       --------    --------
NONCURRENT ASSETS
 Regulatory Assets                                        4,992       5,242
 Long-Term Investments                                    4,581       4,768
 Nuclear Decommissioning Trust Funds                        766         817
 Other Special Funds                                         72         222
 Goodwill                                                   452         569
 Energy Trading Contracts                                    22          29
 Other Intangibles                                          206          63
 Other                                                      236         246
                                                       --------    --------
       Total Noncurrent Assets                           11,327      11,956
                                                       --------    --------
TOTAL ASSETS                                           $ 25,742    $ 25,156
                                                       ========    ========

See Notes to Consolidated Financial Statements.

100

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

                                                                              December 31,
                                                                          --------------------
                                                                            2002        2001
                                                                          --------    --------

CURRENT LIABILITIES
  Long-Term Debt Due Within One Year                                      $    749    $  1,186
  Commercial Paper and Loans                                                   762       1,337
  Accounts Payable                                                           1,115         871
  Energy Trading Contracts                                                     123         279
  Accrued Taxes                                                                229         243
  Current Liabilities of Discontinued Operations                                83         251
  Other                                                                        755         379
                                                                          --------    --------
       Total Current Liabilities                                             3,816       4,546
                                                                          --------    --------
NONCURRENT LIABILITIES
  Deferred Income Taxes and Investment Tax Credits (ITC)                     2,924       3,205
  Regulatory Liabilities                                                       252         368
  Nuclear Decommissioning                                                      766         817
  OPEB Costs                                                                   501         476
  Accrued Pension Costs                                                        336          42
  Cost of Removal                                                              131         146
  Other                                                                        638         467
                                                                          --------    --------
       Total Noncurrent Liabilities                                          5,548       5,521
                                                                          --------    --------
COMMITMENTS AND CONTINGENT LIABILITIES  (See Note 13)

CAPITALIZATION
  LONG-TERM DEBT
  Long-Term Debt                                                             7,116       6,437
  Securitization Debt                                                        2,222       2,351
  Project Level, Non-Recourse Debt                                           1,653       1,404
                                                                          --------    --------
    Total Long-Term Debt                                                    10,991      10,192
                                                                          --------    --------
  SUBSIDIARIES' PREFERRED SECURITIES
    Preferred Stock Without Mandatory Redemption                                80          80
    Preferred Stock With Mandatory Redemption                                  460          --
    Guaranteed Preferred Beneficial Interest in Subordinated Debentures        860         680
                                                                          --------    --------
       Total Subsidiaries' Preferred Securities                              1,400         760
                                                                          --------    --------
  COMMON STOCKHOLDERS' EQUITY
    Common Stock, issued; 2002 - 251,385,937 shares
        2001 - 231,957,608 shares                                            4,056       3,599
    Treasury Stock, at cost; 2002 and 2001 - 26,118,590 shares                (981)       (981)
    Retained Earnings                                                        1,601       1,809
    Accumulated Other Comprehensive Loss                                      (689)       (290)
                                                                          --------    --------
       Total Common Stockholders' Equity                                     3,987       4,137
                                                                          --------    --------
            Total Capitalization                                            16,378      15,089
                                                                          --------    --------
TOTAL LIABILITIES AND CAPITALIZATION                                      $ 25,742    $ 25,156
                                                                          ========    ========

See Notes to Consolidated Financial Statements.

101

PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions)

                                                                                  For The Years Ended December 31,
                                                                                  -------------------------------
                                                                                     2002       2001       2000
                                                                                   -------    -------    -------

CASH FLOWS FROM OPERATING ACTIVITIES
  Net Income                                                                       $   245    $   770    $   764
  Adjustments to reconcile net income to net cash flows from
   operating activities:
   Write-down of Project Investments                                                   497          7         --
   Loss on Disposal of Discontinued Operations, net of tax                              35          2         --
   Cumulative Effect of a Change in Accounting Principle, net of tax                   120         (9)        --
   Depreciation and Amortization                                                       571        496        350
   Amortization of Nuclear Fuel                                                         89        101         96
   Provision for Deferred Income Taxes (Other than Leases) and ITC                    (117)      (118)        (5)
   Non-Cash Employee Benefit Plan Costs                                                193        158        147
   Leveraged Lease Income, Adjusted for Rents Received                                 (45)        (6)        74
   Undistributed Earnings from Affiliates                                              (59)      (111)       (28)
   Foreign Currency Transaction Loss (Gain)                                             70          9         (3)
   Unrealized (Gains) Losses on Energy Contracts and Other Derivatives                 (36)        22        (13)
   (Under) Over Recovery of Electric Energy Costs (BGS and NTC) and MTC                 (1)       110        116
   (Under) Over Recovery of Gas Costs                                                  (41)      (143)        11
   Other Non-Cash Charges (Credits)                                                     54        (68)       (20)
   Net Change in Certain Current Assets and Liabilities                                279        183       (170)
   Employee Benefit Plan Funding and Related Payments                                 (308)      (210)       (35)
   Proceeds from the Withdrawal of Partnership Interests and Other Distributions        63        124         51
   Other                                                                               (81)       (88)      (145)
                                                                                   -------    -------    -------
       Net Cash Provided By Operating Activities                                     1,528      1,229      1,190
                                                                                   -------    -------    -------
CASH FLOWS FROM INVESTING ACTIVITIES
  Additions to Property, Plant and Equipment                                        (1,814)    (2,111)      (815)
  Investments in Joint Ventures, Partnerships and Capital Leases                      (222)      (596)      (821)
  Proceeds from the Sale of Investments and Return of Capital from Partnerships        380        132        177
  Acquisitions, net of Cash Provided                                                  (289)      (832)       (88)
  Other                                                                                (42)      (195)       (84)
                                                                                   -------    -------    -------
       Net Cash Used In Investing Activities                                        (1,987)    (3,602)    (1,631)
                                                                                   -------    -------    -------
CASH FLOWS FROM FINANCING ACTIVITIES
  Net Change in Short-Term Debt                                                       (552)    (1,511)       929
  Issuance of Long-Term Debt                                                         1,542      6,509      1,200
  Issuance of Preferred Securities                                                     180         --         --
  Issuance of Participating Units                                                      460         --         --
  Issuance of Common Stock                                                             536         --         --
  Deferred Issuance Costs                                                              (44)      (228)       (39)
  Redemptions of Long-Term Debt                                                     (1,212)    (1,292)    (1,052)
  Redemptions of Preferred Securities                                                   --       (448)        --
  Purchase of Treasury Stock                                                            --        (91)      (298)
  Cash Dividends Paid on Common Stock                                                 (456)      (448)      (464)
  Other                                                                                  5        (47)         2
                                                                                   -------    -------    -------
       Net Cash Provided By Financing Activities                                       459      2,444        278
                                                                                   -------    -------    -------
  Effect of Exhange Rate Change                                                         (2)        --         --
                                                                                   -------    -------    -------
Net Change In Cash And Cash Equivalents                                                 (2)        71       (163)
Cash And Cash Equivalents At Beginning Of Period                                       167         96        259
                                                                                   -------    -------    -------
Cash And Cash Equivalents At End Of Period                                         $   165    $   167    $    96
                                                                                   =======    =======    =======
Income Taxes Paid                                                                  $   145    $    87    $   485
Interest Paid                                                                      $   843    $   713    $   548
Non-Cash Financing and Investing Activities:
Property, Plant and Equipment Assumed from Acquisitions                            $   538    $   749    $   213
Debt Assumed from Acquisitions                                                     $    --    $   256    $   161
Reduction in Equity and Increase in Debt From Issuance of Participating Units      $    54    $    --    $    --

See Notes to Consolidated Financial Statements.

102

PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
(Millions)

                                                                               Common              Treasury
                                                                                Stock                Stock
                                                                          -----------------    ------------------   Retained
                                                                            Shs.     Amount      Shs.      Amount   Earnings
                                                                          -------   -------    -------    -------   --------

Balance as of January 1, 2000                                                 232     3,604        (16)      (597)     1,193
    Net Income                                                                 --        --         --         --        764
    Other Comprehensive Income (Loss), net of tax:
        Currency Translation Adjustment, net of tax of $(0)                    --        --         --         --         --

           Other Comprehensive Loss                                            --        --         --         --         --

    Comprehensive Income                                                       --        --         --         --         --
    Cash Dividends on Common Stock                                             --        --         --         --       (464)
    Purchase of Treasury Stock                                                 --        --         (8)      (298)        --
                                                                          -------   -------    -------    -------    -------
Balance as of December 31, 2000                                               232   $ 3,604        (24)   $  (895)   $ 1,493
                                                                          -------   -------    -------    -------    -------
    Net Income                                                                 --        --         --         --        770
    Other Comprehensive Income (Loss), net of tax:
        Currency Translation Adjustment, net of tax $(12)                      --        --         --         --         --
        Change in Fair Value of Derivative Instruments, net of tax $(31)       --        --         --         --         --
        Cumulative Effect of a Change in Accounting Principle,
          net of tax $(14)                                                     --        --         --         --         --
        Reclassification Adjustments for Net Amounts included in
          net income, net of tax of $19                                        --        --         --         --         --
        Pension Adjustments, net of tax $(1)                                   --        --         --         --         --
        Change in Fair Value of Equity Investments, net of tax $(1)            --        --         --         --         --

           Other Comprehensive Loss                                            --        --         --         --         --

    Comprehensive Income                                                       --        --         --         --         --
    Cash Dividends on Common Stock                                             --        --         --         --       (449)
    Purchase of Treasury Stock                                                 --        --         (2)       (92)        --
    Other                                                                      --        (5)        --          6         (5)
                                                                          -------   -------    -------    -------    -------
Balance as of December 31, 2001                                               232   $ 3,599        (26)   $  (981)   $ 1,809
                                                                          -------   -------    -------    -------    -------
    Net Income                                                                 --        --         --         --        245
    Other Comprehensive Income (Loss), net of tax:
        Currency Translation Adjustment, net of tax $(63)                      --        --         --         --         --
        Reclassification Adjustment for Losses Included in Net Income
        Change in Fair Value of Derivative Instruments, net of tax $(38)       --        --         --         --         --
        Reclassification Adjustments for Net Amounts included in
          Net Income, net of tax of $10                                        --        --         --         --         --
        Minimum Pension Liability, net of tax $(204)                           --        --         --         --         --
        Change in Fair Value of Equity Investments                             --        --         --         --         --

           Other Comprehensive Loss                                            --        --         --         --         --

    Comprehensive Income                                                       --        --         --         --         --
    Cash Dividends on Common Stock                                             --        --         --         --       (456)
    Issuance of Equity                                                         19       536         --         --         --
    Issuance Costs and Other                                                   --       (79)        --         --          3
                                                                          -------   -------    -------    -------    -------
Balance as of December 31, 2002                                               251   $ 4,056        (26)   $  (981)   $ 1,601
                                                                          =======   =======    =======    =======    =======



                                                                                 Accumulated
                                                                                    Other
                                                                                Comprehensive
                                                                                 Income (Loss)    Total
                                                                                --------------   -------

Balance as of January 1, 2000                                                         (204)      $ 3,996
    Net Income                                                                          --           764
    Other Comprehensive Income (Loss), net of tax:
        Currency Translation Adjustment, net of tax of $(0)                             (2)           (2)
                                                                                                 -------
           Other Comprehensive Loss                                                     --            (2)
                                                                                                 -------
    Comprehensive Income                                                                --           762
    Cash Dividends on Common Stock                                                      --          (464)
    Purchase of Treasury Stock                                                          --          (298)
                                                                                   -------       -------
Balance as of December 31, 2000                                                    $  (206)      $ 3,996
                                                                                   -------       -------
    Net Income                                                                          --           770
    Other Comprehensive Income (Loss), net of tax:
        Currency Translation Adjustment, net of tax $(12)                              (34)          (34)
        Change in Fair Value of Derivative Instruments, net of tax $(31)               (57)          (57)
        Cumulative Effect of a Change in Accounting Principle, net of tax $(14)        (15)          (15)
        Reclassification Adjustments for Net Amounts included in
          net income, net of tax of $19                                                 26            26
        Pension Adjustments, net of tax $(1)                                            (2)           (2)
        Change in Fair Value of Equity Investments, net of tax $(1)                     (2)           (2)
                                                                                                 -------
           Other Comprehensive Loss                                                     --           (84)
                                                                                                 -------
    Comprehensive Income                                                                --           686
    Cash Dividends on Common Stock                                                      --          (449)
    Purchase of Treasury Stock                                                          --           (92)
    Other                                                                               --            (4)
                                                                                   -------       -------
Balance as of December 31, 2001                                                    $  (290)      $ 4,137
                                                                                   -------       -------
    Net Income                                                                          --           245
    Other Comprehensive Income (Loss), net of tax:
        Currency Translation Adjustment, net of tax $(63)                             (117)         (117)
        Reclassification Adjustment for Losses Included in Net Income                   68            68
        Change in Fair Value of Derivative Instruments, net of tax $(38)               (67)          (67)
        Reclassification Adjustments for Net Amounts included in
          Net Income, net of tax of $10                                                 15            15
        Minimum Pension Liability, net of tax $(204)                                  (297)         (297)
        Change in Fair Value of Equity Investments                                      (1)           (1)
                                                                                                 -------
           Other Comprehensive Loss                                                     --          (399)
                                                                                                 -------
    Comprehensive Income                                                                --          (154)
    Cash Dividends on Common Stock                                                      --          (456)
    Issuance of Equity                                                                  --           536
    Issuance Costs and Other                                                            --           (76)
                                                                                   -------       -------
Balance as of December 31, 2002                                                    $  (689)      $ 3,987
                                                                                   =======       =======

See Notes to Consolidated Financial Statements.

103

PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Millions)

                                          For The Years Ended December 31,
                                          --------------------------------
                                            2002         2001        2000
                                          -------      -------     -------
OPERATING REVENUES                        $ 5,919      $ 6,091     $ 5,887

OPERATING EXPENSES
    Energy Costs                            3,684        3,913       2,901
    Operation and Maintenance                 982          996       1,297
    Depreciation and Amortization             409          370         286
    Taxes Other Than Income Taxes             131          121         135
                                          -------      -------     -------
          Total Operating Expenses          5,206        5,400       4,619
                                          -------      -------     -------
OPERATING INCOME                              713          691       1,268
    Other Income                               28          111         173
    Other Deductions                           (2)          (4)         (4)
    Interest Expense                         (406)        (450)       (397)
    Preferred Securities Dividends            (13)         (24)        (46)
                                          -------      -------     -------
INCOME BEFORE INCOME TAXES                    320          324         994
Income Taxes                                 (115)         (89)       (407)
                                          -------      -------     -------
NET INCOME                                    205          235         587
Preferred Stock Dividends                      (4)          (5)         (9)
                                          -------      -------     -------
EARNINGS AVAILABLE TO PUBLIC
  SERVICE ENTERPRISE GROUP INCORPORATED   $   201      $   230     $   578
                                          =======      =======     =======

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

104

PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
(Millions)

                                                           December 31,
                                                       --------------------
                                                         2002        2001
                                                       --------    --------
CURRENT ASSETS
  Cash and Cash Equivalents                            $     35    $    102
  Accounts Receivable                                       787         623
  Allowance for Doubtful Accounts                           (32)        (38)
  Unbilled Revenues                                         275         291
  Natural Gas                                                --         415
  Materials and Supplies                                     45          50
  Prepayments                                                25          40
  Restricted Cash                                            14          12
  Other                                                      16          23
                                                       --------    --------
       Total Current Assets                               1,165       1,518
                                                       --------    --------
  PROPERTY, PLANT AND EQUIPMENT                           9,581       9,170
     Less: Accumulated Depreciation and Amortization     (3,604)     (3,329)
                                                       --------    --------
       Net Property, Plant and Equipment                  5,977       5,841
                                                       --------    --------
NONCURRENT ASSETS
  Regulatory Assets                                       4,992       5,242
  Long-Term Investments                                     123         112
  Other Special Funds                                        44         130
  Intangibles                                                60           7
  Other                                                      68          77
                                                       --------    --------
       Total Noncurrent Assets                            5,287       5,568
                                                       --------    --------
TOTAL ASSETS                                           $ 12,429    $ 12,927
                                                       ========    ========

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

105

PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND CAPITALIZATION
(Millions)

                                                                   December 31,
                                                               --------------------
                                                                 2002        2001
                                                               --------    --------

CURRENT LIABILITIES
  Long-Term Debt Due Within One Year                           $    429    $    668
  Commercial Paper and Loans                                        224          --
  Accounts Payable                                                  724         642
  Energy Contracts                                                   --         133
  Other                                                             315         307
                                                               --------    --------
       Total Current Liabilities                                  1,692       1,750
                                                               --------    --------
NONCURRENT LIABILITIES
  Deferred Income Taxes and Investment Tax Credit (ITC)           2,436       2,551
  Regulatory Liabilities                                            252         368
  Other Postemployment Benefit (OPEB) Costs                         486         466
  Accrued Pension Costs                                             175          13
  Other                                                             209         197
                                                               --------    --------
       Total Noncurrent Liabilities                               3,558       3,595
                                                               --------    --------
COMMITMENTS AND CONTINGENT LIABILITIES  (see Note 13)

CAPITALIZATION
  LONG-TERM DEBT
  Long-Term Debt                                                  2,627       2,626
  Securitization Debt                                             2,222       2,351
                                                               --------    --------
       Total Long-Term Debt                                       4,849       4,977
                                                               --------    --------
  PREFERRED SECURITIES
  Preferred Stock Without Mandatory Redemption                       80          80
  Subsidiaries' Preferred Securities:
    Guaranteed Preferred Beneficial Interest in Subordinated
     Debentures                                                     155         155
                                                               --------    --------
       Total Preferred Securities                                   235         235
                                                               --------    --------
  COMMON STOCKHOLDER'S EQUITY
    Common Stock; 150,000,000 shares authorized,
           132,450,344 shares issued and outstanding                892         892
    Basis Adjustment                                                986         986
    Retained Earnings                                               389         493
    Accumulated Other Comprehensive Loss                           (172)         (1)
                                                               --------    --------
       Total Common Stockholder's Equity                          2,095       2,370
                                                               --------    --------
            Total Capitalization                                  7,179       7,582
                                                               --------    --------
TOTAL LIABILITIES AND CAPITALIZATION                           $ 12,429    $ 12,927
                                                               ========    ========

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

106

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

                                                                         For The Years Ended December 31,
                                                                         --------------------------------
                                                                           2002         2001        2000
                                                                         -------      -------     -------

CASH FLOWS FROM OPERATING ACTIVITIES
  Net Income                                                             $   205      $   235     $   587
  Adjustments to reconcile net income to net cash flows from
   operating activities:
    Depreciation and Amortization                                            409          370         286
    Amortization of Nuclear Fuel                                              --           --          57
    Provision for Deferred Income Taxes and ITC                              (23)        (203)         (4)
    Non-Cash Employee Benefit Plan Costs                                     141          125         131
    Non-Cash Interest Expense (Income)                                        21           (7)        (19)
    Overrecovery of Electric Energy Costs and Market Transition Charge        (1)         110         116
    Underrecovery/Overrecovery of Gas Costs                                  (41)        (143)         11
    Net Changes in certain current assets and liabilities:
       Accounts Receivable and Unbilled Revenues                            (154)         127        (268)
       Natural Gas                                                           415          (43)       (105)
       Inventory - Materials and Supplies                                      5           (2)         (6)
       Prepayments                                                            15          (35)         27
       Restricted Cash                                                        (2)         (11)         --
       Accrued Taxes                                                         (22)           5          44
       Accrued Interest                                                      (13)          11          --
       Accounts Payable                                                       82           56         252
       Other Current Assets and Liabilities                                    2           20         (63)
     Employee Benefit Plan Funding and Related Payments                     (198)        (139)        (18)
    Other                                                                     24          (17)        (55)
                                                                         -------      -------     -------
       Net Cash Provided By Operating Activities                             865          459         973
                                                                         -------      -------     -------
CASH FLOWS FROM INVESTING ACTIVITIES
  Additions to Property, Plant and Equipment                                (472)        (395)       (437)
  Other                                                                       --           --         (17)
                                                                         -------      -------     -------
       Net Cash Used In Investing Activities                                (472)        (395)       (454)
                                                                         -------      -------     -------
CASH FLOWS FROM FINANCING ACTIVITIES
  Net Change in Short-Term Debt                                              224       (1,543)         68
  Issuance of Long-Term Debt                                                 300        2,525         590
  Redemption of Long-Term Debt                                              (667)        (570)       (622)
  Deferred Issuance Costs                                                     (2)        (201)        (36)
  Capital Lease Payments                                                      (6)          (6)         (6)
  Redemption of Preferred Stock                                               --         (448)         --
  Return of Capital                                                           --       (2,265)         --
  Collection of Notes Receivable-Affiliated Company                           --        2,786          --
  Cash Dividends Paid on Common Stock                                       (305)        (274)       (638)
  Preferred Stock Dividends                                                   (4)          (5)         (9)
                                                                         -------      -------     -------
       Net Cash Used In Financing Activities                                (460)          (1)       (653)
                                                                         -------      -------     -------
Net Change In Cash And Cash Equivalents                                      (67)          63        (134)
Cash And Cash Equivalents At Beginning Of Period                             102           39         173
                                                                         -------      -------     -------
Cash And Cash Equivalents At End Of Period                               $    35      $   102     $    39
                                                                         =======      =======     =======
Income Taxes Paid                                                        $   161      $   264     $   593
Interest Paid                                                            $   428      $   427     $   406

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

107

PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
(Millions)

                                                                                                  Accumulated
                                                           Contributed                               Other
                                                Common    Capital from      Basis     Retained   Comprehensive
                                                 Stock        PSEG       Adjustment   Earnings        Loss      Total
                                                -------   ------------   ----------   --------   -------------  -------

Balance as of January 1, 2000                   $ 2,563     $   594       $    --      $   597      $    (3)    $ 3,751
    Net Income                                       --          --            --          587           --         587
    Other Comprehensive Income, net of tax:
                                                                                                                -------
          Comprehensive Income                       --          --            --           --           --         587
                                                                                                                -------
    Cash Dividends on Common Stock                   --          --            --         (800)          --        (800)
    Cash Dividends on Preferred Stock                --          --            --           (9)          --          (9)
    Basis Adjustment                                 --          --           986           --           --         986
                                                -------     -------       -------      -------      -------     -------
Balance as of December 31, 2000                 $ 2,563     $   594       $   986      $   375      $    (3)    $ 4,515
                                                -------     -------       -------      -------      -------     -------
    Net Income                                       --          --            --          235           --         235
    Other Comprehensive Income , net of tax:
       Pension Adjustments, net of tax $(1)          --          --            --           --            2           2
                                                                                                                -------
          Comprehensive Income                       --          --            --           --           --         237
                                                                                                                -------
    Cash Dividends on Common Stock                   --          --            --         (112)          --        (112)
    Cash Dividends on Preferred Stock                --          --            --           (5)          --          (5)
    Return of Capital                            (1,671)       (594)           --           --           --      (2,265)
                                                -------     -------       -------      -------      -------     -------
Balance as of December 31, 2001                 $   892     $    --       $   986      $   493      $    (1)    $ 2,370
                                                -------     -------       -------      -------      -------     -------
    Net Income                                       --          --            --          205           --         205
    Other Comprehensive Loss , net of tax:
       Minimum Pension Liability,
         net of tax $(104)                           --          --            --           --         (171)       (171)
                                                                                                                -------
          Comprehensive Income                       --          --            --           --           --          34
                                                                                                                -------
    Cash Dividends on Common Stock                   --          --            --         (305)          --        (305)
    Cash Dividends on Preferred Stock                --          --            --           (4)          --          (4)
    Return of Capital                                --          --            --           --           --          --
                                                -------     -------       -------      -------      -------     -------
Balance as of December 31, 2002                 $   892     $    --       $   986      $   389      $  (172)    $ 2,095
                                                =======     =======       =======      =======      =======     =======

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

108

PSEG POWER LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(Millions)

                                         For the Years Ended December 31,
                                         --------------------------------
                                           2002         2001        2000
                                         -------      -------     -------
OPERATING REVENUES                       $ 3,670      $ 2,452     $ 2,275

OPERATING EXPENSES
      Energy Costs                         1,886          832         741
      Operation and Maintenance              773          738         686
      Depreciation and Amortization          108           95         136
                                         -------      -------     -------
              Total Operating Expenses     2,767        1,665       1,563
                                         -------      -------     -------
OPERATING INCOME                             903          787         712
      Other Income                            --           --           7
      Interest Expense                      (122)        (143)       (198)
                                         -------      -------     -------
INCOME BEFORE INCOME TAXES                   781          644         521
Income Taxes                                (313)        (250)       (208)
                                         -------      -------     -------
EARNINGS AVAILABLE TO PUBLIC
 SERVICE ENTERPRISE GROUP INCORPORATED   $   468      $   394     $   313
                                         =======      =======     =======

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

109

PSEG POWER LLC
CONSOLIDATED BALANCE SHEETS
(Millions)

                                                                 December 31,
                                                              -----------------
                                                                2002      2001
                                                              -------   -------
                                     ASSETS
CURRENT ASSETS
     Cash and Cash Equivalents                                $    26   $     9
     Accounts Receivable - net                                    499       287
     Fuel                                                         406        76
     Materials and Supplies                                       148       124
     Energy Trading Contracts                                     179       147
     Other                                                         44        13
                                                              -------   -------
          Total Current Assets                                  1,302       656
                                                              -------   -------
PROPERTY, PLANT AND EQUIPMENT                                   5,347     4,238
     Less: Accumulated Depreciation and Amortization           (1,302)   (1,253)
                                                              -------   -------
          Net Property, Plant and Equipment                     4,045     2,985
                                                              -------   -------
NONCURRENT ASSETS
     Deferred Income Taxes and Investment Tax Credits (ITC)       545       572
     Nuclear Decommissioning Trust Funds                          766       817
     Goodwill                                                      16        21
     Intangibles                                                  125        47
     Other                                                        165       141
                                                              -------   -------
          Total Noncurrent Assets                               1,617     1,598
                                                              -------   -------
TOTAL ASSETS                                                  $ 6,964   $ 5,239
                                                              =======   =======
                         LIABILITIES AND MEMBER'S EQUITY

CURRENT LIABILITIES
     Accounts Payable                                         $   671   $   333
     Energy Trading Contracts                                     123       146
     Other                                                        283       111
                                                              -------   -------
        Total Current Liabilities                               1,077       590
                                                              -------   -------
NONCURRENT LIABILITIES
     Nuclear Decommissioning                                      766       817
     Cost of Removal                                              131       146
     Accrued Pension Costs                                        101        10
     Other                                                        131       131
                                                              -------   -------
        Total Noncurrent Liabilities                            1,129     1,104
                                                              -------   -------
COMMITMENTS AND CONTINGENT LIABILITIES  (see Note 13)

LONG-TERM DEBT
     Project Level, Non-Recourse Debt                             800       770
     Long-Term Debt                                             2,516     1,915
                                                              -------   -------
         Total Long-Term Debt                                   3,316     2,685
                                                              -------   -------
MEMBER'S EQUITY
     Contributed Capital                                        1,550     1,350
     Basis Adjustment                                            (986)     (986)
     Retained Earnings                                            966       498
     Accumulated Other Comprehensive Loss                         (88)       (2)
                                                              -------   -------
        Total Member's Equity                                   1,442       860
                                                              -------   -------
TOTAL LIABILITIES AND MEMBER'S EQUITY                         $ 6,964   $ 5,239
                                                              =======   =======

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

110

PSEG POWER LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions)

                                                                  For the Years Ended December 31,
                                                                  --------------------------------
                                                                    2002         2001        2000
                                                                  -------      -------     -------

CASH FLOWS FROM OPERATING ACTIVITIES
  Net Income                                                      $   468      $   394     $   313
  Adjustments to reconcile net income to net cash flows
   from operating activities:
    Depreciation and Amortization                                     108           95         136
    Amortization of Nuclear Fuel                                       89          101          96
    Provision for Deferred Income Taxes                                88           94         (69)
    Unrealized (Gains) Losses on Energy Trading Contracts             (23)          22         (55)
    Non-Cash Employee Benefit Plan Costs                               32           20          11
    Net changes in certain current assets and liabilities:
        Inventory, Materials and Supplies                            (329)         (35)        (30)
        Accounts Receivable                                          (212)           2         161
        Accrued Taxes                                                 (17)           6          13
        Accounts Payable                                              338         (140)        195
        Other Current Assets and Liabilities                          111           74          11
     Employee Benefit Plan Funding Payments                           (76)         (34)         --
     Other                                                            (84)         (80)        (75)
                                                                  -------      -------     -------
       Net Cash Provided By Operating Activities                      493          519         707
                                                                  -------      -------     -------
CASH FLOWS FROM INVESTING ACTIVITIES
  Additions to Property, Plant and Equipment                       (1,046)      (1,592)       (411)
  Proceeds from the Sale of Property, Plant and Equipment              47           30          --
  Acquisition of Generation Businesses, net of cash provided         (272)         (22)        (74)
  Contribution to Decommissioning Funds and Other Special Funds       (29)         (29)        (29)
  Other                                                                --           --         (34)
                                                                  -------      -------     -------
       Net Cash Used In Investing Activities                       (1,300)      (1,613)       (548)
                                                                  -------      -------     -------
CASH FLOWS FROM FINANCING ACTIVITIES
  Net Change in Commercial Paper and Loans                             --           --        (685)
  Issuance of Long-Term Debt                                          630        2,685          --
  Repayment of Note Payable - Affiliated Company                       --       (2,786)         --
  Net Change in Capitalization Activity                                --           --         319
  Proceeds from Contributed Capital                                   200        1,200         150
  Deferred Issuance Costs                                              (6)         (16)         --
                                                                  -------      -------     -------
       Net Cash Provided By (Used In) Financing Activities            824        1,083        (216)
                                                                  -------      -------     -------
Net Change In Cash And Cash Equivalents                                17          (11)        (57)
Cash And Cash Equivalents At Beginning Of Year                          9           20          77
                                                                  -------      -------     -------
Cash And Cash Equivalents At End Of Year                          $    26      $     9     $    20
                                                                  =======      =======     =======

Property, Plant and Equipment Assumed from Acquisitions           $   237      $    22     $    31
Income Taxes Paid                                                 $    91      $   166     $   242
Interest Paid                                                     $   200      $   197     $   118

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

111

PSEG POWER LLC
CONSOLIDATED STATEMENTS OF CAPITALIZATION AND MEMBER'S EQUITY
(Millions)

                                                                                             Accumulated
                                                                                                Other       Total
                                                         Contributed    Basis     Retained  Comprehensive  Member's
                                                           Capital    Adjustment  Earnings      Loss        Equity
                                                         -----------  ----------  --------  -------------  --------

Balance as of January 1, 2000                              $    --     $    --     $    --     $    --     $    --
    Net Income (1)                                              --          --         104          --         104
    Contributed Capital                                        150          --          --          --         150
    Net Transfers to PSEG                                       --          --          --          --          --
    Transfer of Generation Business                             --        (986)         --          --        (986)
                                                           -------     -------     -------     -------     -------
Balance as of December 31, 2000                            $   150     $  (986)    $   104     $    --     $  (732)
                                                           -------     -------     -------     -------     -------
    Net Income (1)                                              --          --         394          --         394
       Change in Fair Value of Derivative Instruments,
          (net of tax $(16))                                    --          --          --         (23)        (23)
        Reclassification Adjustments for Net Amount             --
          included in Net Income (net of tax of $14)            --          --          --          21          21
                                                                                                           -------
       Other Comprehensive Income (Loss)                        --          --          --          --          (2)
                                                                                                           -------
    Comprehensive Income                                                                                       392
    Contributed Capital                                      1,200          --          --          --       1,200
                                                           -------     -------     -------     -------     -------
Balance as of December 31, 2001                            $ 1,350     $  (986)    $   498     $    (2)    $   860
                                                           -------     -------     -------     -------     -------
    Net Income (1)                                              --          --         468          --         468
    Other Comprehensive Income (Loss), net of tax:
       Change in Fair Value of Derivative Instruments,
          (net of tax $(1))                                     --          --          --          (2)         (2)
        Pension Adjustments, net of tax $(50)                   --          --          --         (84)        (84)
                                                                                                           -------
       Other Comprehensive Income (Loss)                        --          --          --          --         (86)
                                                                                                           -------
    Comprehensive Income                                        --          --         468          --         382
    Contributed Capital                                        200          --          --          --         200
                                                           -------     -------     -------     -------     -------
Balance as of December 31, 2002                            $ 1,550     $  (986)    $   966     $   (88)    $ 1,442
                                                           =======     =======     =======     =======     =======

                                                                             Total
                                                                         Capitalization
                                                                          and Member's
                                                         Capitalization      Equity
                                                         --------------  --------------

Balance as of January 1, 2000                               $ 1,272          $ 1,272
    Net Income (1)                                              209              313
    Contributed Capital                                          --              150
    Net Transfers to PSEG                                    (1,481)          (1,481)
    Transfer of Generation Business                                             (986)
                                                            -------          -------
Balance as of December 31, 2000                             $    --          $  (732)
                                                            -------          -------
    Net Income (1)                                               --              394
       Change in Fair Value of Derivative Instruments,
          (net of tax $(16))                                     --              (23)
        Reclassification Adjustments for Net Amount                               --
          included in Net Income (net of tax of $14)             --               21
                                                                             -------
       Other Comprehensive Income (Loss)                         --               (2)
                                                                             -------
    Comprehensive Income                                                         392
    Contributed Capital                                          --            1,200
                                                            -------          -------
Balance as of December 31, 2001                             $    --          $   860
                                                            -------          -------
    Net Income (1)                                               --              468
    Other Comprehensive Income (Loss), net of tax:
        Change in Fair Value of Derivative Instruments,
          (net of tax $(1))                                      --               (2)
        Pension Adjustments, net of tax $(50)                    --              (84)
                                                                             -------
       Other Comprehensive Income (Loss)                         --              (86)
                                                                             -------
    Comprehensive Income                                         --              382
    Contributed Capital                                          --              200
                                                            -------          -------
Balance as of December 31, 2002                             $    --          $ 1,442
                                                            =======          =======

     (1)  Net Income included in retained earnings reflects earnings from the
          legal operations of PSEG Power LLC during 2000. Net Income/Loss
          included in Capitalization for 2000 reflects the Net Income/Loss
          allocated from Public Service Electric and Gas Company.

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

112

PSEG ENERGY HOLDINGS LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(Millions)

                                                                        For The Years Ended December 31,
                                                                        --------------------------------
                                                                          2002         2001        2000
                                                                        -------      -------     -------

OPERATING REVENUES
     Electric Generation and Distribution Revenues                      $   364      $   128     $    --
     Income from Capital and Operating Leases                               260          215         170
     Income from Joint Ventures and Partnerships                             58          144         157
     Interest and Dividend Income                                            46           48           3
     Gain on Withdrawal from/Sale of Partnerships                            32           75          --
     Other                                                                   30           30          40
     Net Investment (Losses) Gains                                          (41)          (2)         35
     Energy Supply Revenues                                                  --           --          67
                                                                        -------      -------     -------
          Total Operating Revenues                                          749          638         472
                                                                        -------      -------     -------
OPERATING EXPENSES
     Write-down of Project Investments                                      497            7          --
     Energy Costs                                                           147           55          66
     Administrative and General                                             111           79          76
     Operation and Maintenance                                               54           40          14
     Depreciation and Amortization                                           35           16           6
                                                                        -------      -------     -------
            Total Operating Expenses                                        844          197         162
                                                                        -------      -------     -------
OPERATING (LOSS) INCOME                                                     (95)         441         310
     Other Income                                                            25            6           3
     Other Deductions                                                       (73)         (12)         (3)
     Interest Expense                                                      (214)        (180)       (134)
                                                                        -------      -------     -------
(LOSS) INCOME BEFORE INCOME TAXES,
    DISCONTINUED OPERATIONS AND CUMULATIVE EFFECT OF
    A CHANGE IN ACCOUNTING PRINCIPLE                                       (357)         255         176
     Income Tax Benefit (Expense)                                           150          (65)        (51)
     Minority Interests in (Earnings) Losses of Subsidiaries                 (2)          (1)          1
                                                                        -------      -------     -------
(LOSS) INCOME BEFORE DISCONTINUED OPERATIONS
      AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE            (209)         189         126
DISCONTINUED OPERATIONS
      Loss From Discontinued Operations, net of tax of
             $9, $8 and $5 in 2002, 2001 and 2000, respectively             (16)         (15)        (12)
      Loss on Disposal of Discontinued Operations,  net of tax of $18       (35)          --          --
                                                                        -------      -------     -------
(LOSS) INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE
      IN ACCOUNTING PRINCIPLE                                              (260)         174         114
Cumulative Effect of a Change in Accounting Principle,
     net of tax of $66 and $8 in 2002 and 2001, respectively               (120)           9          --
                                                                        -------      -------     -------
NET (LOSS) INCOME                                                          (380)         183         114
Preference Units Distributions/Preferred Stock Dividends                    (23)         (22)        (24)
                                                                        -------      -------     -------
(LOSS) EARNINGS AVAILABLE TO PUBLIC SERVICE
       ENTERPRISE GROUP                                                 $  (403)     $   161     $    90
                                                                        =======      =======     =======

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

113

PSEG ENERGY HOLDINGS LLC
CONSOLIDATED BALANCE SHEETS
ASSETS
(Millions)

                                                         December 31,
                                                     ------------------
                                                       2002       2001
                                                     -------    -------
CURRENT ASSETS
  Cash and Cash Equivalents                          $   104    $    54
  Accounts Receivable:
    Trade - Net                                           91        108
    Other Accounts Receivable - Net                       24         17
  Assets Held for Sale                                    83        422
  Notes Receivable                                        73         --
  Inventory                                               22         15
  Prepayments                                              4          2
  Restricted Cash                                         18         --
  Current Assets of Discontinued Operations              107        483
                                                     -------    -------
       Total Current Assets                              526      1,101
                                                     -------    -------
PROPERTY, PLANT AND EQUIPMENT                          1,534      1,181
   Less: Accumulated Depreciation and Amortization      (139)      (157)
                                                     -------    -------
       Net Property, Plant and Equipment               1,395      1,024
                                                     -------    -------
INVESTMENTS
 Capital Leases-Net                                    2,844      2,784
 Corporate Joint Ventures                              1,004      1,115
 Partnership Interests                                   484        659
 Other Investments                                        38         56
                                                     -------    -------
       Total Investments                               4,370      4,614
                                                     -------    -------
OTHER ASSETS
 Goodwill                                                436        548
 Other                                                   111        152
                                                     -------    -------
       Total Other Assets                                547        700
                                                     -------    -------
TOTAL ASSETS                                         $ 6,838    $ 7,439
                                                     =======    =======

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

114

PSEG ENERGY HOLDINGS LLC
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND MEMBER'S/STOCKHOLDER'S EQUITY
(Millions)

                                                                                  December 31,
                                                                              ------------------
                                                                                2002       2001
                                                                              -------    -------

CURRENT LIABILITIES
  Long-Term Debt Due Within One Year                                          $   320    $   243
  Short-Term Borrowings Due to Public Service Enterprise Group Incorporated        --         38
  Accounts Payable                                                                257        211
  Borrowings Under Lines of Credit                                                 --        300
  Notes Payable                                                                   137        285
  Current Liabilities of Discontinued Operations                                   95        251
                                                                              -------    -------
       Total Current Liabilities                                                  809      1,328
                                                                              -------    -------
NONCURRENT LIABILITIES
  Deferred Income Taxes and Investment and Energy Tax Credits                   1,042      1,211
  Other Noncurrent Liabilities                                                    179         99
                                                                              -------    -------
       Total Noncurrent Liabilities                                             1,221      1,310
                                                                              -------    -------
COMMITMENTS AND CONTINGENT LIABILITIES  (See Note 13)

MINORITY INTERESTS                                                                106         47
                                                                              -------    -------
  LONG-TERM DEBT
    Project Level, Non-Recourse Long-Term Debt                                    853        634
    Senior Notes                                                                1,725      1,644
    Medium-Term Notes                                                              --        252
                                                                              -------    -------
       Total Long-Term Debt                                                     2,578      2,530
                                                                              -------    -------
MEMBER'S/STOCKHOLDER'S EQUITY
  Ordinary Unit                                                                 1,888         --
  Preference Units                                                                509         --
  Preferred Stock                                                                  --        509
  Additional Paid-in Capital                                                       --      1,490
  Retained Earnings                                                               107        510
  Accumulated Other Comprehensive Loss                                           (380)      (285)
                                                                              -------    -------
       Total Member's/Stockholder's Equity                                      2,124      2,224
                                                                              -------    -------
TOTAL LIABILITIES AND MEMBER'S/STOCKHOLDER'S EQUITY                           $ 6,838    $ 7,439
                                                                              =======    =======

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

115

PSEG ENERGY HOLDINGS LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions)

                                                                        For The Years Ended December 31,
                                                                        --------------------------------
                                                                          2002         2001        2000
                                                                        -------      -------     -------

CASH FLOWS FROM OPERATING ACTIVITIES
  Net (Loss) Income                                                     $  (380)     $   183     $   114
  Adjustments to reconcile net income to net cash flows from
   operating activities:
    Depreciation and Amortization                                            54           28          25
    Deferred Income Taxes (Other than Leases)                              (188)         (20)        (11)
    Leveraged Lease Income, Adjusted for Rents Received                     (45)          (6)         74
    Investment Distributions                                                  7           74          51
    Investment in Securities                                                 (5)         (14)         (7)
    Undistributed Earnings from Affiliates                                  (59)        (111)        (28)
    Net Gains on Investments                                                  7          (74)        (35)
    Write-down of Project Investments                                       497            7          --
    Loss on Disposal of Discontinued Operations, net of tax                  35           --          --
    Foreign Currency Transaction Loss                                        70            9          (3)
    Proceeds on Withdrawal from  Partnership                                 47           50          --
    Cumulative Effect of a Change in Accounting Principle, net of tax       120           (9)         --
    Net Changes in certain current assets and liabilities:
       Accounts Receivable                                                    2          (56)       (112)
       Accounts Payable                                                      (2)         109          46
       Other Current Assets and Liabilities                                  42           51          16
    Other                                                                    (3)          13          10
                                                                        -------      -------     -------
       Net Cash Provided By Operating Activities                            199          234         140
                                                                        -------      -------     -------
CASH FLOWS FROM INVESTING ACTIVITIES
  Additions to Property, Plant and Equipment                               (353)        (169)        (56)
  Investments in Joint Ventures and Partnerships                           (191)        (137)       (361)
  Investments in Capital Leases                                             (31)        (460)       (460)
  Proceeds from Sale of Capital Leases                                      183          104          89
  Acquisitions, net of Cash Acquired                                        (17)        (810)        (14)
  Proceeds from sale of Discontinued Operations                              45           --          --
  Return of Capital from Partnerships                                       147            2          87
  Other                                                                     (20)        (104)        (43)
                                                                        -------      -------     -------
       Net Cash Used In Investing Activities                               (237)      (1,574)       (758)
                                                                        -------      -------     -------
CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from Capital Contributions                                       400          400         300
  Net (Decrease) Increase in Short-Term Debt                               (424)         139         146
  Cash Dividends Paid                                                       (23)         (26)        (37)
  Restricted Cash (Increase) Decrease                                       (18)           2           3
  Net Increase in Short-Term Affiiliate Borrowings                           31           40          --
  Proceeds from Sale of Senior Notes                                        133          939         297
  Early Retirement of Senior Notes                                          (41)          --          --
  Proceeds from Project-Level Non-Recourse Debt                             228          348          34
  Repayment of Medium-Term and Project-Level Non-Recourse Debt             (229)        (422)       (155)
  Other                                                                      33          (42)          4
                                                                        -------      -------     -------
       Net Cash Provided By Financing Activities                             90        1,378         592
                                                                        -------      -------     -------
Effect of Exchange Rate Changes on Cash                                      (2)          --          --
Net Change In Cash And Cash Equivalents                                      50           38         (26)
Cash And Cash Equivalents At Beginning Of Year                               54           16          42
                                                                        -------      -------     -------
Cash And Cash Equivalents At End Of Year                                $   104      $    54     $    16
                                                                        =======      =======     =======

Supplemental Disclosure of Cash Flow Information
   Cash Payments (Receipts)  for:
       Income Taxes (Benefits)                                          $  (126)   $  (178)   $  (105)
       Interest Paid                                                    $   193    $   155    $    87

Non-Cash Investing and Financing Activities:
       Fair Value of Property, Plant and Equipment Acquired             $   301    $   727    $   182
       Debt Assumed from Companies Acquired                             $    --    $   256    $   161

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

116

PSEG ENERGY HOLDINGS LLC
CONSOLIDATED STATEMENTS OF MEMBER'S/STOCKHOLDER'S EQUITY
(Millions)

                                                                                            Additional
                                                                     Ordinary   Preference  Preferred   Paid-In   Retained
                                                                       Unit        Units      Stock     Capital   Earnings
                                                                     --------   ----------  ----------  -------   --------

Balance as of January 1, 2000                                         $    --    $    --     $   509    $   790   $   276
    Net Income                                                             --         --          --         --       114
    Other Comprehensive Loss, net of tax:
    Currency Translation Adjustment, net of tax of $0                      --         --          --         --        --

        Other Comprehensive Loss                                           --         --          --         --        --

    Comprehensive Income                                                   --         --          --         --        --
    Additional Contributed Capital                                         --         --          --        300        --
    Preferred Stock Dividends                                              --         --          --         --       (24)
    Common Stock Dividends                                                 --         --          --         --       (13)
                                                                      -------    -------     -------    -------   -------
Balance as of December 31, 2000                                            --         --         509      1,090       353
                                                                      -------    -------     -------    -------   -------
    Net Income                                                             --         --          --         --       183
    Other Comprehensive Income (Loss), net of tax:
    Currency Translation Adjustment, net of tax of $(6)                    --         --          --         --        --
    Cumulative Effect of a Change in Accounting Principle,
        net of tax of $14                                                  --         --          --         --        --
    Current Period Declines in Fair Value of Derivative
        Instruments-Net                                                    --         --          --         --        --
    Reclassification Adjustments for Net Amounts Included
        in Net Income                                                      --         --          --         --        --

        Other Comprehensive Loss                                           --         --          --         --        --

    Comprehensive Income                                                   --         --          --         --        --
    Additional Contributed Capital                                         --         --          --        400        --
    Preferred Stock Dividends                                              --         --          --         --       (22)
    Common Stock Dividends                                                 --         --          --         --        (4)
                                                                      -------    -------     -------    -------   -------
Balance as of December 31, 2001                                            --         --         509      1,490       510
                                                                      -------    -------     -------    -------   -------
    Net Income                                                             --         --          --         --      (380)
    Other Comprehensive Income (Loss), net of tax:
       Currency Translation Adjustment, net of tax of $(43)                --         --          --         --        --
       Reclassification Adjustment for Losses Included in Net Income,
      net of tax of $37                                                    --         --          --         --        --
       Current Period Declines in Fair Value of Derivative
        Instruments, net of tax of $(12)                                   --         --          --         --        --
        Reclassification Adjustments for Net Amounts Included
        in Net Income, net of tax of $6                                    --         --          --         --        --
        Minimum Pension Liability Adjustment                               --         --          --         --        --

        Other Comprehensive Loss                                           --         --          --         --        --

    Comprehensive Loss                                                     --         --          --         --        --
    Additional Contributed Capital                                        100         --          --        300        --
    Recapitalization of Energy Holdings' Assets and Liabilities         1,790        509        (509)    (1,790)       --
    Preference Units/Preferred Stock Dividends                             --         --          --         --       (23)
    Dividend of Pantellos Corporation to PSEG                              (2)        --          --         --        --
                                                                      -------    -------     -------    -------   -------
Balance as of December 31, 2002                                       $ 1,888    $   509     $    --    $    --   $   107
                                                                      -------    -------     -------    -------    -------

                                                                          Accumulated
                                                                             Other       Total Member's/
                                                                        OComprehensive    Stockholder's
                                                                         Income (Loss)       Equity
                                                                        --------------   ---------------

Balance as of January 1, 2000                                               $  (200)         $ 1,375
    Net Income                                                                   --              114
    Other Comprehensive Loss, net of tax:
    Currency Translation Adjustment, net of tax of $0                            (3)              (3)
                                                                                             -------
        Other Comprehensive Loss                                                 --               (3)
                                                                                             -------
    Comprehensive Income                                                         --              111
    Additional Contributed Capital                                               --              300
    Preferred Stock Dividends                                                    --              (24)
    Common Stock Dividends                                                       --              (13)
                                                                            -------          -------
Balance as of December 31, 2000                                                (203)           1,749
                                                                            -------          -------
    Net Income                                                                   --              183
    Other Comprehensive Income (Loss), net of tax:
    Currency Translation Adjustment, net of tax of $(6)                         (55)             (55)
    Cumulative Effect of a Change in Accounting Principle,
        net of tax of $14                                                       (15)             (15)
    Current Period Declines in Fair Value of Derivative
        Instruments-Net                                                         (16)             (16)
    Reclassification Adjustments for Net Amounts Included
        in Net Income                                                             4                4
                                                                                             -------
        Other Comprehensive Loss                                                 --              (82)
                                                                                             -------
    Comprehensive Income                                                         --              101
    Additional Contributed Capital                                               --              400
    Preferred Stock Dividends                                                    --              (22)
    Common Stock Dividends                                                       --               (4)
                                                                            -------          -------
Balance as of December 31, 2001                                                (285)           2,224
                                                                            -------          -------
    Net Income                                                                   --             (380)
    Other Comprehensive Income (Loss), net of tax:
       Currency Translation Adjustment, net of tax of $(43)                    (117)            (117)
       Reclassification Adjustment for Losses Included in Net Income,
      net of tax of $37                                                          68               68
       Current Period Declines in Fair Value of Derivative
        Instruments, net of tax of $(12)                                        (52)             (52)
        Reclassification Adjustments for Net Amounts Included
        in Net Income, net of tax of $6                                          12               12
        Minimum Pension Liability Adjustment                                     (6)              (6)
                                                                                             -------
        Other Comprehensive Loss                                                 --              (95)
                                                                                             -------
    Comprehensive Loss                                                           --             (475)
    Additional Contributed Capital                                               --              400
    Recapitalization of Energy Holdings' Assets and Liabilities                                   --
    Preference Units/Preferred Stock Dividends                                   --              (23)
    Dividend of Pantellos Corporation to PSEG                                    --               (2)
                                                                            -------          -------
Balance as of December 31, 2002                                             $  (380)         $ 2,124
                                                                            -------          -------

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

117

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     This combined Form 10-K 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 makes representations only as to itself and make no other representations whatsoever as to any other company.

Note 1. Organization and Summary of Significant Accounting Policies

Organization

     PSEG

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

     PSE&G

     PSE&G is an operating public utility providing electric and gas service in certain areas within the State of New Jersey. Following the transfer of its generation-related assets and liabilities to Power in August 2000 and gas supply business to Power in May 2002, PSE&G continues to own and operate its transmission and distribution business.

     Power

     Power is a multi-regional wholesale energy supply business that uses energy trading to optimize the value of its portfolio of electric generating and gas capacity and its supply obligations. Power has three principal direct wholly-owned subsidiaries: PSEG Nuclear LLC (Nuclear), PSEG Fossil LLC (Fossil) and PSEG Energy Resources & Trade LLC (ER&T). Power and its subsidiaries were initially established to acquire, own and operate the electric generation-related business of PSE&G pursuant to the Final Decision and Order (Final Order) issued by the New Jersey Board of Public Utilities (BPU) under the New Jersey Electric Discount and Energy Competition Act (Energy Competition Act) discussed below. Power also has a finance company subsidiary, PSEG Power Capital Investment Co. (Power Capital), which provides certain financing for Power’s subsidiaries.

     Energy Holdings

     Energy Holdings is the parent of PSEG Global Inc. (Global), which invests and participates in the development and operation of international and domestic projects in the generation and distribution of energy, which include cogeneration and independent power production facilities and electric distribution companies; PSEG Resources LLC (Resources), which makes investments primarily in energy-related leveraged leases; PSEG Energy Technologies Inc. (Energy Technologies), which provides energy-related services and construction to industrial and commercial customers; Enterprise Group Development Corporation (EGDC), a commercial real estate property management business; PSEG Capital Corporation (PSEG Capital), which serves as a financing vehicle for Energy Holdings’ subsidiaries, and borrows on the basis of a minimum net worth maintenance agreement with PSEG; and Enterprise Capital Funding Corporation (Funding), which is currently inactive and formerly served as the financing vehicle on the basis of Energy Holdings’ consolidated financial position. EGDC has been conducting a controlled exit from the real estate business since 1993. The businesses of Energy Technologies are presented as discontinued operations and are expected to be sold in 2003. PSEG Capital’s final maturity is in 2003, at which point it will no longer be utilized.

     Energy Holdings, a New Jersey limited liability company, is the successor to PSEG Energy Holdings Inc. pursuant to a merger consummated in October 2002 which changed the legal form of the business from a corporation to a limited liability company. Energy Holdings succeeded to all the assets and liabilities of PSEG Energy Holdings Inc. in accordance with the New Jersey Limited Liability Company Act. Energy Holdings has succeeded to PSEG Energy Holdings Inc.’s reporting obligations under the Securities Exchange Act of 1934, as amended. As part of the

118

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Energy Holdings reorganization, PSEG Resources Inc. became a wholly-owned subsidiary of Resources, a newly formed New Jersey limited liability company. Resources is wholly-owned by Energy Holdings. This reorganization was completed to further improve efficiencies within PSEG’s tax reporting process.

     Other

     Services provides management and administrative services such as accounting, legal, communications, human resources, information technology, treasury and financial, investor relations, stockholder services and risk management to PSEG and its subsidiaries. Services charges PSEG and its subsidiaries for the cost of work performed and services provided by it.

Summary of Significant Accounting Policies

     Consolidation

PSEG, PSE&G, Power and Energy Holdings

     PSEG’s, PSE&G’s, Power’s and Energy Holdings’ consolidated financial statements include their respective accounts and those of their respective subsidiaries. PSEG, PSE&G, Power and Energy Holdings and their respective subsidiaries consolidate those entities in which they have a controlling interest. Those entities in which PSEG, PSE&G, Power and Energy Holdings and their respective subsidiaries do not have a controlling interest are being accounted for under the equity method of accounting. For investments in which significant influence does not exist, the cost method of accounting is applied. All significant intercompany accounts and transactions are eliminated in consolidation. No gains or losses are recorded on any intercompany transactions.

PSE&G and Power

     In addition, Power and PSE&G each has undivided interests in certain jointly owned facilities. Power and PSE&G are responsible to pay for their respective ownership share of additional construction costs, fuel inventory purchases and operating expenses. All revenues and expenses related to these facilities are consolidated at their respective pro-rata ownership share in the appropriate revenue and expense categories on the Consolidated Statements of Operations.

     Accounting for the Effects of Regulation

PSE&G

     PSE&G prepares its financial statements in accordance with the provisions of Statement of Financial Standards (SFAS) No. 71, “Accounting for the Effects of Certain Types of Regulation” (SFAS 71). In general, SFAS 71 recognizes that accounting for rate-regulated enterprises should reflect the economic effects of regulation. As a result, a regulated utility is required to defer the recognition of costs (a regulatory asset) or the recognition of obligations (a regulatory liability) if it is probable that, through the rate-making process, there will be a corresponding increase or decrease in future rates. Accordingly, PSE&G has deferred certain costs and recoveries, which will be amortized over various future periods. To the extent that collection of such costs or payment of liabilities is no longer probable as a result of changes in regulation and/or PSE&G’s competitive position, the associated regulatory asset or liability is charged or credited to income. PSE&G’s transmission and distribution business continues to meet the requirements for application of SFAS 71.

     Derivative Financial Instruments

PSEG, PSE&G, Power and Energy Holdings

     PSEG, PSE&G, Power and Energy Holdings use derivative financial instruments to manage risk from changes in interest rates, congestion credits, emission credits, commodity prices and foreign currency exchange rates, pursuant to its business plans and prudent practices.

119

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

     PSEG, PSE&G, Power and Energy Holdings recognize all derivative instruments on the balance sheet at their fair value. Changes in the fair value of a derivative that is highly effective as, and that is designated and qualifies as, a fair-value hedge (including foreign currency fair-value hedges), along with changes of the fair value of the hedged asset or liability that are attributable to the hedged risk, are recorded in current-period earnings. Changes in the fair value of a derivative that is highly effective as and that is designated and qualifies as a cash flow hedge (including foreign currency cash flow hedges), are recorded in Other Comprehensive Income (OCI) until earnings are affected by the variability of cash flows of the hedged transaction. Any hedge ineffectiveness is included in current-period earnings. In certain circumstances, PSEG, PSE&G, Power and/or Energy Holdings enter into derivative contracts and do not designate them as fair value or cash flow hedges, in such cases, changes in fair value are recorded in earnings.

     Power

     Additionally, Power has certain energy trading contracts that do not meet the definition of a derivative. Those contracts are also carried at fair market value with changes recorded in current-period earnings. Upon adoption of Emerging Issues Task Force (EITF) Issue No. 02-3, “Accounting for Contracts Involved in Energy Trading and Risk Management Activities” (EITF 02-3) on January 1, 2003, Power will record these contracts at historical cost. See Note 2. New Accounting Standards.

     For additional information regarding Derivative Financial Instruments, see Note 12. Risk Management.

     Revenue Recognition

     PSE&G

     PSE&G’s Operating Revenues are recorded based on services rendered to customers during each accounting period. PSE&G records unbilled revenues for the estimated amount customers will be billed for services rendered from the time meters were last read to the end of the respective accounting period. The unbilled revenue is estimated each month based on weather factors, line losses and unaccounted for gas factors, estimated customer usage by class and applicable customer rates based on regression analyses reflecting significant historical trends and experience.

     Power

     The majority of Power’s revenues relate to the Basic Generation Service (BGS), Basic Gas Supply Service (BGSS) and other bilateral contracts which are accounted for on the accrual basis, as the energy is delivered. Power also records revenues and energy costs for physical energy delivered to and received from the power pool. Power also records margins from energy trading on a net basis as revenues pursuant to EITF 02-3 and SFAS 133 “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133). See Note 12. Risk Management for further discussion.

     Energy Holdings

     The majority of Resources’ revenues relate to its investments in leveraged leases and are accounted for under SFAS 13 “Accounting for Leases” (SFAS 13). Income on leveraged leases is recognized by a method which produces a constant rate of return on the outstanding net investment in the lease, net of the related deferred tax liability, in the years in which the net investment is positive. Any gains or losses incurred as a result of a lease termination are recorded as revenues as these events occur in the ordinary course of business of managing the investment portfolio. In accordance with specialized accounting practices, Resources records revenue from the changes in share prices of publicly-traded equity securities held within its leveraged buyout funds. See Note 8. Long-Term Investments for further discussion.

     Global records revenues from its investments in generation and distribution facilities. Certain of Global’s investments are majority owned and controlled by Global and the revenues from these projects are recorded as Global’s revenues. Other investments are less than majority owned and are accounted for under the equity or cost methods as appropriate. Revenues for many of these investments are estimated on a monthly basis and trued up to actual results in the next accounting month. Gains or losses incurred as a result of exiting one of these businesses are typically recorded as a component of Operating Income.

120

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

     Depreciation and Amortization

     PSE&G

     PSE&G calculates depreciation under the straight-line method based on estimated average remaining lives of the several classes of depreciable property. These estimates are reviewed on a periodic basis and necessary adjustments are made as approved by the BPU. The depreciation rate stated as a percentage of original cost of depreciable property was 3.37% for 2002, 3.32% for 2001 and 3.52% for 2000.

     Power

     Power calculates depreciation on generation-related assets based on the assets’ estimated useful lives determined based on planned operations. The estimated useful lives are from 3 years to 20 years for general plant. The estimated useful lives for buildings and generating stations are as follows:

Class of Property	Estimated Useful Life
Fossil Production	30-55 years
Nuclear Generation	30-40 years
Pumped Storage	45 years

     Energy Holdings

     Energy Holdings calculates depreciation on property, plant and equipment under the straight-line method with estimated useful lives from 3 years to 40 years.

Taxes Other than Income Taxes

     PSE&G

     Taxes Other than Income Taxes is comprised of the transitional energy facilities assessment (TEFA). TEFA is collected from PSE&G customers and presented gross on PSE&G’s Consolidated Statement of Operations.

Allowance for Funds Used During Construction (AFDC) and Interest Capitalized During Construction (IDC)

     PSE&G

     AFDC represents the cost of debt and equity funds used to finance the construction of new utility assets under the guidance of SFAS 71. The amount of AFDC capitalized was reported in the Consolidated Statements of Operations as a reduction of interest charges. The rates used for calculating AFDC in 2002, 2001, and 2000 were 8.80%, 6.71%, and 6.45%, respectively. In 2002, 2001, and 2000, PSE&G’s AFDC amounted to $1 million, $2 million, and $1 million, respectively.

     Power and Energy Holdings

     IDC represents the cost of debt used to finance the construction of non-utility facilities. The amount of IDC capitalized is reported in the Consolidated Statements of Operations as a reduction of interest charges. Power’s weighted average rates used for calculating IDC in 2002, 2001 and 2000 were 7.01%, 7.98% and 9.98%, respectively. In 2002, 2001, and 2000, Power’s IDC amounted to $95 million, $63 million, and $14 million, respectively. Energy Holdings’ weighted average rates used for calculating IDC in 2002, 2001 and 2000 were 9.06%, 8.05% and 7.93%, respectively. In 2002, 2001, and 2000, Energy Holdings’ IDC amounted to $13 million, $16 million, and $21 million, respectively.

121

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

     Income Taxes

PSEG, PSE&G, Power and Energy Holdings

     PSEG and its subsidiaries file a consolidated Federal income tax return and income taxes are allocated to PSEG’s subsidiaries based on the taxable income or loss of each subsidiary. Investment tax credits were deferred in prior years and are being amortized over the useful lives of the related property.

     Foreign Currency Translation/Transactions

Energy Holdings

     Revenues and expenses are translated at average exchange rates for the year. Transaction gains and losses that arise from exchange rate fluctuations on normal operating transactions denominated in a currency other than the functional currency are included in earnings as incurred.

     The assets and liabilities of foreign operations are translated into US Dollars at current exchange rates. Resulting translation adjustments are reflected in OCI, net of taxes, as a separate component of member’s/stockholders’ equity.

     Cash and Cash Equivalents

PSEG, PSE&G, Power and Energy Holdings

     Cash and cash equivalents consists primarily of working funds and highly liquid marketable securities (commercial paper and money market funds) with an original maturity of three months or less.

     Materials and Supplies and Fuel

PSE&G

     PSE&G’s materials and supplies are carried at average cost in accordance with rate-based regulation.

Power and Energy Holdings

     The carrying value of the materials and supplies and fuel for Power and Energy Holdings is valued at lower of cost or market.

     Property, Plant and Equipment

PSE&G

     PSE&G’s additions to plant, property and equipment and replacements that are either retirement units or property record units are capitalized at original cost. The cost of maintenance, repair and replacement of minor items of property is charged to appropriate expense accounts as incurred. At the time units of depreciable property are retired or otherwise disposed of, the original cost, adjusted for net salvage value, is charged to accumulated depreciation.

Power and Energy Holdings

     Power and Energy Holdings only capitalize costs which increase the capacity or extend the life of an existing asset, represent a newly acquired or constructed asset or represent the replacement of a retired asset. The cost of maintenance, repair and replacement of minor items of property is charged to appropriate expense accounts as incurred. Environmental costs are capitalized if the costs mitigate or prevent future environmental contamination or if the

122

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

costs improve existing assets’ environmental safety or efficiency. All other environmental expenditures are expensed.

     Unamortized Loss on Reacquired Debt and Debt Expense

PSE&G

     PSE&G’s bond issuance costs and associated premiums and discounts are generally amortized over the life of the debt issuance. In accordance with New Jersey Board of Public Utility (BPU) and Federal Energy Regulatory Commission (FERC) regulations, PSE&G’s costs to reacquire debt are deferred and amortized over the remaining original life of the retired debt. When refinancing debt, the unamortized portion of the original debt issuance costs of the debt being retired must be amortized over the life of the replacement debt. Gains and losses on reacquired debt associated with PSE&G’s regulated operations will continue to be deferred and amortized to interest expense over the period approved for ratemaking purposes.

     Nuclear Decommissioning Trust Funds

Power

     Funds in Power’s Nuclear Decommissioning Trust are stated at fair value. Changes in the fair value of the trust funds are also reflected in the accrued liability for nuclear decommissioning. See Note 2. New Accounting Standards for a discussion of SFAS 143.

     Investments in Corporate Joint Ventures and Partnerships

Energy Holdings

     Global’s and Resources’ interests in active joint ventures and partnerships are accounted for under the equity method of accounting where their respective ownership interests are 50% or less and significant influence over joint venture or partnership operating and management decisions exists. For investments in which significant influence does not exist, the cost method of accounting is applied. Interest is capitalized on investments during the construction and development of qualifying assets.

     Resources carries its partnership investments in certain venture capital and leveraged buyout funds investing in securities at fair value where market quotations and an established liquid market of underlying securities in the portfolio are available. Fair value is determined based on the review of market price and volume data in conjunction with PSEG’s invested liquid position in such securities. Changes in fair value are recorded in Operating Revenues in the Consolidated Statements of Operations.

     Goodwill

PSEG, Power and Energy Holdings

     PSEG, Power and Energy Holdings record the cost in excess of fair value of net assets (including tax attributes) of companies acquired in purchase business transactions as goodwill.

     PSEG, Power and Energy Holdings annually evaluate the recoverability of goodwill by estimating the fair value of the businesses to which goodwill relates. PSEG, Power and Energy Holdings typically determine fair value by estimating the future discounted cash flows. The discount rate used in determining discounted cash flows is a rate corresponding to the cost of capital of the business to which the goodwill relates. Estimated cash flows are then determined by disaggregating PSEG’s, Power’s and Energy Holdings’ respective business segments to an operational and organizational level for which meaningful identifiable cash flows can be determined. When estimated future discounted cash flows are less than the carrying value of the net assets (tangible or identifiable intangibles) and related goodwill, impairment losses of goodwill are charged to operations. Impairment losses, limited to the carrying value of goodwill, represent the excess sum of the fair value of the net assets (tangible or identifiable intangibles) and goodwill over the discounted cash flows of the business being evaluated. In

123

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

determining the estimated future cash flows, PSEG, Power and Energy Holdings consider current and projected future levels of income, as well as business trends, prospects and economic conditions.

     For a discussion of business combinations and goodwill, see Note 2. New Accounting Standards and Note 9. Purchase Business Combinations/Asset Acquisitions.

     Capital Leases as Lessor

     Energy Holdings

     Resources, as lessor, leases property and equipment, through leveraged leases, with terms ranging from 4 to 45 years. The lease investments are recorded on a net basis by totaling the lease rents receivable over the lease term and adding the residual value, if any, less unearned income and deferred taxes to be recognized over the lease term. Leveraged leases are recorded net of non-recourse debt.

     Deferred Project Costs

     Power and Energy Holdings

     Power and Energy Holdings capitalize all direct external and direct incremental internal costs related to project development once a project reaches certain milestones. Once the project reaches financial closing, the deferred project balance is transferred to the investment account. These costs are amortized on a straight-line basis over the lives of the related project assets. Such amortization commences upon the date of commercial operation. Development costs related to unsuccessful projects are charged to expense. Deferred project costs are recorded in Other Assets on the Consolidated Balance Sheets.

     Use of Estimates

     PSEG, PSE&G, Power and Energy Holdings

     The process of preparing financial statements in conformity with GAAP requires the use of estimates and assumptions regarding certain types of assets, liabilities, revenues and expenses. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements. Accordingly, upon settlement, actual results may differ from estimated amounts.

     Reclassifications

     PSEG, PSE&G, Power and Energy Holdings

     Certain reclassifications of amounts reported in prior periods have been made to conform with the current presentation.

Note 2. New Accounting Standards

SFAS No. 142, “Goodwill and Other Intangible Assets” (SFAS 142)

     PSEG, PSE&G, Power and Energy Holdings

     On January 1, 2002, PSEG, PSE&G, Power and Energy Holdings adopted SFAS 142. Under this standard, PSEG, PSE&G, Power and Energy Holdings were required to complete an impairment analysis of goodwill before June 30, 2002 and record any required impairment retroactive to January 1, 2002. Under SFAS 142, goodwill is considered a nonamortizable asset and is subject to an annual review for impairment and an interim review when certain events or changes in circumstances occur. The effect of no longer amortizing goodwill on an annual basis was not material to PSEG’s, PSE&G’s or Power’s financial position and results of operations upon adoption.

124

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

     In addition to goodwill, PSEG has consolidated intangible assets related to its defined benefit pension plans, which is not subject to amortization for Power’s emissions allowances and for various access rights at Power’s Albany station. PSEG’s total intangible assets were $206 million, including $114 million, $52 million and $40 million related to defined benefit plans, emissions allowances and various access rights, respectively, as of December 31, 2002.

     Power and Energy Holdings

     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.

     Energy Holdings

     During the second quarter of 2002, Energy Holdings finalized its evaluation of the effect of SFAS 142 on the recorded amount of goodwill. The total amount of goodwill impairments was $120 million, net of tax of $66 million and was comprised of $36 million (after-tax) at Empresa Distribuidora de Electricidad de Entre Rios S.A. (EDEERSA), an Argentine distribution company, $34 million (after-tax) at Rio Grande Energia (RGE), a Brazilian distribution company of which Global owns 32%, $32 million (after-tax) at Energy Technologies and $18 million (after-tax) at Tanir Bavi, a generating facility in India, which was 74% owned by Global. All of the goodwill related to these companies, other than RGE, was fully impaired.

     As of December 31, 2002, the remaining carrying value of Energy Holdings’ goodwill was $436 million, of which $430 million was recorded in connection with Global’s acquisitions of Sociedad Austral de Electricidad S.A. (SAESA), a distribution company in Chile, and Empresa de Electricidad de los Andes S.A. (Electroandes), a generation company in Peru in August and December of 2001, respectively. For the year ended December 31, 2001, amortization expense related to goodwill was $3 million.

     As of December 31, 2002, Energy Holdings’ pro-rata share of the remaining goodwill included on the balance sheets of its equity method investees totaled $282 million.In accordance with generally accepted accounting principles, such goodwill is not consolidated on the balance sheet. Energy Holdings’ share of the amortization expense related to such goodwill was $8 million for the year ended December 31, 2001.

     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 December 31, 2002.

125

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Power and Energy Holdings

     As of December 31, 2002 and 2001, Power and Energy Holdings’ goodwill and pro-rata share of goodwill in consolidated equity method projects was as follows:

	As of December 31,
	2002		2001
Consolidated Investments	(Millions)
Energy Holdings (1)
SAESA(2)	$	290	$	315
EDEERSA(3)		—		63
Electroandes(4)		140		164
Elektrocieplownia Chorzow Sp. Z o.o. (ELCHO)		6		6
Total Energy Holdings-Global		436		548
Power – Albany Steam Station (5)		16		21
Total PSEG Consolidated Goodwill		452		569
Pro-Rata Share of Equity Method Investments
Energy Holdings
RGE (6)		60		142
Chilquinta Energia S.A. (Chilquinta) (7)		163		174
Luz del Sur S.A.A.		34		34
Kalaeloa		25		25
Pro-Rata Share of Equity Investment Goodwill		282		375
Total PSEG Goodwill	$	734	$	944

	(1)	Goodwill for Tanir Bavi and Energy Technologies was fully impaired in 2002. For 2001, goodwill for Tanir Bavi and Energy Technologies of $27 million and $53 million, respectively, was reclassed to Current Assets of Discontinued Operations. See Note 5. Discontinued Operations for additional information.
	(2)	The decrease at SAESA relates to final purchase price adjustments that resulted in higher value allocated to fixed assets.
	(3)	The decrease at EDEERSA relates to an impairment of $56 million under SFAS 142 and to purchase price adjustments of $7 million made subsequent to December 31, 2001.
	(4)	The decrease at Electroandes relates to purchase price adjustments made subsequent to December 31, 2001 which resulted in higher value allocated to Property, Plant and Equipment.
	(5)	The decrease at Albany relates to a purchase price adjustment related to a contingent liability.
	(6)	The decrease at RGE relates to an impairment under SFAS 142 totaling $50 million and the devaluation of the Brazilian Real amounting to $32 million.
	(7)	The decrease at Chilquinta relates to the devaluation of the Chilean Peso.
Power
In addition to goodwill associated with Power’s Albany Station (see table above), Power has intangible assets relating to its defined benefit pension plans, for its emissions allowances and for various access rights at the Albany station, all of which are not subject to amortization. Power’s intangible asset relating to its defined benefit pension plans totaled $33 and $5 million as of December 31, 2002 and 2001, respectively. Power’s intangible assets relating to its emissions allowances totaled $52 million and $2 million as of December 31, 2002 and 2001, respectively. Power’s intangible assets relating to various access rights at its Albany Station totaled approximately $40 million as of December 31, 2002 and 2001.
126

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

     PSE&G

     PSE&G has intangible assets relating to its defined benefit pension plans totaling $60 million and $7 million as of December 31, 2002 and December 31, 2001, respectively. These intangible assets are not subject to amortization.

SFAS No. 144. “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144)

     PSEG, PSE&G, Power and Energy Holdings

     On January 1, 2002, (SFAS 144) which provides guidance on the accounting for the impairment or disposal of long-lived assets, became effective. For long-lived assets to be held and used, the new rules are similar to previous guidance which required the recognition of an impairment when the undiscounted cash flows will not recover its carrying amount. The impairment to be recognized is measured as the difference between the carrying amount and fair value of the asset. The computation of fair value now removes goodwill from consideration and incorporates a probability-weighted cash flow estimation approach. The previous guidance provided in SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of ” (SFAS 121) is to be applied to assets that are to be disposed of by sale. Additionally, assets qualifying for discontinued operations treatment have been expanded beyond the former major line of business or class of customer approach. Long-lived assets to be disposed of by other than sale now recognize impairment at the date of disposal, but are considered assets to be held and used until that time. There was no impact on the Consolidated Financial Statements of PSEG, PSE&G, Power or Energy Holdings upon adoption of these rules. For additional information, see Note 4. Asset Impairments.

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

     PSEG, PSE&G, Power and Energy Holdings

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

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

     PSE&G and Power

     Power has performed a review of its potential obligations under SFAS 143 and believes that its quantifiable obligations are primarily related to the decommissioning of its nuclear power plants. Prior to the adoption of SFAS 143, amounts collected from PSE&G customers that have been deposited into the Nuclear Decommissioning Trust 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 liability. Beginning January 1, 2003, amounts will be recorded in earnings or in OCI, as appropriate. As of December 31, 2002, Power had a $766 million asset and liability recorded on its Consolidated Balance Sheets for nuclear decommissioning.

127

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

     In addition to the quantifiable obligations, Power identified certain legal obligations that meet the criteria of SFAS 143, which at this time are not quantifiable. These obligations relate to certain industrial establishments subject to the Industrial Site Recovery Act, underground storage tanks subject to the Spill Compensation and Control Act, permits and authorizations, the restoration of an area occupied by a reservoir when the reservoir is no longer needed, an obligation to retire from operation, certain plants prior to the initial burning of fuel from a new plant and the demolition of certain plants and the restoration of the sites when the plants are no longer in service.

     In August 2002, PSE&G filed a petition requesting clarification from the BPU regarding the future cost responsibility for nuclear decommissioning and whether: (a) PSE&G’s customers will continue to pay for such costs; or (b) such customer responsibility will terminate at the end of the four-year transition period on July 31, 2003 and become the sole responsibility of Power. The outcome of this petition will affect the treatment of a material portion of the liability recorded for Power’s nuclear decommissioning obligation. If the BPU determines that PSE&G’s customers will continue to pay for these costs, the majority of the difference between the previously recorded amount of the liability and the liability calculated under SFAS 143 will continue to be deferred on the balance sheet. If the BPU determines that such customer responsibility terminates at the end of the transition period, then the net effect of implementation will be recorded as a one-time benefit as a Cumulative Effect of a Change in Accounting Principle. A decision is expected as part of PSE&G’s electric base rate case, which is expected to be completed prior to July 2003. Although the outcome of this petition cannot be predicted, management believes that the net effect of adopting this accounting standard should be recorded in earnings. Power also has $131 million of liabilities, $7 million of which relates to legal obligations, recorded on its Consolidated Balance Sheets at December 31, 2002 related to the Cost of Removal associated with its fossil generating stations. These potential obligations are required to be reversed upon implementation of SFAS 143.

     Therefore, upon adoption of this standard on January 1, 2003, PSEG and Power will record an adjustment for a Cumulative Effect of a Change in Accounting Principle in the Consolidated Statements of Operations by reducing the existing liabilities to their present value. It is anticipated that the result will be a benefit to net income, and therefore equity, in a range of $300 million to $400 million. Of this amount, $200 million to $300 million relates to interests in certain nuclear units Power purchased from PSE&G which is subject to the BPU issue discussed above, approximately $55 million relates to interests in certain nuclear units Power purchased from Atlantic City Electric Company (ACE) and Delmarva Power and Light Company (DP&L) which is not subject to BPU approval and approximately $70 million relates to the cost of removal liabilities for the fossil units being reversed.

     The BPU could decide that the future cost for decommissioning the nuclear units rests with PSE&G’s customers. If that is the case, the portion of the benefit to equity related to the nuclear units Power purchased from PSE&G would be reversed and a regulatory liability would be established. The $55 million related to the nuclear units purchased from ACE and DP&L and the $70 million related to the cost of removal liabilities for the fossil units would be unaffected.

     PSE&G

     At December 31, 2002, PSE&G had no legal liabilities, as contemplated under SFAS 143, recorded on the consolidated balance sheets and therefore the effect of adoption will not result in an adjustment to the consolidated statement of earnings. PSE&G does, however, have cost of removal liabilities embedded within Accumulated Depreciation pursuant to SFAS 71. Since PSE&G is a regulated enterprise, these amounts will continue to be recorded and presented in Accumulated Depreciation and will be disclosed in accordance with SFAS 143.

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

128

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

     Energy Holdings

     Energy Holdings identified certain legal obligations that met the criteria of SFAS 143 and are not expected to be material to the Consolidated Statement of Operations.

SFAS No. 145, “Rescission of FASB Statements Nos. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections” (SFAS 145)

     PSEG, PSE&G, Power and Energy Holdings

     Effective January 1, 2002, PSEG, PSE&G, Power and Energy Holdings adopted SFAS 145. This Statement rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishments of Debt,” (SFAS 4) and an amendment of that Statement, SFAS No. 64, “Extinguishments of Debt Made to Satisfy Sinking Fund Requirements” (SFAS 64). SFAS 4 required that gains and losses from extinguishments of debt that were included in the determination of net income be aggregated, and if material, classified as an extraordinary item. Since the issuance of SFAS 4, the use of debt extinguishments has become part of the risk management strategy of many companies, representing a type of debt extinguishment that does not meet the criteria for classification as an extraordinary item. Based on this trend, the FASB issued this rescission of SFAS 4 and SFAS 64. Accordingly, under SFAS 145, PSEG now records these gains and losses in Other Income and Other Deductions, respectively. PSEG recorded pre-tax gains of $13 million ($8 million after-tax) from the early retirement of debt as a component of Other Income for the period ended December 31, 2002. Also, PSEG reclassified a pre-tax loss of $3 million ($2 million after-tax) from the early retirement of debt to a component of Other Deductions for the period ended December 31, 2001.

SFAS 133

     PSEG, PSE&G, Power and Energy Holdings

     On January 1, 2001, PSE&G, Power and Energy Holdings adopted SFAS 133. SFAS 133 established accounting and reporting standards for derivative instruments, including certain derivative instruments included in other contracts, and for hedging activities. It requires an entity to recognize the fair value of derivative instruments held as assets or liabilities on the balance sheet. For cash flow hedging purposes, changes in the fair value of the effective portion of the gain or loss on the derivative are reported in Other Comprehensive Income (OCI) or as a Regulatory Asset (Liability), net of tax. Amounts in accumulated OCI are ultimately recognized in earnings when the related hedged forecasted transaction occurs. The change in the fair value of the ineffective portion of the gain or loss on a derivative instrument designated as a cash flow hedge is recorded in earnings. Derivative instruments that have not been designated as hedges are adjusted to fair value through earnings.

     Energy Holdings

     Upon adoption, Energy Holdings recorded a cumulative effect of a change in accounting principle of $9 million, net of tax and a decrease to OCI of $15 million, respectively.

EITF 02-3

     PSE&G and Power

     EITF 02-3 requires all gains and losses on energy trading derivatives to be reported on a net basis. Also, energy trading contracts that are not derivatives will no longer be marked to market. Instead, settlement accounting will be used. EITF 02-3 was effective for all new contracts executed after October 25, 2002 and will require a cumulative effect adjustment to income in the first quarter of 2003 for all contracts executed prior to October 25, 2002. The vast majority of Power’s energy contracts qualify as derivatives under SFAS 133 and will therefore continue to be marked to market. Management believes the impact of adopting this EITF 02-3 will not be material to the financial statements.

129

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

     Pursuant to EITF Issue No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent” (EITF 99-19), PSE&G (prior to the generation-related asset transfer in August 2000) and Power had been recording trading revenues and trading related costs on a gross basis for physical energy and capacity sales and purchases. In accordance with EITF 02-3, beginning in the third quarter of 2002, Power started reporting energy trading revenues and energy trading costs on a net basis and have reclassified prior periods to conform with this net presentation. As a result, both Operating Revenues and Energy Costs were reduced by approximately $1.9 billion, $2.3 billion and $2.6 billion for the years ended December 31, 2002, 2001 and 2000, respectively. This change in presentation did not have an effect on trading margins, net income or cash flows.

Financial Interpretation (FIN) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN 45)

     PSEG, PSE&G, Power and Energy Holdings

     FIN 45 enhances the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee, although PSEG, PSE&G, Power and Energy Holdings do not anticipate the recording of such liabilities will be material to their respective Consolidated Financial Statements. The initial recognition and initial measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. For further information regarding Power’s and Energy Holdings’ respective guarantees, refer to Note 13. Commitments and Contingent Liabilities.

FIN No. 46, “Consolidation of Variable Interest Entities (VIE)” (FIN 46)

     PSEG, PSE&G, Power and Energy Holdings

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

Other

     PSE&G, Power and Energy Holdings

     In connection with the January 2003 EITF meeting, the FASB was requested to reconsider an interpretation of SFAS 133. The interpretation, which is contained in the Derivatives Implementation Group’s C-11 guidance, relates to the pricing of contracts that include broad market indices. In particular, that guidance discusses whether the pricing in a contract that contains broad market indices (e.g., CPI) could qualify as a normal purchase or sale under SFAS 133. PSEG, PSE&G, Power and Energy Holdings are currently reevaluating which contracts, if any, that have previously been designated as normal purchases or sales would now not qualify for this exception. PSEG, PSE&G, Power and Energy Holdings are currently evaluating the effects that this guidance will have on their respective results of operations, financial position and net cash flows.

130

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
Note 3. Change in Accounting Principle
PSE&G and Power
PSE&G and Power has each changed its method of accounting for the classification of assets and liabilities arising from transactions related to energy trading contracts when the right of set-off exists, from a separate presentation of assets and liabilities to a net presentation. PSE&G and Power believe that the right of set-off exists when all of the following conditions are met:
	·	PSE&G or Power and its respective counterparty owes the other determinable amounts;
	·	PSE&G or Power have the right to set off the amount owed with the amount owed by its respective counterparty;
	·	PSE&G or Power intend to set off; and
	·	the right of set-off is enforceable by law.
PSE&G and Power each believe that this change in method of accounting and classification is preferable and more closely represents the economic substance of such transactions. Additionally, the new method reflects PSE&G’s and Power’s existing practice of settling amounts net, and is consistent with the classification of trading revenues and trading costs on a net basis on the Consolidated Statements of Operations.
As of and for the year ended December 31, 2002, there was no effect on revenues, expenses, net income or cash flows as a result of this change. Affected amounts on the Consolidated Balance Sheets have been reclassified for all periods presented. The impact of this reclassification was a decrease as of December 31, 2001 in PSEG’s current assets, noncurrent assets, current liabilities and noncurrent liabilities by approximately $266 million ($240 million related to Power and $26 million related to PSE&G), $17 million (primarily all related to Power), $271 million ($240 million related to Power and $31 million related to PSE&G) and $12 million (a $17 million decrease related to Power and a $5 million increase related to PSE&G), respectively.
Note 4. Asset Impairments
Energy Holdings
As of December 31, 2001, Energy Holdings’ aggregate investment exposure in Argentina was $632 million, including certain loss contingencies. These investments included a 90% owned distribution company, Empresa Distribuidora de Electricidad de Entre Rios S.A. (EDEERSA); minority interests in three distribution companies, Empresa Distribuidora de Energia Norte S.A. (EDEN), Empresa Distribuidora de Energia Sur S.A. (EDES) and Empresa Distribuidora La Plata S.A. (EDELAP); and two generating companies, Central Termica San Nicolas S.A. (CTSN), and AES Parana S.C.A. (Parana) which were under contract for sale to certain subsidiaries of The AES Corporation (AES). In June 2002, Energy Holdings determined that the carrying value of its Argentine investments was impaired. The combination of the year-to-date operating losses, goodwill impairment at EDEERSA, write-down of $497 million for all Argentine assets, and certain loss contingencies resulted in a pre-tax charge to earnings of $623 million ($406 million after-tax). In connection with the write-down of Energy Holdings’ Argentine assets, Energy Holdings recorded a net deferred tax asset of $217 million. Energy Holdings has reviewed this deferred tax asset for recoverability and no reserve is required. For a discussion of certain contingencies related to Argentine investments, see Note 13. Commitments and Contingent Liabilities.
131

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

     The tables below provide pre-tax and after-tax impacts of the various impairment charges, results of operations and accruals of loss contingencies recorded with respect to Energy Holdings’ investments in Argentina for the periods ended December 31, 2002 and 2001.

	(Pre-Tax) December 31,					(After-Tax) December 31,
	2002			2001		2002			2001
	(Millions)
(Losses) Earnings Before Local Taxes-EDEERSA	$	(59	)	$	21	$	(40	)	$	13
Write-down of EDEERSA		(94	)		—		(61	)		—
Write-down of Assets Held for Sale to AES		(403	)		—		(262	)		—
Loss Contingencies and Other		(11	)		—		(7	)		—
Goodwill Impairment-EDEERSA		(56	)		—		(36	)		—
Total	$	(623	)	$	21	$	(406	)	$	13

     The asset impairments are described in more detail below.

     EDEERSA

     In January 2002, the Argentine Federal government enacted a temporary emergency law that imposed various changes to the concession contracts in effect between electric distributors and local and federal regulators. The Province of Entre Rios enjoined in the emergency law impacting operations at EDEERSA. The Argentine government and regulators made unilateral decisions to abrogate key components of the tariff concessions related to public utilities. In addition to the emergency law, the Province of Entre Rios unilaterally enacted other laws which forced EDEERSA to accept provincial bonds, known as “federales”, as payment for electric service in lieu of Argentine Pesos. Federales cannot be exchanged outside of the Entre Rios Province. In addition, restrictions were imposed on EDEERSA’s ability to terminate service to a majority of customers in the event of nonpayment.

     Such laws significantly restricted Global’s ability to control the operations of EDEERSA, as unilateral changes enacted by the government restricted Global’s ability to manage its operations to reduce the financial losses incurred as a result of such actions. In the second quarter of 2002, Global believed such temporary measures were likely to be permanent in nature as a credible solution to the economic crisis in Argentina, including International Monetary Fund (IMF) support, was not probable. The more significant provisions included in the initial emergency law remain in effect. As a result of a loss of control of the financial and operational management of EDEERSA, the investment is recorded in accordance with the equity method of accounting as of December 31, 2002. Global has no significant exposure remaining related to EDEERSA as of December 31, 2002.

     As of January 1, 2002, goodwill related to Energy Holdings’ investment in EDEERSA was approximately $56 million and was included in Energy Holdings’ previously disclosed investment exposure. As part of the adoption of SFAS 142, Energy Holdings determined that this goodwill was impaired and all of the goodwill was written-off as of January 1, 2002. See Note 2. New Accounting Standards for a further discussion of the goodwill analysis.

     Based on actual and projected operating losses at EDEERSA and the continued economic uncertainty in Argentina, Energy Holdings determined that it was necessary to test these assets for impairment. Such impairment analyses were completed as of June 30, 2002. As a result of these analyses, Energy Holdings determined that these assets were completely impaired under SFAS 144. Energy Holdings recorded total charges and losses of $213 million, pre-tax, related to this investment for the year ended December 31, 2002. These pre-tax charges consisted of goodwill impairment charges (calculated under SFAS 142) of $56 million, operating losses of $59 million, of which $45 million was recorded in the first quarter of 2002, a write-off of the remaining $94 million net asset balance pursuant to the SFAS 144 impairment analysis and loss contingencies and other items of $4 million. The total after-tax charges and losses related to this investment were $139 million for the period ended December 31, 2002.

132

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

     Energy Holdings’ share of the pre-tax (Losses) Earnings for EDEERSA are included in the Consolidated Statements of Operations as indicated in the following table:

	December 31,
	2002(A)			2001(B)
	(Millions)
Operating Revenues	$	19		$	63
Operating Expenses		14			41
Operating Income		5			22
Other Losses – Foreign Currency Transaction Loss		(68	)		—
Minority Interest and Other		4			( 1	)
(Loss) Earnings before Taxes	$	(59	)	$	21

	(A)	In the second quarter of 2002, as a result of a loss of control of EDEERSA, Energy Holdings accounted for this investment in accordance with the equity method of accounting.
	(B)	Operating results for EDEERSA included $7 million of revenues recorded in accordance with the equity method of accounting for the six months ended June 30, 2001. In the third quarter of 2001, Global recorded EDEERSA as a consolidated entity as it was a majority-owned investment.
Stock Purchase Agreement
On August 24, 2001, Global entered into a Stock Purchase Agreement with AES to sell its minority interests in EDEN, EDES, EDELAP, CTSN and Parana, to certain subsidiaries of AES. In connection with the terms of the Stock Purchase Agreement, Global accrued interest and other receivables of $17 million through February 6, 2002, which were direct obligations of AES. On February 6, 2002, AES notified Global that it was terminating the Stock Purchase Agreement. In the Notice of Termination, AES alleged that a Political Risk Event, within the meaning of the Stock Purchase Agreement, had occurred by virtue of certain decrees of the Government of Argentina, thereby giving AES the right to terminate the Stock Purchase Agreement. As discussed previously, Energy Holdings recorded a Write-Down of Project Investments of $403 million, pre-tax, net of the reduction discussed below, for the year ended December 31, 2002. Global filed suit in New York State Supreme Court for New York County against AES to enforce its rights under the Stock Purchase Agreement. A settlement was reached in October 2002 between the parties under which Global will transfer its minority ownership interest in EDEN, EDES, EDELAP, Parana and CTSN to AES. AES paid Global $15 million under the settlement and, in addition, has issued promissory notes which should yield an additional $15 million, plus interest at 12%, maturing through July 2003. In the fourth quarter of 2002, Energy Holdings assessed the collectibility of the notes receivable and recognized $9 million of Operating Income. This amount was recorded as a reduction in the Write-Down of Project Investments. In February 2003, Energy Holdings received the first note installment totaling $5 million, plus interest.
133

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Note 5. Discontinued Operations

Energy Holdings

     Energy Technologies’ Investments

     Energy Technologies is primarily comprised of 11 heating, ventilating and air conditioning (HVAC) and mechanical operating companies. In June 2002, Energy Holdings adopted a plan to sell its interests in the HVAC/mechanical operating companies. The sale of these companies is expected to be completed by June 30, 2003. Energy Holdings has retained the services of an investment-banking firm to market these companies to interested parties. The HVAC/mechanical operating companies meet the criteria for classification as components of discontinued operations and all prior periods have been reclassified to conform to the current year’s presentation.

     In addition to the pre-tax goodwill impairment of $53 million recorded in accordance with the adoption of SFAS 142, Energy Holdings reviewed this investment for impairment in accordance with SFAS 144 and has further reduced the carrying value of the 11 HVAC/mechanical operating companies to their fair value less costs to sell and recorded a loss on disposal for the year ended December 31, 2002 of $21 million, net of $11 million in taxes. Energy Holdings’ remaining investment position in Energy Technologies is approximately $56 million, of which $32 million relates to deferred tax assets from discontinued operations and $12 million relates to certain intercompany payables included in Current Liabilities of Discontinued Operations. For a discussion of these intercompany payables included in the Current Liabilities of Discontinued Operations, see Note 22. Related-Party Transactions.

     Operating results of the HVAC/mechanical operating companies, less certain allocated costs from Energy Holdings, have been reclassified into discontinued operations in the Consolidated Statements of Operations. The results of operations of these discontinued operations for the periods ended December 31, 2002, 2001 and 2000, respectively, are displayed below:

	Years Ended December 31,
	2002			2001			2000
	(Millions)
Operating Revenues	$	378		$	441		$	316
Operating Loss	$	(30	)	$	(31	)	$	(20	)
Loss Before Income Taxes	$	(32	)	$	(34	)	$	(17	)
Net Loss	$	(21	)	$	(22	)	$	(12	)

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

	As of December 31,
	2002		2001
	(Millions)
Current Assets	$	82	$	152
Noncurrent Assets		25		74
Total Assets	$	107	$	226
Current Liabilities	$	85	$	76
Noncurrent Liabilities		5		2
Long-Term Debt		5		1
Total Liabilities	$	95		79

134

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Tanir Bavi

     In the fourth quarter of 2002, Global sold its 74% interest in Tanir Bavi, a 220 MW barge mounted, combined-cycle generating facility in India. Tanir Bavi meets the criteria for classification as a component of discontinued operations and all prior periods have been reclassified to conform to the current year’s presentation. Global reduced the carrying value of Tanir Bavi to the contracted sales price of $45 million and recorded a loss on disposal of $14 million (after-tax) for the year-ended December 31, 2002. The operating results of Tanir Bavi for the years ended December 31, 2002 and 2001 yielded income of $5 million and $7 million (after-tax), respectively.

     For information regarding the goodwill impairment associated with Tanir Bavi, see Note 2. New Accounting Standards.

     Global’s share of operating results of this discontinued operation are summarized in the following table:

	Years Ended December 31,
	2002		2001 (A)
	(Millions)
Operating Revenues	$	61	$	56
Operating Income	$	23	$	16
Income Before Income Taxes	$	7	$	14
Net Income	$	5	$	7

(A)  Commerical operations at Tanir Bavi began in 2001.

     The carrying amounts of the assets and liabilities of Tanir Bavi, as of December 31, 2001, have been reclassified into Current Assets of Discontinued Operations and Current Liabilities of Discontinued Operations, respectively, in the Consolidated Balance Sheets. The carrying amounts of the major classes of assets and liabilities of Tanir Bavi, as of December 31, 2001, are summarized in the following tables:

	As of December 31, 2001
	(Millions)
Current Assets		$	37
Net Property, Plant and Equipment			190
Noncurrent Assets			30
Total Assets		$	257
Current Liabilities		$	45
Noncurrent Liabilities			19
Long-Term Debt			108
Total Liabilities		$	172

135

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Note 6. Regulatory Issues and Accounting Impacts of Deregulation

New Jersey Energy Master Plan Proceedings and Related Orders

     PSE&G and Power

     Following the enactment of the New Jersey Electric Discount and Energy Competition Act (Energy Competition Act), the BPU issued its Final Order in 1999 relating to PSE&G’s rate unbundling, stranded costs and restructuring proceedings (Final Order). This Final Order deregulated the electric generation business and set the stage to deregulate the gas supply business in New Jersey. As a result of this process, PSE&G transferred its generation business to Power in August 2000 and the gas supply business to Power in May 2002. The electric business was transferred at the BPU prescribed price of $2.4 billion, plus $343 million for the book value of the related materials and supplies. PSE&G transferred its gas inventories and contracts to Power and its subsidiaries in May 2002 for approximately $183 million.

     Also in the Final Order, the BPU concluded that PSE&G should recover up to $2.9 billion (net of tax) of its electric generation-related stranded costs through securitization of $2.4 billion, plus an estimated $125 million of transaction costs, and an opportunity to recover up to $540 million (net of tax) of its unsecuritized generation-related stranded costs on a net present value basis. The $540 million is subject to recovery through a market transition charge (MTC) included in Operating Revenues through the transition period ending July 31, 2003. PSE&G remits the MTC revenues to Power as part of the BGS contract as provided for by the Final Order which is included in operating revenues.

     On January 31, 2001, $2.5 billion of securitization bonds (non-recourse asset backed securities) were issued by PSE&G Transition Funding LLC (Transition Funding), in eight classes with maturities ranging from 1 year to 15 years. Also on January 31, 2001, PSE&G received payment from Power on its $2.8 billion promissory note used to finance the transfer of PSE&G’s generation business. The proceeds from these transactions were used to pay for certain debt issuance and related costs for securitization, retire a portion of PSE&G’s outstanding short-term debt, reduce PSE&G common equity, loan funds to PSEG and make various short-term investments in accordance with the Final Order.

     In order to properly recognize the recovery of the allowed unsecuritized stranded costs over the transition period, PSE&G recorded a charge to net income of $88 million, pre-tax, or $52 million, after tax, in the third quarter of 2000 for the cumulative amount of estimated collections in excess of the allowed unsecuritized stranded costs from August 1, 1999 through September 30, 2000. As of December 31, 2002, the amount of estimated collections in excess of the allowed unsecuritized stranded costs was $189 million. For additional information, see Note 7. Regulatory Assets and Liabilities. After deferrals, pre-tax MTC revenues recognized were $221 million in 1999, $239 million in 2000, $196 million in 2001 and $98 million in 2002. In 2003, PSE&G expects to record approximately $115 million in pre-tax MTC revenues.

Note 7. Regulatory Assets and Liabilities

PSE&G

     PSE&G prepares its financial statements in accordance with the provisions of SFAS 71. A regulated utility is required to defer the recognition of costs (a regulatory asset) or the recognition of obligations (a regulatory liability) if it is probable that, through the rate-making process, there will be a corresponding increase or decrease in future rates. Accordingly, PSE&G has deferred certain costs, which will be amortized over various future periods. These costs are deferred based on rate orders issued by the BPU or the FERC and PSE&G’s experience with prior rate cases. As of December 31, 2002, approximately 87% of PSE&G’s regulatory assets were deferred based on written rate orders. Regulatory assets recorded on a basis other than by an issued rate order have less certainty of recovery

136

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

since they can be disallowed in the future by regulatory authorities. However, PSE&G has experienced no material disallowances in the past. PSE&G believes that all of its regulatory assets are probable of recovery.

     As of December 31, 2002 and 2001, respectively, PSE&G had deferred the following regulatory assets and liabilities on the Consolidated Balance Sheets:

	As of December 31,
	2002		2001		Recovery/Refund Period
	(Millions)
Regulatory Assets
Stranded Costs To Be Recovered	$	3,885	$	4,105	Through December 2015	(1)(2)
Deferred Income Taxes		328		302	Various
OPEB-Related Costs		193		212	Through December 2012	(2)
Societal Benefits Charges (SBC)		—		4
Manufactured Gas Plant Remediation Costs		115		87	Various	(2)
Unamortized Loss on Reacquired Debt and Debt Expense		86		92	Over remaining debt life	(1)
Underrecovered Gas Costs		154		117	Through September 2004	(1)
Unrealized Losses on Gas Contracts		—		137
Unrealized Losses on Interest Rate Swap		66		18	Through December 2015	(2)
Repair Allowance Taxes		93		84	Through August 2004	(2)(3)
Decontamination and Decommissioning Costs		21		25	Through December 2007
Plant and Regulatory Study Costs		25		32	Through December 2021	(2)
Regulatory Restructuring Costs		26		27	Through July 2007	(1)(3)
Total Regulatory Assets	$	4,992	$	5,242
Regulatory Liabilities
Excess Depreciation Reserve	$	171	$	319	Through July 31, 2003	(2)
Non-Utility Generation Transition Charge (NTC)		27		46	Through August 2004	(1)(3)
SBC		50		—	Through August 2004	(1)(2)(3)
Other		4		3	Various	(1)
Total Regulatory Liabilities	$	252	$	368

(1)	Recovered/Refunded with interest
(2)	Recoverable/Refundable per specific rate order
(3)	Recovery/Refunding is pending the outcome of the current electric base rate or deferral case
All regulatory assets and liabilities are excluded from PSE&G’s rate base unless otherwise noted. The descriptions below define certain regulatory items.
Stranded Costs To Be Recovered: This reflects deferred costs to be recovered through the securitization transition charge that was authorized by the BPU. Funds collected through the securitization transition charge will be used to make the future interest and principal payments on the transition bonds.
Deferred Income Taxes: This amount represents the portion of deferred income taxes that will be recovered through future rates, based upon established regulatory practices, which permit the recovery of current taxes. Accordingly, this regulatory asset is offset by a deferred tax liability and is expected to be recovered, without interest, over the period the underlying book-tax timing differences reverse and become current taxes.
137

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

     OPEB-Related Costs: Includes costs associated with the adoption of SFAS No. 106. “Employers’ Accounting for Benefits Other Than Pensions” which were deferred in accordance with EITF Issue 92-12, “Accounting for OPEB Costs by Rate Regulated Enterprises.”

     SBC: The SBC, as authorized by the BPU 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 consumer education; 5) electric bad debt expenses; and 6) MTC overrecovery. All components except for MTC accrue interest.

     Manufactured Gas Plant Remediation Costs: Represents a three-year estimate of the environmental investigation and remediation program costs that are probable of recovery in future rates.

     Unamortized Loss on Reacquired Debt and Debt Expense: Represents bond issuance costs, premiums, discounts and losses on reacquired long-term debt.

     Underrecovered Gas Costs: Represents PSE&G’s gas costs in excess of the amount included in rates and probable of recovery in the future. The current portion of the balance does not accrue interest.

     NTC: This 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 BGS costs in excess of current rates, as approved by the BPU.

     Unrealized Losses on Gas Contracts: This represents the recoverable portion of unrealized losses associated with contracts used in PSE&G’s gas distribution business.

     Unrealized Losses on Interest Rate Swap: This represents the costs related to Transition Funding’s interest rate swap that will be recovered without interest over the life of Transition Funding’s transition bonds. This asset is offset by a derivative liability on the balance sheet.

     Repair Allowance Taxes: This represents tax, interest and carrying charges relating to disallowed tax deductions for repair allowance as authorized by the BPU.

     Decontamination and Decommissioning Costs: These costs are related to PSE&G’s portion of the obligation for nuclear decontamination and decommissioning costs of US Department of Energy nuclear sites dating back prior to the generation asset transfer to Power in 2000.

     Plant and Regulatory Study Costs: These are costs incurred by PSE&G required by the BPU related to current and future operations, including safety, planning, management and construction.

     Regulatory Restructuring Costs: These are costs related to the restructuring of the energy industry in New Jersey through the Energy Competition Act and include such items as the system design work necessary 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.

     Excess Depreciation Reserve: As required by the BPU, PSE&G reduced its depreciation reserve for its electric distribution assets and recorded such amount as a regulatory liability.

     Other Regulatory Liabilities: This includes the following: 1) amounts collected from customers in order for Transition Funding to obtain a AAA rating on its transition bonds; and 2) amounts available to fund consumer education discounts.

138

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Note 8. Long-Term Investments

	December 31,
	2002		2001
Energy Holdings:	(Millions)
Leveraged Leases	$	2,844	$	2,784
Partnerships:
General Partnerships		43		44
Limited Partnerships		441		615
Total Partnerships		484		659
Corporate Joint Ventures		1,004		1,115
Securities		6		6
Other Investments (A)		32		50
Total Long-Term Investments of Energy Holdings		4,370		4,614
PSE&G (B)		123		112
Power (C)		78		36
Other Investments (D)		10		6
Total Long-Term Investments	$	4,581	$	4,768

	(A)	Primarily relates to Demand Side Management (DSM) investments at Resources.
	(B)	Primarily relates to life insurance and supplemental benefits of $113 million and $102 million as of December 31, 2002 and 2001 respectively.
	(C)	Amounts represent Sulfur Dioxide (SO2) and Nitrogen Oxide (NOx)emission credits held for future use.
	(D)	Amounts represent investments at PSEG (parent company).
Energy Holdings
Leveraged Leases
Energy Holdings’ net investment, through Resources, in leveraged leases is comprised of the following elements:

	December 31,
	2002			2001
	(Millions)
Lease rents receivable	$	3,429		$	3,644
Estimated residual value of leased assets		1,414			1,414
		4,843			5,058
Unearned and deferred income		(1,999	)	(2,274		)
Total investments in leveraged leases		2,844			2,784
Deferred taxes		(1,325	)	(1,175		)
Net investment in leveraged leases	$	1,519		$	1,609

     Resources’ pre-tax income and income tax effects related to investments in leveraged leases are as follows:

	Years Ended December 31,
	2002			2001			2000
	(Millions)
Pre-tax income	$	251		$	206		$	163
Income tax effect on pre-tax income	$	92		$	62		$	58
Amortization of investment tax credits	$	(1	)		$(1	)	$	(1	)

139

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

     Resources’ initial investment in leveraged leases represents approximately 15% to 20% of the purchase price of the leveraged leased property. The balance is provided by third-party financing in the form of non-recourse long-term debt which is secured by the property.

     In 2002, Resources invested $31 million in a leveraged lease financing of a district heating network leased to Linz Gas/Warme GmbH, a district heating utility providing service to the residents of Linz, Austria, and the surrounding area.

     In November 2002, Resources terminated its two lease transactions with affiliates of TXU-Europe, the Peterborough and Kings Lynn facilities due to an uncured default under the lease financial covenants. Resources received cash proceeds of $183 million, recognizing an after-tax gain of $4 million. As a result of these lease terminations, Resources will pay income taxes of $115 million in 2003.

     In 2001, Resources negotiated the early termination of nine leveraged leases and received cash proceeds of $104 million, recognizing an after-tax gain of $10 million. As a result of these lease terminations, Resources paid income taxes of $87 million in 2002.

     In 2000, Resources negotiated the early termination of four leveraged leases and received cash proceeds of $89 million, recognizing an after-tax gain of $24 million. As a result of these lease terminations, Resources paid income taxes of $24 million in 2001.

     Partnership Investments and Corporate Joint Ventures

     Energy Holdings’ partnership investments of $484 million and corporate joint ventures of approximately $1 billion are those of Resources, Global and EGDC.

     Investments in and Advances to Affiliates

     Investments in net assets of affiliated companies accounted for under the equity method of accounting by Global amounted to $1.3 billion and $1.5 billion at December 31, 2002 and December 31, 2001, respectively. During the three years ended December 31, 2002, 2001 and 2000, the amount of dividends from these investments was $64 million, $51 million, and $107 million respectively. Global’s share of income and cash flow distribution percentages currently range from 16% to 50%. Interest is earned on loans made to various projects. Such loans earned rates of interest ranging from 7.5% to 20% during 2002 and 2001.

140

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

      Summarized results of operations and financial position of all affiliates in which Global uses the equity method of accounting are presented below:

	Foreign			Domestic		Total
	(Millions)
For the Year Ended December 31, 2002
Condensed Statement of Operations Information
Revenue	$	1,125		$	492	$	1,617
Gross Profit	$	413		$	149		562
Minority Interest	$	(10	)	$	—	$	(10	)
Net Income	$	148		$	6	$	154
As of December 31, 2002
Condensed Balance Sheet Information
Assets:
Current Assets	$	494		$	110	$	604
Property, Plant and Equipment		1,597			1,193		2,790
Goodwill		586			50		636
Other Noncurrent Assets		489			24		513
Total Assets	$	3,166		$	1,377	$	4,543
Liabilities:
Current Liabilities	$	464		$	56	$	520
Debt*		868			641		1,509
Other Noncurrent Liabilities		183			72		255
Minority Interest		—		43			43
Total Liabilities		1,558			769		2,327
Equity		1,608			608		2,216
Total Liabilities and Equity	$	3,166		$	1,377	$	4,543
	Foreign			Domestic		Total
	(Millions)
For the Year Ended December 31, 2001
Condensed Statement of Operations Information
Revenue	$	1,099		$	473	$	1,572
Gross Profit	$	416		$	165	$	581
Minority Interest	$	(20	)	$	—	$	(20	)
Net Income	$	180		$	91	$	271
As of December 31, 2001
Condensed Balance Sheet Information
Assets:
Current Assets	$	366		$	131	$	497
Property, Plant and Equipment		1,625			1,406		3,031
Goodwill		863			50		913
Other Noncurrent Assets		481			23		504
Total Assets	$	3,335		$	1,610	$	4,945
Liabilities:
Current Liabilities	$	487		$	109	$	596
Debt*		802			658		1,460
Other Noncurrent Liabilities		245			212		457
Minority Interest		25			—		25
Total Liabilities		1,559			979		2,538
Equity		1,776			631		2,407
Total Liabilities and Equity	$	3,335		$	1,610	$	4,945

141

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

	Foreign			Domestic		Total
	(Millions)
For the Year Ended December 31, 2000
Condensed Statement of Operations Information
Revenue	$	1,334		$	452	$	1,786
Gross Profit	$	532		$	256	$	788
Minority Interest	$	(24	)	$	—	$	(24	)
Net Income	$	190		$	162	$	352

* Debt is non-recourse to PSEG, Energy Holdings and Global

     Other Investments

     Resources also has limited partnership investments in two leveraged buyout funds, a collateralized bond obligation structure, a clean air facility and solar electric generating systems. Resources’ total investment in limited partnerships was $118 million, and $163 million as of December 31, 2002 and 2001, respectively.

     Included in the limited partnership amounts above are interests in two leveraged buyout funds that hold publicly traded securities, which are managed by KKR Associates L.P., (KKR). The book value of the investment in the leveraged buyout funds was $93 million and $130 million as of December 31, 2002 and December 31, 2001, respectively. The largest single investment in the funds held indirectly by Resources is the investment in approximately 16,847,000 shares of common stock of Borden, Inc., having a book value of $48 million and $81 million as of December 31, 2002 and 2001, respectively.

     Resources applies fair value accounting to investments in the funds where publicly traded market prices are available as described in Note 1. Organization and Summary of Significant Accounting Policies. Approximately $24 million and $34 million represent the fair value of Resources’ share of the publicly traded securities in the funds as of December 31, 2002 and 2001, respectively. For a discussion of other than temporary impairments of non-publicly traded equity securities within certain leveraged buyout funds at Resources, see Note 12. Risk Management.

     During January and February 2001, KKR sold its interest in FleetBoston Financial Corporation. Resources received cash proceeds of $35 million and recorded a $4 million pre-tax gain as a result of this transaction. In August 2001, KKR sold its interest in Gillette Corporation. Resources received cash proceeds of $30 million from the sale, which had a book value of $31 million.

142

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Note 9. Purchase Business Combinations/Asset Acquisitions

Power

     On December 6, 2002, Power purchased Wisvest Connecticut LLC, which owns the Bridgeport Harbor Station (BHS), the New Haven Harbor Station (NHHS) and the related assets and liabilities, from Wisvest Corporation (Wisvest), a subsidiary of Wisconsin Energy Corporation. The name of Wisvest Connecticut LLC was subsequently changed to PSEG Power Connecticut LLC.

     The aggregate purchase price was approximately $272 million, which consisted of approximately $269 million of cash paid to Wisvest and approximately $3 million of direct acquisition costs necessary to conduct the transaction, which were paid to third parties.

     Power has not finalized the allocation of the purchase price as of December 31, 2002. As shown in the table below, an estimation of this allocation was prepared and recorded as of December 6, 2002. Power Connecticut’s results of operations were reflected in the Consolidated Statements of Operations from December 6, 2002 through December 31, 2002.

	As of December 6, 2002
	(Millions)
Current Assets		$	26
Property, Plant and Equipment			237
Intangible Assets			44
Total Assets Acquired			307
Current Liabilities			16
Noncurrent Liabilities			19
Total Liabilities Assumed			35
Net Assets Acquired		$	272

     Approximately $42 million of the intangible assets consisted of SO₂ allowances, which can be sold on the open market or used to offset plant emissions. These allowances have an indefinite life.

Energy Holdings

     In June 2002, Global completed a 35% acquisition of the 590MW (electric) and 618 MW (thermal) coal-fired Skawina CHP Plant (Skawina), located in Poland, and purchased an additional approximate 15%, increasing its ownership to approximately 50%. The purchase price of this ownership interest was $31 million and was allocated $18 million to Current Assets, $51 million to Property, Plant and Equipment, $14 million to Current Liabilities, $9 million to Noncurrent Liabilities and $15 million to minority interest.

     During the fourth quarter of 2002, Global increased its interest in GWF Energy LLC (GWF Energy), which includes three new gas-fired peaking plants located in California, to 76%. The partnership agreement stipulates that the condition for control is indicated at 75% or greater ownership interest of the voting stock. Global’s investment in GWF Energy was recorded in accordance with the equity method of accounting as of September 30, 2002. Global’s investment in GWF Energy is recorded as a consolidated entity as of December 31, 2002 and for the three months ended December 31, 2002. The partner in this investment, Harbinger GWF LLC, has the right to buy back from Global up to one-half of the reduction of its equity ownership in GWF Energy from the 50% ownership level. This right terminates at the earlier of project financing or September 30, 2003.

143

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Note 10. Schedule of Consolidated Capital Stock and Other Securities

	Outstanding Shares At December 31, 2002	Current Redemption Price Per Share	December 31, 2002		December 31, 2001
			(Millions)
PSEG Common Stock (no par) (A)
Authorized 500,000,000 shares; issued and outstanding (at
December 31, 2001, 205,839,018 shares)	225,267,347		$	3,075	$	2,618
PSEG Preferred Securities (B)
PSEG Quarterly Guaranteed Preferred Beneficial Interest in
PSEG’s Subordinated Debentures (D) (F)
7.44%	9,000,000	—	$	225	$	225
Floating Rate (LIBOR + 1.22%)	150,000	—		150		150
7.25%	6,000,000	—		150		150
8.75% (F)	7,200,000	—		180		—
Total Quarterly Guaranteed Preferred Beneficial Interest in
PSEG’s Subordinated Debentures			$	705	$	525
PSEG Participating Units
10.25% (G)	9,200,000	—	$	460	$	—
PSE&G Preferred Securities
PSE&G Cumulative Preferred Stock (C) without Mandatory
Redemption (D) $100 par value series
4.08%	146,221	103.00	$	15	$	15
4.18%	116,958	103.00		12		12
4.30%	149,478	102.75		15		15
5.05%	104,002	103.00		10		10
5.28%	117,864	103.00		12		12
6.92%	160,711	—		16		16
Total Preferred Stock without Mandatory Redemption			$	80	$	80
PSE&G 8.00% Monthly Guaranteed Preferred Beneficial
Interest in Subordinated Debentures (D)(E)	2,400,000	25.00	$	60	$	60
PSE&G 8.125% Quarterly Guaranteed Preferred Beneficial Interest in
PSE&G’s Subordinated Debentures (D)(E)	3,800,000	—	$	95	$	95

(A)	In 1999, PSEG’s Board of Directors authorized the repurchase of up to 30 million shares of its common stock in the open market. As of December 31, 2001, PSEG repurchased approximately 26.5 million shares of common stock at a cost of approximately $997 million. No shares were repurchased in 2002. The repurchased shares have been held as treasury stock or used for other corporate purposes.
	In November 2002, PSEG issued 17.25 million shares of common stock for approximately $458 million, with net proceeds of $443 million. In addition, in 2002, PSEG began issuing new shares under the Dividend Reinvestment and Stock Purchase Plan (DRASPP) and the Employee Stock Purchase Plan (ESPP), rather than purchasing them on the open market. For the year ended December 31, 2002, PSEG issued approximately 2.2 million shares for approximately $78 million under these plans. Total authorized and unissued shares of common stock available for issuance through PSEG’s DRASPP, ESPP and various employee benefit plans amounted to 5,663,081.
(B)	PSEG has authorized a class of 50,000,000 shares of Preferred Stock without par value, none of which is outstanding.
144

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
(C)	At December 31, 2002, there were an aggregate of 6,704,766 shares of $100 par value and 10,000,000 shares of $25 par value Cumulative Preferred Stock which were authorized and unissued and which, upon issuance, may or may not provide for mandatory sinking fund redemption. If dividends upon any shares of Preferred Stock are in arrears in an amount equal to the annual dividend thereon, voting rights for the election of a majority of PSE&G’s Board of Directors become operative and continue until all accumulated and unpaid dividends thereon have been paid, whereupon all such voting rights cease, subject to being revived from time to time.
	There are no arrearages in cumulative preferred stock and no voting rights for preferred shares. No preferred stock agreement contains any liquidation preferences in excess of par or stated values or any “deemed” liquidation events.
(D)	At December 31, 2002 and 2001, the annual dividend requirement of PSEG’s Trust Preferred Securities (Guaranteed Preferred Beneficial Interest in PSEG’s Subordinated Debentures) including those issued in connection with the Participating Units and their embedded costs was $101,330,00 and 5.99% and $38,433,000 and 4.91%, respectively.
	At December 31, 2002 and 2001, the annual dividend requirement and embedded dividend rate for PSE&G’s Preferred Stock without mandatory redemption was $3,987,867 and 5.03%, $10,127,383 and 5.03%, respectively.
	At December 31, 2002 and 2001, the annual dividend requirement and embedded cost of the Monthly Income Preferred Securities (Guaranteed Preferred Beneficial Interest in PSE&G’s Subordinated Debentures) was $4,800,000 and 4.90%, $7,768,750 and 4.90%, respectively.
	At December 31, 2002 and 2001, the annual dividend requirement of the Quarterly Income Preferred Securities (Guaranteed Preferred Beneficial Interest in PSE&G’s Subordinated Debentures) and their embedded costs were $7,718,750 and 4.97%, $16,439,584 and 4.97%, respectively.
(E)	PSE&G Capital L.P., PSE&G Capital Trust I and PSE&G Capital Trust II were formed and are controlled by PSE&G for the purpose of issuing Monthly and Quarterly Income Preferred Securities (Monthly and Quarterly Guaranteed Preferred Beneficial Interest in PSE&G’s Subordinated Debentures). The proceeds were loaned to PSE&G and are evidenced by PSE&G’s Deferrable Interest Subordinated Debentures. If and for as long as payments on PSE&G’s Deferrable Interest Subordinated Debentures have been deferred, or PSE&G has defaulted on the indentures related thereto or its guarantees thereof, PSE&G may not pay any dividends on its common and preferred stock. The Subordinated Debentures and the indentures constitute a full and unconditional guarantee by PSE&G of the Preferred Securities issued by the partnership and the trusts.
(F)	Enterprise Capital Trust I, Enterprise Capital Trust II, Enterprise Capital Trust III, Enterprise Capital Trust IV and PSEG Funding Trust II were formed and are controlled by PSEG for the purpose of issuing Quarterly Trust Preferred Securities (Quarterly Guaranteed Preferred Beneficial Interest in PSEG’s Subordinated Debentures). The proceeds were loaned to PSEG and are evidenced by Deferrable Interest Subordinated Debentures. If and for as long as payments on the Deferrable Interest Subordinated Debentures have been deferred, or PSEG had defaulted on the indentures related thereto or its guarantees thereof, PSEG may not pay any dividends on its common and preferred stock. The Subordinated Debentures constitute PSEG’s full and unconditional guarantee of the Preferred Securities issued by the trusts.
	In December 2002, PSEG Funding Trust II issued $180 million of 8.75% Trust Preferred Securities.
(G)	In September 2002, PSEG Funding Trust I issued 9.2 million Participating Units with a stated amount of $50 per unit. Each unit consists of a 6.25% trust preferred security due 2007 having a liquidation value of $50, and a stock purchase contract obligating the purchasers to purchase shares of PSEG common stock in an amount equal to $50 on November 16, 2005. In exchange for the obligations under the purchase contract, the purchasers will receive quarterly contract adjustment payments at the annual rate of 4.00% until such date. The number of new shares issued on November 16, 2005 will depend upon the average closing price per share of PSEG common stock for the 20 consecutive trading days ending the third trading day immediately preceding November 16, 2005. Based on the formula described in the purchase contract, at that time PSEG
145

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

will issue between 11,429,139 and 13,714,967 shares of its common stock. The net proceeds from the sale of the Participating Units was $446.2 million. In connection with the issuance of the Participating Units, PSEG recorded a $54 million reduction to equity associated with the stock purchase contracts.
 

PSEG applies SFAS No. 128, “Earnings Per Share”, specifically the treasury stock method, when accounting for the forward purchase contract associated with these participating units. If PSEG’s common stock price were to exceed $40.25 per share, shares would be added to the diluted earnings per share calculation. For additional information, see Note 18. Stock Options and Employee Stock Purchase Plan.
 

Fair Value of Preferred Securities

     The estimated fair values were determined using the market quotations or values of instruments with similar terms, credit ratings, remaining maturities and redemptions as of December 31, 2002 and 2001, respectively.

	As of December 31, 2002				As of December 31, 2001
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(Millions)
PSE&G Cumulative Preferred Stock	$	80	$	59	$	80	$	66
Monthly Guaranteed Preferred Beneficial Interest in
PSE&G’s Subordinated Debentures		60		62		60		60
Quarterly Guaranteed Preferred Beneficial Interest in
PSE&G’s Subordinated Debentures		95		97		95		96
Quarterly Guaranteed Preferred Beneficial Interest in
PSEG’s Subordinated Debentures	705		673		525		520
Participating Units in
PSEG’s Subordinated Debentures	460		459			—		—

 

146

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Note 11. Schedule of Consolidated Debt

Long-Term Debt

		December 31,
	Maturity	2002			2001
PSEG		(Millions)
Senior Note-6.89% (A)	2009	$	245		$	—
Floating Rate Notes-LIBOR plus 0.875%	2002		—			275
Other			3			—
Principal Amount Outstanding			248			275
Amounts Due Within One Year (B)			—			(275	)
Total Long-Term Debt of PSEG (Parent)			248		$	—
PSE&G
First and Refunding Mortgage Bonds:
6.125%	2002	$	—		$	258
6.875%-8.875%	2003		300			300
6.50%	2004		286			286
9.125%	2005		125			125
6.75%	2006		147			147
6.25%	2007		113			113
6.75%–7.375%	2013-2017		330			330
6.45%–9.25%	2018-2022		139			139
5.20%–7.50%	2023-2027		434			434
5.45%–6.55%	2028-2032		499			499
5.00%–8.00%	2033-2037		160			160
Medium-Term Notes:
5.125% (C)	2012		300			—
7.19%	2002		—			290
8.10%–8.16%	2008-2012		60			60
7.04%	2018-2022		9			9
7.15%–7.18%	2023-2027		39			39
Principal Amount Outstanding			2,941			3,189
Amounts Due Within One Year (B)			(300	)		(547	)
Net Unamortized Discount			(14	)		(16	)
Total Long-Term Debt of PSE&G (Parent)		$	2,627		$	2,626

147

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

		December 31,
	Maturity	2002			2001
Transition Funding (PSE&G)		(Millions)
Securitization Bonds:
5.46%	2004	$	—		$	52
5.74%	2007		300			369
5.98%	2008		183			183
LIBOR plus 0.30%	2011		496			496
6.45%	2013		328			328
6.61%	2015		454			454
6.75%	2016		220			220
6.89%	2017		370			370
Principal Amount Outstanding			2,351			2,472
Amounts Due Within One Year (B)			(129	)		(121	)
Total Securitization Debt of Transition Funding		$	2,222		$	2,351
Total PSE&G		$	4,849		$	4,977
Power
Senior Notes:
6.88%	2006	$	500		$	500
6.95% (D)	2012		600			—
7.75%	2011		800			800
8.63%	2031		500			500
Total Senior Notes			2,400		$	1,800
Pollution Control Notes:
5.00%	2012	$	66		$	66
5.50%	2020		14			14
5.85%	2027		19			19
5.75%	2031		25			25
Total Pollution Control Notes		$	124		$	124
Non-recourse debt :
Variable (3.00% to 5.00%)	2005	$	800		$	770
Principal Amount Outstanding			3,324			2,694
Amounts Due Within One Year (B)			—			—
Net Unamortized Discount			(8	)		(9	)
Total Long-Term Debt of Power		$	3,316		$	2,685

148

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

		December 31,
	Maturity	2002			2001
Energy Holdings		(Millions)
Senior Notes:
9.125% (E)	2004	$	279		$	300
8.625% (E)(F)	2008		507			400
10.00%	2009		400			400
8.50%(E)	2011		544			550
Principal Amount Outstanding		1,730				1,650
Net Unamortized Discount			(5	)		(6	)
Total Long-Term Debt of Energy Holdings (Parent)		$	1,725		$	1,644
PSEG Capital (Energy Holdings)
Medium-Term Notes:
3.12% – 7.72%	2002	$	—		$	228
6.25%	2003		252			252
Principal Amount Outstanding			252			480
Amounts Due Within One Year (B)		(252		)		(228	)
Total Long-Term Debt of PSEG Capital		$	—		$	252
Global (Energy Holdings)
Non-recourse Debt:
5.47% – 10.385%	2002	$	—		$	14
5.19% – 6.96%	2003		67			38
5.19% – 13.22%	2004-2019		832			564
14.00% – Minority Shareholder Loan	2027		—			10
Principal Amount Outstanding			899			626
Amounts Due Within One Year (B)			(67	)		(14	)
Total Long-Term Debt of Global		$	832		$	612
Resources (Energy Holdings)
8.60% – Bank Loan	2001-2020	$	22		$	23
Principal Amount Outstanding			22			23
Amounts Due Within One Year (B)			(1	)		(1	)
Total Long-Term Debt of Resources			21			22
Total Long-Term Debt of Energy Holdings		$	2,578		$	2,530
Total PSEG Consolidated Long-Term Debt		10,991			$	10,192

149

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
(A)	In October 2002, PSEG closed on a $245 million private placement debt transaction with a five-year average life, with the proceeds being used to reduce short-term debt.
(B)	The aggregate principal amounts of mandatory requirements for sinking funds and maturities for each of the five years following December 31, 2002 are as follows:

			PSE&G						Energy Holdings
Year	PSEG		PSE&G		Transition Funding		PSEG Power		Energy Holdings		PSEG Capital		Global		Resources		Total
	(Millions)
2003	$	—	$	300	$	—	$	—	$	—	$	252	$	67	$	1	$	620
2004		—		286		—		—		276		—		41		1		604
2005		—		125		—		800		—		—		47		1		973
2006		—		147		—		500		—		—		52		1		700
2007		—		113		300		—		—		—		52		1		466
	$	—	$	971	$	300	$	1,300	$	276	$	252	$	259	$	5	$	3,363

	(C)	In September 2002, PSE&G issued $300 million of 5.125% Medium-Term Notes due 2012, the proceeds of which were used to repay $290 million of 7.19% Medium-Term Notes that matured.
	(D)	In June 2002, Power issued $600 million of 6.95% Senior Unsecured Notes due 2012. The proceeds were used to repay short-term funding from PSEG, including amounts related to the Gas Contract Transfer from PSE&G in May 2002.
	(E)	In 2002, Energy Holdings repurchased a combined total of $54 million of Senior Notes.
	(F)	In 2002, Energy Holdings, in a private placement, sold $135 million of 8.625% Senior Notes due in 2008 and subsequently completed an exchange offer for these Senior Notes.
Short-Term Liquidity
PSEG
In order to support its short-term financing requirements, as well as those of Power and Services, PSEG has revolving credit facilities that are used both as a source of short-term funding and to provide backup liquidity for its $1 billion commercial paper program.
PSE&G
PSE&G maintains credit facilities to backup its $400 million commercial paper program.
Power
Power has a $50 million credit facility, but primarily relies on PSEG for its short-term financing needs.
Energy Holdings
Energy Holdings has credit facilities that are used both as a source of short-term funding and to issue letters of credit.
150

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

      PSEG, PSE&G, Power and Energy Holdings

     As of December 31, 2002, PSEG had a total of approximately $2.5 billion of committed credit facilities, with approximately $600 million drawn against such facilities resulting in $1.9 billion in available liquidity. In addition to this amount, PSEG had access to certain uncommitted credit facilities. The following table summarizes the various revolving credit facilities of PSEG and its subsidiaries and the liquidity available as of December 31, 2002.

Company	Expiration Date	Total Facility		Primary Purpose	Usage at 12/31/02		Available Liquidity at 12/31/02
				(Millions)
PSEG:
364-day Credit Facility	March 2003	$	620	CP Support	$	300	$	320
364-day Bilateral
Facility	March 2003	$	75	CP Support	$	—		75
5-year Credit Facility	March 2005	$	280	CP Support	$	—	$	280
3-year Credit Facility	December 2005	$	350	CP Support /Funding	$	—	$	350
Uncommitted Bilateral
Agreement	N/A		*	Funding	$	101		N/A
PSE&G:
364-day Credit Facility	June 2003	$	200	CP Support	$	183	$	17
3-year Credit Facility	June 2005	$	200	CP Support	$	—	$	200
Uncommitted Bilateral
Agreement	N/A		*	Funding	$	41		N/A
Energy Holdings:
364-day Credit Facility	May 2003	$	200	Funding	$	—	$	200
5-year Credit Facility	May 2004	$	495	Funding	$	74	$	421
Uncommitted Bilateral
Agreement	N/A		*	Funding	$	—		N/A
Power:
3-year Credit Facility	August 2005	$	50	Funding	$	6	$	44

* Availability varies based on market conditions.

     As of December 31, 2002, PSEG’s consolidated total short-term debt outstanding was $762 million, including $300 million of commercial paper and $101 million in loans outstanding under PSEG’s uncommitted bilateral agreement, $183 million in commercial paper and $41 million in loans outstanding under PSE&G’s uncommitted bilateral agreement and $137 million of non-recourse short-term financing at Global with various rates, primarily consisting of amounts related to its investment in Electroandes.

     In addition, as shown in the above table, there was $74 million and $6 million outstanding in letters of credit under the credit facilities of Energy Holdings and Power, respectively.

151

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Fair Value of Debt

     The estimated fair values were determined using the market quotations or values of instruments with similar terms, credit ratings, remaining maturities and redemptions as of December 31, 2002 and December 31, 2001, respectively.

	December 31, 2002			December 31, 2001
	Carrying Amount		Fair Value	Carrying Amount	Fair Value
	(Millions)
Long-Term Debt:
PSEG	$	248	$  249	$   275	$   275
Energy Holdings	$	2,898	$2,730	$2,773	$2,834
PSE&G	$	2,927	$3,211	$3,173	$3,290
Transition Funding (PSE&G)	$	2,351	$2,543	$2,472	$2,575
Power	$	3,316	$3,372	$2,685	$2,835

     Because their maturities are less than one year, fair values approximate carrying amounts for cash and cash equivalents, short-term debt and accounts payable.

Note 12. Risk Management

     PSEG, PSE&G, Power and Energy Holdings

     The operations of PSEG, PSE&G, Power, and Energy Holdings are exposed to market risks from changes in commodity prices, foreign currency exchange rates, interest rates and equity prices that could affect the results of operations and financial conditions. PSEG manages its exposure to these market risks through its regular operating and financing activities and, when deemed appropriate, hedges 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 its respective business plans and prudent business practices.

Energy Trading Contracts

     Power

     Power maintains a strategy of entering into trading positions to optimize the value of its portfolio of generation assets, gas supply contracts and its electric and gas supply obligations. Power does not engage in the practice of simultaneous trading for the purpose of increasing trading volume or revenue. Power engages in physical and financial transactions in the electricity wholesale markets and executes an overall risk management strategy to

152

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

mitigate the effects of adverse movements in the fuel and electricity markets. Power actively trades energy and energy-related products, including electricity, natural gas, electric capacity, fixed transmission rights, coal and emission allowances, in the spot, forward and futures markets, primarily in Pennsylvania-New Jersey-Maryland Power Pool (PJM), and electricity in the Super Region, which extends from Maine to the Carolinas and the Atlantic Coast to Indiana and natural gas in the producing region, the Henry Hub Basin, as well as the Super Region. These contracts also involve financial transactions including swaps, options and futures.

     For the year ended December 31, 2002, Power marked to market its energy trading contracts in accordance with EITF 02-3 and SFAS 133, see Note 1. Organization and Summary of Significant Accounting Policies. As of December 31, 2002 and 2001, substantially all of these contracts had terms of two years or less. Wherever possible, market 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. Only one such contract which expires in 2003, is marked to a model and has an effect on earnings. The effects on earnings of the contract that was marked to a model was immaterial.

     In prior periods, Power disclosed gains and losses related to certain activities within its trading segment. Commencing with its change in segment reporting discussed in Note 19. Financial Information by Business Segments, Power has excluded certain transactions, such as firm transmission rights and Basic Gas Supply Service (BGSS) results, from this table and solely report gains and losses on transactions accounted for pursuant to EITF 02-3. There was no change in margins, net income or cash flows as a result of this change in presentation. Prior periods have been reclassified to conform to this presentation.

     For the years ended December 31, 2002, 2001 and 2000, Power recorded net margins of $47 million, $130 million and $73 million, respectively, as shown below:

	For the Year Ended December 31,
	2002		2001			2000
	(Millions)
Realized Gains	$	38	$	163		$	23
Unrealized Gains (Losses)		17		(26	)		55
Gross Margin		55		137			78
Broker Fees and Other Trading-Related
Expense		8		7			5
Net Margin	$	47	$	130		$	73

     As of December 31, 2002 and 2001, the cumulative unrealized gains related to these energy trading contracts were approximately $24 million and $7 million, respectively. The contracts related to the majority of these gains had terms of less than two years.

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

Derivative Instruments and Hedging Activities

     Commodity Contracts

     Power

     The availability and price of energy commodities are subject to fluctuations from factors such as weather, environmental policies, changes in supply and demand, state and federal regulatory policies and other events.

     In order to hedge a portion of Power’s forecasted energy purchases to meet its electric supply requirements, Power enters into forward purchase contracts, futures, options and swaps. These contracts, in conjunction with

153

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

owned electric generation capacity, are designed to cover estimated wholesale electric customer commitments. Power has also forecasted the energy delivery from its generating stations based on the forward price curve movement of energy and, as a result, entered into swaps, options and futures transactions to hedge the price of gas to meet its gas purchases requirements for generation. These transactions qualified as cash flow hedges under SFAS 133. As of December 31, 2002 the fair value of these hedges was $5 million. Unrealized gains and losses associated with these hedges of $3 million, net of tax, was charged to OCI for the year ended December 31, 2002. There was no ineffectiveness associated with these hedges. These hedges will mature through 2003.

     Also, prior to May 2002, PSE&G had entered into gas forwards, futures, options and swaps to hedge its forecasted requirements for natural gas, which was required under an agreement with the BPU in 2001. Effective with the transfer of PSE&G’s gas contracts to Power on May 1, 2002, Power acquired all of the derivatives entered into by PSE&G. The use of derivatives to hedge the forecasted purchase of natural gas qualifed as a cash flow hedge. Gains or losses from these derivatives is recovered from customers as part of the monthly billing to PSE&G. Derivatives relating to commercial and industrial customers is accounted for in accordance with SFAS 133 where appropriate. Gains or losses on these derivatives are deferred and reported as a component of OCI. There was no ineffectiveness or excluded ineffectiveness realized on these hedges. As of December 31, 2002 Power had gas forwards, futures, options and swaps to hedge forecasted requirements with a fair value of approximately $1.4 million. The maximum term of these contracts is approximately one year. As of December 31, 2001, PSE&G had gas forwards, futures, options and swaps to hedge forecasted requirements with a fair value of approximately $(137) million.

     Power also enters into certain other contracts which are derivatives, but do not qualify for hedge accounting under SFAS 133, which was adopted effective January 1, 2001. Most of these contracts are option contracts on gas purchases for generation requirements. Therefore, the changes in fair market value of these derivative contracts are recorded in Energy Costs on the Consolidated Statement of Operations at the end of each reporting period. For the years ended December 31, 2002 and 2001, Power recorded gains on these contracts of $20 million and $12 million, respectively, as shown below:

	For the Year Ended December 31,
	2002				2001
	(Millions)
Realized Gains (Losses)		$	(1	)		$	23
Unrealized Gains (Losses)			21				(11	)
Gross Margin		$	20			$	12

     As of December 31, 2002 and 2001, the cumulative unrealized gains and (losses) related to these contracts were approximately $20 million and $(7) million, respectively. The contracts related to the majority of these gains and losses had terms of less than two years.

     As of December 31, 2002 and 2001, substantially all of these contracts had terms of two years or less and were valued through market exchanges and, where necessary, broker quotes.

Interest Rates

     PSEG, PSE&G, Power and Energy Holdings

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

     The fair value of interest rate swaps, designated and effective as cash flow hedges, are initially recorded in OCI. Reclassification of unrealized gains or losses on cash flow hedges of variable-rate debt instruments from OCI into earnings occurs as interest payments are accrued on the debt instrument and generally offsets the change in the interest accrued on the underlying variable rate debt. In order to test the effectiveness of such swaps, a hypothetical

154

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

swap is used to mirror all the critical terms of the underlying debt and utilize regression analysis to assess the effectiveness of the actual swap at inception and on an ongoing basis. The assessment is done periodically to ensure the swaps continue to be effective. PSEG, PSE&G, Power and Energy Holdings determine the fair value of interest rate swaps through counterparty valuations, internal valuations and broker quotes. There have been no material changes in the techniques or models used in the valuation of interest rate swaps during the periods presented. There is minimal impact of counterparty credit risk on the fair value of the hedges since each of PSEG, PSE&G, Power and Energy Holdings’ policies require that its respective counterparties have investment grade credit ratings.

     Ineffectiveness may occur if the actual draw down of the debt and the notional amount of the swap during the construction phase are different. The amount of ineffectiveness, if any, is recorded in earnings at the end of the reporting period. The impact of ineffectiveness on net income should be minimal because the interest rate swaps and the underlying debt are indexed to the same benchmark interest rate. Therefore, interest rate fluctuations should be offset.

     The table below displays fair value, ineffectiveness and OCI information relating to PSEG, PSE&G, Power and Energy Holdings’ interest rate swaps as of December 31, 2002 and 2001:

												OCI
									OCI			Losses		Maturity
	Fair Market Value						Ineffectiveness		Losses			to be		of Longest
									Reclassed			Reclassed		Cash Flow
	2002			2001			2002	2001	in 2002			in 2003		Hedge
	(Millions)
PSEG	$	(21	)	$	(5	)	$  —	$  —	$  6			$  6		2008
PSE&G (A)		(66	)		(19	)	—	—	—			—		2011
Power		(9	)		2		—	—	(3		)	—		2005
Energy Holdings		(138	)		(73	)	—	—	12			16		2018
	$	(234	)	$	(95	)	$  —	$  —		$15			$22

(A) Amounts at PSE&G relate to an interest rate swap at Transition Funding, which is offset by a Regulatory Asset of $66 million.

Equity Securities

     Energy Holdings

     During 2002, Resources recognized a $38 million (pre-tax) loss from other than temporary impairments of non-publicly traded equity securities within certain leveraged buyout funds and other investments, which is included in Operating Revenues in the Consolidated Statements of Operations. As of December 31, 2002, Resources had investments in leveraged buyout funds of approximately $93 million, of which $24 million was comprised of public securities with available market prices and $69 million was comprised of non-publicly traded securities. Comparably, as of December 31, 2001, Resources had investments in leveraged buyout funds of approximately $130 million, of which $34 million was comprised of public securities with available market prices and $96 million was comprised of non-publicly traded securities.

Foreign Currencies

     Energy Holdings

     As of December 31, 2002, net foreign currency devaluations have reduced the reported amount of Energy Holdings’ total Member’s Equity by $307 million, of which $202 million and $103 million were caused by

155

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

the devaluation of the Brazilian Real and the Chilean Peso, respectively. For the net foreign currency devaluations for the period ended December 31, 2002 and 2001, see Energy Holdings’ Consolidated Statements of Member’s Equity.

     Global holds a 60% ownership interest in Carthage Power Company (CPC), a Tunisian generation facility. The Power Purchase Agreement (PPA), signed in 1999 and extending through 2022, contains an embedded derivative that indexes the fixed Tunisian Dinar payments to US Dollar exchange rates. This embedded derivative is the longest standing foreign currency hedge that is outstanding. The indexation portion of the PPA is considered an embedded derivative and has been recognized and valued separately as a derivative instrument. As currencies devalue/revalue in relation to the US Dollar, the derivative increases/decreases in value equal to the discounted present value of additional units of foreign currency (measured in US Dollars) over the life of the PPA. This increased/decreased value is reported on the Consolidated Balance Sheets as an asset/liability. To the extent that such indexation is provided to hedge foreign currency debt exposure, the offsetting amount is recorded in OCI. Amounts will be reclassified from OCI to earnings over the life of the debt. To the extent such indexation is provided to hedge an equity return in US Dollars, the offsetting amount is recorded in earnings. As of December 31, 2002 and 2001, Global has recorded a derivative asset of $26 million and $35 million, respectively. For the year ended December 31, 2002, Global recorded a loss of $7 million, after taxes and minority interest, related to this embedded derivative, offsetting $8 million in foreign currency gains from the US Dollar debt at CPC. This was the only ineffectiveness that was present for the year ended December 31, 2002 and was immaterial to earnings. As of December 31, 2001, Global recorded a loss of $10 million to earnings, after tax and minority interest, of which $9 million was recorded as a Cumulative Effect of a Change in Accounting Principle.

     In May 2002, Energy Holdings purchased foreign currency call options in order to hedge its average 2002 earnings denominated in Brazilian Reais and in Peruvian Nuevo Soles for the remainder of 2002. These options are not considered hedges for accounting purposes under SFAS 133 and, as a result, changes in their fair value are recorded directly to earnings. Global recorded a gain of $1 million related to Brazilian and Peruvian option contracts that expired during 2002. In December 2002, Energy Holdings purchased foreign currency call options in order to hedge its average 2003 earnings denominated in Chilean Pesos and Peruvian Nuevo Soles for the entire 2003 year. Changes in the fair value of these options are recorded directly to earnings. As of December 31, 2002, Energy Holdings had recorded a derivative asset of $2 million related to these assets. For the year ended December 31, 2002, the impact on earnings as a result of changes in fair value of these instruments was immaterial.

     During 2001, Global purchased approximately 100% of a Chilean distribution company, Sociedad Austral de Electricidad S.A. (SAESA). As a requirement to obtain certain debt financing necessary to fund the acquisition, and in order to hedge against fluctuations in the US Dollar to Chilean Peso foreign exchange rates, Global entered into two forward contracts with notional values of $75 million each to exchange Chilean Pesos for US Dollars. These transactions expired in October 2002 but were renewed through January 2003. For accounting purposes, these transactions were considered hedges, whereby changes in fair value were recorded to OCI, until July 2002, when SAESA and its’ holding companies were restructured. Subsequent to July 2002, the changes in fair value of these instruments were recorded to earnings, and serve to offset currency gains or losses on SAESA’s US Dollar denominated debt. As of December 31, 2002 and 2001, Global had recorded a derivative asset of $3 million and $4 million, respectively, and a permanent OCI balance related to the hedge of $6 million. For the period from July 2002 through December 2002, Global recorded an after-tax loss of $7 million related to this hedge, offset by after-tax currency gains on the debt of approximately $8 million.

     Global holds a 32% ownership interest in a Brazilian distribution company, Rio Grande Energia (RGE), whose debt is denominated in US Dollars. As of December 31, 2002 and 2001, Global’s pro-rata share of such debt was approximately $49.3 million and $60 million, respectively. In order to hedge the risk of fluctuations in the exchange rate between the Brazilian Real and US Dollar associated with the principal payments due in May, June and July of 2003 through 2005, RGE entered into a series of nine cross currency interest rate swaps in January 2002. The instruments convert the variable LIBOR-based principal payments to a variable CDI (the Brazilian inter-bank offered rate) based payments. As a result, RGE has hedged its foreign currency exposure but is still at risk for variability in the Brazilian CDI interest rate during the term of the instruments. Global’s share of the notional value of these instruments totals approximately $15 million per year for the instruments maturing in 2003 and 2004 and totals approximately $19 million per year for the instruments maturing in 2005. For accounting purposes,

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

fluctuations in the fair value of the interest rate component of these cross currency swaps is recorded directly to earnings.

     The fair value of foreign currency derivatives, designated and effective as cash flow hedges, are initially recorded in OCI. Reclassification of unrealized gains or losses on cash flow hedges from OCI into earnings generally occurs when the hedged transaction is recorded in earnings and generally offsets the change in the value of the hedged item. Energy Holdings estimates reclassifying less than $1 million of foreign exchange gains from foreign currency cash flow hedges, including Energy Holdings’ pro-rata share from its equity method investees, from OCI to the Consolidated Statements of Operations over the next 12 months. For the period ended December 31, 2002 and 2001, losses transferred from OCI to the Consolidated Statements of Operations were less than $1 million.

Credit Risk

     PSEG, PSE&G, Power and Energy Holdings

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

     Power

     Through the BGS auctions, Power contracted to provide generating capacity to the direct suppliers of New Jersey electric utilities commencing August 1, 2002. These bilateral contracts are subject to credit risk. This credit risk relates to the ability of counterparties to meet their payment obligations for the power delivered under each BGS contract. This risk is substantially higher than the risk associated with potential nonpayment by PSE&G under the BGS contract that expired July 31, 2002. Any failure to collect these payments under the BGS contracts could have a material impact on Power’s results of operations, cash flows and financial position.

Note 13. Commitments and Contingent Liabilities

Nuclear Insurance Coverages and Assessments

     Power

     Power is a member of an industry mutual insurance company, Nuclear Electric Insurance Limited (NEIL). NEIL provides the primary property and decontamination liability insurance at the Salem, Hope Creek and Peach Bottom nuclear facilities. NEIL also provides excess property insurance through its decontamination liability, decommissioning liability and excess property policy and replacement power coverage through its accidental outage policy. NEIL policies may make retrospective premium assessments in case of adverse loss experience. Power’s maximum potential liabilities under these assessments are included in the table and notes below. Certain provisions in the NEIL policies provide that the insurer may suspend coverage with respect to all nuclear units on a site without notice if the Nuclear Regulatory Commission (NRC) suspends or revokes the operating license for any unit on a site, issues a shutdown order with respect to such unit or issues a confirmatory order keeping such unit shut down.

     The American Nuclear Insurers (ANI) and NEIL policies both include coverage for claims arising out of acts of terrorism. The ANI policies are subject to an industry aggregate limit of $200 million, subject to one reinstatement provided the reinstatement does not exceed the balance in the Industry Credit Rating Plan reserve fund. The NEIL Policies are subject to an industry aggregate limit of $3.24 billion plus any amounts available through reinsurance or indemnity.

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     The Price-Anderson Act sets the “limit of liability” for claims that could arise from an incident involving any licensed nuclear facility in the United States. The “limit of liability” is based on the number of licensed nuclear reactors and is adjusted at least every five years based on the Consumer Price Index. The current “limit of liability” is $9.45 billion. All utilities owning a nuclear reactor, including Power, have provided for this exposure through a combination of private insurance and mandatory participation in a financial protection pool, as established by the Price-Anderson Act. Under the Price-Anderson Act, each party with an ownership interest in a nuclear reactor can be assessed its share of $88.1 million per reactor per incident, payable at $10 million per reactor per incident per year. If the damages exceed the “limit of liability,” the President is to submit to Congress a plan for providing additional compensation to the injured parties. Congress could impose further revenue raising measures on the nuclear industry to pay claims. Power’s maximum aggregate assessment per incident is $277 million (based on Power’s ownership interests in Hope Creek, Peach Bottom and Salem) and its maximum aggregate annual assessment per incident is approximately $32 million. This does not include the $11 million that could be assessed under the nuclear worker policies. Further, a decision by the US Supreme Court, not involving Power, has held that the Price-Anderson Act did not preclude awards based on state law claims for punitive damages.

     Power’s insurance coverages and maximum retrospective assessments for its nuclear operations are as follows:

Type and Source of Coverages		Total Site Coverage			PSEG Power LLC Assessments
		(Millions)
Public and Nuclear Worker Liability (Primary Layer):
American Nuclear Insurers (ANI)		$	200	(A)		$	11
Nuclear Liability (Excess Layer):
Price-Anderson Act			9,249	(B)			277
Nuclear Liability Total		$	9,449	(C)		$	288
Property Damage (Primary Layer):
Nuclear Electric Insurance Limited (NEIL) Primary
(Salem/Hope Creek/Peach Bottom)		$	500			$	20
Property Damage (Excess Layers):
NEIL II (Salem/Hope Creek/Peach Bottom)			600				8
NEIL Blanket Excess
(Salem/Hope Creek/Peach Bottom)	1,000			(D)			3
Property Damage Total (Per Site)		$	2,100			$	31
Accidental Outage:
NEIL I (Peach Bottom)		$	245	(E)		$	9
NEIL I (Salem)			281				11
NEIL I (Hope Creek)			490				9
Replacement Power Total		$	1,016			$	29

(A)	The primary limit for Public Liability is a per site aggregate limit with no potential for assessment. The Nuclear Worker Liability represents the potential liability from workers claiming exposure to the hazard of nuclear radiation. This coverage is subject to an industry aggregate limit, includes annual automatic reinstatement if the Industry Credit Rating Plan (ICRP) Reserve Fund exceeds $400 million, and has an assessment potential under former canceled policies.
	Effective January 1, 2003, the Nuclear Worker Liability and the Primary Layer of American Nuclear Insurers was increased to $300 million.
(B)	Retrospective premium program under the Price-Anderson liability provisions of the Atomic Energy Act of 1954, as amended. Power is subject to retrospective assessment with respect to loss from an incident at any licensed nuclear reactor in the United States. This retrospective assessment can be adjusted for inflation every

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	five years. The last adjustment was effective as of August 20, 1998. This retrospective program is in excess over the Public and Nuclear Worker Liability primary layers.
(C)	Limit of liability under the Price-Anderson Act for each nuclear incident.
(D)	For property limits excess of $1.1 billion, Power participates in a Blanket Limit policy where the $1 billion limit is shared by Amergen, Exelon, and Power among the Braidwood, Byron, Clinton, Dresden, La Salle, Limerick, Oyster Creek, Quad Cities, TMI-1 facilities owned by Amergen and Exelon and the Peach Bottom, Salem and Hope Creek facilities. This limit is not subject to reinstatement in the event of a loss. Participation in this program significantly reduces Power’s premium and the associated potential assessment.
(E)	Peach Bottom has an aggregate indemnity limit based on a weekly indemnity of $2.3 million for 52 weeks followed by 80% of the weekly indemnity for 68 weeks. Salem has an aggregate indemnity limit based on a weekly indemnity of $2.5 million for 52 weeks followed by 80% of the weekly indemnity for 75 weeks. Hope Creek has an aggregate indemnity limit based on a weekly indemnity of $4.5 million for 52 weeks followed by 80% of the weekly indemnity for 71 weeks.

Old Dominion Electric Cooperative (ODEC)

     PSE&G and Power

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

     In November 1997, FERC issued the PJM Restructuring Order, which required PSE&G to modify its contract with ODEC to remove pancaked transmission rates. While PSE&G sought rehearing of this order, it was nonetheless required to reduce its rate to ODEC by approximately $6 million per year, effective April 1, 1998. In 2000, FERC issued its order denying PSE&G’s request for rehearing. Thereafter, PSE&G appealed to the US Court of Appeals for judicial review of the matter.

     In July 2002, the Court ruled that FERC had not met its burden to justify modification of the ODEC contract. On December 19, 2002, based on the Court ruling, FERC reversed its November 1997 order thereby reinstating the original contract terms. This allows Power to collect amounts for April 1998 through December 2002 that would not have otherwise been collected over the contract term. The difference in revenues between the contracted rate and the FERC-ordered reduced rate is approximately $30 million, inclusive of back interest and represents a gain contingency to Power. Power billed ODEC for this amount in January 2003 and will record this gain when realized.

Guaranteed Obligations

     Power

     Power has guaranteed certain commodity related transactions for its subsidiary, ER&T, which is involved in energy marketing activities. These guarantees were provided to counterparties in order to facilitate physical and financial agreements in gas, pipeline capacity, transportation, oil, electricity and related commodities and services. These Power guarantees support the current exposure (net billed and unbilled energy plus mark-to-market value on open positions), interest and other costs on sums due and payable by ER&T under these agreements. Guarantees

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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. If the exposure were one directional at year-end with all contracts “out-of-the-money” for Power, then the maximum liability (face value) of the guarantees on December 31, 2002 and 2001 would be $1.1 billion and $506 million, respectively. The probability of all contracts at ER&T being simultaneously “out-of-the-money” given the nature of ER&T’s asset backed transactions is highly unlikely. For this reason, the current exposure at any point in time is a more meaningful representation of the liability under these guarantees. The current exposure from such liabilities was $268 million and $153 million as of December 31, 2002, and 2001, respectively. To the extent liabilities exist under the commodity related contracts subject to these guarantees, such liabilities are included in the Consolidated Balance Sheets.

     In addition, all Master Agreements and other supply contracts contain margin and/or other collateral requirements that, as of December 31, 2002, could require Power to post additional collateral of approximately $320 million if Power were to lose its investment grade credit rating.

     As of December 31, 2002, letters of credit issued by Power were outstanding in the amount of approximately $73 million in support of various contractual obligations.

     Energy Holdings

     Energy Holdings and/or Global have guaranteed certain obligations of Global’s subsidiaries or affiliates, including the successful completion, performance or other obligations related to certain projects in an aggregate amount of approximately $339 million as of December 31, 2002. The guarantees include a $61 million equity commitment for ELCHO in Poland, a $55 million standby equity commitment for Skawina in Poland, $56 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 L.L.C. in connection with electric distribution companies in Chile and Peru. Additional guarantees consist of a $35 million leasing agreement guarantee for Prisma in Italy, $27 million in standby letters of credit for SAESA (which were eliminated upon the refinancing at SAESA in January 2003) and various other guarantees comprising the remaining $49 million. A substantial portion of such guarantees will be cancelled upon successful completion, performance and/or refinancing of construction debt with non-recourse project debt.

     In the normal course of business, Energy Technologies secures construction obligations with performance bonds issued by insurance companies. Prior to January 2003, in the event that Energy Technologies’ tangible equity was reduced to an amount less than $100 million, Energy Holdings would have been required to provide additional support for the performance bonds. Tangible equity is defined as net equity less goodwill. As of December 31, 2002, Energy Technologies’ tangible equity was $105 million. As of December 31, 2002, Energy Technologies had $228 million of such bonds outstanding, of which $45 million was at risk in ongoing construction projects. The performance bonds are not included in the $339 million of guaranteed obligations discussed above. In January 2003, Energy Holdings provided an indemnification agreement and $31 million of letters of credit to replace the $100 million capital retention agreement referred to above. These amounts are expected to decrease over time as Energy Technologies completes the work in process or transfers ownership to other companies.

Environmental Matters

     PSE&G and Power

     Hazardous Waste

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

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     PSE&G

PSE&G Manufactured Gas Plant Remediation Program

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

     As of December 31, 2002, PSE&G’s estimated liability for remediation costs through 2004 aggregated $115 million. Expenditures beyond 2004 cannot be reasonably estimated.

Passaic River Site

     The United States Environmental Protection Agency (EPA) has determined that a nine mile stretch of the Passaic River in the area of Newark, New Jersey is a “facility” 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.”

     In a separate matter, PSE&G and certain of its predecessors conducted industrial operations at properties within the Passaic River facility. The operations included one operating electric generating station one former generating station, and four former MGPs. PSE&G’s costs to clean up former MGPs are recoverable from utility customers through the SBC. PSE&G has sold the site and obtained releases and indemnities for liabilities arising out of the site in connection with the sale. PSE&G cannot predict what action, if any, the EPA or any third party may take against PSE&G with respect to this matter, or in such an event, what costs may be incurred to address any such claims. However, such costs may be material.

     Power

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

     The EPA and the NJDEP issued a demand in March 2000 under the Federal Clean Air Act (CAA) requiring information to assess whether projects completed since 1978 at the Hudson and Mercer coal burning units were implemented in accordance with applicable PSD/NSR regulations. Power completed its response to the information request in November 2000. In January 2002, Power reached an agreement with New Jersey and the federal governments to resolve allegations of noncompliance with federal and State of 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 NOx, 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. Power also paid a $1.4 million civil penalty and has agreed to spend up to $6 million on supplemental environmental projects. The agreement resolving the NSR allegations concerning the Hudson and Mercer coal-fired units also resolved the dispute over Bergen 2 regarding the applicability of PSD requirements, and allowed construction of the unit to be completed and operation to commence.

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

     Industrial Site Recovery Act

     Potential environmental liabilities related to subsurface contamination at certain generating stations have been identified. The New Jersey statute that led to the identification is the Industrial Site Recovery Act (ISRA) that applies to the sale of certain assets. In the second quarter of 1999, in anticipation of the transfer of PSE&G’s generation-related assets to Power, a study was conducted to identify potential environmental liabilities and PSEG recorded a $53 million liability related to these obligations, which is represented on the Consolidated Balance Sheets.

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New Generation and Development

     Power

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

     Through an indirect, wholly-owned subsidiary, Power is developing the Bethlehem Energy Center, a 763 MW combined-cycle power plant that will replace the 376 MW Albany, NY Steam Station. Total costs for this project are expected to be approximately $483 million with expenditures to date of approximately $170 million. Construction began in 2002 with the expected completion date in 2005, at which time the existing station will be retired.

     Power is constructing a 1,218 MW combined-cycle generation plant at Linden, New Jersey with costs estimated at approximately $711 million and expenditures to date of approximately $564 million. Completion is expected in 2005, at which time 451 MW of existing generating capacity at the site will be retired.

     Power is constructing through indirect, wholly-owned subsidiaries, two natural gas-fired combined cycle electric generation plants in Waterford, Ohio (821 MW) and Lawrenceburg, Indiana (1,096 MW) at an estimated aggregate total cost of $1.2 billion. Total expenditures to date on these projects have been approximately $1.0 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 December 31, 2002, approximately $275 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 June 2003. The Lawrenceburg facility is currently scheduled to achieve commercial operation in November 2003.

     Power also has contracts with outside parties to purchase upgraded turbines for the Salem Nuclear Generating Station Units 1 and 2 and to purchase upgraded turbines and to purchase a power uprate for Hope Creek Generating Station to increase its generating capacity. The contracts are subject to regulatory approval and the projects are currently scheduled to be completed by 2004 for Salem Unit 1 and Hope Creek and 2006 for Salem Unit 2. Power’s aggregate estimated costs for these projects are $210 million, with expenditures to date of approximately $40 million.

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

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Minimum Fuel Purchase Requirements

     Power

     Power uses coal for its fossil electric generation stations. Power purchases coal through various contracts and in the spot market. The total minimum purchase requirements included in these contracts amount to approximately $75 million through 2003.

     Power has several long-term purchase contracts with uranium suppliers, converters, enrichers and fabricators to meet the currently projected fuel requirements for Salem and Hope Creek. On average, Power has various multi-year requirements-based purchase commitments that total approximately $88 million per year to meet Salem and Hope Creek fuel needs. Power has been advised by Exelon, the co-owner and operator of the Peach Bottom that it has similar purchase contracts to satisfy the fuel requirements for Peach Bottom.

Nuclear Fuel Disposal

     Power

     After spent fuel is removed from a nuclear reactor, it is placed in temporary storage for cooling in a spent fuel pool at the nuclear station site. Under the Nuclear Waste Policy Act of 1982 (NWPA), as amended, the Federal government has entered into contracts with the operators of nuclear power plants for transportation and ultimate disposal of the spent nuclear fuel. To pay for this service, 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 ($21 million for 2002), subject to such escalation as may be required to assure full cost recovery by the Federal government. Payments made to the United States Department of Energy (DOE) for disposal costs are based on nuclear generation and are included in Energy Costs in the Consolidated Statements of Operations.

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

     Under the NWPA, the DOE was required to begin taking possession of the spent nuclear fuel by no later than 1998. The DOE has announced that it does not expect a facility to be available earlier than 2010. Exelon has advised us that it had signed an agreement with the DOE applicable to Peach Bottom under which Exelon would be reimbursed for costs incurred resulting from the DOE’s delay in accepting spent nuclear fuel. The agreement allows Exelon to reduce the charges paid to the Nuclear Waste Fund to reflect costs reasonably incurred due to the DOE’s delay. Past and future expenditures associated with Peach Bottom’s recently completed on-site dry storage facility would be eligible for this reduction in DOE fees. 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 group of eight utilities filed a petition against the DOE in the US Court of Appeal for the Eleventh Circuit, seeking to set aside the receipt of credits by Exelon out of the Nuclear Waste Fund, as stipulated in the Peach Bottom agreement. On September 24, 2002, the Court issued an opinion upholding the challenge by the petitioners regarding the settlement agreement’s compensation provisions. Under the terms of the agreement, DOE and Exelon are required to meet and discuss alternative funding sources for the settlement credits. Initial meetings have occurred. The Eleventh Circuit’s opinion suggests that the federal judgment fund should be available as an alternate source. The agreement provides that if such negotiations are unsuccessful, the agreement will be null and void. Any payments required by Power resulting from a disallowance of the previously reduced fees would be included in Energy Costs in the Consolidated Statements of Operations.

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     On September 26, 2001, 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.

     In October 2001, Power filed a complaint in the US Court of Federal Claims, along with a number of other plaintiffs, seeking $28.2 million in relief from past overcharges by the DOE for enrichment services. No assurances can be given as to any damage recovery.

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

Energy Holdings

     Argentina

     Global has certain contingent obligations that are likely to occur if certain projects in Argentina continue to default on their debt and performance obligations. The estimated amount to cover this exposure is $7 million and has been recorded as a component of Operating Expenses in the Consolidated Statements of Operations.

     Under certain circumstances, Global could be obligated to settle its share (approximately $26 million) of a project loan for EDELAP should it or the majority owner of the project, take certain actions including forcing or permitting certain loan parties to declare bankruptcy. In addition, the guarantee can be triggered by transferring the shares of certain loan parties without lender consent. Breach of this transfer covenant can be cured by delivering certain pledge agreements relating to the ownership of loan parties to the lenders. Global could also be liable for any incremental direct damages arising from the breach of these covenants. Given the likely cure of any breach by the project sponsors, such a contingent obligation has a low probability of being triggered and, therefore, no provision has been made in Global’s Consolidated Financial Statements. Under the terms of the settlement of Global’s litigation with AES, AES is required to deliver pledge agreements that may be required under the loan documents. For further information, see Note 4. Asset Impairments.

     California

     In May 2001, GWF Energy LLC (GWF Energy), a joint venture between Global and Harbinger GWF LLC entered into a 10-year power purchase agreement (PPA) with the California Department of Water Resources (CDWR) to provide approximately 340 MW of electric capacity to California from three new natural gas-fired peaking plants, the Hanford, Henrietta and Tracy Peaker Plants. Total project cost for these plants is estimated at approximately $345 million.

     In 2002, GWF Energy entered into negotiations with the California Public Utilities Commission (CPUC) and the California Electricity Oversight Board (collectively the California Parties) resulting in the execution of (i) an amended and restated PPA that has been affirmed by the CPUC as “just and reasonable” and (ii) a settlement agreement with the California Parties, the CDWR, the Governor of the State of California and the People of California by and through the Attorney General.

     The Hanford and Henrietta Peaker Plants were completed in August 2001 and in June 2002, respectively, and the Tracy Peaker Plant, a 167 MW facility, is now under construction. The commercial operations date deadline of the Tracy Peaker Plant is July 1, 2003 under the amended and restated PPA discussed above. As of December 31, 2002, Global’s equity investment in these plants was $228 million. Upon successful completion of project financing, which is currently expected to occur in the second quarter of 2003, Global’s permanent equity investment in the plants, including contingencies, is not expected to exceed $150 million. In the event financing does not occur, Global’s investment in these plants could increase to approximately $293 million.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Global’s ownership interest in this project was 76% as of December 31, 2002. For a description of turbine loans and working capital loans from Global to GWF Energy pending completion of project financing, see Note 22. Related-Party Transactions.

     Chile

     Global owns SAESA, a group of companies that consists of four distribution companies and one transmission company that provide electric service to customers in southern Chile. SAESA had a $150 million loan facility in place that had an original maturity date of October 18, 2002 and is recorded as a component of Notes Payable and Project Level Non-Recourse Debt on Energy Holdings’ Consolidated Balance Sheets as of December 31, 2002. The principal payment was not made as scheduled and the lending group agreed not to declare any payment defaults or exercise any remedies with regard to that loan and accordingly a term sheet for an extension of the loan to April 2003 was agreed to. On January 17, 2003, SAESA issued bonds worth $114 million in the Chilean market. SAESA divided the debt issue into a $61 million, 7-year bond with a coupon rate of 5.39% and another $54 million bond maturing in 21 years at a rate of 6.6%. SAESA also signed a syndicated bank loan for $58 million. These funds were used to repay the $150 million loan scheduled to mature in April 2003. In January 2003, Global contributed an additional $55 million in equity and increased its investment in SAESA to $466 million.

     Peru

     In December 2001, Global acquired an interest in Electroandes, a 183 MW hydroelectric generation and distribution company in Peru. Part of the purchase price was financed with a $100 million one year bridge loan which matured in December 2002. The loan facility provided that the maturity date could be extended for six months if certain conditions were met. The loan was extended to June 2003 and a refinancing plan is underway.

     India

     Energy Holdings has a 20% interest in a 330 MW Naphtha/natural gas fired plant (PPN) in the Indian State of Tamil Nadu. Energy Holdings’ investment exposure (investment less non-recourse debt) in this facility is approximately $40 million. Power from the facility is sold under a long-term power purchase agreement with the Tamil Nadu Electricity Board (TNEB) which sells the power to retail end-user customers. The TNEB has not been able to make full payment to the plant for the purchase of energy under contract due to its overall poor liquidity situation. The past due receivable at PPN as of December 31, 2002 at the project company is approximately $57 million, Energy Holdings’ share of which is approximately $8 million, net of a $3 million reserve.

     Poland

     In January 2002, Global acquired a 35% interest in the 590 MW (electric) and 618 MW (thermal) coal-fired Skawina CHP Plant (Skawina), located in Poland and in June 2002 increased its ownership interest to approximately 50%. The transaction includes the obligation to purchase additional shares in 2003 that will bring Global’s aggregate 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 expended $31 million during 2002 for its approximate 50% ownership interest and the total equity investment is expected to be approximately $105 million, including contingencies and equity commitment guarantees.

     Tunisia

     Global owns a 60% interest in Carthage Power Company (CPC), a 471 MW gas-fired combined-cycle electric generation facility located in Rades, Tunisia. CPC has entered into a 20-year power purchase contract for the sale of 100% of the output to Societe Tunisienne de l’ Electricite et du Gaz (STEG). The contract called for the plant to be operational by November 24, 2001, however, due to delays in construction, this deadline was not met. STEG has declared that it is entitled to liquidated damages at the rate of $67 thousand a day since November 24, 2001 in accordance with the terms of the power purchase contract. CPC is contesting STEG’s claim and the two parties are currently in negotiations to settle this dispute. The facility was built by Alstom Centrales Energetiques S.A.,

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(Alstom) an independent contractor, who was also obligated to complete construction by September 3, 2001. The facility commenced operation on May 14, 2002. CPC believes it is entitled to liquidated damages from Alstom in amounts greater than the claims by STEG. Such liquidated damages are secured by letters of credit totaling $30 million.

Minimum Lease Payments

     PSEG, PSE&G and Energy Holdings

     PSE&G, Services and Energy Holdings lease administrative office space under various operating leases. In addition, PSE&G, Services and Energy Holdings expense the costs of renting various facilities for an immaterial amount. Total future minimum lease payments as of December 31, 2002 are:

	2003		2004		2005		2006		2007		After 2007		Total
	(Millions)
PSE&G	$	3	$	3	$	3	$	2	$	2	$	—	$	13
Services		1		1		1		1		1		3		8
Energy Holdings		6		5		4		4		4		14		37
Total PSEG	$	10	$	9	$	8	$	7	$	7	$	17	$	58

     Power and PSE&G have entered into capital leases for administrative office space. The total future minimum payments and present value of these capital leases as of December 31, 2002 are:

	PSE&G				Power
	(Millions)
2003		$	6		$	1
2004			6			1
2005			6			1
2006			6			2
2007			6			2
Thereafter			50			12
Total minimum lease payments		$	80		$	19
Less: Imputed Interest			(38	)		(7	)
Present Value of net minimum lease payments		$	42		$	12

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Note 14. Nuclear Decommissioning Trust

Power

In accordance with Federal regulations, entities owning an interest in nuclear generating facilities are required to determine the costs and funding methods necessary to decommission such facilities upon termination of operation. As a general practice, each nuclear owner places funds in independent external trust accounts it maintains to provide for decommissioning.

     The ownership of the Nuclear Decommissioning Trust Funds was transferred to Nuclear with the transfer of the generation-related assets from PSE&G to Power. Pursuant to the Final Order, PSE&G will collect approximately $30 million annually through the SBC and will remit to Power an equivalent amount solely to fund the trust through at least the end of the transition period, July 31, 2003. For information relating to cost responsibility for nuclear decommissioning subsequent to July 31, 2003, see Note 2. New Accounting Standards. The fair market value of these funds as of December 31, 2002 and 2001 was $766 million and $817 million, respectively.

Power maintains the external master nuclear decommissioning trust previously established by PSE&G. This trust contains two separate funds: a qualified fund and a non-qualified fund. Section 468A of the Internal Revenue Code limits the amount of money that can be contributed into a “qualified” fund. Contributions made into a qualified fund are tax deductible. In the most recent study the total cost of decommissioning, Power’s share of its five nuclear units was estimated at approximately $1.8 billion in year-end 2002 dollars, excluding contingencies.

Note 15. Other Income and Deductions

Other Income

	PSE&G		Power		Energy Holdings		Other (A)			Consolidated Total
For the Year Ended December 31, 2002:	(Millions)
Interest Income	$	17	$	—	$	—	$	2		$	19
Gain on Disposition of Property		10		—		—		—			10
Change in Derivative Fair Value		—		—		12		—			12
Gain on Early Retirement of Debt		—		—		13		—			13
Other		1		—		—		2			3
Total Other Income	$	28	$	—	$	25	$	4		$	57
For the Year Ended December 31, 2001:
Interest Income	$	104	$	—	$	—	$	(67	)	$	37
Gain on Disposition of Property		4		—		—		—			4
Other		3		—		6		—			9
Total Other Income	$	111	$	—	$	6	$	(67	)	$	50
For the Year Ended December 31, 2000:
Interest Income	$	164	$	1	$	—	$	(143	)	$	22
Litigation Settlement		6		6		—		(6	)		6
Minority Interest		—		—		—		1			1
Foreign Currency Gains		—		—		3		—			3
Other		3		—		—		(2	)		1
Total Other Income	$	173	$	7	$	3	$	(150	)	$	33

167

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Other Deductions

	PSE&G		Power		Energy Holdings		Other (A)		Consolidated Total
For the Year Ended December 31, 2002:	(Millions)
Donations	$	2	$	—	$	—	$—		$	2
Minority Interest		—		—		—	2			2
Foreign Currency Losses		—		—		70	—			70
Other		—		—		3	2			5
Total Other Deductions	$	2	$	—	$	73	$4		$	79
For the Year Ended December 31, 2001:
Donations	$	3	$	—	$	—	$—		$	3
Minority Interest		—		—		—	1			1
Foreign Currency Losses		—		—		9	—			9
Loss on Early Retirement of Debt		—		—		3	—			3
Other		1		—		—	(2	)		(1	)
Total Other Deductions	$	4	$	—	$	12	$(1	)	$	15
For the Year Ended December 31, 2000:
Donations	$	3	$	—	$	—	$(3	)	$	—
Other		1		—		3	(1	)		3
Total Other Deductions	$	4	$	—	$	3	$(4	)	$	3

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

168

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Note 16. Income Taxes

     A reconciliation of reported income tax expense with the amount computed by multiplying pre-tax income by the statutory Federal income tax rate of 35% is as follows:

	PSE&G				Power			Energy Holdings				Other			Consolidated Total
2002	(Millions)
Net Income (Loss)		$	201		$	468			$	(403	)	$	(21	)		$	245
Loss from Discontinued Operations,
(Including Loss on Disposal, Net of Tax— $27)			––			––				(51	)		––		(51			)
Cumulative Effect of a Change in
Accounting Principle, (Net of Tax— $66)			––			––				(120	)		––		(120			)
Minority Interest in Earnings of Subsidiaries			––			––				(2	)		2				––
Net Income before Retained Earnings
Adjustment and Minority Interests			201			468				(230	)		(23	)			416
Preferred Dividends (net)			(4	)		––				(23	)		20				(7	)
Net Income before Retained Earnings
Adjustment and Preferred Dividends			205			468				(207	)		(43	)			423
Income Taxes:
Federal – Current			121			184				(108	)		(29	)			168
Deferred			(44	)		69				(23	)		6				8
ITC			(2	)		––				(2	)		––				(4	)
Total Federal			75			253				(133	)		(23	)			172
State – Current			17			41				(1	)		(7	)			50
Deferred			23			19				(27	)		––				15
Total State			40			60				(28	)		(7	)			65
Foreign – Current			––			––				1			––				1
Deferred			––			––				10			––				10
Total Foreign			––			––				11			––				11
Total			115			313				(150	)		(30	)			248
Pre-tax Income		$	320		$	781			$	(357	)	$	(73	)		$	671
Tax computed at the statutory rate		$	112		$	273			$	(125	)	$	(25	)		$	235
Increase (decrease) attributable to flow through    of certain tax adjustments:
Plant Related Items			(15	)		––				––			––				(15	)
Amortization of investment tax credits			(2	)		––				(2	)		––				(4	)
Other			(6	)		1				2			(1	)			(4	)
Tax Effects Attributable to Foreign
Operations			––			––				(11	)		––				(11	)
New Jersey Corporate Business Tax			26			39				(14	)		(4	)			47
Subtotal			3			40				(25	)		(5	)			13
Total income tax provisions		$	115		$	313			$	(150	)	$	(30	)		$	248
Effective income tax rate	35.9			%	40.1		%	42.0			%	41.1		%	37.0			%

169

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

	PSE&G			Power			Energy Holdings			Other			Consolidated Total
							(Millions)
2001
Net Income (Loss)	$	230		$	394		$	161		$	(15	)		$	770
Loss from Discontinued Operations, (Net of Tax— $8)		––			––			(15	)		––				(15	)
Cumulative Effect of a Change in Accounting
Principle, (Net of Tax— $8)		––			––			9			––				9
Minority Interest in Earnings of Subsidiaries		––			––			(1	)		1				––
Net Income before Retained Earnings
Adjustment and Minority Interests		230			394			168			(16	)			776
Preferred Dividends (net)		(5	)		––			(22	)		––				(27	)
Net Income before Retained Earnings
Adjustment and Preferred Dividends		235			394			190			(16	)			803
Income Taxes:
Federal – Current		250			139		(100		)		(31	)			258
Deferred	(192		)		74			161			13				56
ITC		(2	)		––			(1	)		––				(3	)
Total Federal		56			213			60			(18	)			311
State – Current		42			17			9			(4	)			64
Deferred		(9	)		20			(11	)		(1	)			(1	)
Total State		33			37			(2	)		(5	)			63
Foreign – Current		––			––			1			––				1
Deferred		––			––			6			––				6
Total Foreign		––			––			7			––				7
Total		89		250				65			(23	)			381
Pre-tax Income	$	324		$	644		$	255		$	(39	)		$	1,184
Tax computed at the statutory rate	$	113		$	225		$	89		$	(13	)		$	414
Increase (decrease) attributable to flow through   of certain tax adjustments:
Plant Related Items		(41	)		––			––			––				(41	)
Amortization of investment and energy tax credits		(2	)		––			(1	)		––				(3	)
Other		(2	)		1			(2	)		(1	)			(4	)
Tax Effects Attributable to Foreign Operations		––			––			(18	)		––				(18	)
New Jersey Corporate Business Tax		21			24			(3	)		(9	)			33
Subtotal		(24	)		25			(24	)		(10	)			(33	)
Total income tax provisions	$	89		$	250		$	65		$	(23	)		$	381
Effective income tax rate	27.4		%	38.8		%	25.4		%	59.0		%	32.2			%

170

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

	PSE&G (A)				Power (A)				Energy Holdings					Other (A)			Consolidated Total
2000	(Millions)
Net Income (Loss)		$	578			$	313			$	90			$	(217	)		$	764
Loss from Discontinued Operations,    (Net of Tax— $ 5)			––				––		(12			)			––				(12	)
Minority Interest in Earnings of Subsidiaries			––				––				1				(1	)			––
Net Income before Retained Earnings
Adjustment and Minority Interests			578				313		101						(216	)			776
Preferred securities (net)			(9	)			––		(24			)			24				(9	)
Net Income before Retained Earnings
Adjustment and Preferred Dividends			587				313		125						(240	)			785
Income Taxes:
Federal – Current			261				139		(127			)			(116	)			157
Deferred			50				25		169						(16	)			228
ITC			(1	)			––				(1	)			––				(2	)
Total Federal			310				164				41				(132	)			383
State – Current			150				114				4				(109	)			159
Deferred			(53	)			(70	)			2				71				(50	)
Total State			97				44				6				(38	)			109
Foreign – Current			––				––				––				––				––
Deferred			––				––				4				––				4
Total Foreign			––				––				4				––				4
Total			407				208				51				(170	)			496
Pre-tax Income		$	994			$	521			$	176			$	(410	)		$	1,281
Tax computed at the statutory rate		$	348			$	182			$	61			$	(143	)		$	448
Increase (decrease) attributable to flow through    of certain tax adjustments:
Plant Related Items			(15	)			––				––				––				(15	)
Amortization of investment tax credits			(1	)			––				(1	)			––				(2	)
Other			17				(4	)			1				(9	)			5
Tax Effects Attributable to Foreign
Operations			––				––		(14			)			––				(14	)
New Jersey Corporate Business Tax			58				30				4				(18	)			74
Subtotal			59				26		(10			)			(27	)			48
Total income tax provisions		$	407			$	208			$	51			$	(170	)		$	496
Effective income tax rate	40.9			%	39.9			%	29.0			%	41.5			%	38.7			%

(A)  Included in Power’s results for 2000 are the results of PSE&G’s generation business prior to the generation-related asset transfer in August 2000. For additional information see Note 19. Financial Information by Business Segments.

     PSEG, PSE&G, Power and Energy Holdings

     Each of PSEG, PSE&G, Power and Energy Holdings provide deferred taxes at the enacted statutory tax rate for all temporary differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities irrespective of the treatment for rate-making purposes. Management believes that it is probable that the accumulated tax benefits that previously have been treated as a flow-through item to PSE&G customers will be recovered from PSE&G’s customers in the future. Accordingly, an offsetting regulatory asset was established. As of December 31, 2002, PSE&G had a deferred tax liability and an offsetting regulatory asset of $328 million representing the tax costs expected to be recovered through rates based upon established regulatory practices which permit recovery of current taxes payable. This amount was determined using the enacted Federal income tax rate of 35% and State income tax rate of 9%.

     Energy Holdings

     Energy Holdings’ effective tax rate differs from the statutory Federal income tax rate of 35% primarily due to the imposition of state taxes and the fact that Global accounts for many of its foreign investments using the equity method of accounting. Under such accounting method, Global reflects in revenues its pro-rata share of the investment’ s net income. The foreign income taxes are a component of each PSEG and Energy Holdings’ equity in earnings rather than included as a component of the income tax provision.

171

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

The following is an analysis of deferred income taxes:

	PSE&G						Power						Energy Holdings						Other					Consolidated
	2002			2001			2002			2001			2002			2001			2002			2001		2002			2001
Deferred Income Taxes	(Millions)
Assets:
Current (net)		$	16		$	21	$ ––			$ ––				$ ––			$ ––		$ ––				$ ––		$	16		$	21
Non-current:
Unrecovered Investment Tax Credits			19			19		––			––			––			––			––			––			19			19
Nuclear Decommissioning		––			––			26			25			––			––			––			––			26			25
SFAS 133		––			––			2			3			45			14			9			2			56			19
Other Comprehensive Income		122			––			58			––			3			––			24			––		207				––
New Jersey Corporate Business Tax		380			407			125			137			(5	)		(13	)		––			––		500			531
OPEB			99			83		––			––			––			––			––			––			99			83
Cost of Removal		––			––			51			54			––			––			––			––			51			54
Investment Related Adjustments		––			––			––			––			270			––			––			––		270				––
Development Fees		––			––			––			––			22			21			––			––			22			21
Foreign Currency Translation		––			––			––			––			34			29			––			––			34			29
Contractual Liabilities and
Environmental Costs		––			––			35			35			––			––			––			––			35			35
Market Transition Charge			64			56		––			––			––			––			––			––			64			56
Total Non-current		684			565			297			254			369			51			33			2		1,383			872
Total Assets		700			586			297			254			369			51			33			2		1,399			893
Liabilities:
Non-current:
Plant Related Items		1,244			1,228		(276		)	(341		)		––			––			5			3		973			890
Securitization		1,545			1,594			––			––			––			––			––			––		1,545			1,594
Leasing Activities		––			––			––			––			1,298			1,146			––			––		1,298			1,146
Partnership Activities		––			––			––			––			66			73			––			––			66			73
Conservation Costs			10			24		––			––			––			––			––			––			10			24
Pension Costs			84			70		25			15			(3)			––			15			9		121				94
Taxes Recoverable Through
Future Rates (net)		145			130			––			––			––			––			––			––		145			130
Income from Foreign Operation		––			––			––			––			42			41			––			––			42			41
Other			38			14		(4	)		1			1			(6	)		4			6			39			15
Total Non-current		3,066			3,060		(255		)	(325		)		1,404			1,254			24			18		4,239			4,007
Total Liabilities		3,066			3,060		(255		)	(325		)		1,404			1,254			24			18		4,239			4,007
Summary — Accumulated
Deferred Income Taxes:
Net Current Assets			16			21		––			––			––			––			––			––			16			21
Net Non-current Liability		2,382			2,495		(552		)	(579		)		1,035			1,203			(9	)		16		2,856			3,135
Total	$	2,366		$	2,474		$	(552	)	$	(579	)	$	1,035		$	1,203		$	(9	)	$	16	$	2,840		$	3,114

172

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Note 17. Pension, Other Postretirement Benefit (OPEB) and Savings Plans

     PSEG sponsors several qualified and nonqualified pension plans and other postretirement benefit plans covering PSEG, as well as its participating affiliates, current and former employees who meet certain eligibility criteria. The following table provides a reconciliation of the changes in the fair value of plan assets over each of the two years in the period ended December 31, 2002 and a reconciliation of the funded status at the end of both years.

Pension and Other Postretirement Benefit Plans

	Pension Benefits						Other Benefits
	2002			2001			2002			2001
	(Millions)						(Millions)
Change in Benefit Obligation:
Benefit Obligation at Beginning of Year	$	2,676		$	2,494		$	674		$	703
Service Cost		69			63			18			16
Interest Cost		188			182			47			47
Actuarial (Gain)/Loss		162			90			84			8
Benefits Paid		(156	)		(153	)		(48	)		(40	)
Plan Amendments		7			––			––			(60	)
Business Combinations		22			––			2			––
Benefit Obligation at End of Year		2,968			2,676			777			674
Change in Plan Assets:
Fair Value of Assets at Beginning of Year		2,228			2,376			40			28
Actual Return on Plan Assets		(192	)		(85	)		(3	)		(1	)
Employer Contributions		240			90			61			53
Benefits Paid		(156	)		(153	)		(48	)		(40	)
Business Combinations		11			––			1			––
Fair Value of Assets at End of Year		2,131			2,228			51			40
Reconciliation of Funded Status:
Funded Status		(837	)		(448	)		(726	)		(634	)
Unrecognized Net
Transition Obligation		5			12			248			276
Prior Service Cost		104			114			––			––
(Gain) Loss		1,003			456			(25	)		(120	)
Net Amount Recognized	$	275		$	134		$	(503	)	$	(478	)
Amounts Recognized in Statement of
Financial Position:
Prepaid Benefit Cost	$	3		$	160		$ ––			$ ––
Accrued Cost		(343	)		(53	)		(503	)		(478	)
Intangible Asset		114			20			N/A			N/A
Accumulated Other Comprehensive Income (pre-tax)		501			7			N/A			N/A
Net Amount Recognized	$	275		$	134		$	(503	)	$	(478	)
Separate Disclosure for Pension Plans With
Accumulated Benefit Obligation in Excess of
Plan Assets:
Projected Benefit Obligation at End of Year	$	2,946		$	76
Accumulated Benefit Obligation at End of Year	$	2,451		$	61
Fair Value of Assets at End of Year	$	2,113		$	8

173

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

     The pension benefits table above provides information relating to the funded status of all qualified and nonqualified pension plans and other postretirement benefit plans on an aggregate basis.

	Pension Benefits									Other Benefits
	2002			2001			2000			2002			2001			2000
	(Millions)									(Millions)
Components of Net Periodic Benefit Cost:
Service Cost	$	69		$	63		$	60		$	19		$	16		$	12
Interest Cost		188			182			173			47			47			54
Expected Return on Plan Assets		(206	)		(211	)		(221	)		(4	)		(3	)		(3	)
Amortization of Net
Transition Obligation		8			8			8			27			27			31
Prior Service Cost		17			16			14			––			––			2
(Gain)/Loss		13			––			1			(4	)		(6	)		(3	)
Net Periodic Benefit Cost	$	89		$	58		$	35		$	85		$	81		$	93
Components of Total Benefit Expense:
Net Periodic Benefit Cost	$	89		$	58		$	35		$	85		$	81		$	93
Effect of Regulatory Asset		––			––			––			19			19			19
Total Benefit Expense Including Effect of
Regulatory Asset	$	89		$	58		$	35		$	104		$	100		$	112
Components of Other Comprehensive Income:
Decrease in Intangible Asset	$	(95	)	$	3		$	1
Increase in Additional Minimum Liability		589			1			(2	)
Other Comprehensive Income (pre-tax)	$	494		$	4		$	(1	)		N/A			N/A			N/A
Weighted-Average Assumptions as of December 31:
Discount Rate		6.75	%		7.25	%		7.50	%		6.75	%		7.25	%		7.50	%
Expected Return on Plan Assets		9.00	%		9.00	%		9.00	%		9.00	%		9.00	%		9.00	%
Rate of Compensation Increase		4.69	%		4.69	%		4.69	%		4.69	%		4.69	%		4.69	%
Rate of Increase in Health Benefit Costs
Administrative Expense											5.00	%		5.00	%		5.00	%
Dental Costs											6.00	%		6.00	%		6.00	%
Pre-65 Medical Costs
Immediate Rate											9.00	%		9.50	%		10.00	%
Ultimate Rate											6.00	%		6.00	%		6.00	%
Year Ultimate Rate Reached											2008			2008			2008
Post-65 Medical Costs
Immediate Rate											7.00	%		7.50	%		8.00	%
Ultimate Rate											6.00	%		6.00	%		6.00	%
Year Ultimate Rate Reached											2004			2004			2004
Effect of a Change in the Assumed Rate of
Increase in Health Benefit Costs:
Effect of a 1% Increase On
Total of Service Cost and Interest Cost											4.7			4.6			4.5
Postretirement Benefit Obligation											45.7			45.4			48.5
Effect of a 1% Decrease On
Total of Service Cost and Interest Cost											(4.0	)		(3.9	)		(3.8	)
Postretirement Benefit Obligation											(38.9	)		(39.1	)		(41.4	)

174

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

401K Plans

     PSEG sponsors two defined contribution plans. Eligible represented employees of PSE&G, Power and Services participate in the PSEG Employee Savings Plan (Savings Plan), while eligible non-represented employees of PSE&G, Power, Energy Holdings and Services participate in the PSEG Thrift and Tax-Deferred Savings Plan (Thrift Plan). These plans are 401(k) plans to which eligible employees may contribute up to 50% of their compensation. Employee contributions up to 7% for Savings Plan participants and up to 8% for Thrift Plan participants are matched with employer contributions of cash or PSEG common stock equal to 50% of such employee contributions. For periods prior to March 1, 2002, employer contributions, related to participant contributions in excess of 5% and up to 7%, were made in shares of PSEG common stock for Savings Plan participants. For periods prior to March 1, 2002, Employer contributions, related to participant contributions in excess of 6% and up to 8%, were made in shares of PSEG common stock for Thrift Plan participants. The shares for these contributions were purchased in the open market. Beginning on March 1, 2002, and thereafter, all Employer contributions will be made in cash to each plan. The amount expensed for Employer matching contributions to the plans was approximately $25 million, $24 million, and $22 million in 2002, 2001 and 2000, respectively.

     PSE&G, Power, Energy Holdings and Services eligible employees participate in non-contributory pension and OPEB plans sponsored by PSEG and administered by Services. In addition, represented and nonrepresented employees are eligible for participation in PSEG’s two defined contribution plans described above.

PSE&G

     PSE&G’s pension costs amounted to $46 million, $30 million and $17 million for the years ended December 31, 2002, 2001 and 2000, respectively. For 2002, this amount represented approximately 52% of PSEG’s total consolidated pension costs. PSE&G’s Thrift Plan and Savings Plan matching costs amounted to approximately $13 million, $12 million and $11 million for the years ended December 31, 2002, 2001 and 2000, respectively. PSE&G’s OPEB costs amounted to $95 million, $95 million, and $109 million for the years ended December 31, 2002, 2001, and 2000, respectively. For 2002, this amount represented approximately 92% of PSEG’s total consolidated OPEB costs.

Power

     Power’s pension costs amounted to $26 million, $16 million and $9 million for the years ended December 31, 2002, 2001 and 2000, respectively. For 2002, this amount represented approximately 29% of PSEG’s total consolidated pension costs. Power’s Thrift Plan and Savings Plan matching costs amounted to approximately $8 million, $8 million and $8 million for the years ended December 31, 2002, 2001 and 2000, respectively. Power’s OPEB costs amounted to $6 million, $4 million, and $2 million for the years ended December 31, 2002, 2001, and 2000, respectively. For 2002, this amount represented approximately 6% of PSEG’s total consolidated OPEB costs.

Energy Holdings

     Energy Holdings’ pension costs amounted to $2 million and $1 million for the years ended December 31, 2002 and 2001, respectively. For 2002, this amount represented approximately 4% of PSEG’s total consolidated pension costs. Energy Holdings’ Thrift Plan and Savings Plan matching costs amounted to approximately $1 million for each of the years ended December 31, 2002, 2001 and 2000. Energy Holdings OPEB costs amounted to less than $1 million for each of the years ended December 31, 2002, 2001 and 2000.

175

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Note 18. Stock Options and Employee Stock Purchase Plan

PSEG

     Stock Options

     Under PSEG’s 1989 Long-Term Incentive Plan (1989 LTIP) and its 2001 Long-Term Incentive Plan (2001 LTIP), non-qualified options to acquire shares of common stock may be granted to officers and other key employees of PSEG, PSE&G, Power, Energy Holdings and Services selected by the Organization and Compensation Committee of PSEG’s Board of Directors, the plan’s administrative committee (Committee). In addition, certain key executives have received option grants under the 1989 LTIP in connection with their employment agreements. Payment by option holders upon exercise of an option may be made in cash or, with the consent of the Committee, by delivering previously acquired shares of PSEG common stock. In instances where an optionee tenders shares acquired from a grant previously exercised that were held for a period of less than six months, an expense will be recorded for the difference between the fair market value at exercise date and the option price. Options are exercisable over a period of time designated by the Committee (but not prior to one year from the date of grant) and are subject to such other terms and conditions as the Committee determines. Vesting schedules may be accelerated upon the occurrence of certain events, such as a change in control. Options may not be transferred during the lifetime of a holder.

     The 1989 LTIP currently provides for the issuance of up to 8,000,000 options to purchase shares of common stock. At December 31, 2002, there were 3,817,717 options available for future grants under the 1989 LTIP.

     The 2001 LTIP currently provides for the issuance of up to 15,000,000 options to purchase shares of common stock. At December 31, 2002, there were 9,241,500 options available for future grants under the 2001 LTIP.

     PSEG purchases shares on the open market to meet the exercise of stock options. The difference between the cost of the shares (generally purchased on the date of exercise) and the exercise price of the options has been reflected in Stockholders’ Equity except where otherwise discussed.

     Changes in common shares under option for the three fiscal years in the period ended December 31, 2002 are summarized as follows:

	2002				2001				2000
	Options		Weighted Average Exercise Price		Options		Weighted Average Exercise Price		Options		Weighted Average Exercise Price
Beginning of year	7,652,463		$	41.22	5,186,099		$	40.38	2,561,883		$	34.60
Granted	1,890,000			31.62	2,833,000			41.84	2,745,500			45.33
Exercised	(157,332	)		36.28	(303,135	)		32.83	(110,684	)		29.87
Canceled	(192,500	)		41.94	(63,501	)		41.27	(10,600	)		31.23
End of year	9,192,631			39.32	7,652,463			41.22	5,186,099			40.38
Exercisable at end of year	4,542,165		$	40.24	2,767,830		$	39.19	1,170,278		$	34.91
Weighted average fair
value of options granted
during the year			$	4.37			$	7.22			$	8.73

176

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

      The following table provides information about options outstanding at December 31, 2002:

Options Outstanding						Options Exercisable
Range of Exercise Prices		Outstanding at December 31, 2002	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Exercisable at December 31, 2002	Weighted Average Exercise Price
$	25.03— $ 30.02	173,300	5.0 years	$	29.56	173,300	$	29.56
$	30.03— $ 35.03	2,930,331	8.9 years		32.05	1,070,331		33.13
$	35.04— $ 40.03	690,500	6.0 years		39.31	690,500		39.31
$	40.04— $ 45.04	3,169,000	8.6 years		41.83	1,306,716		42.16
$	45.05— $ 50.05	2,229,500	8.1 years		46.06	1,301,318		46.07
$	25.03— $ 50.05	9,192,631	8.3 years	$	39.32	4,542,165	$	40.24

     For this purpose, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 2002, 2001, and 2000, respectively: expected volatility of 30.24%, 28.22% and 26.63%, risk free interest rates of 2.82%, 4.40% and 6.06%, expected lives of 4.0 years, 4.2 years and 4.4 years, respectively. There was a dividend yield of 6.84% in 2002, 5.18% in 2001 and 4.77% in 2000.

     PSEG applies APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for stock-based compensation plans, which are described below. 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. Had compensation costs for stock option grants been determined based on the fair value at the grant dates for awards under these plans in accordance with SFAS No. 123 “Accounting for Stock-Based Compensation,” there would have been a charge to net income of approximately $10.4 million, $9.6 million and $3.6 million in 2002, 2001 and 2000, respectively, with a $(0.05), $(0.05) and $(0.02) impact on earnings per share in 2002, 2001 and 2000, respectively.

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

	Year Ended December 31,
	2002			2001			2000
				(Millions)
Net Income, as reported	$	245		$	770		$	764
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects		(10	)		(10	)		(4	)
Pro forma Net Income	$	235		$	760		$	760
Earnings per share:
Basic and Diluted – as reported	$	1.17		$	3.70		$	3.55
Basic and Diluted – pro forma	$	1.12		$	3.65		$	3.53

Diluted Earning Per Share

     Diluted earning per share assumes the issuance of potentially dilutive common shares outstanding during the period and the repurchase of common shares that would have occurred with proceeds from the assumed issuance.

177

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

     These potentially dilutive instruments include stock options, vesting of non-vested stock awards, and certain convertible preferred securities.

     As shown in the tables above, as of December 31, 2002, options to purchase approximately 9.2 million shares of common stock at an average price of $39.32 per share were outstanding during 2002. These securities were not included in the computation of diluted EPS because these options’ exercise price was greater than the average market price of common shares, thus making these securities anti-dilutive.

Stock Compensation

     Executive Officers

     In June 1998, the Committee granted 150,000 shares of restricted common stock to a key executive. An additional 60,000 shares of restricted stock was granted to this executive in November 2001. These shares are subject to restrictions on transfer and subject to risk of forfeiture until earned by continued employment. The shares vest on a staggered schedule beginning on March 31, 2002 and become fully vested on March 31, 2007. The unearned compensation related to this restricted stock grant as of December 31, 2002 is approximately $4 million and is included in retained earnings on the consolidated balance sheets.

     In addition, in July 2001, the Committee granted 100,000 shares of restricted common stock to another key executive. These shares are subject to restrictions on transfer and subject to risk of forfeiture until earned by continued employment. The shares vest at one-third per year and become fully vested on July 1, 2004. The unearned compensation related to this restricted stock grant as of December 31, 2002 is approximately $2 million and is included in retained earnings on the consolidated balance sheets.

     Outside Directors

     During 2002, a director who was not an officer of PSEG or its subsidiaries and affiliates was paid an annual retainer of $30,000 and a fee of $1,500 for attendance at any Board or committee meeting, inspection trip, conference or other similar activity relating to PSEG or PSE&G. This amount was raised to $40,000 effective for 2003. Pursuant to the Compensation Plan for Outside Directors, a certain percentage, currently fifty percent, of the annual retainer is paid in PSEG Common Stock. No additional retainer is paid for service as a director of PSE&G. Each Committee Chair received an additional annual retainer of $3,000, increased for 2003 to $5,000 except for the Chair of the Audit Committee, who will receive $10,000. In addition, beginning in 2003, each member of the Audit Committee will receive an annual retainer of $5,000. In January 2003, PSEG amended the Compensation Plan for Outside Directors pursuant to which 100,000 shares of Common Stock may be awarded to directors of PSEG who are not employees of PSEG or its subsidiaries.

     PSEG also maintains a Stock Plan for Outside Directors pursuant to which directors of PSEG who are not employees of PSEG or its subsidiaries receive shares of restricted stock for each year of service as a director. For 2002, this amount was 600 shares, increased to 800 shares for 2003. The restrictions on the stock granted under the Stock Plan for Outside Directors provide that the shares are subject to forfeiture if the director leaves service at any time prior to the Annual Meeting of Stockholders following his or her 70th birthday. This restriction would be deemed to have been satisfied if the director’s service were terminated after a “change in control” as defined in the Plan or if the director were to die in office. PSEG also has the ability to waive these restrictions for good cause shown. Restricted stock may not be sold or otherwise transferred prior to the lapse of the restrictions. Dividends on shares held subject to restrictions are paid directly to the director, and the director has the right to vote the shares. The fair value of these shares is recorded as compensation expense in the Consolidated Statements of Operations. In January 2003, PSEG adopted the Stock Plan for Outside Directors pursuant to which 100,000 shares of Common Stock may be awarded as restricted stock to directors of PSEG who are not employees of PSEG or its subsidiaries.

178

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Employee Stock Purchase Plan

     PSEG maintains an employee stock purchase plan for all eligible employees of PSEG, PSE&G, Power, Energy Holdings and Services. Under the plan, shares of the common stock may be purchased at 95% of the fair market value through payroll deductions. Employees may purchase shares having a value not exceeding 10% of their base pay. During 2002, 2001, and 2000, employees purchased 104,627, 85,552, and 101,986 shares at an average price of $36.41, $44.02, and $37.06 per share, respectively. At December 31, 2002, 169,456 shares were available for future issuance under this plan. In January 2003, an additional 2,000,000 shares were authorized for this plan.

Note 19. Financial Information by Business Segments

Basis of Organization

     PSEG, PSE&G, Power and Energy Holdings

     The reportable segments were determined by management in accordance with SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information” (SFAS 131). These segments were determined based on how management measures the performance based on segment net income, as illustrated in the following table, and how it allocates resources to each business.

     The majority of operations within the business segment Energy Technologies were reclassified into discontinued operations during 2002. The DSM investments, which were the only remaining continuing operations of Energy Technologies, were transferred to Resources effective December 31, 2002. Therefore, Energy Technologies is no longer reported as a separate segment. The amounts related to Energy Technologies are included in Energy Holdings’ Other Activities and all prior periods have been restated to conform to the current year’s presentation.

     Power

     Power earns revenues by selling energy, capacity and ancillary services on a wholesale basis under contract to power marketers and to load serving entities (LSEs) and by bidding the energy, capacity and ancillary services of Power into the market. Power also enters into trading contracts for energy capacity, firm transmission rights, gas, emission allowances and other energy related contracts to optimize the value of its portfolio of generating assets and its electric and gas supply obligations.

     Power’s business has evolved during 2002. With the transfer of the BGSS contract to Power and the commencement of the new BGS contracts with wholesale electric suppliers, Power’s business has become a fully integrated wholesale energy supply business. As a result of that evolution of Power’s business, trading activities changed from a stand-alone operation to a function that has become fully integrated with the wholesale energy supply business and primarily serves to optimize the value of that business. Therefore, upon review and in accordance with SFAS 131, PSEG determined that Power’s generation and trading components no longer meet the definition of separate operating segments for financial reporting purposes and PSEG has reported Power’s financial position and results of operations as one segment. All prior periods have been reclassified to conform to the current presentation.

     PSE&G

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

179

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

     Energy Holdings

Global

     Global earns revenues from its investment in and operation of projects in the generation and distribution of energy, both domestically and internationally. Global has ownership interests in four distribution companies (excluding those in Argentina which were fully impaired during 2002) which serve approximately 2.9 million customers and has developed or acquired interests in electric generation facilities which sell energy, capacity and ancillary services to numerous customers. The generation plants sell power under long-term agreements as well as on a merchant basis while the distribution companies are rate-regulated enterprises.

Resources

     Resources earns revenues from its passive investments in leveraged leases, limited partnerships, leveraged buyout funds and marketable securities. Over 75% of Resources’ investments are in energy industry related leveraged leases. DSM Investments were transferred to Resources on December 31, 2002 and earn revenues primarily from monthly payments from utilities, representing shared electricity savings from the installation of energy efficient equipment. Resources operates both domestically and internationally, however, revenues from all international investments are denominated in US dollars.

Other

     Energy Holdings’ other activities include amounts applicable to Energy Holdings (parent company), the HVAC/operating companies of Energy Technologies, which were reclassified into discontinued operations in 2002, and EGDC. The net losses primarily relate to financing and certain administrative and general costs at the Energy Holdings parent corporation.

     Other

     PSEG’s other activities include amounts applicable to PSEG (parent corporation), and intercompany eliminations, primarily relating to intercompany transactions between Power and PSE&G. No gains or losses are recorded on any intercompany transactions, rather, all intercompany transactions are at cost or, in the case of the BGS and 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 22. Related-Party Transactions. The net losses primarily relate to financing and certain administrative and general costs at the PSEG parent corporation.

180

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Information related to the segments of PSEG’s and its subsidiaries is detailed below:

					Energy Holdings
	Power		PSE&G		Resources		Global			Other			Other			Consolidated Total
	(Millions)
For the Year Ended December 31, 2002:
Total Operating Revenues	$	3,670	$	5,919	$	247	$	501		$	1		$	(1,948	)	$	8,390
Depreciation and Amortization		108		409		5		29			1			19			571
Operating Income (Loss)		903		713		213		(296	)	(12		)		5			1,526
Interest Income		—		17		—		—		—				2			19
Net Interest Charges		122		406		99		115		—				41			783
Income (Loss) Before Income Taxes		781		320		121		(465	)	(13		)		(80	)		664
Income Taxes		313		115		37		(184	)	(3		)		(30	)		248
Equity in Earnings of Unconsolidated    Subsidiaries		—		—		1		58		—				—			59
Income (Loss) Before Discontinued
Operations and Cumulative Effect of a
Change in Accounting Principle		468		201		84		(285	)	(8		)		(44	)		416
Income (Loss) from Discontinued Operations		—		—		—		(9	)	(42		)		—			(51	)
Cumulative Effect of a Change in Accounting Principle		—		—		—		(88	)	(32		)		—			(120	)
Segment Earnings (Loss)		468		201		78		(399	)	(82		)		(21	)		245
As of December 31, 2002:
Total Assets	$	6,964	$	12,429	$	3,086	$	3,802		$	(50	)	$	(489	)	$	25,742
Investments in Equity Method Subsidiaries	$	—	$	—	$	118	$	1,300		$	20		$	—		$	1,438
For the Year Ended December 31, 2002:
Gross Additions to Long-Lived Assets	$	1,318	$	472	$	37	$	579		$	(4	)	$	(64	)	$	2,338
For the Year Ended December 31, 2001:
Total Operating Revenues	$	2,452	$	6,091	$	241	$	396		$	1		$	(2,126	)	$	7,055
Depreciation and Amortization		95		370		4		11		1				15			496
Operating Income		787		691		211		243		(13		)		(3	)		1,916
Interest Income		—		104		—		—		—				(67	)		37
Net Interest Charges		143		450		100		78		2				(51	)		722
Income Before Income Taxes		644		324		111		153		(9		)		(66	)		1,157
Income Taxes		250		89		34		35		(4		)		(23	)		381
Equity in Earnings of Unconsolidated Subsidiaries		—		—		55		143		—				—			198
Income (Loss) Before Discontinued Operations and Cumulative Effect of a Change in Accounting Principle		394		230		77		117		(5		)		(37	)		776
Income (Loss) from Discontinued
Operations		—		—		—		7		(22		)		—			(15	)
Cumulative Effect of a Change in Accounting Principle		—		—		—		9		—				—			9
Segment Earnings (Loss)		394		230		71		116		(26		)		(15	)		770
As of December 31, 2001:
Total Assets	$	5,239	$	12,927	$	3,085	$	4,074		$	280		$	(449	)	$	25,156
Investments in Equity Method Subsidiaries	$	—	$	—	$	163	$	1,541		$	19		$	—		$	1,723
For the Year Ended December 31, 2001:
Gross Additions to Long-Lived Assets	$	1,614	$	395	$	462	$	1,249		$	(31	)	$	16		$	3,705

  181

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

					Energy Holdings
	Power (A)		(A) PSE&G		Resources		Global		Other			Other			Consolidated Total
For the Year Ended December 31, 2000:	(Millions)
Total Operating Revenues	$	2,275	$	4,644	$	233	$	169	$	70		$	(870	)	$	6,521
Depreciation and Amortization		136		209		5		1		—			(1	)		350
Operating Income		712		869		207		120	(17		)		16			1,907
Interest Income		1		164		—		—		—			(143	)		22
Net Interest Charges		198		348		79		54		1			(109)			571
Income Before Income Taxes		521		638		128		69	(21		)		(63	)		1,272
Income Taxes		208		260		47		12		(8	)		(23	)		496
Equity in Earnings of Unconsolidated
Subsidiaries		—		—		13		157		—			—			170
Income (Loss) Before Discontinued
Operations		313		369		81		58	(13		)		(32	)		776
Loss from Discontinued Operations		—		—		—		—	(12		)		—			(12	)
Segment Earnings (Loss)		313		369		75		40	(25		)		(8	)		764

(A) Included in the Power segment for 2000 are the results of the generation business of PSE&G prior to the asset transfer in August 2000. These results through July 31, 2000 are included in PSE&G’s Consolidated Statement of Operations for the year ended December 31, 2000. Because Power’s historical information was derived from historical financial statements of PSE&G, these amounts are also included on Power’s Consolidated Statement of Operations for the year ended December 31, 2000. For segment reporting purposes, these amounts are appropriately classified as Power. Amounts relating to the generation business of PSE&G prior to the asset transfer to Power in August 2000 were as follows:

		(Millions)
Operating Revenues	$	1,243
Operating Expenses
Energy Costs		410
Operations and Maintenance		357
Depreciation and Amortization		77
Total Operating Expenses		844
Operating Income		399
Other Income		6
Interest Expense		(49	)
Income Taxes		(147	)
Net Income	$	209

182

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

     Geographic information for PSEG is disclosed below. The foreign assets and operations noted below were made solely through Energy Holdings.

	Revenues (A)						Assets (B)
	December 31,						December 31,
	2002		2001		2000		2002		2001
	(Millions)						(Millions)
United States	$	7,864	$	6,687	$	6,333	$	21,556	$	20,392
Foreign Countries		526		368		188		4,186		4,764
Total	$	8,390	$	7,055	$	6,521	$	25,742	$	25,156
Identifiable assets in foreign countries include:
Chile							$	1,060	$	880
Netherlands								988		911
Argentina								—		737
Peru								429		520
Tunisia								322		245
India (C)								38		288
Poland								380		166
Brazil								211		282
Other								758		735
Total							$	4,186	$	4,764

(A)	Revenues are attributed to countries based on the locations of the investments. Global’s revenue includes its share of the net income from joint ventures recorded under the equity method of accounting.
(B)	Total assets are net of foreign currency translation adjustment of $(340) million (pre-tax) as of December 31, 2002 and $(285) million (pre-tax) as of December 31, 2001.
(C)	Approximately $257 million at December 31, 2001 relates to Tanir Bavi, which was discontinued as of June 30, 2002 and was sold in October 2002.
As of December 31, 2002, Global and Resources had approximately $2.9 billion and $1.3 billion, respectively of international assets. As of December 31, 2002, foreign assets represented 16% and 61% of PSEG’s and Energy Holdings’ consolidated assets, respectively, and the revenues related to those foreign assets contributed 6% and 70% to PSEG’s and Energy Holdings’ consolidated revenues, respectively, for the year ended December 31, 2002.
183

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Note 20. Property, Plant and Equipment and Jointly Owned Facilities

     Information related to Property, Plant and Equipment as of December 31, 2002 and 2001 is detailed below:

	PSE&G		Power		Energy Holdings		Other		PSEG Consolidated
2002	(Millions)
Generation:
Fossil Production	$	—	$	2,467	$	599	$	—	$	3,066
Nuclear Production		—		215		—		—		215
Nuclear Fuel in Service		—		527		—		—		527
Construction Work in Progress		—		2,062		466		—		2,528
Total Generation		—		5,271		1,065		—		6,336
Transmission and Distribution:
Electric Transmission		1,243		—		—		—		1,243
Electric Distribution		4,446		—		329		—		4,775
Gas Transmission		74		—		—		—		74
Gas Distribution		3,271		—		—		—		3,271
Construction Work in Progress		20		—		27		—		47
Plant Held for Future Use		18		—		—		—		18
Other		91		—		—		—		91
Total Transmission and Distribution		9,163		—		356		—		9,519
Other		418		76		113		100		707
Total	$	9,581	$	5,347	$	1,534	$	100	$	16,562
2001
Generation:
Fossil Production	$	—	$	1,856	$	88	$	—	$	1,944
Nuclear Production		—		154		—		—		154
Nuclear Fuel in Service		—		486		—		—		486
Construction Work in Progress		—		1,687		312		—		1,999
Total Generation		—		4,183		400		—		4,583
Transmission and Distribution:
Electric Transmission		1,201		—		—		—		1,201
Electric Distribution		4,254		—		577		—		4,831
Gas Transmission		74		—		—		—		74
Gas Distribution		3,121		—		—		—		3,121
Construction Work in Progress		26		—		32		—		58
Plant Held for Future Use		20		—		—		—		20
Other		89		—		—		—		89
Total Transmission and Distribution		8,785		—		609		—		9,394
Other		385		55		172		111		723
Total	$	9,170	$	4,238	$	1,181	$	111	$	14,700

184

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

     PSE&G and Power

     PSE&G and Power have ownership interests in and are responsible for providing their share of the necessary financing for the following jointly owned facilities. All amounts reflect the share of PSE&G’s and Power’s jointly owned projects and the corresponding direct expenses are included in Consolidated Statements of Operations as operating expenses.

December 31, 2002	Ownership Interest		Plant		Accumulated Depreciation
Power:	(Millions, where Applicable)
Coal Generating
Conemaugh	22.50	%	$	203		$	76
Keystone	22.84	%	$	155		$	56
Nuclear Generating
Peach Bottom	50.00	%	$	225		$	105
Salem	57.41	%	$	324		$	177
Nuclear Support Facilities	Various		$	34		$	13
Pumped Storage Facilities
Yards Creek	50.00	%	$	28		$	16
Merrill Creek Reservoir	13.91	%	$	2		$	—
PSE&G:
Transmission Facilities	Various		$	80		$	33
Linden SNG Plant	90.00	%	$	5		$	5
December 31, 2001
Power:
Coal Generating
Conemaugh	22.50	%	$	199		$	70
Keystone	22.84	%	$	128		$	51
Nuclear Generating
Peach Bottom	50.00	%	$	263		$	156
Salem	57.41	%	$	257		$	161
Nuclear Support Facilities	Various		$	32		$	9
Pumped Storage Facilities
Yards Creek	50.00	%	$	28		$	12
Merrill Creek Reservoir	13.91	%	$	2		$	—
PSE&G:
Transmission Facilities	Various		$	80		$	30
Linden SNG Plant	90.00	%	$	5		$	4

     Power

     Power holds undivided ownership interests in the jointly owned facilities above, excluding related nuclear fuel and inventories. Power is entitled to shares of the generating capability and output of each unit equal to its respective ownership interests. Power also pays its ownership share of additional construction costs, fuel inventory purchases and operating expenses. Power’s share of expenses for the jointly owned facilities is included in the appropriate expense category.

     Power’s subsidiary, PSEG Nuclear LLC (Nuclear) co-owns Salem and Peach Bottom with Exelon Generation Company, LLC. Nuclear is the owner-operator of Salem and Exelon Generation Company, LLC is the operator of Peach Bottom. A committee appointed by the co-owners reviews/approves major planning, financing and budgetary (capital and operating) decisions. Operating decisions within the above guidelines are made by the owner-operator.

     Reliant Resources is a co-owner and the operator for Keystone Generating Station and Conemaugh Generating Station. A committee appointed by all co-owners makes all planning, financing and budgetary (capital and operating) decisions. Operating decisions within the above guidelines are made by Reliant Resources.

185

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

     Power is a co-owner in the Yards Creek Pumped Storage Generation Facility. First Energy is also a co-owner and the operator of this facility. First Energy submits separate capital and Operations and Maintenance budgets, subject to the approval of Power.

     Power is a minority owner in the Merrill Creek Reservoir. Merrill Creek Reservoir is the owner-operator of this facility. The operator submits separate capital and Operations and Maintenance budgets, subject to the approval of the non-operating owners.

     All owners receive revenues, Operations and Maintenance and capital allocations based on their ownership percentages. Each owner is responsible for any financing with respect to its pro rata share of capital expenditures.

Note 21. Selected Quarterly Data (Unaudited)

     The information shown below, in the opinion of PSEG, PSE&G, Power and Energy Holdings, includes all adjustments, consisting only of normal recurring accruals, necessary to a fair presentation of such amounts.

	Calendar Quarter Ended
	March 31,								June 30,							September 30,							December 31,
	2002				2001				2002			2001				2002				2001			2002				2001
PSEG Consolidated:	(Millions, where Applicable)
Operating Revenues	$	1,914			$	2,186			$	1,469		$	1,216			$	2,328			$	1,615		$	2,679			$	2,038
Operating Income			538				586		(129		)			415				529			429				588				486
Income before Discontinued Operations    and Cumulative Effect of a Change in    Accounting Principle			181				256		(227		)			153				207			175				255				192
Income (loss) from Discontinued Operations			(1	)			(4	)		(37	)			(10	)			(3	)		(3	)			(10	)			2
Cumulative Effect of a Change in    Accounting Principle		(120		)			9			––				––				––			––				––				––
Net Income (Loss)			60				261		(264		)			143				204			172				245				194
Earnings per Share
(Basic and Diluted)			0.29			1.25			(1.28		)			0.68				0.99			0.83				1.14				0.95
Weighted Average Common       Shares and Potential Dilutive Effect          of Stock Options Outstanding			206				208			207				209				207			208				216				208
PSE&G:
Operating Revenues	$	1,659			$	1,952			$	1,230		$	1,311			$	1,405			$	1,395		$	1,625			$	1,433
Operating Income			210				247			107				146				184			159				212				139
Net Income			68				112			8				32				56			65				73				26
Earnings Available to PSEG			67				109			7				31				55			65				72				25
Power:
Operating Revenues	$		577		$		612		$	693		$		322		$	1,092			$	685		$	1,308			$		833
Operating Income			228				236			172				201				241			173				262				177
Net Income			120				102			83				104				121			87				144				101
Energy Holdings:
Operating Revenues	$		166		$		128		$	166		$		94		$		212		$	159		$		205		$		257
Operating Income			101				104		(411		)			70				103			94				112				173
Income before Discontinued Operations    and Cumulative Effect of a Change in    Accounting Principle			6				55		(310		)			27				43			32				52				75
(Loss) Income from Discontinued       Operations			(1	)			(4	)		(37	)			(10	)			(3	)		(3	)			(10	)			2
Cumulative Effect of a Change in
Accounting Principle		(120		)			9			––				––				––			––				––				––
Net (Loss) Income		(115		)			60		(347		)			17				40			29				42				77
(Loss) Earnings Available to PSEG		(121		)			54		(352		)			12				34			23				36				72

186

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Note 22. Related-Party Transactions

Affiliate Loans

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

     PSEG and PSE&G

     On January 31, 2001, PSE&G loaned approximately $1.1 billion to PSEG at 14.23% per annum and recorded interest income of approximately $33 million relating to the loan in 2001. PSEG repaid the loan on April 16, 2001. PSE&G also returned approximately $2.3 billion of capital to PSEG on January 31, 2001 utilizing proceeds from the $2.5 billion securitization transaction and the generation asset transfer, as required by the Final Order, as part of the recapitalization. For additional information, see Note 6. Regulatory Issues and Accounting Impacts of Deregulation.

     PSEG and Power

     As of December 31, 2002 and 2001, Power had a payable to PSEG of approximately $239 million and $164 million, respectively, for short-term funding needs. Interest expense related to these borrowings was $4 million and $23 million for the year ended December 31, 2002 and 2001, respectively.

     PSEG and Energy Holdings

     As of December 31, 2002, Energy Holdings had a receivable due from PSEG of $62 million. Interest Income related to this borrowing was immaterial.

Changes in Capitalization

     PSE&G

     PSE&G paid a common stock dividend of approximately $305 million to PSEG in 2002.

     Power

     During 2002, PSEG invested $200 million of additional equity in Power, the proceeds of which were used to repay short-term debt and fund additional investments.

     Energy Holdings

     During 2002, PSEG invested $400 million of additional equity in Energy Holdings, the proceeds of which were used to repay short-term debt and fund additional investments.

Tax Sharing Agreement

     PSEG, PSE&G, Power and Energy Holdings

     PSEG files a consolidated Federal income tax return with its affiliated companies. A tax allocation agreement exists between PSEG and its affiliated companies. The general operation of these agreements is that the subsidiary company will compute its taxable income on a stand-alone basis. If the result is a net tax liability, such amount shall be paid to PSEG. If there are net operating losses and/or tax credits, the subsidiary shall receive payment for the tax savings from PSEG to the extent that PSEG is able to utilize those benefits.

Power and Energy Holdings

     Foster Wheeler Ltd.

     Certain contracts were entered into with subsidiaries of Foster Wheeler Ltd. E. James Ferland, PSEG Chairman of the Board, President and Chief Executive Officer, serves on the Board of Directors of Foster Wheeler Ltd. Richard J. Swift, who serves on PSEG’s Board of Directors, was the President and Chief Executive Officer of Foster Wheeler Ltd. at the time the contracts were entered into. The original contracts were for approximately $369 million of engineering, procurement and construction services related to the development of certain generating facilities for Power, Global and Services, $129 million of which was rendered in 2002. As of December 31, 2002, the aggregate open commitment under the contracts is approximately $69 million, of which $6 million, $62 million and $1 million relates to Power, Global and Services, respectively. PSEG believes that the contracts were entered

187

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

into on commercial terms no more favorable than those available in an arms-length transaction from other parties and the pricing is consistent with that available from other third parties.

     Equipment Purchases and Sales

     Global purchased equipment from Power totaling $47 million and $30 million in 2002 and 2001, respectively. These amounts were sold at book value, thus no gain or loss was recorded on these transactions. As of December 31, 2002 and 2001, there were no outstanding receivables or payables related to such sales.

PSE&G and Power

     Transfer of Electric Generating Assets

     In August 2000, PSE&G transferred its electric generating assets to Power in exchange for a $2.786 billion Promissory Note. Interest on the Promissory Note was payable at an annual rate of 14.23%, which represented PSE&G’s weighted average cost of capital. For the year ended, December 31, 2000, PSE&G recorded interest income of approximately $143 million relating to the Promissory Note. For the period from January 1, 2001 to January 31, 2001, PSE&G recorded interest income of approximately $34 million relating to the Promissory Note. Power repaid the Promissory Note on January 31, 2001.

     Effective with the transfer of the electric generation business, Power charges PSE&G for the MTC and the energy and capacity provided to meet its BGS requirements. For the years ended December 31, 2002, 2001 and 2000, PSE&G was charged by Power approximately $1.2 billion, $2 billion and $0.8 billion, respectively, for the MTC and BGS. As of December 31, 2002, and 2001, PSE&G’s payable to Power (or Power’s receivable) relating to these costs was approximately $2 million and $158 million, respectively.

     For the years ended December 31, 2002, 2001 and 2000, PSE&G sold energy and capacity to Power at the market price of approximately $77 million, $158 million and $78 million, which PSE&G purchased under various NUG contracts at costs above market prices. As of December 31, 2002 PSE&G had no receivable (or Power’s payable) related to these purchases as compared to the $7 million receivable as of December 31, 2001. As a result of the Final Order, PSE&G has established an NTC to recover the above market costs related to these NUG contracts. The difference between PSE&G’s costs and recovery of costs through the NTC and sales to Power, which are priced at the locational marginal price (LMP) set by the PJM ISO for energy and at wholesale market prices for capacity, is deferred as a regulatory asset.

     These transactions were properly recognized on each company’s stand-alone financial statements and were eliminated when preparing PSEG’s consolidated financial statements. 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 BGSS contracts between Power and PSE&G, at rates prescribed by the BPU.

     Under the BGS contract, which terminated on July 31, 2002, Power sold energy directly to PSE&G, which in turn sold this energy to its customers. For the new BGS contract period beginning August 1, 2002, Power entered into contracts with third parties who are direct suppliers of New Jersey’s EDCs and PSE&G purchases the energy for its customers’ needs from such direct suppliers. Due to this change in the BGS model, these revenues and expenses were no longer recorded as intercompany revenues and expenses and were no longer eliminated in consolidation after August 1, 2002.

     Transfer of Gas Supply Contracts and Gas Inventory

     Effective May 1, 2002, PSE&G transferred its gas supply contracts and gas inventory requirements to Power for approximately $183 million. On the same date, PSE&G entered into a requirements contract with Power under which Power provides the gas supply services needed to meet PSE&G’s BGSS requirements. The contract term ends March 31, 2004 and PSE&G has a three-year renewal option. As part of the agreement, PSE&G is providing Power the use of its peak shaving facilities at cost.

     From May 1, 2002 through December 31, 2002, Power billed PSE&G approximately $703 million for BGSS. As of December 31, 2002, PSE&G’s payable to Power related to the BGSS contract was approximately $241 million.

188

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

PSEG, PSE&G, Power and Energy Holdings

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

	Services billed for the Year Ended December 31,				Payable to Services as of December 31,
	2002		2001		2002		2001
	(Millions)
PSEG	$	13	$	––	$	1	$	––
PSE&G	$	200	$	235	$	16	$	26
Power	$	119	$	130	$	2	$	14
Energy Holdings	$	22	$	23	$	3	$	3

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

Energy Holdings

     Operation and Maintenance and Development Fees

     Global provides operating, maintenance and other services to and receives management and guaranty fees from various joint ventures and partnerships in which it is an investor. Fees related to the development and construction of certain projects are deferred and recognized when earned. Income from these services of $3 million, $3 million, and $12 million, were included in Operating Revenues in the Consolidated Statements of Operations for the years ended December 31, 2002, 2001, and 2000, respectively.

     Affiliate Payables due to PSEG from Energy Technologies

     As of December 31, 2002 and December 31, 2001, Energy Technologies had recorded affiliate payables due to PSEG and its associated companies, other than Energy Holdings, of $12 million and $6 million, respectively. The amounts are recorded as a component of Current Liabilities of Discontinued Operations on the Consolidated Balance Sheets. Energy Technologies will repay the balance of the intercompany payable of $12 million prior to or upon the sale of the HVAC/mechanical operating companies.

     Loans to TIE

     Global and its partner, Panda Energy International, Inc., through Texas Independent Energy, L.P. (TIE), a 50/50 joint venture, owns and operates two electric generation facilities in Texas. As of December 31, 2002 and 2001, Global’s investments in the TIE partnership include $73 million and $165 million, respectively, of loans that earn interest at an annual rate of 12% that are expected to be repaid over the next 10 years. The loan structure was put in place to provide Global with a preferential cash and earnings flow from the projects after third-party debt service. Global received $101 million of loan repayments, including interest, and invested $51 million of equity in the TIE investments for the year ended December 31, 2002. Global’s share of interest earned was $10 million. However, only 50% of the interest received is being recorded as income as the interest related to Global’s 50% ownership share is being eliminated in consolidation.

189

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

     Loans to GWF Energy

     Global provided GWF Energy approximately $98 million of secured loans to finance the purchase of turbines. The turbine loans were interest bearing and the rates ranged from 12% to 15% per annum. The first installment payment began May 31, 2002 and as of December 31, 2002, the loans were repaid in accordance with the loan agreement.

     Global had also provided GWF Energy up to $74 million of working capital loans to fund construction costs pending completion of project financing. Such loans earned interest at 20% per annum and were convertible into equity at Global’s option. During 2002, Global converted $71 million of such working capital loans to equity, which increased Global’s ownership of GWF Energy to 76%. The partnership agreement stipulates that the condition for control is indicated at 75% or greater ownership interest of the voting stock. Accordingly, Global’s investment in GWF Energy is recorded as a consolidated entity as of December 31, 2002 and for the three months ended December 31, 2002. Harbinger GWF LLC has the right to buy back from Global up to one-half of the reduction of its equity ownership in GWF Energy from the 50% ownership level. Such right terminates at the earlier of project financing or September 30, 2003. The loan structures were put in place to provide Global with a preferential cash and earnings distribution from GWF Energy similar to Global’s subordinated loans from TIE. For a discussion of the commercial dates of operation and issues of the construction process with respect to these three plants, see Note 13. Commitments and Contingent Liabilities.

     Transfer of Asset Management Group (AMG) from Energy Technologies to Resources

     As of December 31, 2002, Energy Technologies contributed its equity investment in the capital stock of AMG, which includes various DSM investments, to Resources. The aggregate book value, which approximated fair value, of the stock contributed was $42 million. As of December 31, 2002, AMG has total assets of $45 million and earnings of $7 million for the year ended December 31, 2002.

190

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Note 23. Guarantees of Debt

Power

     In April 2001, Power issued $500 million of 6.875% Senior Notes due 2006, $800 million of 7.75% Senior Notes due 2011 and $500 million of 8.625% Senior Notes due 2031. Additionally, in June 2002, Power issued $600 million of 6.95% Senior Notes due 2012. Each series of the Senior Notes is fully and unconditionally and jointly and severally guaranteed by Fossil, Nuclear and ER&T. The following table presents condensed financial information for the guarantor subsidiaries as well as Power’s non-guarantor subsidiaries as of December 31, 2002 and 2001:

For the Year Ended December 31, 2002:	Power			Guarantor Subsidiaries			Other Subsidiaries			Consolidating Adjustments			Total
	(Millions)
Revenues	$	2		$	5,041		$	43		$	(1,416	)	$	3,670
Operating Expenses		—			4,140			43		(1,416		)	2,767
Operating Income (Loss)		2			901			—			—			903
Other Income		616			—			—		(616		)		—
Interest Expense		(180	)		(60	)		118			—		(122		)
Income Taxes		78			(350	)		(41	)		—		(313		)
Net Income (Loss)	$	516		$	491		$	77		$	(616	)	$	468
As of December 31, 2002:
Current Assets	$	1,068		$	1,283		$	89		$	(1,138	)	$	1,302
Property, Plant and Equipment, net		42		2,430				1,573			—		4,045
Noncurrent Assets		3,196		1,777				1,355		(4,711		)	1,617
Total Assets	$	4,306		$	5,490		$	3,017		$	(5,849	)	$	6,964
Current Liabilities	$	128		$	1,571		$	504		$	(1,126	)	$	1,077
Noncurrent Liabilities		125			984			28			(8	)	1,129
Note Payable — Affiliated Company		97		1,150				—		(1,247		)		—
Long-Term Debt		2,516			—			800			—		3,316
Member’s Equity		1,440		1,785				1,685		(3,468		)	1,442
Total Liabilities and Member’s Equity	$	4,306		$	5,490		$	3, 017		$	(5,849	)	$	6,964
For the Year Ended December 31, 2002:
Net Cash Provided By (Used In) Operating Activities	$	(182	)	$	617		$	298		$	(240	)	$	493
Net Cash Provided By (Used In) Investing Activities	$	(695	)	$	(749	)	$	(625	)	$	769		$	(1,300	)
Net Cash Provided By (Used In) Financing Activities	$	877		$	150		$	328		$	(531	)	$	824

191

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Concluded

	Power			Guarantor Subsidiaries			Other Subsidiaries			Consolidating Adjustments			Total
	(Millions)
For the Year Ended December 31, 2001:
Revenues	$	2		$	3,965		$	24		$	(1,539	)	$	2,452
Operating Expenses		—			3,164			40		$	(1,539	)	1,665
Operating Income (Loss)		2			801			(16	)		—			787
Other Income (Loss)		584			—			—			(584	)		—
Interest Expense	(182		)		(69	)		108			—		(143		)
Income Taxes		74			(292	)		(32	)		—		(250		)
Net Income (Loss)	$	478		$	440		$	60		$	(584	)	$	394
As of December 31, 2001:
Current Assets	$	399		$	1,195		$	64		$	(1,002	)	$	656
Property, Plant and Equipment, net		40			1,992			953			—		2,985
Noncurrent Assets	2,454				1,475		1,230				(3,561	)	1,598
Total Assets	$	2,893		$	4,662		$	2,247		$	(4,563	)	$	5,239
Current Liabilities	$	81		$	1,284		$	215		$	(990	)	$	590
Noncurrent Liabilities		16			1,094			16			(22	)	1,104
Note Payable — Affiliated Company		21			1,150			—			(1,171	)		—
Long-Term Debt	1,915				—			770			—		2,685
Member’s Equity		860			1,134		1,246				(2,380	)		860
Total Liabilities and Member’s Equity	$	2,893		$	4,662		$	2,247		$	(4,563	)	$	5,239
For the Year Ended December 31, 2001:
Net Cash Provided By (Used In) Operating Activities	$	313		$	830		$	(989	)	$	365		$	519
Net Cash Provided By (Used In) Investing Activities	$	41		$	(1,544	)	$	(947	)	$	837		$	(1,613	)
Net Cash Provided By (Used In) Financing Activities	$	329		$	704		$	1,936		$	(1,886	)	$	1,083

     There are no 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.

192

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

PSEG

     None.

PSE&G

     None.

Power

     None.

Energy Holdings

     None.

PART III

ITEM 10.   ITEM DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANTS

Executive Officers

The Executive Officers of each of PSEG, PSE&G, Power and Energy Holdings, respectively, are set forth below, as indicated for each individual.

NAME	AGE DECEMBER 31, 2002	OFFICE	EFFECTIVE DATE FIRST ELECTED TO PRESENT POSITION
E. James Ferland	60	Chairman of the Board, President and	July 1986 to present
(1)(2)(3)(4)		Chief Executive Officer (PSEG)
		Chairman of the Board and Chief	July 1986 to present
		Executive Officer (PSE&G)
		Chairman of the Board and Chief	June 1989 to present
		Executive Officer (Energy Holdings)
		Chairman of the Board and Chief	June 1999 to present
		Executive Officer (Power)
		Chairman of the Board and	November 1999 to present
		Chief Executive Officer (Services)
Thomas M. O’Flynn	42	Executive Vice President and Chief	July 2001 to present
(1)(3)(4)		Financial Officer (PSEG)
		Executive Vice President – Finance	July 2001 to present
		(Services)
		Executive Vice President and Chief	August 2002 to present
		Financial Officer (Energy Holdings)
		Executive Vice President and Chief	February 2002 to present
		Financial Officer (Power)
		Managing Director	December 1997 to May 2001
		(Morgan Stanley)

193

Robert J. Dougherty, Jr.	51	Vice President	March 1995 to present
(1)(4)		(PSEG)
		President and Chief Operating Officer	January 1997 to present
		(Energy Holdings)
Alfred C. Koeppe	56	President and Chief Operating	February 2000 to present
(1)(2)		Officer (PSE&G)
		Senior Vice President – Corporate	October 1996 to February 2000
		Services and External Affairs (PSE&G)
R. Edwin Selover	57	Senior Vice President	April 2002 to present
(1)(2)		and General Counsel
		(PSEG)
		Vice President and General Counsel
		(PSEG)	April 1988 to April 2002
		Senior Vice President and General	January 1988 to present
		Counsel (PSE&G)
		Senior Vice President and General	November 1999 to present
		Counsel (Services)
Patricia A. Rado	60	Vice President and Controller	April 1993 to present
(1)(2)(3)		(PSEG)
		Vice President and Controller	April 1993 to present
		(PSE&G)
		Vice President and Controller	June 1999 to present
		(Power)
		Vice President and Controller	November 1999 to present
		(Services)
Robert E. Busch	56	President & Chief Operating Officer	April 2001 to present
(1)(2)		(Services)
		Senior Vice President – Finance and	November 1999 to April 2001
		Chief Financial Officer (Services)
		Senior Vice President and	March 1998 to present
		Chief Financial Officer (PSE&G)
Thomas R. Smith	42	Executive Vice President – Operations &	September 2000 to present
(3)		Development (Power)
		President – Fossil	September 2000 to present
		Generation (Power)
		Executive Vice President and	January 2000 to September 2000
		Chief Operating Officer (Global)
Harold W. Borden Jr.	58	Vice President and General	June 1999 to present
(3)		Counsel (Power)
74
		Vice President – Law (PSE&G)	April 1995 to July 1999
Morton A. Plawner	55	Treasurer (PSEG)	January 1998 to present
(3)
		Vice President and	January 1998 to present
		Treasurer (PSE&G)
		Vice President and	June 1999 to present
		Treasurer (Power)

194

Frank Cassidy	56	President and Chief Operating Officer	July 1999 to present
(1)(3)		(Power)
		President (Energy Technologies)	November 1996 to June 1999
Michael J. Thomson	44	President and Chief Executive	January 1997 to present
(4)		Officer (Global)
Eileen A. Moran	48	President and Chief Executive	May 1990 to present
(4)		Officer (Resources)
		President and Chief Executive	January 1997 to present
		Officer (EGDC)
Stanley M.	50	President and Chief Executive Officer	June 1999 to present
Kosierowski		(Energy Technologies)
(4)
		Executive Vice President and	February 1999 to June 1999
		Chief Operating Officer
		(Energy Technologies)
		Vice President – Customer Operations	January 1997 to February 1999
		(PSE&G)
Miriam E. Gilligan	51	Vice President – Finance and	December 2001 to present
(4)		Treasurer (Energy Holdings)
		Treasurer (Energy Holdings)	1997 to December 2001
Derek M. DiRisio	38	Vice President and Controller	June 1998 to present
(4)		(Energy Holdings)
		Director – Accounting Services	November 1997 to June 1998
		(Energy Holdings)

(1)	Executive Officer of PSEG
(2);	Executive Officer of PSE&G
(3)	Executive Officer of Power
(4)	Executive Officer of Energy Holdings
Directors
PSEG
The information required by Item 10 of Form 10-K with respect to (i) present directors of PSEG who are nominees for election as directors at PSEG’s Annual Meeting of Stockholders to be held on April 15, 2003, and directors whose terms will continue beyond the meeting, and (ii) compliance with Section 16 (a) of the Securities Exchange Act of 1934, as amended, is set forth under the headings "Election of Directors" and Section 16 (a) “Beneficial Ownership Reporting Compliance” in PSEG’s definitive Proxy Statement for such Annual Meeting of Stockholders, which definitive Proxy Statement is expected to be filed with the Securities and Exchange Commission on or about March 7, 2003 and which information set forth under said heading is incorporated herein by this reference thereto.
PSE&G
E. JAMES FERLAND has been a director since 1986. Age 61. Chairman of Executive Committee. For additional information, see Executive Officers table above.
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     ALBERT R. GAMPER, JR. has been a director since December 2000. Age 60. Director of PSEG. He has been Chairman of the Board, President and Chief Executive Officer of The CIT Group, Inc., Livingston, New Jersey (commercial finance company) since July 2002. Was President and Chief Executive Officer of The CIT Group, Inc., from February 2002 to June 2002. Was President and Chief Executive Officer of Tyco Capital Corporation from June 2001 to February 2002. Was Chairman of the Board, President and Chief Executive Officer of The CIT Group, Inc., from January 2000 to June 2001. Was President and Chief Executive Officer of The CIT Group, Inc. from December 1989 to December 1999.

     CONRAD K. HARPER has been a director since May 1997. Age 62. Director of PSEG. Has been of counsel to the law firm of Simpson Thacher & Bartlett, New York, New York since January 2003. Was a partner from October 1996 to December 2002 and from 1974 to May 1993. Was Legal Adviser, US Department of State from May 1993 to June 1996. Director of New York Life Insurance Company.

     MARILYN M. PFALTZ has been a director since 1980. Age 70. Director of PSEG. Has been a partner of P and R Associates, Summit, New Jersey (communications specialists) since 1968. Director of AAA National Association, AAA Investment Company, AAA Life Re Ltd. and Beacon Trust Company.

      Power

     ROBERT E. BUSCH has been a director since December 2000. Age 56. For additional information, see Executive Officers table above.

     FRANK CASSIDY has been a director since 1999. Age 56. For additional information, see Executive Officers table above.

     ROBERT J. DOUGHERTY, JR. has been a director since 1999. Age 51. For additional information, see Executive Officers table above.

     E. JAMES FERLAND has been a director since 1999. For additional information see Executive Officers table above.

     R. EDWIN SELOVER has been a director since 1999, Age 57. For additional information, see Executive Officers table above.

     MICHAEL J. THOMSON has been a director since January 2000. Age 44. For additional information, see Executive Officers table above.

     Energy Holdings

     ROBERT E. BUSCH has been a director since December 2000. For additional information, see Executive Officers table above.

     FRANK CASSIDY has been a director since January 2000. For additional information, see Executive Officers table above.

     ROBERT J. DOUGHERTY, JR. has been a director since January 2000. For additional information, see Executive Officers table above.

     E. JAMES FERLAND has been a director since 1989. For additional information, see Executive Officers table above.

     THOMAS M. O’FLYNN has been a director since July 2001. For additional information, see Executive Officers table above.

     R. EDWIN SELOVER has been a director since January 2000, For additional information, see Executive Officers table above.

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ITEM 11. EXECUTIVE COMPENSATION

PSEG

     The information required by Item 11 of Form 10-K is set forth under the heading "Executive Compensation" in PSEG’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held April 15, 2003 which definitive Proxy Statement is expected to be filed with the Securities and Exchange Commission on or about March 7, 2003 and such information set forth under such heading is incorporated herein by this reference thereto.

PSE&G

      Information regarding the compensation of the Chief Executive Officer and the four most highly compensated executive officers of PSE&G as of December 31, 2002 is set forth below. Amounts shown were paid or awarded for all services rendered to PSEG and its subsidiaries and affiliates including PSE&G.

				Long TermCompensation
		Annual Compensation		Awards			Payouts
Name and Principal Position	Year	Salary $	Bonus/Annual Incentive Award ($)(1)	Restricted Stock ($)		Options (#) (2)	LTIP Payouts ($) (3)	All Other Compensation ($) (4)
E. James Ferland	2002	975,000	713,000	0		350,000	0	6,002
Chairman of the Board and	2001	962,525	1,023,000	2,248,000	(5)	350,000	400,800	51,152
Chief Executive Officer	2000	890,000	1,001,300	0		300,000	361,440	59,037
Alfred C. Koeppe	2002	374,000	143,200	0		75,000	0	8,004
President and Chief	2001	358,654	270,000	0		75,000	100,200	6,803
Operating Officer	2000	340,000	255,000	0		310,000	90,360	6,805
R. Edwin Selover	2002	390,000	125,000	0		80,000	0	8,004
Senior Vice President and	2001	367,852	225,000	0		70,000	100,200	6,867
General Counsel	2000	325,000	170,600	0		40,000	81,324	17,280
Robert E. Busch	2002	360,000	153,200	0		65,000	0	8,006
Senior Vice President and	2001	335,482	262,500	0		315,000	60,120	6,803
Chief Financial Officer	2000	300,000	157,500	0		40,000	0	6,805
Patricia A. Rado	2002	220,000	53,600	0		25,000	0	5,593
Vice President and	2001	209,835	94,500	0		25,000	24,048	6,449
Controller	2000	200,000	90,000	0		15,000	18,072	7,289

(1)	Amount awarded in 2002 and 2001 were earned under the Restated and Amended Management Incentive Compensation Plan and in 2000 was earned under the Management Incentive Compensation Plan and determined and was paid in the following year based on individual performance and financial and operating performance of PSEG and PSE&G, including comparison to other companies.
(2)	All grants of options to purchase shares of PSEG Common Stock were non-qualified options made under the 1989 Long-Term Incentive Plan (1989 LTIP) and/or the 2001 Long-Term Incentive Plan (2001 LTIP). All options granted were non-tandem. Non-tandem grants are made without performance units and dividend equivalents.
(3)	Amount paid in proportion to options exercised, if any, based on value of previously granted performance units and dividend equivalents under the 1989 LTIP, each as measured during three-year period ending the year prior to the year in which payment is made. Under the 1989 LTIP, tandem grants were made with an equal number of performance units and dividend equivalents which may provide cash payments, dependent upon future financial performance of PSEG in comparison to other companies and dividend payments by PSEG, to assist recipients in exercising options granted. The tandem grant was made at the beginning of a
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	three-year performance period and cash payment of the value of such performance units and dividend equivalents is made following such period in proportion to the options, if any, exercised at such time.
(4)	Includes employer contribution to the Thrift and Tax-Deferred Savings Plan:

Year	Ferland ($)	Koeppe ($)	Selover ($)	Busch ($)	Rado ($)
2002	6,002	8,004	8,004	8,006	5,593
2001	5,102	6,803	5,104	6,803	6,449
2000	5,102	6,805	4,747	6,805	6,422

In addition, 2001 and 2000 amounts include for Mr. Ferland $46,050, and $53,935; for Mr. Selover $10,493, and $12,533; and for Mrs. Rado $1,093 and $867, respectively, representing earnings credited on compensation deferred under PSE&G’s Deferred Compensation Plan in excess of 120% of the applicable Federal long-term interest rate as prescribed under Section 1274(d) of the Internal Revenue Code. Prior to January 1, 2000, under PSEG’s Deferred Compensation Plan, interest was paid at prime rate plus 1/2%, adjusted quarterly. Effective January 1, 2000, the Plan was amended to permit participants to select from among four additional investment options for compensation that is deferred.

(5)

Value as of original grant date, based on the closing price of $40.80 on the New York Stock Exchange on November 20, 2001, with respect to an award to Mr. Ferland of 60,000 shares of restricted stock, with 30,000 shares vesting in 2006 and 30,000 shares vesting in 2007. Dividends on the entire grant are paid in cash from the date of award.

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OPTION GRANTS IN LAST FISCAL YEAR (2002)
Name	Number of Securities Underlying Options Granted (1)	% of Total Options Granted to Employees in Fiscal Year	Exercise or Base Price ($/Sh)	Expiration Date	Grant Date Present Value ($) (2)
E. James Ferland	350,000	18.5	31.43	12/17/12	1,536,500
Alfred C. Koeppe	75,000	4.0	31.43	12/17/12	329,250
R. Edwin Selover	80,000	4.2	31.43	12/17/12	351,200
Robert E. Busch	65,000	3.4	31.43	12/17/12	285,350
Patricia A. Rado	25,000	1.3	31.43	12/17/12	109,750

(1)

Granted under the 2001 LTIP with exercisability commencing December 17, 2003, December 17, 2004 and December 17, 2005, respectively, with respect to one-third of the options at each such date.

(2)

Determined using the Black-Scholes model, incorporating the following material assumptions and adjustments: (a) exercise price of $31.43, equal to the fair market value of the underlying PSEG Common Stock on the date of grant; (b) an option term of ten years on all grants; (c) interest rate of 4.03% that represent the interest rates on US Treasury securities on the date of grant with a maturity date corresponding to that of the option terms; (d) volatility of 31.67% calculated using daily PSEG Common Stock prices for the one-year period prior to the grant date; (e) dividend yield of 6.87% and (f) reductions of approximately 7.83% to reflect the probability of forfeiture due to termination prior to vesting, and approximately 6.96% to reflect the probability of a shortened option term due to termination of employment prior to the option expiration dates. Actual values which may be realized, if any, upon any exercise of such options, will be based on the market price of PSEG Common Stock at the time of any such exercise and thus are dependent upon future performance of PSEG Common Stock. There is no assurance that any such value realized will be at or near the value estimated by the Black-Scholes model utilized.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR (2002) AND FISCAL YEAR ENDOPTION VALUES (12/31/02)
			Number of Unexercised Options at FY-End (#) (1)		Value of Unexercised In-the-Money Options At FY-End ($) (3)
Name	SharesAcquired on Exercise (#)(1)	ValueRealized ($)(2)	Exercisable (#)	Unexercisable (#)	Exercisable ($) (3)	Unexercisable ($) (3)
E. James Ferland	0	0	781,667	683,333	253,750	234,500
Alfred C. Koeppe	0	0	275,000	295,000	25,375	50,250
R. Edwin Selover	0	0	120,001	139,999	25,375	53,600
Robert E. Busch	0	0	138,334	321,666	0	43,550
Patricia A. Rado	0	0	41,334	46,666	0	16,750

(1)	Does not reflect any options granted and/or exercised after year-end (12/31/02). The net effect of any such grants and exercises is reflected in the table appearing under Security Ownership of Directors, Management and Certain Beneficial Owners.
(2)	Represents difference between exercise price and market price of PSEG Common Stock on date of exercise.
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(3) Represents difference between market price of PSEG Common Stock and the respective exercise prices of the options at fiscal year end (12/31/02). Such amounts may not necessarily be realized. Actual values which may be realized, if any, upon any exercise of such options will be based on the market price of PSEG Common Stock at the time of any such exercise and thus are dependent upon future performance of PSEG Common Stock.
 

     Employment Contracts and Arrangements

     PSEG has entered into an employment agreement dated as of June 16, 1998 and amended as of November 20, 2001 with Mr. Ferland covering his employment as Chief Executive Officer through March 31, 2007. The Agreement provides that Mr. Ferland will be re-nominated for election as a Director during his employment under the Agreement. The Agreement provides that Mr. Ferland’s base salary, target annual incentive bonus and long term incentive bonus will be determined based on compensation practices for CEO’s of similar companies and that his annual salary will not be reduced during the term of the Agreement. The Agreement also provided for an award to him of 150,000 shares of restricted PSEG Stock as of June 16, 1998 and 60,000 shares of restricted PSEG Common Stock as of November 20, 2001, with 60,000 shares vesting in 2002; 20,000 shares vesting in 2003; 30,000 shares vesting in 2004; 40,000 shares vesting in 2005; 30,000 shares vesting in 2006; and 30,000 shares vesting in 2007. Any non-vested shares are forfeited upon his retirement unless the Board of Directors, in its discretion, determines to waive the forfeiture. The Agreement provides for the granting of 22 years of pension credit for Mr. Ferland’s prior service, which was awarded at the time of his initial employment.

     PSE&G has entered into an employment agreement with Mr. Koeppe dated as of October 17, 2000 and Mr. Busch dated as of April 24, 2001, covering the respective employment of each in the position listed in the Summary Compensation Table through October 16, 2005 for Mr. Koeppe and April 24, 2006 for Mr. Busch. The agreements are essentially identical and provide that the base salary, target annual incentive bonus and long-term incentive bonus will be determined based on compensation practices of similar companies and that their annual salary will not be reduced during the term of the Agreement, and awarded to Mr. Koeppe 250,000 options on PSEG Common Stock, 50,000 of which vest each October 17 and expire on October 17, 2010 and awarded to Mr. Busch 250,000 options on PSEG Common Stock, 50,000 of which vest each April 24 and expire on April 24, 2011 in each case provided that the individual has remained continuously employed by PSEG through such date. The agreement for Messrs. Busch and Koeppe also provide for the grant of additional years of credited service for retirement purposes in light of allied work experience of fifteen years and twenty-five years, respectively.

     The Agreements further provide that if the individual is terminated without “Cause” or resigns for “Good Reason” (as those terms are defined in each Agreement) during the term of the Agreement, the respective entire restricted stock award or the entire option award becomes vested, the individual will be paid a benefit of two times base salary and target bonus, and his welfare benefits will be continued for two years unless he is sooner employed. In the event such a termination occurs after a “Change in Control” (also as defined in the Agreement), the payment to the individual becomes three times the sum of salary and target bonus, continuation of welfare benefits for three years unless sooner reemployed, payment of the net present value of providing three years additional service under PSEG’s retirement plans, and a gross-up for excise taxes on any termination payments due under the Internal Revenue Code. The respective Agreements provide that Mr. Ferland is prohibited for two years and Messrs. Koeppe and Busch are prohibited for one year from competing with and each is prohibited for two years from recruiting employees from, PSEG or its subsidiaries or affiliates, after termination of employment. Violation of these provisions requires a forfeiture of the respective restricted stock grant and option and certain benefits.

     Compensation Committee Interlocks and Insider Participation

     PSE&G does not have a compensation committee. Decisions regarding compensation of PSE&G’s executive officers are made by the Organization and Compensation Committee of PSEG. Hence, during 2002 the PSE&G Board of Directors did not have, and no officer, employee or former officer of PSE&G participated in any deliberations of such Board, concerning executive officer compensation.

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     Compensation of Directors and Certain Business Relationships

     During 2002, a director who was not an officer of PSEG or its subsidiaries and affiliates, including PSE&G, was paid an annual retainer of $30,000 and a fee of $1,500 for attendance at any Board or committee meeting, inspection trip, conference or other similar activity relating to PSEG or PSE&G. This amount was raised to $40,000 effective for 2003. Pursuant to the Compensation Plan for Outside Directors, a certain percentage, currently fifty percent, of the annual retainer is paid in PSEG Common Stock. No additional retainer is paid for service as a director of PSE&G. Each PSEG Committee Chair received an additional annual retainer of $3,000, increased for 2003 to $5,000 except for the Chair of the Audit Committee, who will receive $10,000. In addition, beginning in 2003, each member of the Audit Committee will receive an annual retainer of $5,000.

     PSEG also maintains a Stock Plan for Outside Directors pursuant to which directors who are not employees of PSEG or its subsidiaries receive shares of restricted stock for each year of service as a director. For 2002, this amount was 600 shares, increased to 800 shares for 2003. Such shares held by each non-employee director are included in the table above under the heading Security Ownership of Directors, Management and Certain Beneficial Owners.

     The restrictions on the stock granted under the Stock Plan for Outside Directors provide that the shares are subject to forfeiture if the director leaves service at any time prior to the Annual Meeting of Stockholders following his or her 70th birthday. This restriction would be deemed to have been satisfied if the director’s service were terminated after a “change in control” as defined in the Plan or if the director were to die in office. PSEG also has the ability to waive these restrictions for good cause shown. Restricted stock may not be sold or otherwise transferred prior to the lapse of the restrictions. Dividends on shares held subject to restrictions are paid directly to the director, and the director has the right to vote the shares.

     Compensation Pursuant to Pension Plans

     The table below illustrates annual retirement benefits for executive officers expressed in terms of single life annuities based on the average final compensation and service shown and retirement at age 65. A person’s annual retirement benefit is based upon a percentage that is equal to years of credited service plus 30, but not more than 75%, times average final compensation at the earlier of retirement, attainment of age 65 or death. These amounts are reduced by Social Security benefits and certain retirement benefits from other employers. Pensions in the form of joint and survivor annuities are also available.

PENSION PLAN TABLE
		Length of Service
Average Final Compensation		30 Years		35 Years		40 Years		45 Years
$	400,000	$	240,000	$	260,000	$	280,000	$	300,000
	500,000		300,000		325,000		350,000		375,000
	600,000		360,000		390,000		420,000		450,000
	700,000		420,000		455,000		490,000		525,000
	800,000		480,000		520,000		560,000		600,000
	900,000		540,000		585,000		630,000		675,000
	1,000,000		600,000		650,000		700,000		750,000
	1,100,000		660,000		715,000		770,000		825,000
	1,200,000		720,000		780,000		840,000		900,000
	1,300,000		780,000		845,000		910,000		975,000
	1,400,000		840,000		910,000		980,000		1,050,000
	1,500,000		900,000		975,000		1,050,000		1,125,000

     Average final compensation, for purposes of retirement benefits of executive officers, is generally equivalent to the average of the aggregate of the salary and bonus amounts reported in the Summary Compensation Table above under ’Annual Compensation’ for the five years preceding retirement, not to exceed 150% of the average annual salary for such five year period. Messrs. Ferland, Koeppe, Selover, Busch and Mrs. Rado will have accrued approximately 48, 46, 43, 34, and 29years of credited service, respectively, as of age 65.

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Power

     Omitted pursuant to conditions set forth in General Instruction I of Form 10-K.

Energy Holdings

     Omitted pursuant to conditions set forth in General Instruction I of Form 10-K.

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

PSEG

     The information required by Item 12 of Form 10-K with respect to directors, executive officers and certain beneficial owners is set forth under the heading “Security Ownership of Directors, Management and Certain Beneficial Owners” in PSEG’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held April 15, 2003 which definitive Proxy Statement is expected to be filed with the Securities and Exchange Commission on or about March 7, 2003, and such information set forth under such heading is incorporated herein by this reference thereto.

     The following table indicates the securities authorized for issuance under equity compensation plans as of December 31, 2002:

Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (A)	Weighted-average exercise price of outstanding options, warrants and rights			Number of securities remaining available for future issuance under equity compensation plans
Equity Compensation
plans approved by
security holders	5,758,500		$	39.35	9,241,500
Equity compensation
plans not approved by
security holders	3,744,131		$	39.25	3,987,173
Total:	9,502,631		$	39.32	13,228,673

(A)  Includes 310,000 shares granted under restricted stock agreements of certain key employees.

     For additional discussion of specific plans concerning equity-based compensation, see Note 18. Stock Options and Employee Stock Purchase Plan of the Notes, Item 11. Executive Compensation for PSE&G, above, and the information set forth under the heading “Executive Compensation” in PSEG’s definitive Proxy Statement for the Annual Meeting of Stockholders.

PSE&G

     All of PSE&G’s, 132,450,344 outstanding shares of Common Stock are owned beneficially and of record by PSE&G’s parent, PSEG, 80 Park Plaza, P.O. Box 1171, Newark, New Jersey.

     The following table sets forth beneficial ownership of PSEG Common Stock, including options, by the directors and executive officers named below as of February 21, 2003. None of these amounts exceed 1% of the PSEG Common Stock outstanding at such date, except for the amount for all directors and executive officers as a

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group which constitutes approximately 1.41%. No director or executive officer owns any of PSE&G’s Preferred Stock of any class.

Name	Amount and Nature of Beneficial Ownership
E. James Ferland	1,761,252	(1)
R. Edwin Selover	275,489	(2)
Alfred C. Koeppe	578,952	(3)
Robert E. Busch	461,823	(4)
Patricia A. Rado	90,854	(5)
Albert R. Gamper, Jr.	3,404	(6)
Conrad K. Harper	4,954	(7)
Marilyn M. Pfaltz	13,518	(8)
All directors and executive officers as a group (8 persons)	3,190,246	(9)

(1)	Includes the equivalent of 14,205 shares held under PSE&G Thrift and Tax-Deferred Savings Plan. Includes options to purchase 1,465,000 shares, 781,667 of which are currently exercisable. Includes 210,000 shares of restricted stock, which vest as described in the Summary Compensation Table Note 5.
(2)	Includes the equivalent of 10 shares of PSE&G Thrift and Tax-Deferred Savings Plan. Includes options to purchase 260,000 shares, 120,001 of which are currently exercisable.
(3)	Includes the equivalent of 2,852 shares held under the PSE&G Thrift and Tax-Deferred Savings Plan. Includes options to purchase 570,000 shares, 275,000 of which are currently exercisable.
(4)	Includes the equivalent of 173 shares held under PSE&G Thrift and Tax-Deferred Savings Plan. Includes options to purchase 460,000 shares, 138,334 of which are currently exercisable.
(5)	Includes options to purchase 88,000 shares, 41,334 of which are currently exercisable.
(6)	Includes 1,200 shares of restricted stock awarded pursuant to the Stock Plan for Outside Directors described below.
(7)	Includes 3,000 shares of restricted stock awarded pursuant to the Stock Plan for Outside Directors described below.
(8)	Includes 6,355 shares of restricted stock awarded pursuant to the Stock Plan for Outside Directors described below.
(9)	Includes the equivalent of 17,241 shares held under PSE&G Thrift and Tax-Deferred Savings Plan. Includes options to purchase 2,843,000 shares, 1,356,336 of which are currently exercisable. Includes 210,000 shares of restricted stock.

Power

Omitted pursuant to conditions set forth in General Instruction I of Form 10-K.

Energy Holdings

Omitted pursuant to conditions set forth in General Instruction I of Form 10-K.

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS

PSEG

     The information required by Item 13 of Form 10-K is set forth under the heading “Executive Compensation” in PSEG’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held April 15, 2003, which definitive Proxy Statement is expected to be filed with the Securities and Exchange Commission on or about March 7, 2003. Such information set forth under such heading is incorporated herein by this reference thereto.

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PSE&G

None.

Power

Omitted pursuant to conditions set forth in General Instruction I of Form 10-K.

Energy Holdings

Omitted pursuant to conditions set forth in General Instruction I of Form 10-K.

ITEM 14.   DISCLOSURE CONTROLS AND PROCEDURES

PSEG, PSE&G, Power and Energy Holdings

Each of PSEG, PSE&G, Power and Energy Holdings has established and maintain disclosure controls and procedures which are designed to provide reasonable assurance that material information relating to each company, including its respective consolidated subsidiaries, is made known to the Chief Executive Officer and Chief Financial Officer of each company, by others within those entities, particularly during the period in which its annual report is being prepared. Each of PSEG, PSE&G, Power and Energy Holdings has established a Disclosure Committee which is made up of several key management employees and reports directly to the Chief Financial Officer and Chief Executive Officer of each company, to monitor and evaluate these disclosure controls and procedures. The Chief Financial Officer and Chief Executive Officer of each company have evaluated the effectiveness of the disclosure controls and procedures as of a date within 90 days prior to the filing date of these annual reports (the “Evaluation Date”) and based on this evaluation, it was concluded that the disclosure controls and procedures were effective in providing reasonable assurance during the period covered in the respective annual reports. There were no significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of each company’s most recent evaluation.

204

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

Date: February 25, 2003	/s/ E. James Ferland
	E. James Ferland Public Service Enterprise Group Incorporated Chief Executive Officer

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

Date: February 25, 2003	/s/ Thomas M. O’Flynn
	Thomas M. O’Flynn Public Service Enterprise Group Incorporated Chief Financial Officer

206

Certification Pursuant to Rules 13a-14 and 15d-14 of the 1934 Securities Exchange Act
		I certify that:
1.		I have reviewed this annual report on Form 10-K of Public Service Electric and Gas Company (the registrant);
2.		Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.		Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
	a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
	b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
	c)	presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.		The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
	a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified any material weaknesses in internal controls; and
	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6.		The registrant’s other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: February 25, 2003	/s/ E. James Ferland
	E. James Ferland Public Service Electric and Gas Company Chief Executive Officer

207

Certification Pursuant to Rules 13a-14 and 15d-14 of the 1934 Securities Exchange Act
		I certify that:
1.		I have reviewed this annual report on Form 10-K of Public Service Electric and Gas Company (the registrant);
2.		Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.		Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
	a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
	b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
	c)	presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.		The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
	a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified any material weaknesses in internal controls; and
	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6.		The registrant’s other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: February 25, 2003	/s/ Robert E. Busch
	Robert E. Busch Public Service Electric and Gas Company Senior Vice President and Chief Financial Officer

208

Certification Pursuant to Rules 13a-14 and 15d-14 of the 1934 Securities Exchange Act
		I certify that:
1.		I have reviewed this annual report on Form 10-K of PSEG Power LLC (the registrant);
2.		Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.		Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
	a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
	b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
	c)	presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.		The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
	a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified any material weaknesses in internal controls; and
	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6.		The registrant’s other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: February 25, 2003	/s/ E. James Ferland
	E. James Ferland PSEG Power LLC Chief Executive Officer

209

Certification Pursuant to Rules 13a-14 and 15d-14 of the 1934 Securities Exchange Act
		I certify that:
1.		I have reviewed this annual report on Form 10-K of PSEG Power LLC (the registrant);
2.		Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.		Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
	a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
	b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
	c)	presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.		The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
	a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified any material weaknesses in internal controls; and
	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6.		The registrant’s other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: February 25, 2003	/s/ Thomas M. O’Flynn
	Thomas M. O’Flynn PSEG Power LLC Chief Financial Officer

210

Certification Pursuant to Rules 13a-14 and 15d-14 of the 1934 Securities Exchange Act
		I certify that:
1.		I have reviewed this annual report on Form 10-K of PSEG Energy Holdings LLC (the registrant);
2.		Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.		Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
	a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
	b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
	c)	presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.		The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
	a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified any material weaknesses in internal controls; and
	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6.		The registrant’s other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: February 25, 2003	/s/ E. James Ferland
	E. James Ferland PSEG Energy Holdings LLC Chief Executive Officer

211

Certification Pursuant to Rules 13a-14 and 15d-14 of the 1934 Securities Exchange Act
		I certify that:
1.		I have reviewed this annual report on Form 10-K of PSEG Energy Holdings LLC (the registrant);
2.		Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.		Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
	a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
	b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
	c)	presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.		The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
	a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified any material weaknesses in internal controls; and
	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6.		The registrant’s other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: February 25, 2003	/s/ Thomas M. O’Flynn
	Thomas M. O’Flynn PSEG Energy Holdings LLC Chief Financial Officer

212

PART IV
ITEM 15.		EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A)	The following Financial Statements are filed as a part of this report:
	a.	PSEG’s Consolidated Balance Sheets as of December 31, 2002 and 2001 and the related Consolidated Statements of Operations, Cash Flows and Common Stockholders’ Equity for the three years ended December 31, 2002 on pages 100 and 101, 99, 102 and 103, respectively.
	b.	PSE&G’s Consolidated Balance Sheets as of December 31, 2002 and 2001 and the related Consolidated Statements of Operations, Cash Flows and Common Stockholder’s Equity for the three years ended December 31, 2002 on pages 105 and 106, 104, 107 and 108, respectively.
	c.	PSEG Power LLC Consolidated Balance Sheets as of December 31, 2002 and 2001 and the related Consolidated Statements of Operations, Cash Flows and Capitalization and Member’s Equity for the three years ended December 31, 2002 on pages 110, 109, 111 and 112, respectively.
	d.	PSEG Energy Holdings LLC Consolidated Balance Sheets as of December 31, 2002 and 2001 and the related Consolidated Statements of Operations, Cash Flows and Member’s/Common Stockholder’s Equity for the three years ended December 31, 2002 on pages 114 and 115, 113, 116 and 117, respectively.
(B)	The following documents are filed as a part of this report:
	a.	PSEG Financial Statement Schedules:
		Schedule II—Valuation and Qualifying Accounts for each of the three years in the period ended December 31, 2002 (page 215).
	b.	PSE&G Financial Statement Schedules:
		Schedule II—Valuation and Qualifying Accounts for each of the three years in the period ended December 31, 2002 (page 215).
	c.	Power’s Financial Statement Schedules:
		Schedule II—Valuation and Qualifying Accounts for each of the three years in the period ended December 31, 2002 (page 216).
	d.	Energy Holdings’ Financial Statement Schedules:
		Schedule II—Valuation and Qualifying Accounts for each of the three years in the period ended December 31, 2002 (page 216).
		Schedules other than those listed above are omitted for the reason that they are not required or are not applicable, or the required information is shown in the consolidated financial statements or notes thereto.
(C)	The following documents are filed as a part of this report:
	a.	PSEG:
		Exhibit 3d:  Amended and Restated Trust Agreement for Enterprise Capital Trust I Exhibit 3f:  Amended and Restated Trust Agreement for Enterprise Capital Trust III Exhibit 3g:  Amended and Restated Trust Agreement for PSEG Funding Trust I Exhibit 3h:  Amended and Restated Trust Agreement for PSEG Funding Trust II Exhibit 4c:  First Supplemental Indenture to Indenture dated January 1, 1998, dated July 1, 1998 Exhibit 4d:  Indenture dated as of December 17, 2002 Exhibit 10a(17):  Stock Plan for Outside Directors, as amended Exhibit 10a(20):  Compensation Plan for Outside Directors Exhibit 12:  Computation of Ratios of Earnings to Fixed Charges Exhibit 18:  Independent Auditors' Preferability Letter dated February 7, 2003 Exhibit 21:  Subsidiaries of Registrant Exhibit 23:  Independent Auditors’ Consent
213

		Exhibit 99:    Certification by E. James Ferland Exhibit 99a: Certification by Thomas M. O’Flynn (See Exhibit Index on pages 221 to 224)
	b.	PSE&G:
		Exhibit 3c  Amended and Restated Trust Agreement for PSE&G Capital Trust I Exhibit 3d  Amended and Restated Trust Agreement for PSE&G Capital Trust II Exhibit 4a(97):  Supplemental Indenture between PSE&G and Wachovia Bank dated September 1, 2002 Exhibit 12a:      Computation of Ratios of Earnings to Fixed Charges Exhibit 12b: Computation of Ratios of Earnings to Fixed Charges Plus Preferred Stock Dividend Requirements Exhibit 18a  Independent Auditors' Preferability Letter dated February 7, 2003 Exhibit 21:      Subsidiaries of Registrant Exhibit 23:      Independent Auditors’ Consent Exhibit 99b:    Certification by E. James Ferland Exhibit 99c:   Certification by Robert E. Busch (See Exhibit Index on pages 225 to 231)
	c.	Power:
		Exhibit 12c:    Computation of Ratios of Earnings to Fixed Charges Exhibit 18b  Independent Auditors' Preferability Letter dated February 7, 2003 Exhibit 99d:    Certification by E. James Ferland Exhibit 99e: Certification by Thomas M. O’Flynn (See Exhibit Index on page 232)
	d.	Energy Holdings:
		Exhibit 12d:    Computation of Ratios of Earnings to Fixed Charges Exhibit 99f:    Certification by E. James Ferland Exhibit 99g: Certification by Thomas M. O’Flynn (See Exhibit Index on page 233)
(D)	The following reports on Form 8-K were filed during the last quarter of 2002 and the 2003 period covered by this report under Item 5:

a.PSEG:
Items Reported	Date of Report
Items 5 and 7	November 22, 2002
Items 5 and 7	January 28, 2003
b.   PSE&G:
Items Reported	Date of Report
Items 5 and 7	January 28, 2003
c.   Power:
Items Reported	Date of Report
Items 5 and 7	January 28, 2003
d.   Energy Holdings:
Items Reported	Date of Report
Items 5 and 7	January 28, 2003

214

SCHEDULE II

PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
Schedule II — Valuation and Qualifying Accounts
Years Ended December 31, 2002 — December 31, 2000

Column A	Column B		Column C						Column D			Column E
			Additions
Description	Balance at Beginning of Period		Charged to cost and expenses			Charged to other accounts describe			Deductions- describe			Balance at End of Period
	(Millions)
2002:
Allowance for Doubtful Accounts	$	40	$	43		$	—		$	49	(A)	$	34
Materials and Supplies Valuation Reserve		2		2			1	(C)		—			5
Other Reserves		2		—			10	(D)		—			12
Other Valuation Allowances		22		—			—			2	(F)		20
2001:
Allowance for Doubtful Accounts	$	39	$	39		$	2	(E)	$	40	(A)	$	40
Materials and Supplies Valuation Reserve		11		—			—			9	(B)		2
Other Reserves		4		—			—			2	(D)		2
Other Valuation Allowances		22		—			—			—			22
2000:
Allowance for Doubtful Accounts	$	35	$	45		$	—		$	41	(A)	$	39
Materials and Supplies Valuation Reserve		11		—			—			—			11
Other Reserves		2		2	(D)		—			—			4
Other Valuation Allowances		22		—			—			—			22

(A)	Accounts Receivable/Investments written off.
(B)	Reduced reserve to appropriate level and to remove obsolete inventory.
(C)	Acquired two Connecticut electric generating stations.
(D)	Includes various liquidity, credit and bad debt reserves.
(E)	Valuation allowances consolidated in connection with the acquisition of SAESA.
(F)	Recorded in connection with the sales of certain properties held by EGDC.

PUBLIC SERVICE ELECTRIC AND GAS COMPANY
Schedule II — Valuation and Qualifying Accounts
Years Ended December 31, 2002 — December 31, 2000

Column A	Column B		Column C			Column D			Column E
				Additions
Description	Balance at Beginning of Period		Charged to cost and expenses		Charged to other accounts- describe	Deductions describe			Balance at End of Period
	(Millions)
2002:
Allowance for Doubtful Accounts	$	38	$	43	$—	$	49	(A)	$	32
2001:
Allowance for Doubtful Accounts	$	39	$	45	$—	$	46	(A)	$	38
2000:
Allowance for Doubtful Accounts	$	35	$	45	$—	$	41	(A)	$	39
Materials and Supplies Valuation Reserve		11		—	—		11	(B)		—

(A)	Accounts Receivable/Investments written off.
(B)	Transferred to Power
215

PSEG POWER LLC
Schedule II — Valuation and Qualifying Accounts
Years Ended December 31, 2002 — December 31, 2000

Column A	Column B		Column C						Column D			Column E
			Additions
Description	Balance at Beginning of Period		Charged to cost and expenses			Charged to other accounts- describe			Deductions describe			Balance at End of Period
	(Millions)
2002:
Materials and Supplies Valuation Reserve	$	2	$	2		$	1	(B)	$	—		$	5
Other Reserves		2		10	(C)		—			—			12
2001:
Materials and Supplies Valuation Reserve	$	11	$	—		$	—		$	9	(A)	$	2
Other Reserves		4		—			—			2	(C)		2
2000:
Materials and Supplies Valuation Reserve	$	11	$	—		$	—		$	—		$	11
Other Reserves		2		2	(C)		—			—			4

(A)	Reduced reserve to appropriate level and removed obsolete inventory.
(B)	Acquired two Connecticut electric generation stations.
(C)	Includes various liquidity, credit and bad debt reserves.
PSEG ENERGY HOLDINGS LLC Schedule II — Valuation and Qualifying Accounts Years Ended December 31, 2002— December 31, 2000

Column A	Column B		Column C					Column D			Column E
			Additions
Description	Balance at Beginning of Period		Charged to cost and expenses		Charged to other accounts- describe			Deductions describe			Balance at End of Period
	(Millions)
2002:
Allowance for Doubtful Accounts	$	2	$	—	$	—		$	—		$	2
Other Valuation Allowances		22		—		—			2	(B)		20
2001:
Allowance for Doubtful Accounts	$	—	$	—	$	2	(A)	$	—		$	2
Other Valuation Allowances		22		—		—			—			22
2000:
Allowance for Doubtful Accounts	$	—	$	—	$	—		$	—		$	—
Other Valuation Allowances		22		—		—			—			22

(A)	Valuation allowance consolidated in connection with the acquisition of SAESA.
(B)	Recorded in connection with the sales of certain properties held by EDGC.
(C)	Includes various liquidity, credit and bad debt reserves.

216

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.

Public Service Enterprise Group Incorporated
By	/s/ E. JAMES FERLAND
	E. James Ferland Chairman of the Board, President and Chief Executive Officer

Date: February 25, 2003

     Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. The signatures of the undersigned shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.

Signature	Title	Date
E. JAMES FERLAND	Chairman of the Board,	February 25, 2003
	President and Chief Executive Officer
E. James Ferland	and Director (Principal Executive Officer)
THOMAS M. O’FLYNN	Executive Vice President and Chief	February 25, 2003
	Financial Officer (Principal Financial Officer)
Thomas M. O’Flynn
PATRICIA A. RADO	Vice President and Controller	February 25, 2003
	(Principal Accounting Officer)
Patricia A. Rado
ERNEST H. DREW	Director	February 25, 2003
Ernest H. Drew
ALBERT R. GAMPER, JR.	Director	February 25, 2003
Albert R. Gamper, Jr.
RAYMOND V. GILMARTIN	Director	February 25, 2003
Raymond V. Gilmartin
CONRAD K. HARPER	Director	February 25, 2003
Conrad K. Harper
WILLIAM V. HICKEY	Director	February 25, 2003
William V. Hickey
SHIRLEY ANN JACKSON	Director	February 25, 2003
Shirley Ann Jackson
MARILYN M. PFALTZ	Director	February 25, 2003
Marilyn M. Pfaltz
RICHARD J. SWIFT	Director	February 25, 2003
Richard J. Swift

217

SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. The signature of the undersigned shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.

Public Service Electric and Gas Company
By	/s/ ALFRED C. KOEPPE
	Alfred C. Koeppe President and Chief Operating Officer

Date: February 25, 2003

     Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. The signatures of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.

Signature	Title	Date
E. JAMES FERLAND	Chairman of the Board and Chief	February 25, 2003
	Executive Officer and Director
E. James Ferland	(Principal Executive Officer)
ROBERT E. BUSCH	Senior Vice President — Finance and Chief	February 25, 2003
	Financial Officer (Principal Financial Officer)
Robert E. Busch
PATRICIA A. RADO	Vice President and Controller	February 25, 2003
	(Principal Accounting Officer)
Patricia A. Rado
ALBERT R. GAMPER, JR.	Director	February 25, 2003
Albert R. Gamper, Jr.
CONRAD K. HARPER	Director	February 25, 2003
Conrad K. Harper
MARILYN M. PFALTZ	Director	February 25, 2003
Marilyn M. Pfaltz

218

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.

PSEG Power LLC
By	/s/ FRANK CASSIDY
	Frank Cassidy
	President and
	Chief Operating Officer

Date: February 25, 2003

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. The signatures of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.

Signature	Title	Date
E. JAMES FERLAND	Chairman of the Board and	February 25, 2003
	Chief Executive Officer and Director
E. James Ferland	(Principal Executive Officer)
THOMAS M. O’FLYNN	Executive Vice President and Chief	February 25, 2003
	Financial Officer and Director
Thomas M. O’Flynn	(Principal Financial Officer)
PATRICIA A. RADO	Vice President and Controller	February 25, 2003
	(Principal Accounting Officer)
Patricia A. Rado
ROBERT E. BUSCH	Director	February 25, 2003
Robert E. Busch
FRANK CASSIDY	Director	February 25, 2003
Frank Cassidy
ROBERT J. DOUGHERTY, JR.	Director	February 25, 2003
Robert J. Dougherty, Jr.
R. EDWIN SELOVER	Director	February 25, 2003
R. Edwin Selover
MICHAEL J. THOMSON	Director	February 25, 2003
Michael J. Thomson
219

SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.

PSEG Energy Holdings LLC
By	/s/ ROBERT J. DOUGHERTY, JR.
	Robert J. Dougherty, Jr. President and Chief Operating Officer

Date: February 25, 2003

     Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. The signatures of the undersigned shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.

Signature	Title	Date
E. JAMES FERLAND	Chairman of the Board and	February 25, 2003
	Chief Executive Officer and Director
E. James Ferland	(Principal Executive Officer)
THOMAS M. O’FLYNN	Executive Vice President and	February 25, 2003
	Chief Financial Officer and Director
Thomas M. O’Flynn	(Principal Financial Officer)
DEREK M. DIRISIO	Vice President and Controller	February 25, 2003
	(Principal Accounting Officer)
Derek M. DiRisio
ROBERT E. BUSCH	Director	February 25, 2003
Robert E. Busch
FRANK CASSIDY	Director	February 25, 2003
Frank Cassidy
ROBERT J. DOUGHERTY, JR.	Director	February 25, 2003
Robert J. Dougherty, Jr.
R. EDWIN SELOVER	Director	February 25, 2003
R. Edwin Selover

220

EXHIBIT INDEX
Certain Exhibits previously filed with the Commission and the appropriate securities exchanges are indicated as set forth below. Such Exhibits are not being refiled, but are included because inclusion is desirable for convenient reference.
(a)	Filed by PSE&G with Form 10-K under the Securities Exchange Act of 1934, on the respective dates indicated, File No. 001-00973.
(b)	Filed by PSE&G with Form 10-Q under the Securities Exchange Act of 1934, on the respective dates indicated, File No. 001-00973.
(c)	Filed by PSEG with Form 10-K under the Securities Exchange Act of 1934, on the respective dates indicated, File No. 001-09120.
(d)	Filed with registration statement of PSE&G under the Securities Exchange Act of 1934, File No. 1-973, effective July 1, 1935, relating to the registration of various issues of securities.
(e)	Filed with registration statement of Public Service Enterprise Group Incorporated under the Securities Act of 1933, No. 33-2935 filed January 28, 1986, relating to PSE&G’s plan to form a holding company as part of a corporate restructuring.
(f)	Filed with PSEG Form 10-K under the Securities Exchange Act of 1934, on the respective dates indicated, File No. 001-09120.
(g)	Filed by PSE&G with Form 8-A under the Securities Exchange Act of 1934, on the respective dates indicated, File No. 001-00973.
(h)	Filed by PSE&G with Form 8-K under the Securities Exchange Act of 1934, on the respective dates indicated, File No. 001-00973.
(i)	Filed by PSE&G with Form 10-K under the Securities Exchange Act of 1934, on the respective dates indicated, File No. 001-00973.
(j)	Filed by PSE&G with Form 10-Q under the Securities Exchange Act of 1934, on the respective dates indicated, File No. 001-00973.
(k)	Filed by PSEG with Form 10-K under the Securities Exchange Act of 1934, on the respective dates indicated, File No. 001-09120.
(l)	Filed with registration statement of PSE&G under the Securities Exchange Act of 1934, File No. 1-973, effective July 1, 1935, relating to the registration of various issues of securities.
(m)	Filed with registration statement of PSE&G under the Securities Act of 1933, No. 2-4995, effective May 20, 1942, relating to the issuance of $15,000,000 First and Refunding Mortgage Bonds, 3% Series due 1972.
(n)	Filed with registration statement of PSE&G under the Securities Act of 1933, No. 2-7568, effective July 1, 1948, relating to the proposed issuance of 200,000 shares of Cumulative Preferred Stock.
(o)	Filed with registration statement of PSE&G under the Securities Act of 1933, No. 2-8381, effective April 18, 1950, relating to the issuance of $26,000,000 First and Refunding Mortgage Bonds, 2 3/4% Series due 1980.
(p)	Filed with registration statement of PSE&G under the Securities Act of 1933, No. 2-12906, effective December 4, 1956, relating to the issuance of 1,000,000 shares of Common Stock.

(q)	Filed with registration statement of PSE&G under the Securities Act of 1933, No. 2-59675, effective September 1, 1977, relating to the issuance of $60,000,000 First and Refunding Mortgage Bonds, 8 1/8% Series I due 2007.
(r)	Filed with registration statement of PSE&G under the Securities Act of 1933, No. 2-60925, effective March 30, 1978, relating to the issuance of 750,000 shares of Common Stock through an Employee Stock Purchase Plan.
(s)	Filed with registration statement of PSE&G under the Securities Act of 1933, No. 2-65521, effective October 10, 1979, relating to the issuance of 3,000,000 shares of Common Stock.
(t)	Filed with registration statement of PSE&G under the Securities Act of 1933, No. 2-74018, filed on June 16, 1982, relating to the Thrift Plan of PSE&G.
(u)	Filed with registration statement of PSEG under the Securities Act of 1933, No. 33-2935 filed January 28, 1986, relating to PSE&G’s plan to form a holding company as part of a corporate restructuring.
(v)	Filed with registration statement of PSE&G under the Securities Act of 1933, No. 33-13209 filed April 9, 1987, relating to the registration of $575,000,000 First and Refunding Mortgage Bonds pursuant to Rule 415.
(w)	Filed with registration statement of PSE&G under the Securities Act of 1933, No. 333-02763, effective June 12, 1996, relating to the registration of $350,000,000 of Cumulative Quarterly Income Preferred Securities of PSE&G Capital Trust I, II and III.
(x)	Filed with the registration statement of PSEG under the Securities Act of 1933, No. 333-43241, effective January 8, 1998, relating to the registration of $225,000,000 of Trust Preferred Securities of Enterprise Capital Trust, I, II and III.
(y)	Filed with registration statement of PSE&G under the Securities Act of 1933, No. 333-76020, effective February 12, 2002, relating to the registration of $1,000,000,000 of Senior Debt Securities.
(z)	Filed with registration statement of PSEG under the Securities Act of 1933, No. 333-86372, effective July 3, 2002 relating to the registration of $1.5 billion of Common Stock, Preferred Stock, Stock Purchase Contracts, Stock Purchase Units and Debt Securities and PSEG Funding Trust I Preferred Trust Securities.
(aa)	Filed with registration statement of PSEG under the Securities Act of 1933, No. 333-101400, effective December 5, 2002 relating to the registration of $1.0 billion of Common Stock, Preferred Stock, Stock Purchase Contracts, Stock Purchase Units and Debt Securities and PSEG Funding Trust II, III and IV Preferred Trust Securities.
(bb)	Filed with registration statement of PSEG under the Securities Act of 1933, No. 033-45491, effective February 4, 1992, relating to the Employee Stock Purchase Plan.

PSEG
Exhibit Number
		Previous Filing
This Filing		Commission			Exchanges
3			(e)	3a	(e)	3a	Certificate of Incorporation Public Service Enterprise
							Group Incorporated
3	b		(z)	3b	(z)	3b	By-Laws of Public Service Enterprise
				4/16/02		4/16/02	Group Incorporated
3	c		(c)	3c	(c)	3c	Certificate of Amendment of Certificate of
				4/11/88		4/11/88	Incorporation of Public Service Enterprise Group Incorporated,
							effective April 23, 1987
3	d						Amended and Restated Trust Agreement for Enterprise Capital Trust I
3	e		(b)	3	(b)	3	Amended and Restated Trust Agreement for Enterprise Capital
				8/14/98		8/14/98	Trust II

PSEG
Exhibit Number
		Previous Filing
This Filing		Commission		Exchanges
3	f					Amended and Restated Trust Agreement for Enterprise Capital Trust III
3	g					Amended and Restated Trust Agreement for PSEG Funding Trust I
3	h					Amended and Restated Trust Agreement for PSEG Funding Trust II
4a(1)		(b)	4f	(b)	4f	Indenture between Public Service Enterprise Group Incorporated and
			5/13/98		5/13/98	First Union National Bank (now, Wachovia Bank,National
						Association), as Trustee, dated January 1, 1998 providing for
						Deferrable Interest Subordinated Debentures in Series (relating to
						Quarterly Preferred Securities)
4a(2)		(b)	4a	(b)	4a	First Supplemental Indenture to Indenture dated as of January 1, 1998
			8/14/98		8/14/98	between Public Service Enterprise Group Incorporated and First
						Union National Bank (now, Wachovia Bank, National Association),
						as Trustee, dated June 1, 1998 providing for the issuance of Floating
						Rate Deferrable Interest Subordinated Debentures, Series B (relating
						to Trust Preferred Securities)
4a(3)		(b)	4b	(b)	4b	Second Supplemental Indenture to Indenture dated as of January1,
			8/14/98		8/14/98	1998 between Public Service Enterprise Group Incorporated and First
						Union National Bank (now, Wachovia Bank, National Association),
						as Trustee, dated July 1, 1998 providing for the issuance of
						Deferrable Interest Subordinated Debentures, Series C (relating to
						Trust Preferred Securities)
4	b	(a)	4f	(a)	4f	Indenture dated as of November 1, 1998 between Public Service
			11/1/00		11/1/00	Enterprise Group Incorporated and First Union National Bank (now,
						Wachovia Bank, National Association) providing for the issuance of
						Senior Debt Securities
4	c					First Supplemental Indenture to Indenture dated as of November 1,
						1998 between Public Service Enterprise Group Incorporated and
						Wachovia Bank, National Association, as Trustee, dated September
						10, 2002 providing for the issuance of Senior Deferrable Notes
						(Senior Debt Securities)
4	d					Indenture dated as of December 17, 2002 between Public Service
						Enterprise Group Incorporated and Wachovia Bank, National
						Association providing for the issuance of Debentures in Series
						including 8.75% Deferrable Interest Junior Subordinated Debentures,
						Series D
9						Inapplicable
10a(1)		(c)	10a(1)	(c)	10a(1)	Deferred Compensation Plan for Directors
			2/25/00		2/25/00
10a(2)		(c)	10a(2)	(c)	10a(2)	Deferred Compensation Plan for Certain Employees
			2/25/00		2/25/00
10a(3)		(c)	10a(3)	(c)	10a(3)	Limited Supplemental Benefits Plan for Certain Employees
			2/25/00		2/25/00
10a(4)		(c)	10a(4)	(c)	10a(4)	Mid Career Hire Supplemental Retirement Income Plan
			2/25/00		2/25/00
10a(5)		(c)	10a(5)	(c)	10a(5)	Retirement Income Reinstatement Plan for Non-Represented
						Employees
			2/25/00		2/25/00
10a(6)		(b)	10a(6)	(b)	10a(6)	1989 Long-Term Incentive Plan, as amended
			11/2/02		11/2/02
10a(7)		(c)	10a(7)	(c)	10a(7)	2001 Long-Term Incentive Plan
			3/06/01		3/06/01

PSEG
Exhibit Number
	Previous Filing
This Filing	Commission		Exchanges
10a(8)	(c)	10a(8)	(c)	10a(8)	Restated and Amended Management
		3/06/01		3/06/01	Incentive Compensation Plan
10a(9)	(b)	10	(b)	10	Employment Agreement with E. James Ferland dated
		8/14/98		8/14/98	June 16, 1998
10a(10)	(c)	10(a)10	(c)	10(a)10	Amendment to Employment Agreement with E. James Ferland dated
		3/1/02		3/1/02	November 20, 2001
10a(11)	(b)	10a(22)	(a)	10a(22)	Employment Agreement with Thomas M. O’Flynn
		11/13/00		11/13/00	dated April 18, 2001
10a(12)	(c)	10(a)12	(c)	10(a)12	Amendment to Employment Agreement with Thomas M. O’Flynn
		3/1/02		3/1/02	dated December 21, 2001
10a(13)	(a)	10a(14)	(a)	10a(14)	Letter Agreement with Patricia A. Rado dated
		02/26/94		03/09/94	March 24, 1993
10a(14)	(b)	10a(21)	(b)	10a(21)	Employment Agreement with Alfred C. Koeppe dated
		11/13/00		11/13/00	October 17, 2000
10a(15)	(b)	10a(19)	(b)	10a(19)	Employment Agreement with Frank Cassidy dated
		11/13/00		11/13/00	October 17, 2000
10a(16)	(b)	10a(20)	(b)	10a(20)	Employment Agreement with Robert J. Dougherty, Jr. dated
		11/13/00		11/13/00	October 17, 2000
10a(17)					Stock Plan for Outside Directors, as amended
10a(18)	(f)	10a(23)	(f)	10a(23)	Employment Agreement with Robert E. Busch dated April 24,
		8/9/01		8/9/01	2001
10a(19)	(bb)		(bb)		Employee Stock Purchase Plan
10a(20)					Compensation Plan for Outside Directors
11					Inapplicable
12					Computation of Ratios of Earnings to Fixed Charges
13					Inapplicable
16					Inapplicable
18					Independent Auditors’ Preferability Letter dated February 7, 2003
21					Subsidiaries of the Registrant
22					Inapplicable
23					Independent Auditors’ Consent
24					Inapplicable
99					Certification by E. James Ferland, pursuant to Section 1350 of
					Chapter 63 of Title 18 of the United States Code
99a					Certification by Thomas M. O’Flynn, pursuant to Section 1350
					of Chapter 63 of Title 18 of the United States Code

PSE&G
Exhibit Number
		Previous Filing
This Filing	Commission				Exchanges
3a(1)	(b)	3a		(b)	3a	Restated Certificate of Incorporation of PSE&G
		8/28/86			8/29/86
3a(2)	(c)	3a(2)		(c)	3a(2)	Certificate of Amendment of Certificate of Restated Certificate of
					4/10/87	Incorporation of PSE&G filed February 18, 1987 with the State of
						New Jersey adopting limitations of liability provisions in
						accordance with an amendment to New Jersey Business
						Corporation Act
3a(3)	(a)	3(a)3		(a)	3(a)3	Certificate of Amendment of Restated Certificate of Incorporation
		2/3/94			2/14/94	of PSE&G filed June 17, 1992 with the State of New Jersey,
						establishing the 7.44% Cumulative Preferred Stock ($100 Par) as a
						series of Preferred Stock
3a(4)	(a)	3(a)4		(a)	3(a)4	Certificate of Amendment of Restated Certificate of Incorporation
		2/3/94			2/14/94	of PSE&G filed March 11, 1993 with the State of New Jersey,
						establishing the 5.97% Cumulative Preferred Stock ($100 Par) as a
						series of Preferred Stock
3a(5)	(a)	3(a)5		(a)	3(a)5	Certificate of Amendment of Restated Certificate of Incorporation
		2/3/94			2/14/94	of PSE&G filed January 27, 1995 with the State of New Jersey,
						establishing the 6.92% Cumulative Preferred Stock ($100 Par) and
						the 6.75% Cumulative Preferred Stock — $25 Par as series of
						Preferred Stock
3b(1)	(d)			(d)		Copy of By-Laws of PSE&G
		8/8/00			8/8/00
3c						Amended and Restated Trust Agreement for PSE&G Capital Trust I
3d(1)						Amended and Restated Trust Agreement for PSE&G Capital Trust II
3e	(w)	3.6		(w)		Trust Agreement for PSE&G Capital Trust III
		4/23/96			4/23/96
4a(1)	(f)	B-1		(c)	4b(1)	Indenture between PSE&G and Fidelity Union Trust Company
					2/18/81	(now, Wachovia Bank, National Association), as Trustee, dated
						August 1, 1924, securing First and Refunding Mortgage Bond
						Indentures between PSE&G and First Fidelity Bank, National
						Association (now, Wachovia Bank, National Association), as
						Trustee, supplemental to Exhibit 4a(1), dated as follows:
4a(2)	(i)	7	(1a)	(c)	4b(2)	April 1, 1927
					2/18/81
4a(3)	(k)	2b(3)		(c)	4b(3)	June 1, 1937
					2/18/81
4a(4)	(k)	2b(4)		(c)	4b(4)	July 1, 1937
					2/18/81
4a(5)	(k)	2b(5)		(c)	4b(5)	December 19, 1939
					2/18/81
4a(6)	(g)	B-10		(c)	4b(6)	March 1, 1942
					2/18/81
4a(7)	(k)	2b(7)		(c)	4b(7)	June 1, 1949
					2/18/81
4a(8)	(k)	2b(8)		(c)	4b(8)	May 1, 1950
					2/18/81
4a(9)	(k)	2b(9)		(c)	4b(9)	October 1, 1953
					2/18/81
4a(10)	(k)	2b(10)		(c)	4b(10)	May 1, 1954
					2/18/81

PSE&G
Exhibit Number
		Previous Filing
This Filing	Commission			Exchanges
4a(11)	(j)	4b(16)	(c)	4b(11)	November 1, 1956
				2/18/81
4a(12)	(k)	2b(12)	(c)	4b(12)	September 1, 1957
				2/18/81
4a(13)	(k)	2b(13)	(c)	4b(13)	August 1, 1958
				2/18/81
4a(14)	(k)	2b(14)	(c)	4b(14)	June 1, 1959
				2/18/81
4a(15)	(k)	2b(15)	(c)	4b(15)	September 1, 1960
				2/18/81
4a(16)	(k)	2b(16)	(c)	4b(16)	August 1, 1962
				2/18/81
4a(17)	(k)	2b(17)	(c)	4b(17)	June 1, 1963
				2/18/81
4a(18)	(k)	2b(18)	(c)	4b(18)	September 1, 1964
				2/18/81
4a(19)	(k)	2b(19)	(c)	4b(19)	September 1, 1965
				2/18/81
4a(20)	(k)	2b(20)	(c)	4b(20)	June 1, 1967
				2/18/81
4a(21)	(k)	2b(21)	(c)	4b(21)	June 1, 1968
				2/18/81
4a(22)	(k)	2b(22)	(c)	4b(22)	April 1, 1969
				2/18/81
4a(23)	(k)	2b(23)	(c)	4b(23)	March 1, 1970
				2/18/81
4a(24)	(k)	2b(24)	(c)	4b(24)	May 15, 1971
				2/18/81
4a(25)	(k)	2b(25)	(c)	4b(25)	November 15, 1971
				2/18/81
4a(26)	(k)	2b(26)	(c)	4b(26)	April 1, 1972
				2/18/81
4a(27)	(a)	2	(c)	4b(27)	March 1, 1974
		3/29/74		2/18/81
4a(28)	(a)	2	(c)	4b(28)	October 1, 1974
		10/11/74		2/18/81
4a(29)	(a)	2	(c)	4b(29)	April 1, 1976
		4/6/76		2/18/81
4a(30)	(a)	2	(c)	4b(30)	September 1, 1976
		9/16/76		2/18/81
4a(31)	(k)	2b(31)	(c)	4b(31)	October 1, 1976
				2/18/81

PSE&G
Exhibit Number
	Previous Filing
This Filing	Commission			Exchanges
4a(32)	(a)	2	(c)	4b(32)	June 1, 1977
		6/29/77		2/18/81
4a(33)	(l)	2b(33)	(c)	4b(33)	September 1, 1977
				2/18/81
4a(34)	(a)	2	(c)	4b(34)	November 1, 1978
		11/21/78		2/18/81
4a(35)	(a)	2	(c)	4b(35)	July 1, 1979
		7/25/79		2/18/81
4a(36)	(m)	2d(36)	(c)	4b(36)	September 1, 1979 (No. 1)
				2/18/81
4a(37)	(m)	2d(37)	(c)	4b(37)	September 1, 1979 (No. 2)
				2/18/81
4a(38)	(a)	2	(c)	4b(38)	November 1, 1979
		12/3/79		2/18/81
4a(39)	(a)	2	(c)	4b(39)	June 1, 1980
		6/10/80		2/18/81
4a(40)	(a)	2	(a)	2	August 1, 1981
		8/19/81		8/19/81
4a(41)	(b)	4e	(b)	4e	April 1, 1982
		4/29/82		5/5/82
4a(42)	(a)	2	(a)	2	September 1, 1982
		9/17/82		9/20/82
4a(43)	(a)	2	(a)	2	December 1, 1982
		12/21/82		12/21/82
4a(44)	(d)	4(ii)	(d)	4(ii)	June 1, 1983
		7/26/83		7/27/83
4a(45)	(a)	4	(a)	4	August 1, 1983
		8/19/83		8/19/83
4a(46)	(d)	4(ii)	(d)	4(ii)	July 1, 1984
		8/14/84		8/17/84
4a(47)	(d)	4(ii)	(d)	4(ii)	September 1, 1984
		11/2/84		11/9/84
4a(48)	(b)	4(ii)	(b)	4(ii)	November 1, 1984 (No. 1)
		1/4/85		1/9/85
4a(49)	(b)	4(ii)	(b)	4(ii)	November 1, 1984 (No. 2)
		1/4/85		1/9/85
4a(50)	(a)	2	(a)	2	July 1, 1985
		8/2/85		8/2/85
4a(51)	(c)	4a(51)	(c)	4a(51)	January 1, 1986
		2/11/86		2/11/86
4a(52)	(a)	2	(a)	2	March 1, 1986
		3/28/86		3/28/86

PSE&G
Exhibit Number
	Previous Filing
This Filing	Commission		Exchanges
4a(53)	(a)	2(a)	(a)	2(a)	April 1, 1986 (No. 1)
		5/1/86		5/1/86
4a(54)	(a)	2(b)	(a)	2(b)	April 1, 1986 (No. 2)
		5/1/86		5/1/86
4a(55)	(p)	4a(55)	(p)	4a(55)	March 1, 1987
		4/9/87		4/9/87
4a(56)	(a)	4	(a)	4	July 1, 1987 (No. 1)
		8/17/87		8/17/87
4a(57)	(d)	4	(d)	4	July 1, 1987 (No. 2)
		11/13/87		11/20/87
4a(58)	(a)	4	(a)	4	May 1, 1988
		5/17/88		5/18/88
4a(59)	(a)	4	(a)	4	September 1, 1988
		9/27/88		9/28/88
4a(60)	(a)	4	(a)	4	July 1, 1989
		7/25/89		7/26/89
4a(61)	(a)	4	(a)	4	July 1, 1990 (No. 1)
		7/25/90		7/26/90
4a(62)	(a)	4	(a)	4	July 1, 1990 (No. 2)
		7/25/90		7/26/90
4a(63)	(a)	4	(a)	4	June 1, 1991 (No. 1)
		7/1/91		7/2/91
4a(64)	(a)	4	(a)	4	June 1, 1991 (No. 2)
		7/1/91		7/2/91
4a(65)	(a)	4	(a)	4	November 1, 1991 (No. 1)
		12/2/91		12/3/91
4a(66)	(a)	4	(a)	4	November 1, 1991 (No. 2)
		12/2/91		12/3/91
4a(67)	(a)	4	(a)	4	November 1, 1991 (No. 3)
		12/2/91		12/3/91
4a(68)	(a)	4	(a)	4	February 1, 1992 (No. 1)
		2/27/92		2/28/92
4a(69)	(a)	4	(a)	4	February 1, 1992 (No. 2)
		2/27/92		2/28/92
4a(70)	(a)	4	(a)	4	June 1, 1992 (No. 1)
		6/17/92		6/11/92
4a(71)	(a)	4	(a)	4	June 1, 1992 (No. 2)
		6/17/92		6/11/92
4a(72)	(a)	4	(a)	4	June 1, 1992 (No. 3)
		6/17/92		6/11/92

PSE&G
Exhibit Number
	Previous Filing
This Filing
	Commission		Exchanges
4a(73)	(a)	4	(a)	4	January 1, 1993 (No. 1)
		2/2/93		2/2/93
4a(74)	(a)	4	(a)	4	January 1, 1993 (No. 2)
		2/2/93		2/2/93
4a(75)	(a)	4	(a)	4	March 1, 1993
		3/17/93		3/18/93
4a(76)	(b)	4	(a)	4	May 1, 1993
		5/27/93		5/28/93
4a(77)	(a)	4	(a)	4	May 1, 1993 (No. 2)
		5/25/93		5/25/93
4a(78)	(a)	4	(a)	4	May 1, 1993 (No. 3)
		5/25/93		5/25/93
4a(79)	(b)	4	(b)	4	July 1, 1993
		12/1/93		12/1/93
4a(80)	(a)	4	(a)	4	August 1, 1993
		8/3/93		8/3/93
4a(81)	(b)	4	(b)	4	September 1, 1993
		12/1/93		12/1/93
4a(82)	(a)	4	(a)	4	September 1, 1993 (No. 2)
		12/1/93		12/1/93
4a(84)	(a)	4	(a)	4	February 1, 1994
		2/3/94		2/14/94
4a(85)	(a)	4	(a)	4	March 1, 1994 (No. 1)
		3/15/94		3/16/94
4a(86)	(a)	4	(a)	4	March 1, 1994 (No. 2)
		3/15/94		3/16/94
4a(87)	(d)	4	(d)	4	May 1, 1994
		11/8/94		12/2/94
4a(88)	(d)	4	(d)	4	June 1, 1994
		11/8/94		12/2/94
4a(89)	(d)	4	(d)	4	August 1, 1994
		11/8/94		12/2/94
4a(90)	(d)	4	(d)	4	October 1, 1994 (No. 1)
		11/8/94		12/2/94
4a(91)	(d)	4	(d)	4	October 1, 1994 (No. 2)
		11/8/94		12/2/94
4a(92)	(a)	4	(a)	4	January 1, 1996 (No.1)
		1/26/96		1/26/96
4a(93)	(a)	4	(a)	4	January 1, 1996 (No. 2)
		1/26/96		1/26/96
4a(94)	(c)	4			December 1, 1996
		2/26/97

PSE&G
Exhibit Number
	Previous Filing
This Filing	Commission		Exchanges
4a(95)	(a)	4	(a)	4	June 1, 1997
		6/17/97		6/17/97
4a(96)	(a)	4	(a)	4	May 1, 1998
		5/15/98		5/15/98
4a(97)					September 1, 2002
4b	(b)	4	(b)	4	Indenture of Trust between PSE&G and Chase Manhattan Bank
		12/1/93		12/1/93	(National Association), as Trustee, providing for Secured Medium-
					Term Notes dated July 1, 1993
4c(1)	(b)		(c)		Indenture between PSE&G and First Fidelity Bank, National
		2/23/95		2/23/95	Association (now, Wachovia Bank, National Association), as
					Trustee, dated November 1, 1994, providing for Deferrable Interest
					Subordinated Debentures in Series
4c(2)	(a)	4b(5)	(a)	4b(5)	Supplemental Indenture between PSE&G and First Fidelity Bank,
					National Association (now, Wachovia Bank, National
	(d)	4d(2)	(d)	4d(2)	Association), as Trustee, dated September 1, 1995 providing for
		5/13/98		5/13/98	Deferrable Interest Subordinated Debentures, Series B (relating to
					Monthly Preferred Securities)
4d(1)	(d)	4e(1)	(d)	4e(1)	Indenture between PSE&G and First Union National Bank (now,
		5/13/98		5/13/98	Wachovia Bank, National Association), as Trustee, dated June 1,
					1996 providing for Deferrable Interest Subordinated Debentures in
					Series (relating to Quarterly Preferred Securities)
4d(2)	(d)	4e(2)	(d)	4e(2)	Supplemental Indenture between PSE&G and First Union National
		5/13/98		5/13/98	Bank (now, Wachovia Bank, National Association), as Trustee,
					dated February 1, 1997 providing for Deferrable Interest
					Subordinated Debentures, Series B (relating to Quarterly Preferred
					Securities)
4e	(q)	4-6	(q)	4-6	Indenture dated as of December 1, 2000 between Public Service
		2/12/02		2/12/02	and Gas Company and First Union National Bank (now, Wachovia
					Bank, National Association), as Trustee, providing for Senior Debt
					Securities.
10a(1)	(c)	10a(1)	(c)	10a(1)	Deferred Compensation Plan for Directors
		2/25/00		2/25/00
10a(2)	(c)	10a(2)	(c)	10a(2)	Deferred Compensation Plan for Certain Employees
		2/25/00		2/25/00
10a(3)	(c)	10a(3)	(c)	10a(3)	Limited Supplemental Benefits Plan for Certain Employees
		2/25/00		2/25/00
10a(4)	(c)	10a(4)	(c)	10a(4)	Mid Career Hire Supplemental Retirement Income Plan
		2/25/00		2/25/00
10a(5)	(c)	10a(5)	(c)	10a(5)	Retirement Income Reinstatement Plan for Non-Represented
					Employees
		2/25/00		2/25/00
10a(6)	(b)	10a(6)	(b)	10a(6)	1989 Long-Term Incentive Plan, as amended
		11/2/02		11/2/02
10a(7)	(c)	10a(7)	(c)	10a(7)	2001 Long-Term Incentive Plan
		3/5/01		3/5/01
10a(8)	(c)	10a(8)		10a(8)	Restated and Amended Management
		3/5/01		3/5/01	Incentive Compensation Plan

PSE&G
Exhibit Number
		Previous Filing
This Filing		Commission		Exchanges
10a(9)		(d)	10	(d)	10	Employment Agreement with E. James Ferland, dated June 16,
			8/14/98		8/14/98	1998
10a(10)		(c)	10(a)10	(c)	10(a)10	Amendment to Employment Agreement with E. James Ferland dated
			3/1/02		3/1/02	November 20, 2001
10a(11)		(c)	10a(13)	(c)	10a(13)	Letter Agreement with Patricia A. Rado dated
			2/26/94		3/9/94	March 24, 1993
10a(12)		(d)	10a(21)	(d)	10a(21)	Employment Agreement with Alfred C. Koeppe dated
			11/13/00		11/13/00	October 17, 2000
10a(13)		(f)	10a(23)	(f)	10a(23)	Employment Agreement with Robert E. Busch dated April 24,
			8/9/01		8/9/01	2001
11						Inapplicable
12	a					Computation of Ratios of Earnings to Fixed Charges
12	b					Computation of Ratios of Earnings to Fixed Charges Plus
						Preferred Stock Dividend Requirements
13						Inapplicable
16						Inapplicable
18						Independent Auditors’ Preferability Letter dated February 7, 2003
19						Inapplicable
21	a					Inapplicable
23	a					Independent Auditors’ Consent
24						Inapplicable
99	b					Certification by E. James Ferland, pursuant to Section 1350 of
						Chapter 63 of Title 18 of the United States Code
99	c					Certification by Robert E. Busch, pursuant to Section 1350 of
						Chapter 63 of Title 18 of the United States Code

Power

     Certain Exhibits previously filed with the Commission and the appropriate securities exchanges are indicated as set forth below. Such Exhibits are not being refiled, but are included because inclusion is desirable for convenient reference.

Power
Exhibit Number
		Previous Filing
This Filing		Commission
3	a	3.1	Certificate of Formation of PSEG Power LLC; Filed by Power with Registration
			Statement No. 333-69228 on Form S-4 filed October 5, 2001.
3	b	3.2	PSEG Power LLC Limited Liability Company Agreement; Filed by Power with
			Registration Statement No. 333-69228 on Form S-4 filed October 5, 2001.
4	a	4.1	Indenture dated April 16, 2001 between Registrants and The Bank of New York and
			form of Subsidiary Guaranty included therein.Filed by Power with Registration
			Statement No. 333-69228 on Form S-4 filed October 5, 2001.
10		10	Basic Generation Service Contract with PSE&G. Filed by Power with Registration
			Statement No. 333-69228 on Form S-4 filed October 5, 2001.
11			Inapplicable
12	c		Computation of Ratio of Earnings to Fixed Charges
13			Inapplicable
16			Inapplicable
18			Independent Auditors’ Preferability Letter dated February 7, 2003
19			Inapplicable
24			Inapplicable
99	d		Certification by E. James Ferland, pursuant to Section 1350 of Chapter 63 of Title 18
			of the United States Code
99	e		Certification by Thomas M. O’Flynn, pursuant to Section 1350 of Chapter 63 of Title
			18 of the United States Code

Energy Holdings

     Certain Exhibits previously filed with the Commission and the appropriate securities exchanges are indicated as set forth below. Such Exhibits are not being refiled, but are included because inclusion is desirable for convenient reference.

Energy Holdings
Exhibit Number
		Previous Filing
This Filing		Commission
3	a	3	Certificate of Formation of PSEG Energy Holdings LLC. Incorporated by reference from Form 8-
			K dated October 1, 2002.
3	b	3.1	Certificate of Amendment to Certificate of Formation of PSEGH LLC.
			Incorporated by reference from Form 8-K dated October 1, 2002.
3	c	3.2	Limited Liability Company Agreement of PSEG Energy Holdings L.L.C.
			Incorporated by reference from Form 8-K dated October 1, 2002.
4	a	4.1	Indenture dated October 8, 1999 between Energy Holdings and First Union
			National Bank. Incorporated by reference from Registration Statement No. 333-
			95697 filed June 29, 2000.
4	b	4	First Supplemental Indenture to Indenture dated October 8, 1999 between Energy
			Holdings and Wachovia Bank, National Association dated September 30, 2002.
			Incorporated by reference from Form 8-K dated October 1, 2002.
11			Inapplicable
12	d		Statement regarding Computation of Ratios of Earnings to Fixed Charges
13			Inapplicable
16			Inapplicable
19			Inapplicable
24			Inapplicable
99	f		Certification by E. James Ferland, pursuant to Section 1350 of Chapter 63 of Title
			18 of the United States Code
99	g		Certification by Thomas M. O’Flynn, pursuant to Section 1350 of Chapter 63 of
			Title 18 of the United States Code

EX-3.C

239897.002(B&F)

                              Amended and Restated
                    Trust Agreement for PSE&G Capital Trust I

                                      among

                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
                                 (as Depositor)

                            FIRST UNION NATIONAL BANK
                              (as Property Trustee)

                          FIRST UNION BANK OF DELAWARE
                              (as Delaware Trustee)

                                       and

                     THE ADMINISTRATIVE TRUSTEE NAMED HEREIN

                                   Dated as of
                                  June 26, 1996



                                TABLE OF CONTENTS

                                                                            Page

                                    ARTICLE I

                                  Defined Terms

Section 1.01.  Definitions...................................................  2

                                   ARTICLE II

                            Continuation of the Trust

Section 2.01.  Name.......................................................... 10
Section 2.02.  Office of the Delaware Trustee; Principal Place
               of Business................................................... 10
Section 2.03.  Initial Contribution of Trust Property; Expenses
               of the Trust.................................................. 10
Section 2.04.  Issuance of the Trust Securities.............................. 11
Section 2.05.  Purchase of Debentures........................................ 11
Section 2.06.  Declaration of Trust.......................................... 11
Section 2.07.  Authorization to Enter into Certain
               Transactions.................................................. 12
Section 2.08.  Assets of Trust............................................... 15
Section 2.09.  Title to Trust Property....................................... 15

                                   ARTICLE III

                                 Payment Account

Section 3.01.  Payment Account............................................... 16

                                   ARTICLE IV

                            Distributions; Redemption

Section 4.01.  Distributions................................................. 16
Section 4.02.  Redemption.................................................... 17
Section 4.03.  Subordination of Common Securities............................ 19
Section 4.04.  Payment Procedures............................................ 20
Section 4.05.  Tax Returns and Reports....................................... 20

                                    ARTICLE V

                          Trust Securities Certificates

Section 5.01.  Initial Ownership............................................. 21
Section 5.02.  The Trust Securities Certificates............................. 21


                                       (i)


Section 5.03.  Delivery of Trust Securities Certificates..................... 21
Section 5.04.  Registration of Transfer and Exchange of
               Preferred Securities Certificates............................. 22
Section 5.05.  Mutilated, Destroyed, Lost or Stolen Trust
               Securities Certificates....................................... 23
Section 5.06.  Persons Deemed Securityholders................................ 23
Section 5.07.  Access to List of Securityholders' Names and
               Addresses..................................................... 23
Section 5.08.  Maintenance of Office or Agency............................... 24
Section 5.09.  Appointment of Paying Agent................................... 24
Section 5.10.  No Transfer of Common Securities by Depositor................. 25
Section 5.11.  Book-Entry Preferred Securities Certificates;
               Common Securities Certificate................................. 25
Section 5.12.  Definitive Preferred Securities Certificates.................. 25
Section 5.13.  Rights of Securityholders..................................... 26

                                   ARTICLE VI

                    Acts of Securityholders; Meetings; Voting

Section 6.01.  Limitations on Voting Rights.................................. 26
Section 6.02.  Notice of Meetings............................................ 27
Section 6.03.  Meetings of Preferred Securityholders......................... 28
Section 6.04.  Voting Rights................................................. 28
Section 6.05.  Proxies, etc.................................................. 28
Section 6.06.  Securityholder Action by Written Consent...................... 28
Section 6.07.  Record Date for Voting and Other Purposes..................... 29
Section 6.08.  Acts of Securityholders....................................... 29
Section 6.09.  Inspection of Records......................................... 30

                                   ARTICLE VII

                                  The Trustees

Section 7.01.  Certain Duties and Responsibilities........................... 30
Section 7.02.  Notice of Defaults; Direct Action by
               Securityholders............................................... 31
Section 7.03.  Certain Rights of Property Trustee............................ 32
Section 7.04.  Not Responsible for Recitals or Issuance of
               Securities.................................................... 33
Section 7.05.  May Hold Securities........................................... 33
Section 7.06.  Compensation; Indemnity; Fees................................. 33
Section 7.07.  Corporate Property Trustee Required; Eligibility
               of Trustees................................................... 34
Section 7.08.  Conflicting Interests......................................... 35
Section 7.09.  Co-Trustees and Separate Trustee.............................. 35
Section 7.10.  Resignation and Removal; Appointment of
               Successor..................................................... 37
Section 7.11.  Acceptance of Appointment by Successor........................ 38


                                      (ii)


Section 7.12.  Merger, Conversion, Consolidation or Succession
               to Business................................................... 39
Section 7.13.  Preferential Collection of Claims Against
               Depositor or Trust............................................ 39
Section 7.14.  Reports by Property Trustee................................... 39
Section 7.15.  Reports to the Property Trustee............................... 40
Section 7.16.  Evidence of Compliance with Conditions
               Precedent..................................................... 40
Section 7.17.  Statements Required in Officer's Certificate
               and Opinion of Counsel........................................ 40
Section 7.18.  Number of Trustees............................................ 41
Section 7.19.  Delegation of Power........................................... 41
Section 7.20.  Voting........................................................ 41

                                  ARTICLE VIII

                           Termination and Liquidation

Section 8.01.  Termination Upon Expiration Date.............................. 42
Section 8.02.  Early Termination............................................. 42
Section 8.03.  Termination................................................... 42
Section 8.04.  Liquidation................................................... 42

                                   ARTICLE IX

                                  Mergers, Etc.

Section 9.01.  Mergers, Consolidations, Amalgamations or
               Replacements of the Trust..................................... 44

                                    ARTICLE X

                            Miscellaneous Provisions

Section 10.01. Limitation of Rights of Securityholders....................... 46
Section 10.02. Amendment..................................................... 46
Section 10.03. Severability.................................................. 47
Section 10.04. Governing Law................................................. 47
Section 10.05. Payments Due on Non-Business Day.............................. 47
Section 10.06. Successors and Assigns........................................ 48
Section 10.07. Headings...................................................... 48
Section 10.08. Reports, Notices and Demands.................................. 48
Section 10.09. Agreement Not to Petition..................................... 49
Section 10.10. Trust Indenture Act; Conflict with Trust
               Indenture Act................................................. 49
Section 10.11. Acceptance of Terms of Trust Agreement,
               Guarantee and Indenture....................................... 49


                                     (iii)


                                                                            Page


                                      (iv)


                                                                            Page


                                      (v)


                              PSE&G Capital Trust I

              Certain Sections of this Trust Agreement relating to
                         Sections 310 through 318 of the
                           Trust Indenture Act of 1939

Trust Indenture                                                  Trust Agreement
  Act Section                                                        Section
- ---------------                                                  ---------------

ss. 310(a)(1)...............................................................7.07
       (a)(2)...............................................................7.07
       (a)(3)...............................................................7.09
       (a)(4)........................................................2.07(a)(ii)
       (b)..................................................................7.08
ss. 311(a)..................................................................7.13
       (b)..................................................................7.13
ss. 312(a)..................................................................5.07
       (b)..................................................................5.07
       (c)..................................................................5.07
ss. 313(a)..................................................................7.14
       (b)..................................................................7.14
       (c)..................................................................7.14
       (d)..................................................................7.14
ss. 314(a)..................................................................7.15
       (b)........................................................Not Applicable
       (c)(1).........................................................7.16, 7.17
       (c)(2).........................................................7.16, 7.17
       (c)(3).....................................................Not Applicable
       (d)........................................................Not Applicable
       (e)................................................................. 7.17
ss. 315(a)......................................................7.01(a), 7.03(a)
       (b)...........................................................7.02, 10.08
       (c)...............................................................7.01(a)
       (d)............................................................7.01, 7.03
       (e)........................................................Not Applicable
ss. 316(a)........................................................Not Applicable
       (a)(1)(A)..................................................Not Applicable
       (a)(1)(B)..................................................Not Applicable
       (a)(2).....................................................Not Applicable
       (b)........................................................Not Applicable
       (c)........................................................Not Applicable
ss. 317(a)(1).....................................................Not Applicable
       (a)(2).....................................................Not Applicable
       (b)..................................................................5.09
ss. 318(a).................................................................10.10

- ------------------
     Note: This reconciliation and tie sheet shall not, for any


                                      (vi)


purpose, be deemed to be a part of the Trust Agreement.


                                     (vii)


     AMENDED AND RESTATED TRUST AGREEMENT of PSE&G Capital Trust I (the
"Trust"), dated as of June 26, 1996, among (i) Public Service Electric and Gas
Company, a New Jersey corporation (the "Depositor"), (ii) First Union National
Bank, a national banking association, as trustee (the "Property Trustee"), (iii)
First Union Bank of Delaware, a Delaware banking corporation whose address in
Delaware is 1225 King Street, Wilmington, Delaware 19801, as Delaware trustee
(the "Delaware Trustee"), (iv) Fred F. Saunders, an individual whose address is
c/o Public Service Electric and Gas Company, 80 Park Plaza, P.O. Box 570,
Newark, New Jersey 07101 (the "Administrative Trustee") (the Property Trustee,
the Delaware Trustee and the Administrative Trustee are referred to collectively
as the "Trustees"), and (v) the several Holders, as hereinafter defined.

                                   WITNESSETH:

     WHEREAS, the Depositor, the Property Trustee, the Delaware Trustee and the
Administrative Trustee have heretofore duly declared and established a business
trust pursuant to the Delaware Business Trust Act by entering into a Trust
Agreement, dated as of April 19, 1996 (the "Original Trust Agreement"), and by
executing and filing with the Secretary of State of the State of Delaware a
Certificate of Trust on April 19, 1996, a form of which is attached hereto as
Exhibit A; and

     WHEREAS, the Depositor, the Property Trustee, the Delaware Trustee and the
Administrative Trustee desire to amend and restate the Original Trust Agreement
in its entirety as set forth herein to provide for, among other things, (i) the
issuance of the Common Securities, as hereinafter defined, by the Trust to the
Depositor, (ii) the issuance and sale of the Preferred Securities, as
hereinafter defined, by the Trust pursuant to the Underwriting Agreement, as
hereinafter defined, and (iii) the acquisition by the Trust from the Depositor
of the Debentures, as hereinafter defined.

     NOW, THEREFORE, in consideration of the agreements and obligations set
forth herein and for other good and valuable consideration, the sufficiency of
which is hereby acknowledged, each party, for the benefit of the other party and
for the benefit of the Securityholders, as hereinafter defined, hereby amends
and restates the Original Trust Agreement in its entirety and agrees as follows:



                                    ARTICLE I

                                  Defined Terms

     Section 1.01. Definitions. For all purposes of this Trust Agreement, except
as otherwise expressly provided or unless the context otherwise requires:

          (a) each term defined in this Article I has the meaning assigned to it
     in this Article I and includes the plural as well as the singular;

          (b) each of the other terms used herein that is defined in the Trust
     Indenture Act, either directly or by reference therein, has the meaning
     assigned to it therein;

          (c) unless the context otherwise requires, any reference to an
     "Article" or a "Section" refers to an Article or a Section, as the case may
     be, of this Trust Agreement; and

          (d) the words "herein", "hereof" and "hereunder" and other words of
     similar import refer to this Trust Agreement as a whole and not to any
     particular Article, Section or other subdivision.

     "Act" has the meaning specified in Section 6.08.

     "Administrative Trustee" means the individual identified as the
"Administrative Trustee" in the preamble to this Trust Agreement, solely in
his/her capacity as Administrative Trustee of the Trust created and continued
hereunder and not in his/her individual capacity, or such Administrative
Trustee's successor in interest in such capacity, or any successor trustee
appointed as herein provided.

     "Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.

     "Bankruptcy Event" means, with respect to any Person, the occurrence of any
of the following events:

     (a) Such Person, pursuant to or within the meaning of


                                       2


any Bankruptcy Law:

          (i)   commences a voluntary case or proceeding;

          (ii)  consents to the entry of an order for relief against it in an
                involuntary case or proceeding;

          (iii) consents to the appointment of a Custodian, as hereinafter
                defined, of it or for all or substantially all of its property,
                and such Custodian is not discharged within 60 days;

          (iv)  makes a general assignment for the benefit of its creditors; or

          (v)   admits in writing its inability to pay its debts generally as
                they become due; or

     (b) A court of competent jurisdiction enters an order or decree under any
Bankruptcy Law that:

          (i)   is for relief against such Person in an involuntary case or
                proceeding;

          (ii)  appoints a Custodian of such Person for all or substantially all
                of its properties;

          (iii) orders the liquidation of such Person;

          (iv)  and in each case the order or decree remains unstayed and in
                effect for 60 days.

     "Bankruptcy Laws" means Title 11 of the United States Code, or similar
federal or state law for the relief of debtors. "Custodian" means any receiver,
trustee, assignee, liquidator, sequestrator, custodian or similar official under
any Bankruptcy Law.

     "Board Resolution" means (i) a copy of a resolution certified by the
Secretary or an Assistant Secretary of the Depositor to have been duly adopted
by the Depositor's Board of Directors or a committee established thereby and to
be in full force and effect on the date of such certification or (ii) a
certificate signed by the authorized officer or officers of the


                                       3


Depositor to whom the Depositor's Board of Directors or a committee established
thereby has delegated its authority, and in each case, delivered to the
Trustees.

     "Book-Entry Preferred Securities Certificates" means certificates
representing Preferred Securities issued in global, fully registered form with
the Clearing Agency as described in Section 5.11.

     "Business Day" means a day other than (a) a Saturday or Sunday, or (b) a
day on which banking institutions in The City of New York or the State of New
Jersey are required by law or executive order to remain closed.

     "Certificate Depository Agreement" means the agreement among the Trust, the
Property Trustee and The Depository Trust Company, as the initial Clearing
Agency, dated as of the Closing Date, relating to the Book-Entry Preferred
Securities Certificates, substantially in the form attached hereto as Exhibit B,
as the same may be amended and supplemented from time to time.

     "Clearing Agency" means an organization registered as a "clearing agency"
pursuant to Section 17A of the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder. The Depository Trust Company
will be the initial Clearing Agency.

     "Closing Date" means the Time of Delivery as defined in the Underwriting
Agreement, which date is also the date of execution and delivery of this Trust
Agreement.

     "Code" means the Internal Revenue Code of 1986, as amended.

     "Commission" means the Securities and Exchange Commission, as from time to
time constituted, created under the Securities Exchange Act of 1934, as amended,
or, if at any time after the execution of this Trust Agreement such Commission
is not existing and performing the duties now assigned to it under the Trust
Indenture Act, then the body performing such duties at such time.

     "Common Security" means an undivided beneficial interest in the assets of
the Trust, having a Liquidation Amount of $25 and having the rights provided
therefor in this Trust Agreement, including the right to receive Distributions
and a Liquidation Distribution as provided herein.

     "Common Securities Certificate" means a certificate


                                       4


evidencing ownership of Common Securities, substantially in the form attached
hereto as Exhibit C.

     "Corporate Trust Office" means the principal corporate office of the
Property Trustee located in the State of New Jersey which at the date hereof is
765 Broad Street, Newark, New Jersey 07107.

     "Creditor" has the meaning specified in Section 2.03.

     "Debenture Event of Default" means an "Event of Default" as defined in the
Indenture with respect to the Debentures.

     "Debenture Redemption Date" means "Redemption Date" as defined in the
Indenture with respect to the Debentures.

     "Debenture Trustee" means First Union National Bank, a national banking
association, in its capacity as trustee under the Indenture, or any successor
thereto appointed in accordance with the terms and provisions of the Indenture.

     "Debentures" means the Depositor's 8.625% Deferrable Interest Subordinated
Debentures, Series A, issued pursuant to the Indenture.

     "Definitive Preferred Securities Certificates" means certificates
representing Preferred Securities issued in certificated, fully registered form
as described in Section 5.12.

     "Delaware Business Trust Act" means Chapter 38 of Title 12 of the Delaware
Code, 12 Del. C. ss. 3801, et seq., as it may be amended from time to time.

     "Delaware Trustee" means the entity identified as the "Delaware Trustee" in
the preamble to this Trust Agreement solely in its capacity as Delaware Trustee
of the Trust created and continued hereunder and not in its individual capacity,
or its successor in interest in such capacity, or any successor trustee
appointed as herein provided.

     "Depositor" has the meaning specified in the preamble to this
Trust Agreement.

     "Distribution Date" has the meaning specified in Section 4.01(a).

     "Distributions" means amounts payable in respect of the Trust Securities as
provided in Section 4.01.


                                       5


     "Event of Default" means the occurrence of a Debenture Event of Default
(whatever the reason for such Event of Default and whether it shall be voluntary
or involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body).

     "Expiration Date" has the meaning specified in Section 8.01.

     "Extension Period" means the period or periods in which pursuant to the
Indenture payments of interest on the Debentures are deferred by extending the
interest payment periods thereof.

     "Guarantee" means the Guarantee Agreement executed and delivered by the
Depositor to First Union National Bank, a national banking association, as
trustee thereunder, contemporaneously with the execution and delivery of this
Trust Agreement, for the benefit of the Holders of the Preferred Securities, as
amended from time to time.

     "Indenture" means the Indenture, dated as of June 1, 1996, between the
Depositor and the Debenture Trustee, as trustee thereunder, as amended or
supplemented from time to time.

     "Lien" means any lien, pledge, charge, encumbrance, mortgage, deed of
trust, adverse ownership interest, hypothecation, assignment, security interest
or preference, priority or other security agreement or preferential arrangement
of any kind or nature whatsoever.

     "Like Amount" means (a) with respect to a redemption of Trust Securities,
Trust Securities having an aggregate Liquidation Amount equal to the principal
amount of Debentures to be paid in accordance with the Indenture and (b) with
respect to a distribution of Debentures to Holders of Trust Securities in
connection with a termination and liquidation of the Trust, Debentures having a
principal amount equal to the aggregate Liquidation Amount of the Trust
Securities in exchange for which such Debentures are distributed.

     "Liquidation Amount" means the stated amount of $25 per Trust Security.

     "Liquidation Date" means the date on which Debentures are to be distributed
to Holders of Trust Securities in connection with a termination and liquidation
of the Trust pursuant to Section 8.04(a).


                                       6


     "Liquidation Distribution" has the meaning specified in Section 8.04(d).

     "1940 Act" means the Investment Company Act of 1940, as amended.

     "Officers' Certificate" means a certificate signed by the Chairman, the
President, any Vice President, the Treasurer, any Assistant Treasurer, the
Secretary or any Assistant Secretary of the Depositor.

     "Opinion of Counsel" means a written opinion of counsel, who may be counsel
for the Trust, the Property Trustee or the Depositor or an Affiliate of the
Depositor, but not an employee of any thereof, and who shall be acceptable to
the Property Trustee.

     "Original Trust Agreement" has the meaning specified in the recitals to
this Trust Agreement.

     "Outstanding", when used with respect to Trust Securities, means, as of the
date of determination, all Trust Securities theretofore executed and delivered
under this Trust Agreement, except:

          (a) Trust Securities theretofore cancelled by the Administrative
     Trustee or delivered to the Administrative Trustee for cancellation;

          (b) Trust Securities for whose redemption money in the necessary
     amount has been theretofore deposited with the Property Trustee or any
     Paying Agent for the Holders of such Trust Securities; provided that, if
     such Trust Securities are to be redeemed, notice of such redemption has
     been duly given pursuant to this Trust Agreement;

          (c) Trust Securities which have been paid or in exchange for or in
     lieu of which other Trust Securities have been executed and delivered
     pursuant to Section 5.05, other than any such Trust Securities in respect
     of which there shall have been presented to the Property Trustee proof
     satisfactory to it that such Trust Securities are held by a bona fide
     purchaser; and

          (d) as provided in Section 8.04(c);

provided, however, that in determining whether the Holders of the requisite
Liquidation Amount of the Outstanding Preferred Securities have given any
request, demand, authorization, direction, notice, consent or waiver hereunder,
Preferred


                                       7


Securities owned by the Depositor, any Trustee or any Affiliate of the Depositor
or any Trustee shall be disregarded and deemed not to be Outstanding, except
that (a) in determining whether any Trustee shall be protected in relying upon
any such request, demand, authorization, direction, notice, consent or waiver,
only Preferred Securities which such Trustee actually knows to be so owned shall
be so disregarded and (b) the foregoing shall not apply at any time when all of
the Outstanding Preferred Securities are owned by the Depositor, one or more of
the Trustees and/or any such Affiliate. Preferred Securities so owned which have
been pledged in good faith may be regarded as Outstanding if the pledgee
establishes to the satisfaction of the Administrative Trustee the pledgee's
right so to act with respect to such Preferred Securities and that the pledgee
is not the Depositor or any Affiliate of the Depositor.

     "Paying Agent" means the Property Trustee and any co-paying agent appointed
pursuant to Section 5.09.

     "Payment Account" means a segregated non-interest-bearing corporate trust
account maintained by the Property Trustee in its trust department for the
benefit of the Securityholders in which all amounts paid to the Property Trustee
in respect of the Debentures or the Guarantee will be held and from which the
Property Trustee or such other Paying Agent shall make payments to the
Securityholders in accordance with Article 4.

     "Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.

     "Preferred Security" means a 8.625% Cumulative Quarterly Income Preferred
Security, Series A issued by the Trust, and having an undivided beneficial
interest in the assets of the Trust, having a Liquidation Amount of $25 and
having rights provided therefor in this Trust Agreement, including the right to
receive Distributions and a Liquidation Distribution as provided herein.

     "Preferred Securities Certificate" means a certificate evidencing ownership
of one or more Preferred Securities, substantially in the form attached hereto
as Exhibit D.

     "Property Trustee" means the commercial bank or trust company identified as
the "Property Trustee" in the preamble to this Trust Agreement solely in its
capacity as Property Trustee of the Trust heretofore created and continued
hereunder and not in its individual capacity, or its successor in interest in
such capacity, or any successor property trustee appointed as herein provided.


                                       8


     "Redemption Date" means, with respect to any Trust Security to be redeemed,
the date fixed for such redemption by or pursuant to this Trust Agreement;
provided that each Debenture Redemption Date and the stated maturity of the
Debentures shall be a Redemption Date for a Like Amount of Trust Securities.

     "Redemption Price" means, with respect to any Trust Security, the
Liquidation Amount of such Trust Security, plus accumulated and unpaid
Distributions thereon to the Redemption Date.

     "Securities Register" and "Securities Registrar" have the respective
meanings specified in Section 5.04.

     "Securityholder" or "Holder" means a Person in whose name a Trust Security
or Securities is registered in the Securities Register; any such Person is a
beneficial owner within the meaning of the Delaware Business Trust Act.

     "Successor Securities" has the meaning specified in Section 8.05.

     "Trust" means the Delaware business trust created and continued hereby and
identified on the cover page to this Trust Agreement.

     "Trust Agreement" means this Amended and Restated Trust Agreement, as the
same may be modified, amended or supplemented in accordance with the applicable
provisions hereof, including all exhibits hereto, including, for all purposes of
this Trust Agreement and any such modification, amendment or supplement, the
provisions of the Trust Indenture Act that are deemed to be a part of and govern
this Trust Agreement and any such modification, amendment or supplement,
respectively.

     "Trust Indenture Act" means the Trust Indenture Act of 1939 as in force at
the date as of which this Trust Agreement was executed; provided, however, that
in the event the Trust Indenture Act of 1939 is amended after such date, "Trust
Indenture Act" means, to the extent required by any such amendment, the Trust
Indenture Act of 1939 as so amended.

     "Trust Property" means (a) the Debentures, (b) any cash on deposit in, or
owing to, the Payment Account and (c) all proceeds and rights in respect of the
foregoing and any other property and assets for the time being held or deemed to
be held by the Property Trustee pursuant to the trusts of this Trust Agreement.


                                       9


     "Trust Security" means any one of the Common Securities or the Preferred
Securities.

     "Trust Securities Certificate" means any one of the Common Securities
Certificates or the Preferred Securities Certificates.

     "Underwriting Agreement" means the Underwriting Agreement, dated June 21,
1996, among the Trust, the Depositor and the Underwriters named therein.

                                   ARTICLE II

                            Continuation of the Trust

     Section 2.01. Name. The Trust created and continued hereby shall be known
as "PSE&G Capital Trust I" as such name may be modified from time to time by the
Administrative Trustee following written notice to the Holders of Trust
Securities and the other Trustees, in which name the Trustees may conduct the
business of the Trust, make and execute contracts and other instruments on
behalf of the Trust and sue and be sued.

     Section 2.02. Office of the Delaware Trustee; Principal Place of Business.
The address of the Delaware Trustee in the State of Delaware is 1225 King
Street, Wilmington, Delaware 19801 or such other address in the State of
Delaware as the Delaware Trustee may designate by written notice to the
Securityholders and the Depositor. The principal place of business of the Trust
is 80 Park Plaza, Newark, New Jersey 07101.

     Section 2.03. Initial Contribution of Trust Property; Expenses of the
Trust.

     (a) The Property Trustee acknowledges receipt in trust from the Depositor
in connection with the Original Trust Agreement of the sum of $10, which
constituted the initial Trust Property.

     (b) The Depositor shall be responsible for and shall pay for all
obligations (other than with respect to the Trust Securities) and all costs and
expenses of the Trust (including, but not limited to, costs and expenses
relating to the organization of the Trust, the issuance and sale of the
Preferred Securities, the fees and expenses (including reasonable counsel fees
and expenses) of the Trustees as provided in Section 7.06, the costs and
expenses of accountants, attorneys, statistical or bookkeeping services,
expenses for printing and engraving and computing or accounting equipment,
Paying Agent(s), Securities Registrar, duplication, travel and telephone and
other telecommunications expenses and


                                       10


costs and expenses incurred in connection with the disposition of Trust assets).

     (c) The Depositor will pay any and all taxes (other than United States
withholding taxes attributable to the Trust or its assets) and all liabilities,
costs and expenses with respect to such taxes of the Trust.

     (d) The Depositor's obligations under this Section 2.03 shall be for the
benefit of, and shall be enforceable by, the Property Trustee and any Person to
whom any such obligations, costs, expenses and taxes are owed (a "Creditor")
whether or not such Creditor has received notice hereof. The Property Trustee
and any such Creditor may enforce the Depositor's obligations under this Section
2.03 directly against the Depositor and the Depositor irrevocably waives any
right or remedy to require that the Property Trustee or any such Creditor take
any action against the Trust or any other Person before proceeding against the
Depositor. The Depositor agrees to execute such additional agreements as may be
necessary or desirable in order to give full effect to the provisions of this
Section 2.03.

     (e) The Depositor shall make no claim upon the Trust Property for the
payment of such expenses.

     Section 2.04. Issuance of the Trust Securities. The Depositor, on behalf of
the Trust and pursuant to the Original Trust Agreement, executed and delivered
the Underwriting Agreement. Contemporaneously with the execution and delivery of
this Trust Agreement, the Administrative Trustee, on behalf of the Trust, shall
execute in accordance with Section 5.02 and deliver to the Underwriters named in
the Underwriting Agreement one or more Book-Entry Preferred Securities
Certificates, registered in the name of the nominee of the initial Clearing
Agency, representing 8,320,000 Preferred Securities having an aggregate
Liquidation Amount of $208,000,000, against receipt by the Property Trustee of
the aggregate purchase price of such Preferred Securities of $208,000,000, which
amount the Administrative Trustee shall promptly deliver to the Property
Trustee. Contemporaneously therewith, the Administrative Trustee, on behalf of
the Trust, shall execute in accordance with Section 5.02 and deliver to the
Depositor a Common Securities Certificate, registered in the name of the
Depositor, representing 257,320 Common Securities having an aggregate
Liquidation Amount of $6,433,000, and in satisfaction of the purchase price of
such Common Securities the Depositor shall deliver to the Property Trustee the
sum of $6,433,000.

     Section 2.05. Purchase of Debentures. Contemporaneously with the execution
and delivery of this Trust Agreement (i) the


                                       11


Administrative Trustee, on behalf of the Trust, shall purchase $214,433,000
aggregate principal amount of Debentures from the Depositor, registered in the
name of the Trust and (ii) in satisfaction of the purchase price for such
Debentures, the Property Trustee, on behalf of the Trust, shall deliver to the
Depositor the sum of $214,433,000.

     Section 2.06. Declaration of Trust. The exclusive purposes and functions of
the Trust are (a) to issue and sell Trust Securities and use the proceeds from
such sale to acquire the Debentures, (b) to maintain the status of the Trust as
a grantor trust for United States Federal income tax purposes, and (c) except as
otherwise limited herein, to engage in only those activities necessary,
convenient or incidental thereto. The Depositor hereby appoints the Trustees as
trustees of the Trust, to have all the rights, powers and duties to the extent
set forth herein, and the Trustees hereby accept such appointment. The Property
Trustee hereby declares that it will hold the Trust Property in trust upon and
subject to the conditions set forth herein for the benefit of the
Securityholders. The Administrative Trustee shall have all rights, powers and
duties set forth herein. The Delaware Trustee shall not be entitled to exercise
any powers, nor shall the Delaware Trustee have any of the duties and
responsibilities of the Property Trustee or the Administrative Trustee set forth
herein. The Delaware Trustee shall be one of the Trustees of the Trust for the
sole and limited purpose of fulfilling the requirements of Section 3807 of the
Delaware Business Trust Act.

     Section 2.07. Authorization to Enter into Certain Transactions.

     (a) The Trustees shall conduct the affairs of the Trust in accordance with
the terms of this Trust Agreement. Subject to the limitations set forth in
paragraph (b) of this Section, and in accordance with the following provisions
(i) and (ii), the Trustees shall have the authority to enter into all
transactions and agreements determined by the Trustees to be appropriate in
exercising the authority, express or implied, otherwise granted to the Trustees
under this Trust Agreement, and to perform all acts in furtherance thereof,
including without limitation, the following:

     (i) As among the Trustees, the Administrative Trustee shall have the power
and authority to act on behalf of the Trust with respect to the following
matters:

     (A) executing and delivering the Trust Securities on behalf of the Trust;

     (B) causing the Trust to enter into, and


                                       12


executing, delivering and performing on behalf of the Trust, the Certificate
Depository Agreement and such other agreements as may be necessary or desirable
in connection with the purposes and function of the Trust, including the
appointment of a successor depositary;

     (C) assisting in registering the Preferred Securities under the Securities
Act of 1933, as amended, and under state securities or blue sky laws, and
qualifying this Trust Agreement as a trust indenture under the Trust Indenture
Act;

     (D) assisting in the listing of the Preferred Securities upon such
securities exchange or exchanges as the Depositor shall determine and the
registration of the Preferred Securities under the Securities Exchange Act of
1934, as amended, and the preparation and filing of all periodic and other
reports and other documents pursuant to the foregoing;

     (E) to the extent provided in this Trust Agreement, terminating and
liquidating the Trust and preparing, executing and filing the certificate of
cancellation with the Secretary of State of the State of Delaware;

     (F) sending notices or assisting the Property Trustee in sending notices
and other information regarding the Trust Securities and the Debentures to
Securityholders in accordance with this Trust Agreement; and

     (G) taking any action incidental to the foregoing as the Administrative
Trustee may from time to time determine is necessary or advisable to give effect
to the terms of this Trust Agreement for the benefit of the Securityholders
(without consideration of the effect of any such action on any particular
Securityholder).

     (ii) As among the Trustees, the Property Trustee shall have the power, duty
and authority to act on behalf of the Trust with respect to the following
matters:

     (A) establishing and maintaining the Payment Account and appointing Paying
Agents (subject to Section 5.09);

     (B) receiving payment of the purchase price of the Trust Securities;

     (C) receiving and holding the Debentures;

     (D) collecting interest and principal payments on the Debentures and
depositing them in the Payment Account;


                                       13


     (E) making Distributions and other payments to the Securityholders in
respect of the Trust Securities;

     (F) exercising all of the rights, powers and privileges of a holder of the
Debentures;

     (G) sending notices of defaults, redemptions, Extension Periods,
liquidations and other information regarding the Trust Securities and the
Debentures to the Securityholders in accordance with this Trust Agreement;

     (H) to the extent provided in this Trust Agreement, terminating and
liquidating the Trust, including distributing the Trust Property in accordance
with the terms of this Trust Agreement, and preparing, executing and filing the
certificate of cancellation with the Secretary of State of the State of
Delaware;

     (I) after an Event of Default, taking any action incidental to the
foregoing as the Property Trustee may from time to time determine is necessary
or advisable to give effect to the terms of this Trust Agreement and protect and
conserve the Trust Property for the benefit of the Securityholders (without
consideration of the effect of any such action on any particular
Securityholder); and

     (J) registering transfers and exchanges of the Preferred Securities in
accordance with this Trust Agreement (but only if at such time the Property
Trustee shall be the Securities Registrar).

     (b) So long as this Trust Agreement remains in effect, the Trust (or the
Trustees acting on behalf of the Trust) shall not undertake any business,
activities or transaction except as expressly provided herein or contemplated
hereby. In particular, the Trustees acting on behalf of the Trust shall not (i)
acquire any assets or investments (other than the Debentures), reinvest the
proceeds derived from investments, possess any power or otherwise act in such a
way as to vary the Trust Property or engage in any activities not authorized by
this Trust Agreement, (ii) sell, assign, transfer, exchange, mortgage, pledge,
set-off or otherwise dispose of any of the Trust Property or interests therein,
including to Securityholders, except as expressly provided herein, (iii) take
any action that would cause the Trust to fail or cease to qualify as a grantor
trust for United States Federal income tax purposes, (iv) incur any indebtedness
for borrowed money or issue any other debt, (v) issue any securities or other
evidences of beneficial ownership of, or beneficial interests in, the Trust
other than the Trust Securities, or (vi) take or consent to any


                                       14


action that would result in the placement of a Lien on any of the Trust
Property. The Administrative Trustee shall defend all claims and demands of all
Persons at any time claiming any Lien on any of the Trust Property adverse to
the interest of the Trust or the Securityholders in their capacity as
Securityholders.

     (c) In connection with the issue and sale of the Preferred Securities, the
Depositor shall have the right and responsibility to assist the Trust with
respect to, or effect on behalf of the Trust, the following (and any actions
taken by the Depositor in furtherance of the following prior to the date of this
Trust Agreement are hereby ratified and confirmed in all respects):

     (i) preparing for filing with the Commission and executing on behalf of the
Trust a registration statement on Form S-3 in relation to the Preferred
Securities, including any amendments thereto;

     (ii) determining the States in which to take appropriate action to qualify
or register for sale all or part of the Preferred Securities and doing any and
all such acts, other than actions which must be taken by or on behalf of the
Trust, and advising the Trustees of actions they must take on behalf of the
Trust, and preparing for execution and filing any documents to be executed and
filed by the Trust or on behalf of the Trust, as the Depositor deems necessary
or advisable in order to comply with the applicable laws of any such States;

     (iii) preparing for filing and executing on behalf of the Trust an
application to the New York Stock Exchange or any other national stock exchange
or The Nasdaq National Market for listing upon notice of issuance of any
Preferred Securities;

     (iv) preparing for filing with the Commission and executing on behalf of
the Trust a registration statement on Form 8-A relating to the registration of
the Preferred Securities under Section 12(b) or 12(g) of the Securities Exchange
Act of 1934, as amended, including any amendments thereto;

     (v) negotiating the terms of, and executing and delivering, the
Underwriting Agreement providing for the sale of the Preferred Securities; and

     (vi) taking any other actions necessary or desirable to carry out any of
the foregoing activities.

     (d) Notwithstanding anything herein to the contrary, the Administrative
Trustee is authorized and directed to conduct the affairs of the Trust and to
operate the Trust so that (i) the Trust


                                       15


will not be deemed to be an "investment company" required to be registered under
the 1940 Act, or taxed as a corporation or a partnership for United States
Federal income tax purposes (ii) the Trust will qualify as a grantor trust for
United States Federal income tax purposes and (iii) the Debentures will be
treated as indebtedness of the Depositor for United States Federal income tax
purposes. In this connection, the Depositor and the Administrative Trustee are
authorized to take any action, not inconsistent with applicable law, the
Certificate of Trust, as amended from time to time, or this Trust Agreement,
that each of the Depositor and the Administrative Trustee determines in their
discretion to be necessary or desirable for such purposes.

     Section 2.08. Assets of Trust. The assets of the Trust shall consist of the
Trust Property.

     Section 2.09. Title to Trust Property. Legal title to all Trust Property
shall be vested at all times in the Property Trustee (in its capacity as such)
and shall be held and administered by the Property Trustee for the benefit of
the Securityholders in accordance with this Trust Agreement.

                                   ARTICLE III

                                 Payment Account

     Section 3.01. Payment Account.

     (a) On or prior to the Closing Date, the Property Trustee shall establish
the Payment Account. All monies and other property deposited or held from time
to time in the Payment Account shall be held by the Property Trustee for the
exclusive benefit of the Securityholders. The Property Trustee shall have
exclusive control of the Payment Account for the purpose of making deposits in
and withdrawals from the Payment Account in accordance with this Trust
Agreement; provided that any Paying Agent shall have the right of withdrawal
with respect to the Payment Account solely for the purpose of making the
payments contemplated under Article 4.

     (b) The Property Trustee shall deposit in the Payment Account, promptly
upon receipt, all payments of principal of or interest on the Debentures and any
amounts paid to the Property Trustee pursuant to the Guarantee. Amounts held in
the Payment Account shall not be invested pending distribution thereof.


                                       16


                                   ARTICLE IV

                            Distributions; Redemption

     Section 4.01. Distributions.

     (a) Distributions on the Trust Securities shall be cumulative, and will
accumulate whether or not there are funds of the Trust available for the payment
of Distributions. Distributions shall accumulate from June 26, 1996 and, except
during an Extension Period for the Debentures pursuant to the Indenture, shall
be payable quarterly in arrears on March 31, June 30, September 30 and December
31 of each year, commencing on June 30, 1996. If any date on which Distributions
are otherwise payable on the Trust Securities is not a Business Day, then the
payment of such Distributions shall be made on the next succeeding day which is
a Business Day (and without any interest or other payment in respect of any such
delay), except that, if such Business Day is in the next succeeding calendar
year, payment of such Distributions shall be made on the immediately preceding
Business Day, in each case with the same force and effect as if made on such
date (each date on which Distributions are payable in accordance with this
Section 4.01(a) is referred to as a "Distribution Date").

     Within two Business Days after receipt by the Property Trustee of notice of
an Extension Period pursuant to Section 4.01 of the Indenture, the Property
Trustee shall give notice thereof to the Securityholders by first class mail,
postage prepaid.

     (b) The Trust Securities represent undivided beneficial interests in the
Trust Property, and, subject to Sections 4.03 and 4.06 hereof, all Distributions
will be made pro rata on each of the Trust Securities. Distributions on the
Trust Securities shall be payable at a rate of 8.625% per annum of the
Liquidation Amount of the Trust Securities. The amount of Distributions payable
for any full quarterly period shall be computed on the basis of a 360-day year
of twelve 30-day months and, for any period shorter than a full month, shall be
computed on the basis of the actual number of days elapsed in such period.
During an Extension Period for the Debentures, the rate per annum at which
Distributions on the Trust Securities accumulate shall be increased by an amount
such that the aggregate amount of Distributions that accumulate on all Trust
Securities during any such Extension Period is equal to the aggregate amount of
interest (including interest payable on unpaid interest at the rate per annum
set forth above, compounded quarterly) that accrues during any such Extension
Period on the Debentures.


                                       17


     (c) Distributions on the Trust Securities shall be made from the Payment
Account by the Property Trustee or any Paying Agent and shall be payable on each
Distribution Date only to the extent that the Trust has funds then available in
the Payment Account for the payment of such Distributions.

     (d) Distributions on the Trust Securities on each Distribution Date shall
be payable to the Holders thereof as they appear on the Securities Register for
the Trust Securities on the relevant record date, which shall be one Business
Day prior to such Distribution Date; provided, however, that in the event that
the Preferred Securities are not in book-entry-only form, the relevant record
date shall be the 15th day of the last month of each calendar quarter, whether
or not a Business Day.

     Section 4.02. Redemption.

     (a) Upon receipt by the Trust of a notice of redemption of Debentures, the
Trust will call for redemption a Like Amount of Trust Securities at the
Redemption Price on the Debenture Redemption Date and will call for redemption
all Outstanding Trust Securities on the stated maturity date of the Debentures.

     (b) Notice of redemption shall be given by the Property Trustee by
first-class mail, postage prepaid, mailed not less than 30 nor more than 60 days
prior to the Redemption Date to each Holder of Trust Securities to be redeemed,
at such Holder's address appearing in the Securities Register. All notices of
redemption shall state:

     (i) the Redemption Date;

     (ii) the Redemption Price;

     (iii) the CUSIP number;

     (iv) the place or places where Trust Securities Certificates are to be
surrendered for payment of the Redemption Price;

     (v) that on the Redemption Date the Redemption Price will become payable
upon each such Trust Security to be redeemed and that Distributions thereon will
cease to accumulate on and after such date; and

     (vi) if less than all of the Outstanding Trust Securities are to be
redeemed, the identification and total Liquidation Amount of the particular
Trust Securities to be redeemed.


                                       18


     (c) The Trust Securities redeemed on each Redemption Date shall be redeemed
at the Redemption Price with the proceeds from the contemporaneous redemption or
payment at maturity of Debentures. Redemptions of the Trust Securities shall be
made and the Redemption Price shall be payable on each Redemption Date only to
the extent that the Trust has funds then available in the Payment Account for
the payment of such Redemption Price.

     (d) If the Trust, by action of the Property Trustee, gives a notice of
redemption in respect of any Preferred Securities, then, on the Redemption Date,
subject to Section 4.02(c), the Property Trustee will irrevocably deposit with
the Paying Agent funds sufficient to pay the Redemption Price for the Preferred
Securities being redeemed on such date and will give the Paying Agent
irrevocable instructions and authority to pay the Redemption Price to the
Holders of such Preferred Securities upon surrender of their Preferred
Securities Certificates. Notwithstanding the foregoing, Distributions payable on
or prior to the Redemption Date for any Trust Securities called for redemption
shall be payable to the Holders of such Trust Securities as they appear on the
Securities Register for the Trust Securities on the record dates for the related
Distribution Dates. If notice of redemption shall have been given and funds
irrevocably deposited as required, then upon the date of such deposit, all
rights of Securityholders holding Trust Securities so called for redemption will
cease, except the right of such Securityholders to receive the Redemption Price,
but without interest, and such Trust Securities will cease to be Outstanding. In
the event that any date on which any Redemption Price is payable is not a
Business Day, then payment of the Redemption Price payable on such date will be
made on the next succeeding day which is a Business Day (and without any
interest or other payment in respect of any such delay), except that, if such
Business Day is in the next succeeding calendar year, such payment will be made
on the immediately preceding Business Day, in each case, with the same force and
effect as if made on such date. In the event that payment of the Redemption
Price in respect of any Trust Securities called for redemption is improperly
withheld or refused, and not paid either by the Trust or by the Depositor
pursuant to the Guarantee, Distributions on such Trust Securities will continue
to accumulate, at the then applicable rate, from the Redemption Date originally
established by the Trust for such Trust Securities to the date such Redemption
Price is actually paid, in which case the actual payment date will be the date
fixed for redemption for purposes of calculating the Redemption Price.

     (e) If less than all the Outstanding Trust Securities are to be redeemed on
a Redemption Date, then the aggregate Liquidation Amount of Trust Securities to
be redeemed shall be


                                       19


allocated 3% to the Common Securities and 97% to the Preferred Securities. The
particular Preferred Securities to be redeemed shall be selected by the Property
Trustee from the Outstanding Preferred Securities not previously called for
redemption, by such method as the Property Trustee shall deem fair and
appropriate. The Property Trustee shall promptly notify the Securities Registrar
in writing of the Preferred Securities selected for redemption. If fewer than
all of the Trust Securities represented by a Trust Securities Certificate are
redeemed, the Administrative Trustee shall execute for the Holder a new Trust
Securities Certificate representing the unredeemed Trust Securities. For all
purposes of this Trust Agreement, unless the context otherwise requires, all
provisions relating to the redemption of Preferred Securities shall relate, in
the case of any Preferred Securities redeemed or to be redeemed only in part, to
the portion of the Liquidation Amount of Preferred Securities which has been or
is to be redeemed.

     Section 4.03. Subordination of Common Securities.

     (a) Payment of Distributions on, and the Redemption Price of, the Trust
Securities, as applicable, shall be made pro rata based on the Liquidation
Amount of the Trust Securities; provided, however, that if on any Distribution
Date or Redemption Date, a Debenture Event of Default shall have occurred and be
continuing, no payment of any Distribution on, or Redemption Price of, any
Common Security, and no other payment on account of the liquidation of Common
Securities, shall be made unless payment in full in cash of all accumulated and
unpaid Distributions on all Outstanding Preferred Securities for all
distribution periods terminating on or prior thereto, or in the case of payment
of the Redemption Price, the full amount of such Redemption Price on all
Outstanding Preferred Securities then being redeemed, shall have been made or
provided for, and all funds immediately available to the Property Trustee shall
first be applied to the payment in full in cash of all Distributions on, or the
Redemption Price of, Preferred Securities then due and payable.

     (b) In the case of the occurrence of any Debenture Event of Default, the
Holder of Common Securities will be deemed to have waived any right to act with
respect to any related Event of Default under this Trust Agreement and such
Debenture Event of Default until the effect of such related Event of Default and
such Debenture Event of Default has been cured, waived or otherwise eliminated.
Until any such Event of Default under this Trust Agreement and such Debenture
Event of Default has been so cured, waived or otherwise eliminated, the Property
Trustee shall act solely on behalf of the Holders of the Preferred Securities
and not the Holder of the Common Securities, and only the Holders of the
Preferred Securities will have the right to direct the Property


                                       20


Trustee to act on their behalf.

     Section 4.04. Payment Procedures. Payments of Distributions pursuant to
Section 4.01 in respect of the Preferred Securities shall be made by check
mailed to the address of the Holder thereof as such address shall appear on the
Securities Register or, if the Preferred Securities are held by a Clearing
Agency, such Distributions shall be made to the Clearing Agency by wire transfer
in immediately available funds. Payments of Distributions pursuant to Section
4.01 in respect of the Common Securities shall be made in such manner as shall
be mutually agreed between the Property Trustee and the Holder of the Common
Securities. Payment of the Redemption Price or Liquidation Distribution of the
Trust Securities shall be made in immediately available funds upon surrender of
the Preferred Securities Certificate representing such Preferred Securities at
the Corporate Trust Office of the Property Trustee.

     Section 4.05. Tax Returns and Reports. The Administrative Trustee shall
prepare (or cause to be prepared), at the Depositor's expense, and file all
Federal, State and local tax and information returns and reports required to be
filed by or in respect of the Trust. In this regard, the Administrative Trustee
shall (a) prepare and file (or cause to be prepared or filed) the appropriate
Internal Revenue Service Form required to be filed in respect of the Trust in
each taxable year of the Trust and (b) prepare and furnish (or cause to be
prepared and furnished) to each Securityholder the related Internal Revenue
Service Form 1099 OID, or any successor form or the information required to be
provided on such form. The Administrative Trustee shall provide the Depositor
and the Property Trustee with a copy of all such returns, reports and schedules
promptly after such filing or furnishing. The Trustees shall comply with United
States Federal withholding and backup withholding tax laws and information
reporting requirements with respect to any payments to Securityholders under the
Trust Securities.

     Section 4.06. Payments under Indenture. Any amount payable hereunder to any
Holder of Preferred Securities shall be reduced by the amount of any
corresponding payment such Holder has directly received pursuant to Section 6.07
of the Indenture or pursuant to the Guarantee. Notwithstanding the provisions
hereunder to the contrary, Securityholders acknowledge that any Holder of
Preferred Securities that receives payment under Section 6.07 of the Indenture
may receive amounts greater than the amount such Holder may be entitled to
receive pursuant to the other provisions of this Trust Agreement.


                                       21


                                    ARTICLE V

                          Trust Securities Certificates

     Section 5.01. Initial Ownership. Upon the creation of the Trust and the
contribution by the Depositor pursuant to Section 2.03 and until the issuance of
the Trust Securities, and at any time during which no Trust Securities are
outstanding, the Depositor shall be the sole beneficial owner of the Trust.

     Section 5.02. The Trust Securities Certificates. The Trust Securities
Certificates shall be issued representing one or more Preferred Securities.
Preferred Securities Certificates representing fractional interests shall not be
issued. The Trust Securities Certificates shall be executed on behalf of the
Trust by manual signature of the Administrative Trustee or by a facsimile
signature of the Administrative Trustee countersigned by the Securities
Registrar. Trust Securities Certificates bearing the manual signatures of
individuals who were, at the time when such signatures shall have been affixed,
authorized to sign on behalf of the Trust, shall be validly issued and entitled
to the benefits of this Trust Agreement, notwithstanding that such individuals
or any of them shall have ceased to be so authorized prior to the delivery of
such Trust Securities Certificates or did not hold such offices at the date of
delivery of such Trust Securities Certificates. A transferee of a Trust
Securities Certificate shall become a Securityholder, and shall be entitled to
the rights and subject to the obligations of a Securityholder hereunder, upon
due registration of such Trust Securities Certificate in such transferee's name
pursuant to Section 5.04.

     Section 5.03. Delivery of Trust Securities Certificates. On the Closing
Date, the Administrative Trustee shall cause Trust Securities Certificates, in
an aggregate Liquidation Amount as provided in Section 2.04, to be executed on
behalf of the Trust as provided in Section 5.02 and delivered in accordance with
the Section 2.04.

     Section 5.04. Registration of Transfer and Exchange of Preferred Securities
Certificates. A registrar appointed by the Depositor (the "Securities
Registrar") shall keep or cause to be kept, at the office or agency maintained
pursuant to Section 5.08, a register (the "Securities Register") in which,
subject to such reasonable regulations as it may prescribe, the Securities
Registrar shall provide for the registration of Trust Securities Certificates
(subject to Section 5.10 in the case of the Common Securities Certificates) and
registration of transfers and exchanges of Preferred Securities Certificates as
herein provided. The Property Trustee shall be the initial Securities Registrar;


                                       22


any successor Securities Registrar shall be appointed by the Administrative
Trustee.

     Upon surrender for registration of transfer of any Preferred Securities
Certificate at the office or agency maintained pursuant to Section 5.08, the
Administrative Trustee shall execute and deliver, in the name of the designated
transferee or transferees, one or more new Preferred Securities Certificates
representing the same number of Preferred Securities dated the date of execution
by the Administrative Trustee. At the option of a Holder, Preferred Securities
Certificates may be exchanged for other Preferred Securities Certificates upon
surrender of the Preferred Securities Certificates to be exchanged at the office
or agency maintained pursuant to Section 5.08. The Securities Registrar shall
not be required to register the transfer of any Preferred Securities that have
been called for redemption or after the Liquidation Date.

     Preferred Securities presented or surrendered for registration of transfer
or exchange shall be accompanied by a written instrument of transfer in form
satisfactory to the Administrative Trustee and the Securities Registrar duly
executed by the Holder or such Holder's attorney duly authorized in writing.
Each Preferred Securities Certificate surrendered for registration of transfer
or exchange shall be cancelled and subsequently disposed of by the Property
Trustee in accordance with its customary practice.

     No service charge shall be made for any registration of transfer or
exchange of Preferred Securities, but the Securities Registrar may require
payment of a sum sufficient to cover any tax or governmental charge that may be
imposed in connection with any transfer or exchange of Preferred Securities.


                                       23


     Section 5.05. Mutilated, Destroyed, Lost or Stolen Trust Securities
Certificates. If (a) any mutilated Trust Securities Certificate shall be
surrendered to the Securities Registrar, or if the Securities Registrar shall
receive evidence to its satisfaction of the destruction, loss or theft of any
Trust Securities Certificate, and (b) there shall be delivered to the Securities
Registrar and the Administrative Trustee such security or indemnity as may be
required by them to hold the Securities Registrar and the Trust harmless, then
in the absence of notice that such Trust Securities Certificate shall have been
acquired by a bona fide purchaser, the Administrative Trustee, on behalf of the
Trust shall execute and make available for delivery, in exchange for or in lieu
of any such mutilated, destroyed, lost or stolen Trust Securities Certificate, a
new Trust Securities Certificate of like tenor. In connection with the issuance
of any new Trust Securities Certificate under this Section, the Administrative
Trustee or the Securities Registrar may require the payment of a sum sufficient
to cover any tax or other governmental charge that may be imposed in connection
therewith. Any duplicate Trust Securities Certificate issued pursuant to this
Section shall constitute conclusive evidence of an undivided beneficial interest
in the assets of the Trust, as if originally issued, whether or not the lost,
stolen or destroyed Trust Securities Certificate shall be found at any time.

     Section 5.06. Persons Deemed Securityholders. Prior to due presentation of
a Trust Security Certificate for registration of transfer, the Administrative
Trustee or the Securities Registrar shall treat the Person in whose name any
Trust Securities Certificate shall be registered in the Securities Register as
the owner and Holder of such Trust Securities Certificate for the purpose of
receiving Distributions and for all other purposes whatsoever, and neither the
Trustees nor the Securities Registrar shall be bound by any notice to the
contrary.

     Section 5.07. Access to List of Securityholders' Names and Addresses. In
the event that the Property Trustee is no longer the Securities Registrar, the
Administrative Trustee or the Depositor shall furnish or cause to be furnished
(a) to the Property Trustee, quarterly not later than 10 days prior to a
Distribution Date, a list, in such form as the Property Trustee may reasonably
require, of the names and addresses of the Securityholders as of the most recent
record date and (b) to the Property Trustee, promptly after receipt by the
Administrative Trustee or the Depositor of a request therefor from the Property
Trustee in order to enable the Paying Agent to pay Distributions in accordance
with Section 4.01 hereof), in each case to the extent such information is in the
possession or control of the Administrative Trustee or the Depositor and is not
identical to a


                                       24


previously supplied list or has not otherwise been received by the Property
Trustee. The rights of Securityholders to communicate with other Securityholders
with respect to their rights under this Trust Agreement or under the Trust
Securities, and the corresponding rights of the Property Trustee shall be as
provided in the Trust Indenture Act. Each Holder, by receiving and holding a
Trust Securities Certificate, shall be deemed to have agreed not to hold the
Depositor, the Property Trustee, the Administrative Trustee or the Delaware
Trustee accountable by reason of the disclosure of its name and address,
regardless of the source from which such information was derived.

     Section 5.08. Maintenance of Office or Agency. The Property Trustee shall
maintain in Newark, New Jersey, an office or offices or agency or agencies where
Preferred Securities may be surrendered for registration of transfer or exchange
and where notices and demands to or upon the Trustees in respect of the Trust
Securities Certificates may be served. The Property Trustee shall give prompt
written notice to the Depositor and to the Securityholders of any change in the
location of the Securities Register or any such office or agency, which shall
initially be at the Corporate Trust Office of the Property Trustee.

     Section 5.09. Appointment of Paying Agent. The Paying Agent shall make
Distributions to Securityholders from the Payment Account and shall report the
amounts of such Distributions to the Property Trustee and the Administrative
Trustee. Any Paying Agent shall have the revocable power to withdraw funds from
the Payment Account for the purpose of making Distributions. The Administrative
Trustee may revoke such power and remove the Paying Agent, provided that such
revocation and removal with respect to the sole Paying Agent shall not become
effective until the appointment of a successor. The Paying Agent shall initially
be the Property Trustee, and any co-paying agent chosen by the Property Trustee
and acceptable to the Administrative Trustee and the Depositor. Any Person
acting as Paying Agent shall be permitted to resign as Paying Agent upon 30
days' written notice to the Administrative Trustee and the Depositor, and, if
applicable, the Property Trustee, provided that such resignation with respect to
the sole Paying Agent shall not become effective until the appointment of a
successor. In the event that the Property Trustee shall no longer be the Paying
Agent or a successor Paying Agent shall resign or its authority to act be
revoked, the Administrative Trustee shall appoint a successor that is acceptable
to the Property Trustee (in the case of any other Paying Agent) and the
Depositor to act as Paying Agent (which shall be a bank or trust company and
have a combined capital and surplus of at least $50,000,000). The Administrative
Trustee shall cause such successor Paying Agent or any additional Paying Agent
appointed by


                                       25


the Administrative Trustee to execute and deliver to the Trustees an instrument
in which such successor Paying Agent or additional Paying Agent shall agree with
the Trustees that as Paying Agent, such successor Paying Agent or additional
Paying Agent will hold all sums, if any, held by it for payment to the
Securityholders in trust for the benefit of the Securityholders entitled thereto
until such sums shall be paid to such Securityholders. The Paying Agent shall
return all of such sums remaining unclaimed to the Property Trustee and upon
removal of a Paying Agent such Paying Agent shall also return such sums in its
possession to the Property Trustee. The provisions of Sections 7.01, 7.03 and
7.06 shall apply to the Property Trustee also in its role as Paying Agent, for
so long as the Property Trustee shall act as Paying Agent and, to the extent
applicable, to any other Paying Agent appointed hereunder. Any reference in this
Trust Agreement to the Paying Agent shall include any co-paying agent unless the
context requires otherwise.

     Section 5.10. No Transfer of Common Securities by Depositor. To the fullest
extent permitted by law, any attempted transfer of the Common Securities shall
be void. The Administrative Trustee shall cause each Common Securities
Certificate issued to the Depositor to contain a legend stating "THIS
CERTIFICATE IS NOT TRANSFERABLE". By execution of this Trust Agreement, the
Depositor agrees to the foregoing provisions.

     Section 5.11. Book-Entry Preferred Securities Certificates; Common
Securities Certificate.

     (a) The Preferred Securities, upon original issuance on the Closing Date,
will not be engraved but will be issued in the form of one or more printed or
typewritten Book-Entry Preferred Securities Certificates, to be delivered to The
Depository Trust Company, the initial Clearing Agency, by, or on behalf of, the
Trust. Such Book-Entry Preferred Securities Certificate or Certificates shall
initially be registered on the Securities Register in the name of Cede & Co.,
the nominee of the initial Clearing Agency.

     (b) A single Common Securities Certificate representing the Common
Securities shall be issued to the Depositor in the form of a definitive Common
Securities Certificate.

     Section 5.12. Definitive Preferred Securities Certificates. If (a) the
Depositor advises the Trustees in writing that the Clearing Agency is no longer
willing or able to properly discharge its responsibilities with respect to the
Preferred Securities Certificates or the Clearing Agency is no longer registered
or in good standing under the Securities Exchange Act of 1934, as amended, or
other applicable statute or regulation, and


                                       26


the Depositor is unable to locate a qualified successor within 90 days, (b) the
Depositor at its option advises the Trustees in writing that it elects to
terminate the book-entry system through the Clearing Agency or (c) an Event of
Default occurs and is continuing, then the Administrative Trustee shall issue
Definitive Preferred Securities Certificates. Upon surrender to the
Administrative Trustee of the Book-Entry Preferred Securities Certificates by
the Clearing Agency, accompanied by registration instructions, the
Administrative Trustee shall execute and deliver the Definitive Preferred
Securities Certificates in accordance with the instructions of the Clearing
Agency. Neither the Securities Registrar nor the Trustees shall be liable for
any delay in delivery of such instructions and may conclusively rely on, and
shall be protected in relying on, such instructions. The Definitive Preferred
Securities Certificates shall be printed, lithographed or engraved or may be
produced in any other manner as is reasonably acceptable to the Administrative
Trustee, as evidenced by the execution thereof by the Administrative Trustee.

     Section 5.13. Rights of Securityholders. The Securityholders shall not have
any right or title to the Trust Property other than the undivided beneficial
interest in the assets of the Trust conferred by their Trust Securities and they
shall have no right to call for any partition or division of property, profits
or rights of the Trust except as described below. The Trust Securities shall be
personal property giving only the rights specifically set forth therein and in
this Trust Agreement. The Trust Securities shall have no preemptive or similar
rights and when issued and delivered to Securityholders against payment of the
purchase price therefor will be fully paid and nonassessable by the Trust. The
Holders of the Trust Securities, in their capacities as such, shall be entitled
to the same limitation of personal liability extended to stockholders of private
corporations for profit organized under the General Corporation Law of the State
of Delaware.


                                       27


                                   ARTICLE VI

                    Acts of Securityholders; Meetings; Voting

     Section 6.01. Limitations on Voting Rights.

     (a) Except as provided herein and in the Indenture and as otherwise
required by law, no Holder of Trust Securities shall have any right to vote or
in any manner otherwise control the administration, operation and management of
the Trust or the obligations of the parties hereto, nor shall anything herein
set forth, or contained in the terms of the Trust Securities Certificates, be
construed so as to constitute the Securityholders from time to time as partners
or members of an association.

     (b) The Trustees shall not (i) direct the time, method and place of
conducting any proceeding for any remedy available to the Debenture Trustee or
executing any trust or power conferred on the Debenture Trustee with respect to
such Debentures, (ii) waive any past default which may be waived under Section
6.04 of the Indenture, (iii) exercise any right to rescind or annul an
acceleration of the principal of all the Debentures or (iv) consent to any
amendment or modification of the Indenture, where such consent shall be
required, without, in each case, obtaining the prior consent of the Holders of
at least a majority in aggregate Liquidation Amount of all Outstanding Preferred
Securities; provided, however, that where such consent under the Indenture would
require the consent of each holder of Debentures affected thereby, no such
consent shall be given by the Property Trustee without the prior written consent
of each Holder of Outstanding Preferred Securities. The Trustees shall not
revoke any action previously authorized or approved by a vote of the Holders of
Preferred Securities, except by a subsequent vote of the Holders of Preferred
Securities. The Property Trustee shall notify all Holders of the Preferred
Securities of any notice received from the Debenture Trustee as a result of the
Trust being the holder of the Debentures. In addition to obtaining the consent
of the Holders of the Preferred Securities, prior to taking any of the foregoing
actions, the Trustees shall, at the expense of the Depositor, obtain an Opinion
of Counsel experienced in such matters to the effect that the Trust will not be
classified as an association taxable as a corporation or partnership for United
States Federal income tax purposes on account of such action and will continue
to be classified as a grantor trust for United States Federal income tax
purposes.

     (c) Subject to Section 10.02(c) hereof, if any proposed amendment to the
Trust Agreement provides for, or the Trustees otherwise propose to effect, (i)
any action that would adversely


                                       28


affect in any material respect the powers, preferences or special rights of the
Preferred Securities, whether by way of amendment to this Trust Agreement or
otherwise, or (ii) the termination or liquidation of the Trust, other than
pursuant to the terms of this Trust Agreement, then the Holders of Outstanding
Preferred Securities will be entitled to vote on such amendment or proposal and
such amendment or proposal shall not be effective except with the approval of
the Holders of at least a majority in aggregate Liquidation Amount of the
Outstanding Preferred Securities.

     Section 6.02. Notice of Meetings. Notice of all meetings of the Preferred
Securityholders, stating the time, place and purpose of the meeting, shall be
given by the Property Trustee pursuant to Section 10.08 to each Preferred
Securityholder of record, at his/her registered address, at least 15 days and
not more than 90 days before the meeting. At any such meeting, any business
properly before the meeting may be so considered whether or not stated in the
notice of the meeting. Any adjourned meeting may be held as adjourned without
further notice.

     Section 6.03. Meetings of Preferred Securityholders. No annual meeting of
Securityholders is required to be held. The Administrative Trustee, however,
shall call a meeting of Securityholders to vote on any matter upon the written
request of the Holders of at least 25% of the aggregate Liquidation Amount of
the Outstanding Preferred Securities and the Administrative Trustee or the
Property Trustee may, at any time in their discretion, call a meeting of
Preferred Securityholders to vote on any matters as to which the Preferred
Securityholders are entitled to vote.

     Holders of at least 50% of the aggregate Liquidation Amount of the
Outstanding Preferred Securities, present in person or by proxy, shall
constitute a quorum at any meeting of Securityholders.

     If a quorum is present at a meeting, an affirmative vote of the Holders of
at least a majority of the aggregate Liquidation Amount of the Outstanding
Preferred Securities present, either in person or by proxy, at such meeting
shall constitute the action of the Securityholders, unless this Trust Agreement
requires a greater number of affirmative votes.

     Section 6.04. Voting Rights. A Securityholder shall be entitled to one vote
for each Trust Security in respect of any matter as to which such Securityholder
is entitled to vote.

     Section 6.05. Proxies, etc. At any meeting of Securityholders, any
Securityholder entitled to vote thereat may vote by proxy, provided that no
proxy shall be voted at any meeting


                                       29


unless it shall have been placed on file with the Administrative Trustee, or
with such other officer or agent of the Trust as the Administrative Trustee may
direct, for verification prior to the time at which such vote shall be taken.
Pursuant to a resolution of the Property Trustee, proxies may be solicited in
the name of the Property Trustee or one or more officers of the Property
Trustee. Only Securityholders of record shall be entitled to vote. When Trust
Securities are held jointly by several Persons, any one of them may vote at any
meeting in person or by proxy in respect of such Trust Securities, but if more
than one of them shall be present at such meeting in person or by proxy, and
such joint owners or their proxies so present disagree as to any vote to be
cast, such vote shall not be received in respect of such Trust Securities. A
proxy purporting to be executed by or on behalf of a Securityholder shall be
deemed valid unless challenged at or prior to its exercise, and the burden of
proving invalidity shall rest on the challenger. No proxy shall be valid more
than three years after its date of execution.

     Section 6.06. Securityholder Action by Written Consent. Any action which
may be taken by Securityholders at a meeting may be taken without a meeting if
Holders of the proportion of the Outstanding Preferred Securities required to
approve such action shall consent to the action in writing.

     Section 6.07. Record Date for Voting and Other Purposes. For the purposes
of determining the Securityholders who are entitled to notice of and to vote at
any meeting or by written consent, or for the purpose of any other action, the
Administrative Trustee may from time to time fix a date, not more than 90 days
prior to the date of any meeting of Securityholders, as a record date for the
determination of the identity of the Securityholders for such purposes.

     Section 6.08. Acts of Securityholders. Any request, demand, authorization,
direction, notice, consent, waiver or other action provided or permitted by this
Trust Agreement to be given, made or taken by Securityholders may be embodied in
and evidenced by one or more instruments of substantially similar tenor signed
by such Securityholders in person or by an agent duly appointed in writing; and,
except as otherwise expressly provided herein, such action shall become
effective when such instrument or instruments are delivered to the
Administrative Trustee. Such instrument or instruments (and the action embodied
therein and evidenced thereby) are herein sometimes referred to as the "Act" of
the Securityholders signing such instrument or instruments. Proof of execution
of any such instrument or of a writing appointing any such agent shall be
sufficient for any purpose of this Trust Agreement and (subject to Section 7.02)
conclusive, if made in the


                                       30


manner provided in this Section.

     The fact and date of the execution by any Person of any such instrument or
writing may be proved by the affidavit of a witness of such execution or by a
certificate of a notary public or other officer authorized by law to take
acknowledgments of deeds, certifying that the individual signing such instrument
or writing acknowledged to him/her the execution thereof. Where such execution
is by a signer acting in a capacity other than his/her individual capacity, such
certificate or affidavit shall also constitute sufficient proof of his/her
authority. The fact and date of the execution of any such instrument or writing,
or the authority of the Person executing the same, may also be proved in any
other manner which any Trustee receiving the same deems sufficient.

     The ownership of Preferred Securities shall be proved by the Securities
Register.

     Any request, demand, authorization, direction, notice, consent, waiver or
other act of the Securityholder of any Trust Security shall bind every future
Securityholder of the same Trust Security and the Securityholder of every Trust
Security issued upon the registration of transfer thereof or in exchange
therefor or in lieu thereof in respect of anything done, omitted or suffered to
be done by the Trustees or the Trust in reliance thereon, whether or not
notation of such action is made upon such Trust Security.

     Without limiting the foregoing, a Securityholder entitled hereunder to take
any action hereunder with regard to any particular Trust Security may do so with
regard to all or any part of the Liquidation Amount of such Trust Security or by
one or more duly appointed agents, each of which may do so pursuant to such
appointment with regard to all or any part of such Liquidation Amount.

     If any dispute shall arise between the Securityholders and the
Administrative Trustee or among such Securityholders or Trustees with respect to
the authenticity, validity or binding nature of any request, demand,
authorization, direction, consent, waiver or other Act of such Securityholder or
Trustee under this Article VI, then the determination of such matter by the
Property Trustee shall be conclusive with respect to such matter.

     Section 6.09. Inspection of Records. Upon reasonable notice to the
Administrative Trustee and the Property Trustee, the records of the Trust shall
be open to inspection by Securityholders during normal business hours for any
purpose reasonably related to such Securityholder's interest as a
Securityholder.


                                       31


                                   ARTICLE VII

                                  The Trustees

     Section 7.01. Certain Duties and Responsibilities.

     (a) The duties and responsibilities of the Trustees shall be as provided by
this Trust Agreement and, in the case of the Property Trustee, also by the Trust
Indenture Act. The Property Trustee, other than during the occurrence and
continuance of an Event of Default, undertakes to perform only such duties as
are specifically set forth in this Trust Agreement and, upon an Event of
Default, must exercise the same degree of care and skill as a prudent person
would exercise or use in the conduct of his/her own affairs. The Trustees shall
have all the privileges, rights and immunities provided by the Delaware Business
Trust Act. Notwithstanding the foregoing, no provision of this Trust Agreement
shall require the Trustees to expend or risk their own funds or otherwise incur
any financial liability in the performance of any of their duties hereunder, or
in the exercise of any of their rights or powers, if they shall have reasonable
grounds for believing that repayment of such funds or adequate indemnity against
such risk or liability is not reasonably assured to it. Whether or not therein
expressly so provided, every provision of this Trust Agreement relating to the
conduct or affecting the liability of or affording protection to the Trustees
shall be subject to the provisions of this Section. Nothing in this Trust
Agreement shall be construed to release the Property Trustee from liability for
its own negligent action, its own negligent failure to act, or its own willful
misconduct. To the extent that, at law or in equity, the Administrative Trustee
has duties (including fiduciary duties) and liabilities relating thereto to the
Trust or to the Securityholders, the Administrative Trustee shall not be liable
to the Trust or to any Securityholder for the Administrative Trustee's good
faith reliance on the provisions of this Trust Agreement. The provisions of this
Trust Agreement, to the extent that they restrict the duties and liabilities of
the Administrative Trustee otherwise existing at law or in equity, are agreed by
the Depositor and the Securityholders to replace such other duties and
liabilities of the Administrative Trustee.

     (b) All payments made by the Property Trustee or any other Paying Agent in
respect of the Trust Securities shall be made only from the income and proceeds
from the Trust Property. Each Securityholder, by its acceptance of a Trust
Security, agrees that (i) it will look solely to the income and proceeds from
the Trust Property to the extent available for distribution to it as herein
provided and (ii) the Trustees are not personally liable to it for


                                       32


any amount distributable in respect of any Trust Security or for any other
liability in respect of any Trust Security. This Section 7.01(b) does not limit
the liability of the Trustees expressly set forth elsewhere in this Trust
Agreement or, in the case of the Property Trustee, in the Trust Indenture Act.

     Section 7.02. Notice of Defaults; Direct Action by Securityholders. Within
90 days after the occurrence of any Event of Default actually known to the
Property Trustee, the Property Trustee shall transmit, in the manner and to the
extent provided in Section 10.08, notice of such Event of Default to the
Securityholders, the Administrative Trustee and the Depositor, unless such Event
of Default shall have been cured or waived. If the Property Trustee has failed
to enforce its rights under this Trust Agreement or the Indenture to the fullest
extent permitted by law and subject to the terms of this Trust Agreement and the
Indenture, any Securityholder may institute a legal proceeding directly against
any Person to enforce the Property Trustee's rights under this Trust Agreement
or the Indenture with respect to Debentures having a principal amount equal to
the aggregate Liquidation Amount of the Preferred Securities of such
Securityholder without first instituting a legal proceeding against the Property
Trustee or any other Person. To the extent that any action under the Indenture
is entitled to be taken by the holders of at least a specified percentage of the
principal amount of the outstanding Debentures, Holders of at least the same
percentage of the Liquidation Amount of the Outstanding Preferred Securities may
also take such action in the name of the Trust if such action has not been taken
by the Property Trustee. Notwithstanding the foregoing, if a Debenture Event of
Default relating to the Depositor's failure to pay the principal of or interest
on the Debentures has occurred and is continuing thereby resulting in an Event
of Default hereunder, then each Holder of Preferred Securities may institute a
legal proceeding directly against the Depositor for enforcement of payment to
such Holder, as provided in Section 6.07 of the Indenture.

     Section 7.03. Certain Rights of Property Trustee. Subject to the provisions
of Section 7.01:

     (a) the Property Trustee may rely and shall be protected in acting or
refraining from acting in good faith upon any resolution, Opinion of Counsel,
certificate, written representation of a Holder or transferee, certificate of
auditors or any other certificate, statement, instrument, opinion, report,
notice, request, consent, order, appraisal, bond, debenture, note, other
evidence of indebtedness or other paper or document believed by it to be genuine
and to have been signed or presented by the proper party or parties;


                                       33


                  (b) if, other than during the occurrence and continuance of an
Event of Default, (i) in performing its duties under this Trust Agreement, the
Property Trustee is required to decide between alternative courses of action or
(ii) in construing any of the provisions in this Trust Agreement, the Property
Trustee finds the same ambiguous or inconsistent with any other provisions
contained herein or (iii) the Property Trustee is unsure of the application of
any provision of this Trust Agreement, then, except as to any matter as to which
the Preferred Securityholders are entitled to vote under the terms of this Trust
Agreement, the Property Trustee shall deliver a notice to the Depositor
requesting written instructions of the Depositor as to the course of action to
be taken. The Property Trustee shall take such action, or refrain from taking
such action, as the Property Trustee shall be instructed in writing to take, or
to refrain from taking, by the Depositor; provided, however, that if the
Property Trustee does not receive such instructions of the Depositor within ten
Business Days after it has delivered such notice, or such reasonably shorter
period of time set forth in such notice (which to the extent practicable shall
not be less than two Business Days), it may, but shall be under no duty to, take
or refrain from taking such action not inconsistent with this Trust Agreement as
it shall deem advisable and in the best interests of the Securityholders, in
which event the Property Trustee shall have no liability except for its own
negligent action, its own negligent failure to act or its own willful
misconduct;



     (c) the Property Trustee may consult with counsel or other experts of its
selection and the advice or opinion of such counsel or other experts with
respect to legal matters or advice within the scope of such experts' area of
expertise shall be full and complete authorization and protection in respect of
any action taken, suffered or omitted by it hereunder in good faith and in
reliance thereon;

     (d) the Property Trustee shall be under no obligation to exercise any of
the rights or powers vested in it by this Trust Agreement at the request or
direction of any of the Securityholders pursuant to this Trust Agreement, unless
such Securityholders shall have offered to the Property Trustee reasonable
security or indemnity against the costs, expenses and liabilities which might be
incurred by it in compliance with such request or direction;

     (e) the Property Trustee shall not be bound to make any investigation into
the facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order,
approval, bond, debenture, note or other evidence of indebtedness or other paper
or document, but


                                       34


the Property Trustee, in its discretion, may make such further inquiry or
investigation into such facts or matters as it may see fit; and

     (f) the Property Trustee may execute any of the trusts or powers hereunder
or perform any duties hereunder either directly or by or through its agents or
attorneys and the Property Trustee shall not be responsible for any misconduct
or negligence on the part of any agent or attorney appointed with due care by it
hereunder.

     Section 7.04. Not Responsible for Recitals or Issuance of Securities. The
recitals contained herein and in the Trust Securities Certificates shall be
taken as the statements of the Trust, and the Trustees do not assume any
responsibility for their correctness. The Trustees shall not be accountable for
the use or application by the Depositor of the proceeds of the Debentures.

     Section 7.05. May Hold Securities. Any Trustee or any other agent of any
Trustee or the Trust, in its individual or any other capacity, may become the
owner or pledgee of Trust Securities and, subject to Sections 7.08 and 7.13 and,
except as provided in the definition of the term Outstanding in Article I, may
otherwise deal with the Trust with the same rights it would have if it were not
a Trustee or such other agent.

     Section 7.06. Compensation; Indemnity; Fees. The Depositor agrees:

     (a) to pay to the Trustees from time to time such compensation as shall
have been agreed in writing with the Depositor for all services rendered by them
hereunder (which compensation shall not be limited by any provision of law in
regard to the compensation of a trustee of an express trust);

     (b) except as otherwise expressly provided herein, to reimburse the
Trustees upon request for all reasonable expenses, disbursements and advances
incurred or made by the Trustees in accordance with any provision of this Trust
Agreement (including the reasonable compensation and the expenses and
disbursements of its agents and counsel), except any such expense, disbursement
or advance as may be attributable to its own negligent action, its own negligent
failure to act or its own wilful misconduct (or, in the case of the
Administrative Trustee, any such expense, disbursement or advance as may be
attributable to his/her gross negligence); and

     (c) to indemnify each of the Trustees or any predecessor Trustee for, and
to hold the Trustees harmless against, any and all loss, damage, claims,
liability, penalty or expense including taxes


                                       35


(other than taxes based on the income of such Trustee) incurred without its own
negligent action, its own negligent failure to act or its wilful misconduct (or,
in the case of the Administrative Trustees, incurred without gross negligence or
bad faith), arising out of or in connection with the acceptance or
administration of this Trust Agreement, including the costs and expenses of
defending itself against any claim or liability in connection with the exercise
or performance of any of its powers or duties hereunder.

     No Trustee may claim any Lien or charge on any Trust Property as a result
of any amount due pursuant to this Section 7.06.

     The provisions of this Section 7.06 shall survive the termination of this
Trust Agreement.

     Section 7.07. Corporate Property Trustee Required; Eligibility of Trustees.

     (a) There shall at all times be a Property Trustee hereunder. The Property
Trustee shall be a Person that is eligible pursuant to the Trust Indenture Act
to act as such and has a combined capital and surplus of at least $50,000,000.
If any such Person publishes reports of condition at least annually, pursuant to
law or to the requirements of its supervising or examining authority, then for
the purposes of this Section, the combined capital and surplus of such Person
shall be deemed to be its combined capital and surplus as set forth in its most
recent report of condition so published. If at any time the Property Trustee
with respect to the Trust Securities shall cease to be eligible in accordance
with the provisions of this Section, it shall resign immediately in the manner
and with the effect hereinafter specified in this Article.

     (b) There shall at all times be one or more Administrative Trustees
hereunder. Each Administrative Trustee shall be either a natural person who is
at least 21 years of age or a legal entity that shall act through one or more
persons authorized to bind that entity.

     (c) There shall at all times be a Delaware Trustee. The Delaware Trustee
shall either be (i) a natural person who is at least 21 years of age and a
resident of the State of Delaware or (ii) a legal entity with its principal
place of business in the State of Delaware and that otherwise meets the
requirements of applicable Delaware law that shall act through one or more
persons authorized to bind such entity.

     Section 7.08. Conflicting Interests. If the Property


                                       36


Trustee has or shall acquire a conflicting interest within the meaning of the
Trust Indenture Act, the Property Trustee shall either eliminate such interest
or resign, to the extent and in the manner provided by, and subject to the
provisions of, the Trust Indenture Act and this Trust Agreement.

     Section 7.09. Co-Trustees and Separate Trustee. Unless an Event of Default
shall have occurred and be continuing, at any time or times, for the purpose of
meeting the legal requirements of the Trust Indenture Act or of any jurisdiction
in which any part of the Trust Property may at the time be located, the
Depositor and the Administrative Trustee (and if more than one Administrative
Trustee, by agreed action of the majority of such Trustees) shall have power (i)
to appoint, and upon the written request of the Administrative Trustee the
Depositor shall for such purpose join with the Administrative Trustee in the
execution, delivery, and performance of all instruments and agreements necessary
or proper to appoint one or more Persons approved by the Property Trustee either
to act as co-trustee, jointly with the Property Trustee, of all or any part of
such Trust Property, or to the extent required by law to act as separate trustee
of any such property, in either case with such powers as may be provided in the
instrument of appointment, and (ii) to vest in such Person or Persons in the
capacity aforesaid, any property, title, right or power deemed necessary or
desirable, subject to the other provisions of this Section. If the Depositor
does not join in such appointment within 15 days after the receipt by it of a
request so to do, or in case a Debenture Event of Default has occurred and is
continuing, the Property Trustee alone shall have power to make such
appointment. Any co-trustee or separate trustee appointed pursuant to this
Section shall either be (i) a natural person who is at least 21 years of age and
a resident of the United States or (ii) a legal entity with its principal place
of business in the United States that shall act through one or more persons
authorized to bind such entity.

     Should any written instrument from the Depositor be required by any
co-trustee or separate trustee so appointed for more fully confirming to such
co-trustee or separate trustee such property, title, right, or power, any and
all such instruments shall, on request, be executed, acknowledged, and delivered
by the Depositor.

     Every co-trustee or separate trustee shall, to the extent permitted by law,
but to such extent only, be appointed subject to the following terms, namely:

     (a) The Trust Securities shall be executed and delivered and all rights,
powers, duties, and obligations hereunder in


                                       37


respect of the custody of securities, cash and other personal property held by,
or required to be deposited or pledged with, the Trustees specified hereunder,
shall be exercised, solely by such Trustees and not by such co-trustee or
separate trustee.

     (b) The rights, powers, duties, and obligations hereby conferred or imposed
upon the Property Trustee in respect of any property covered by such appointment
shall be conferred or imposed upon and exercised or performed by the Property
Trustee or by the Property Trustee and such co-trustee or separate trustee
jointly, as shall be provided in the instrument appointing such co-trustee or
separate trustee, except to the extent that under any law of any jurisdiction in
which any particular act is to be performed, the Property Trustee shall be
incompetent or unqualified to perform such act, in which event such rights,
powers, duties and obligations shall be exercised and performed by such
co-trustee or separate trustee.

     (c) The Property Trustee at any time, by an instrument in writing executed
by it, with the written concurrence of the Depositor, may accept the resignation
of or remove any co-trustee or separate trustee appointed under this Section,
and, in case an Event of Default under the Indenture has occurred and is
continuing, the Property Trustee shall have power to accept the resignation of,
or remove, any such co-trustee or separate trustee without the concurrence of
the Depositor. Upon the written request of the Property Trustee, the Depositor
shall join with the Property Trustee in the execution, delivery, and performance
of all instruments and agreements necessary or proper to effectuate such
resignation or removal. A successor to any co-trustee or separate trustee so
resigned or removed may be appointed in the manner provided in this Section.

     (d) No co-trustee or separate trustee hereunder shall be personally liable
by reason of any act or omission of the Property Trustee, or any other trustee
hereunder.

     (e) The Property Trustee shall not be liable by reason of any act of a
co-trustee or separate trustee.

     (f) Any Act of Holders delivered to the Property Trustee shall be deemed to
have been delivered to each such co-trustee and separate trustee.

     Section 7.10. Resignation and Removal; Appointment of Successor. No
resignation or removal of any Trustee and no appointment of a successor Trustee
pursuant to this Article shall become effective until the acceptance of
appointment by the successor Trustee in accordance with the applicable
requirements of


                                       38


Section 7.11.

     Subject to the immediately preceding paragraph, any Trustee may resign at
any time with respect to the Trust Securities by giving written notice thereof
to the Securityholders.

     Unless an Event of Default shall have occurred and be continuing, any
Trustee may be removed at any time by Act of the Holder of the Common
Securities. If an Event of Default shall have occurred and be continuing, the
Property Trustee or the Delaware Trustee, or both of them, may be removed at
such time only by Act of the Holders of at least a majority in Liquidation
Amount of the Outstanding Preferred Securities, delivered to such Trustee (in
its individual capacity and on behalf of the Trust). The Administrative Trustee
may only be removed by the Holder of Common Securities at any time.

     If the instrument of acceptance by the successor Trustee required by
Section 7.11 shall not have been delivered to the Trustee within 30 days after
the giving of such notice of resignation or removal, the Trustee may petition,
at the expense of the Depositor, any court of competent jurisdiction for the
appointment of a successor Trustee.

     If any Trustee shall resign, be removed or become incapable of acting as
Trustee, or if a vacancy shall occur in the office of any Trustee for any cause,
at a time when no Event of Default shall have occurred and be continuing, the
Holder of Common Securities, by Act of the Holder of Common Securities delivered
to the retiring Trustee, shall promptly appoint a successor Trustee or Trustees
and the Trust, and the retiring Trustee shall comply with the applicable
requirements of Section 7.11. If the Property Trustee or the Delaware Trustee
shall resign, be removed or become incapable of continuing to act as the
Property Trustee or the Delaware Trustee, as the case may be, at a time when an
Event of Default has occurred and is continuing, the Holders of Preferred
Securities, by Act of the Securityholders of at least a majority in Liquidation
Amount of the Outstanding Preferred Securities delivered to the retiring
Trustee, shall promptly appoint a successor Trustee or Trustees, and such
successor Trustee shall comply with the applicable requirements of Section 7.11.
If any Administrative Trustee shall resign, be removed or become incapable of
acting as Administrative Trustee at a time when an Event of Default shall have
occurred and be continuing, the Holder of Common Securities shall appoint a
successor Administrative Trustee. If no successor Trustee shall have been so
appointed by the Holder of Common Securities or the Holders of Preferred
Securities and accepted appointment in the manner required by Section 7.11, any
Securityholder who has been a Securityholder of Trust Securities


                                       39


for at least six months may, on behalf of himself and all others similarly
situated, petition any court of competent jurisdiction for the appointment of a
successor Trustee.

     The Property Trustee shall give notice of each resignation and each removal
of a Trustee and each appointment of a successor Trustee to all Securityholders
in the manner provided in Section 10.08 and shall give notice to the Depositor.
Each notice shall include the name of the successor Trustee and the address of
its Corporate Trust Office if it is the Property Trustee.

     Notwithstanding the foregoing or any other provision of this Trust
Agreement, in the event any Administrative Trustee or Delaware Trustee who is a
natural person dies or becomes, in the opinion of the Depositor, incompetent or
incapacitated, the vacancy created by such death, incompetence or incapacity may
be filled by (a) the unanimous act of the remaining Administrative Trustees if
there are at least two of them or (b) otherwise by the Depositor (with the
successor in each case being a Person who satisfies the eligibility requirements
for Administrative Trustee or for the Delaware Trustee, as the case may be, set
forth in Section 7.07).

     Section 7.11. Acceptance of Appointment by Successor. In case of the
appointment hereunder of a successor Trustee, the retiring Trustee and each
successor Trustee shall execute and deliver to the Trust and the retiring
Trustee an amendment hereto wherein each successor Trustee shall accept such
appointment and which (a) shall contain such provisions as shall be necessary or
desirable to transfer and confirm to, and to vest in, each successor Trustee all
the rights, powers, trusts and duties of the retiring Trustee and (b) shall add
to or change any of the provisions of this Trust Agreement as shall be necessary
to provide for or facilitate the administration of the trusts hereunder by more
than one Trustee, it being understood that nothing herein or in such amendment
shall constitute such Trustees co-trustees of the same trust and that each such
Trustee shall be trustee of a trust or trusts hereunder separate and apart from
any trust or trusts hereunder administered by any other such Trustee and upon
the execution and delivery of such amendment the resignation or removal of the
retiring Trustee shall become effective to the extent provided therein and each
such successor Trustee, without any further act, deed or conveyance, shall
become vested with all the rights, powers, trusts and duties of the retiring
Trustee and the Trust; but, on request of the Trust or any successor Trustee,
such retiring Trustee shall duly assign, transfer and deliver to such successor
Trustee all Trust Property, all proceeds thereof and money held by such retiring
Trustee hereunder.

                  Upon request of any such successor Trustee, the Trust


                                       40


shall execute any and all instruments for more fully and certainly vesting in
and confirming to such successor Trustee all such rights, powers and trusts
referred to in the first or second preceding paragraph, as the case may be.

     No successor Trustee shall accept its appointment unless at the time of
such acceptance such successor Trustee shall be qualified and eligible under
this Article.

     Section 7.12. Merger, Conversion, Consolidation or Succession to Business.
Any Person into which any of the Trustees may be merged or converted or with
which it may be consolidated, or any Person resulting from any merger,
conversion or consolidation to which such Trustee shall be a party, or any
Person succeeding to all or substantially all the corporate trust business of
such Trustee, shall be the successor of such Trustee hereunder, provided such
Person shall be otherwise qualified and eligible under this Article, without the
execution or filing of any paper or any further act on the part of any of the
parties hereto.

     Section 7.13. Preferential Collection of Claims Against Depositor or Trust.
If and when the Property Trustee or the Delaware Trustee shall be or become a
creditor (whether directly or indirectly, secured or unsecured) of the Depositor
or the Trust (or any other obligor upon the Debentures or the Trust Securities),
including under the terms of Section 7.05 hereof, the Property Trustee or the
Delaware Trustee, as the case may be, shall be subject to and shall take all
actions necessary in order to comply with the provisions of the Trust Indenture
Act regarding the collection of claims against the Depositor or Trust (or any
such other obligor).

     Section 7.14. Reports by Property Trustee. The Property Trustee shall
transmit to Holders such reports concerning the Property Trustee and its actions
under this Trust Agreement as may be required pursuant to the Trust Indenture
Act at the times and in the manner provided pursuant thereto. If required by
Section 313(a) of the Trust Indenture Act, the Property Trustee shall, within 60
days after each May 31 following the date of this Trust Agreement deliver to
Holders a brief report, dated as of such May 31, which complies with the
provisions of such Section 313(a).

     A copy of each such report shall, at the time of such transmission to
Holders, be filed by the Property Trustee with each stock exchange upon which
any Preferred Securities are then listed, with the Commission and with the
Trust. The Trust will promptly notify the Property Trustee when any Preferred
Securities are listed on any stock exchange.


                                       41


     Section 7.15. Reports to the Property Trustee. The Depositor and the
Administrative Trustee on behalf of the Trust shall provide to the Property
Trustee such documents, reports and information as required by Section 314 of
the Trust Indenture Act (if any) and the compliance certificate required by
Section 314(a) of the Trust Indenture Act in the form, in the manner and at the
times required by Section 314 of the Trust Indenture Act.

     Section 7.16. Evidence of Compliance with Conditions Precedent. The
Depositor and the Administrative Trustee on behalf of the Trust shall provide to
the Property Trustee evidence of compliance with the conditions precedent, if
any, provided for in this Trust Agreement that relate to any of the matters set
forth in Section 314(c) of the Trust Indenture Act.

     Section 7.17. Statements Required in Officer's Certificate and Opinion of
Counsel.

     Each Officer's Certificate and Opinion of Counsel with respect to
compliance with a covenant or condition provided for in this Trust Agreement
shall include:

     (1) a statement that each Person making such Officer's Certificate or
Opinion of Counsel has read such covenant or condition;

     (2) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such Officer's
Certificate or Opinion of Counsel are based;

     (3) a statement that, in the opinion of each such Person, such Person has
made such examination or investigation as is necessary to enable such Person to
express an informed opinion as to whether or not such covenant or condition has
been complied with; and

     (4) a statement that, in the opinion of such Person, such covenant or
condition has been complied with; provided, however, that with respect to
matters of fact not involving any legal conclusion, an Opinion of Counsel may
rely on an Officer's Certificate or certificates of public officials.

     Section 7.18. Number of Trustees.

     (a) The number of Trustees shall be three, provided that the Holder of all
of the Common Securities by written instrument may increase and, if increased,
may decrease the number of Administrative Trustees.


                                       42


     (b) If a Trustee ceases to hold office for any reason and the number of
Administrative Trustees is not reduced pursuant to Section 7.18(a), or if the
number of Trustees is increased pursuant to Section 7.18(a), a vacancy shall
occur. The vacancy shall be filled with a Trustee appointed in accordance with
Section 7.10.

     (c) The death, resignation, retirement, removal, bankruptcy, incompetence
or incapacity to perform the duties of a Trustee shall not operate to annul the
Trust. Whenever a vacancy shall occur, until such vacancy is filled by the
appointment of an Administrative Trustee in accordance with Section 7.10, the
Administrative Trustees in office, regardless of their number (and
notwithstanding any other provision of this Trust Agreement), shall have all the
powers granted to the Administrative Trustee and shall discharge all the duties
imposed upon the Administrative Trustees by this Trust Agreement.

     Section 7.19. Delegation of Power.

     (a) Any Administrative Trustee may, by power of attorney consistent with
applicable law, delegate to any natural person over the age of 21 his/her power
for the purpose of executing any documents contemplated in Section 2.07(a),
including any registration statement or amendment thereto filed with the
Commission, or making any other governmental filing; and

     (b) the Administrative Trustees shall have power to delegate from time to
time to such of their number, if there is more than one Administrative Trustee,
or to the Depositor the doing of such things and the execution of such
instruments either in the name of the Trust or the names of the Administrative
Trustees or otherwise as the Administrative Trustees may deem expedient, to the
extent such delegation is not prohibited by applicable law or contrary to the
provisions of the Trust, as set forth herein.

     Section 7.20. Voting. Except as otherwise provided in this Trust Agreement,
the consent or vote of the Trustees shall be approved by not less than a
majority of the Administrative Trustees.


                                       43


                                  ARTICLE VIII

                           Termination and Liquidation

     Section 8.01. Termination Upon Expiration Date. Unless earlier terminated,
the Trust shall automatically terminate on June 26, 2050 (the "Expiration
Date"), following the distribution of the Trust Property in accordance with
Section 8.04.

     Section 8.02. Early Termination. The earliest to occur of any of the
following events is an "Early Termination Event":

     (a) the occurrence of a Bankruptcy Event in respect of, or the dissolution
or liquidation of the Depositor or an acceleration of the maturity of the
Debentures pursuant to Section 6.02 of the Indenture;

     (b) upon the election of the Depositor to liquidate the Trust and cause the
distribution of a Like Amount of Debentures to the Holders of the Trust
Securities;

     (c) the redemption of all of the Trust Securities; and

     (d) an order for termination of the Trust shall have been entered by a
court of competent jurisdiction.

     The election of the Depositor pursuant to Section 8.02(b) shall be made by
the Depositor giving written notice to the Trustees not less than 30 days prior
to the date of distribution of the Debentures. Such notice shall specify the
date of distribution of the Debentures and shall be accompanied by an Opinion of
Counsel that such event will not be a taxable event to the Holders of the Trust
Securities for Federal income tax purposes.

     Section 8.03. Termination. The respective obligations and responsibilities
of the Trustees and the Trust created and continued hereby shall terminate upon
the latest to occur of the following: (a) the distribution by the Property
Trustee to Securityholders upon the liquidation of the Trust pursuant to Section
8.04, or upon the redemption of all of the Trust Securities pursuant to Section
4.02, of all amounts required to be distributed hereunder upon the final payment
of the Trust Securities; (b) the payment of any expenses owed by the Trust; and
(c) the discharge of all administrative duties of the Administrative Trustee,
including the performance of any tax reporting obligations with respect to the
Trust or the Securityholders.

     Section 8.04. Liquidation.


                                       44


     (a) If an Early Termination Event specified in clause (a), (c) or (d) of
Section 8.02 occurs or upon the Expiration Date, the Trust shall be liquidated
by the Trustees as expeditiously as the Trustees determine to be possible by
distributing, after satisfaction of liabilities to creditors of the Trust as
provided by applicable law, to each Securityholder a Like Amount of Debentures,
subject to Section 8.04(d). If an Early Termination Event specified in clause
(b) occurs, the Trust shall be liquidated by the Trustee on the date of
distribution of the Debentures specified by the Depositor in its notice
delivered pursuant to Section 8.02. Notice of liquidation shall be given by the
Property Trustee by first-class mail, postage prepaid, mailed not later than 30
nor more than 60 days prior to the Liquidation Date to each Holder of Trust
Securities at such Holder's address appearing in the Securities Register. All
notices of liquidation shall:

     (i) state the Liquidation Date;

     (ii) state that from and after the Liquidation Date, the Trust Securities
will no longer be deemed to be Outstanding and any Trust Securities Certificates
not surrendered for exchange will be deemed to represent a Like Amount of
Debentures; and

     (iii) provide such information with respect to the mechanics by which
Holders may exchange Trust Securities Certificates for certificates evidencing
Debentures, or, if Section 8.04(d) applies, receive a Liquidation Distribution,
as the Administrative Trustee or the Property Trustee shall deem appropriate.

     (b) In order to effect the liquidation of the Trust and distribution of the
Debentures to Securityholders, the Property Trustee, either itself acting as
exchange agent or through the appointment of a separate exchange agent, shall
establish such procedures as it shall deem appropriate to effect the
distribution of Debentures in exchange for the Outstanding Trust Securities
Certificates.

     (c) Except where Section 8.02(c) or 8.04(d) applies, on or after the
Liquidation Date, (i) the Trust Securities will no longer be deemed to be
Outstanding, (ii) certificates representing a Like Amount of Debentures will be
issued to Holders of Trust Securities Certificates, upon surrender of such
certificates to the Administrative Trustee or its agent for exchange, (iii) the
Depositor shall use its best efforts to have the Debentures listed on the New
York Stock Exchange or such other exchange as the Preferred Securities are then
listed and shall take any reasonable action necessary to effect the distribution
of the Debentures, (iv)


                                       45


any Trust Securities Certificates not so surrendered for exchange will be deemed
to represent a Like Amount of Debentures, accruing interest at the rate provided
for in the Debentures from the last Distribution Date on which a Distribution
was made on such Trust Certificates until such certificates are so surrendered
(and until such certificates are so surrendered, no payments or interest or
principal will be made to Holders of Trust Securities Certificates with respect
to such Debentures) and (v) all rights of Securityholders holding Trust
Securities will cease, except the right of such Securityholders to receive
Debentures upon surrender of Trust Securities Certificates.

     (d) In the event that, notwithstanding the other provisions of this Section
8.04, whether because of an order for termination entered by a court of
competent jurisdiction or otherwise, distribution of the Debentures in the
manner provided herein is determined by the Property Trustee not to be
practical, the Trust Property shall be liquidated, and the Trust shall be
terminated, by the Property Trustee in such manner as the Property Trustee
determines. In such event, on the date of the termination of the Trust,
Securityholders will be entitled to receive out of the assets of the Trust
available for distribution to Securityholders, after satisfaction of liabilities
to creditors of the Trust as provided by applicable law, an amount equal to the
Liquidation Amount per Trust Security plus accumulated and unpaid Distributions
thereon to the date of payment (such amount being the "Liquidation
Distribution"). If, upon any such termination, the Liquidation Distribution can
be paid only in part because the Trust has insufficient assets available to pay
in full the aggregate Liquidation Distribution, then, subject to the next
succeeding sentence, the amounts payable by the Trust on the Trust Securities
shall be paid on a pro rata basis (based upon Liquidation Amounts). The Holder
of the Common Securities will be entitled to receive Liquidation Distributions
upon any such termination pro rata (determined as aforesaid) with Holders of
Preferred Securities, except that, if a Debenture Event of Default has occurred
and is continuing, the Preferred Securities shall have a priority over the
Common Securities, and no Liquidation Distribution will be paid to the Holders
of the Common Securities unless and until receipt by all Holders of the
Preferred Securities of the entire Liquidation Distribution payable in respect
thereof.

                                   ARTICLE IX

                                  Mergers, Etc.

     Section 9.01. Mergers, Consolidations, Amalgamations or Replacements of the
Trust. The Trust may not merge with or into,


                                       46


consolidate, amalgamate, or be replaced by, or convey, transfer or lease its
properties and assets as an entirety or substantially as an entirety to any
corporation or other entity, except as described below. The Trust may, at the
request of the Depositor, with the consent of the Administrative Trustee and
without the consent of the Holders of the Preferred Securities, merge with or
into, consolidate, amalgamate, or be replaced by, a trust organized as such
under the laws of any State; provided, that (i) such successor entity either (a)
expressly assumes all of the obligations of the Trust with respect to the
Preferred Securities or (b) substitutes for the Preferred Securities other
securities having substantially the same terms as the Preferred Securities (the
"Successor Securities") so long as the Successor Securities rank the same as the
Preferred Securities rank with respect to the payment of Distributions and
payments upon liquidation and redemption, (ii) the Depositor expressly appoints
a trustee of such successor entity possessing the same powers and duties as the
Property Trustee with respect to the Debentures, (iii) the Successor Securities
are listed, or any Successor Securities will be listed upon notification of
issuance, on any national securities exchange or other organization on which the
Preferred Securities are then listed, (iv) such merger, consolidation,
amalgamation or replacement does not cause the Preferred Securities (including
any Successor Securities) to be downgraded by any nationally recognized
statistical rating organization, (v) such merger, consolidation, amalgamation or
replacement does not adversely affect the rights, preferences and privileges of
the Holders of the Preferred Securities (including any Successor Securities) in
any material respect, (vi) such successor entity has a purpose substantially
similar to that of the Trust, (vii) prior to such merger, consolidation,
amalgamation or replacement, the Depositor has received an Opinion of Counsel to
the effect that (a) such merger, consolidation, amalgamation or replacement does
not adversely affect the rights, preferences and privileges of the Holders of
the Preferred Securities (including any Successor Securities) in any material
respect, and (b) following such merger, consolidation, amalgamation or
replacement, neither the Trust nor such successor entity will be required to
register as an investment company under the 1940 Act and (viii) the Depositor or
any permitted successor assignee owns all of the common securities of such
successor entity and guarantees the obligations of such successor entity under
the Successor Securities at least to the extent provided by the Guarantee and
this Trust Agreement. Notwithstanding the foregoing, the Trust shall not, except
with the consent of all Holders of the Preferred Securities, merge with or into,
consolidate, amalgamate, or be replaced by, any other entity or permit any other
entity to consolidate, amalgamate, merge with or into, or replace it if such
consolidation, amalgamation, merger or replacement would cause the Trust or the
successor entity not to be classified as a grantor


                                       47


trust for United States Federal income tax purposes.

                                    ARTICLE X

                            Miscellaneous Provisions

     Section 10.01. Limitation of Rights of Securityholders. The death or
incapacity of any Person having an interest, beneficial or otherwise, in Trust
Securities shall not operate to terminate this Trust Agreement, nor entitle the
legal representatives or heirs of such Person or any Securityholder for such
Person, to claim an accounting, take any action or bring any proceeding in any
court for a partition or winding-up of the arrangements contemplated hereby, nor
otherwise affect the rights, obligations and liabilities of the parties hereto
or any of them.

     Section 10.02. Amendment.

     (a) This Trust Agreement may be amended from time to time by the Trustees
and the Depositor, without the consent of any Securityholders, to cure any
ambiguity, defect or inconsistency or make any other change which does not
adversely affect in any material respect the interests of any Holder of
Preferred Securities. Any amendments of this Trust Agreement pursuant to Section
10.02(a) shall become effective when notice thereof is given to the
Securityholders.

     (b) Except as provided in Section 10.02(a) and 10.02(c) hereof, any
provision of this Trust Agreement may be amended by the Trustees and the
Depositor with the consent of Holders of at least a majority of the aggregate
Liquidation Amount of the Outstanding Preferred Securities.

     (c) In addition to and notwithstanding any other provision in this Trust
Agreement, without the consent of each affected Securityholder (such consent
being obtained in accordance with Section 6.03 or 6.06 hereof), this Trust
Agreement may not be amended to (i) change the amount, timing or currency of any
Distribution or Liquidation Distribution on the Trust Securities or otherwise
adversely affect the method of payment of any Distribution or Liquidation
Distribution required to be made in respect of the Trust Securities as of a
specified date; (ii) change the redemption provisions of the Trust Securities;
(iii) restrict the right of a Securityholder to institute suit for the
enforcement of any such payment contemplated in (i) or (ii) above on or after
the related date; (iv) modify the first sentence of Section 2.06 hereof; (v)
authorize or issue any beneficial interest in the Trust other than as
contemplated by this Trust Agreement as of the date


                                       48


hereof; (vi) change the conditions precedent for the Depositor to elect to
terminate the Trust and distribute the Debentures to Holders of Preferred
Securities as set forth in Section 8.02; or (vii) affect the limited liability
of any Holder of Preferred Securities, and, notwithstanding any other provision
herein, without the unanimous consent of the Securityholders (such consent being
obtained in accordance with Section 6.03 or 6.06 hereof), paragraphs (b) and (c)
of this Section 10.02 may not be amended.

     (d) Notwithstanding any other provisions of this Trust Agreement, no
amendment to this Trust Agreement shall be made without receipt by the Trust of
an Opinion of Counsel experienced in such matters to the effect that such
amendment will not affect the Trust's status as a grantor trust for United
States Federal income tax purposes or its exemption from regulation as an
"investment company" under the 1940 Act.

     (e) Notwithstanding anything in this Trust Agreement to the contrary,
without the consent of the Depositor, this Trust Agreement may not be amended in
a manner which imposes any additional obligation on the Depositor.

     (f) In the event that any amendment to this Trust Agreement is made, the
Administrative Trustee shall promptly provide to the Depositor a copy of such
amendment.

     (g) In executing any amendment to the Trust Agreement, the Property Trustee
shall be entitled to receive, and (subject to Section 8.01) shall be fully
protected in relying upon, an Opinion of Counsel stating that the execution of
such amendment is authorized or permitted by this Trust Agreement. Except as
contemplated by Section 7.11, the Trustee may, but shall not be obligated to,
enter into any amendment to this Trust Agreement which affects the Trustee's own
rights, duties or immunities under this Trust Agreement or otherwise.

     Section 10.03. Severability. In case any provision in this Trust Agreement
or in the Trust Securities Certificates shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.

     Section 10.04. Governing Law. THIS TRUST AGREEMENT AND THE RIGHTS AND
OBLIGATIONS OF EACH OF THE SECURITYHOLDERS, THE TRUST AND THE TRUSTEES WITH
RESPECT TO THIS TRUST AGREEMENT AND THE TRUST SECURITIES SHALL BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF DELAWARE, WITHOUT
REGARD TO CONFLICT OF LAWS PRINCIPLES.


                                       49


     Section 10.05. Payments Due on Non-Business Day. If the date fixed for any
payment on any Trust Security shall be a day which is not a Business Day, then
such payment need not be made on such date but may be made on the next
succeeding day which is a Business Day (except as otherwise provided therein,
with the same force and effect as though made on the date fixed for such
payment), and no interest shall accumulate thereon for the period after such
date to the date of payment on such succeeding day.

     Section 10.06. Successors and Assigns. This Trust Agreement shall be
binding upon and shall inure to the benefit of any successor to the Trust or
successor Trustee or both, including any successor by operation of law. Except
in connection with a consolidation, merger or sale involving the Depositor that
is permitted under Article V of the Indenture and pursuant to which the assignee
agrees in writing to perform the Depositor's obligations hereunder, the
Depositor shall not assign its obligations hereunder.

     Section 10.07. Headings. The Article and Section headings are for
convenience only and shall not affect the construction of this Trust Agreement.

     Section 10.08. Reports, Notices and Demands. Any report, notice, demand or
other communication which by any provision of this Trust Agreement is required
or permitted to be given or served to or upon any Securityholder or the
Depositor may be given or served in writing by deposit thereof, first-class
postage prepaid in the United States mail, hand delivery or facsimile
transmission, in each case, addressed, (a) in the case of a Holder of a
Preferred Security, to such Holder of a Preferred Security as such
Securityholder's name and address may appear on the Securities Register; and (b)
in the case of the Holder of a Common Security or the Depositor, to Public
Service Electric and Gas Company, 80 Park Plaza, Newark, New Jersey 07101,
Attention: Treasurer, facsimile no.: 201-596-6309. Such notice, demand or other
communication to or upon a Securityholder shall be deemed to have been
sufficiently given or made, for all purposes, upon hand delivery, mailing or
transmission.

     Any notice, demand or other communication which by any provision of this
Trust Agreement is required or permitted to be given or served to or upon the
Trust, the Property Trustee or the Administrative Trustee shall be given in
writing addressed (until another address is published by the Trust) as follows:
(a) with respect to the Property Trustee to First Union National Bank, 765 Broad
Street, Newark, New Jersey 07101, Attention: Corporate Trust Office; (b) with
respect to the Delaware Trustee, to 1225 King Street, Wilmington, Delaware 19801
Attention: Corporate Trust Department; and (c) with respect to the
Administrative Trustee, to the address above for notices to the Depositor,
marked "Attention: Administrative Trustee


                                       50


of PSE&G Capital Trust I c/o Treasurer." Such notice, demand or other
communication to or upon the Trust or the Property Trustee shall be deemed to
have been sufficiently given or made only upon actual receipt of the writing by
the Trust or the Property Trustee.

     Section 10.09. Agreement Not to Petition. Each of the Trustees and the
Depositor agree for the benefit of the Securityholders that, until at least one
year and one day after the Trust has been terminated in accordance with Article
VIII, they shall not file, or join in the filing of, a petition against the
Trust under any Bankruptcy Laws or otherwise join in the commencement of any
proceeding against the Trust under any Bankruptcy Law. In the event the
Depositor or any of the Trustees takes action in violation of this Section
10.09, the Property Trustee agrees, for the benefit of Securityholders, that at
the expense of the Depositor, it shall file an answer with the bankruptcy court
or otherwise properly contest the filing of such petition by the Depositor or
any of the Trustees, as applicable, against the Trust or the commencement of
such action and raise the defense that the Depositor has agreed in writing not
to take such action and should be stopped and precluded therefrom and such other
defenses, if any, as counsel for the Property Trustee or the Trust may assert.
The provisions of this Section 10.09 shall survive the termination of this Trust
Agreement.

     Section 10.10. Trust Indenture Act; Conflict with Trust Indenture Act.

     (a) This Trust Agreement is subject to the provisions of the Trust
Indenture Act that are required to be part of this Trust Agreement and shall, to
the extent applicable, be governed by such provisions.

     (b) The Property Trustee shall be the only Trustee which is a trustee for
the purposes of the Trust Indenture Act.

     (c) If any provision hereof limits, qualifies or conflicts with another
provision hereof which is required to be included in this Trust Agreement by any
of the provisions of the Trust Indenture Act, such required provision shall
control. If any provision of this Trust Agreement modifies or excludes any
provision of the Trust Indenture Act which may be so modified or excluded, the
latter provision shall be deemed to apply to this Trust Agreement as so modified
or excluded, as the case may be.

     (d) The application of the Trust Indenture Act to this


                                       51


Trust Agreement shall not affect the nature of the Trust Securities as equity
securities representing undivided beneficial interests in the assets of the
Trust.

     Section 10.11. Acceptance of Terms of Trust Agreement, Guarantee and
Indenture. THE RECEIPT AND ACCEPTANCE OF A TRUST SECURITY OR ANY INTEREST
THEREIN BY OR ON BEHALF OF A SECURITYHOLDER OR ANY BENEFICIAL OWNER, WITHOUT ANY
SIGNATURE OR FURTHER MANIFESTATION OF ASSENT, SHALL CONSTITUTE THE UNCONDITIONAL
ACCEPTANCE BY THE SECURITYHOLDER AND ALL OTHERS HAVING A BENEFICIAL INTEREST IN
SUCH TRUST SECURITY OF ALL THE TERMS AND PROVISIONS OF THIS TRUST AGREEMENT AND
AGREEMENT TO THE SUBORDINATION PROVISIONS AND OTHER TERMS OF THE GUARANTEE AND
THE INDENTURE, AND SHALL CONSTITUTE THE AGREEMENT OF THE TRUST, SUCH
SECURITYHOLDER AND SUCH OTHERS THAT THE TERMS AND PROVISIONS OF THIS TRUST
AGREEMENT SHALL BE BINDING, OPERATIVE AND EFFECTIVE AS BETWEEN THE TRUST AND
SUCH SECURITYHOLDER AND SUCH OTHERS.

                                                 PUBLIC SERVICE ELECTRIC AND GAS
                                                 COMPANY, as Depositor


                                                 By:
                                                    ----------------------------
                                                      Name:
                                                      Title:

                                                 FIRST UNION NATIONAL BANK, as
                                                 Property Trustee


                                                 By:
                                                    ----------------------------
                                                      Name:
                                                      Title:

                                                 FIRST UNION BANK OF DELAWARE,
                                                 as Delaware Trustee


                                                 By:
                                                    ----------------------------
                                                      Name:
                                                      Title:

                                                 FRED F. SAUNDERS,
                                                 as Administrative Trustee


                                       52


                                                    ----------------------------


                                       53


                                                                       EXHIBIT A

                              CERTIFICATE OF TRUST

                                       OF

                              PSE&G CAPITAL TRUST I

     THIS CERTIFICATE OF TRUST of PSE&G Capital Trust I (the "Trust"), dated
April 19, 1996, is being duly executed and filed by the undersigned, as
trustees, to form a business trust under the Delaware Business Trust Act (12
Del. C. ss. 3801 et seq.).

     (i) Name. The name of the business trust being formed hereby is PSE&G
Capital Trust I.

     (ii) Delaware Trustee. The name and business address of the trustee of the
Trust in the State of Delaware are First Union Bank of Delaware, 1225 King
Street, Wilmington DE 19801; attn: Corporate Trust Department.

     (iii) Counterparts. This Certificate of Trust may be executed in one or
more counterparts, all of which together shall constitute one and the same
instrument.

     (iv) Effective Date. This Certificate of Trust shall be effective as of its
filing.

     IN WITNESS WHEREOF, the undersigned, being the trustees of the Trust, have
executed this Certificate of Trust as of the date first above written.

                                                  FIRST UNION NATIONAL BANK, as
                                                  Trustee

                                                  By:
                                                  Name:
                                                  Title:

                                                  FIRST UNION BANK OF DELAWARE,
                                                  as Trustee

                                                  By:
                                                  Name:
                                                  Title:

                                                  -----------------------------,
                                                  as Trustee
                                                  Name:  Fred F. Saunders


                                      A-1


                                                                       EXHIBIT B

                                                              June 26, 1996

The Depository Trust Company
55 Water Street, 49th Floor
New York, New York  10041-0099

Attention: General Counsel's Office

     Re: PSE&G Capital Trust I Preferred Securities

Ladies and Gentlemen:

     The purpose of this letter is to set forth certain matters relating to the
issuance and deposit with The Depository Trust Company ("DTC") of the PSE&G
Capital Trust I 8.625% Cumulative Quarterly Income Preferred Securities, Series
A (the "Preferred Securities"), of PSE&G Capital Trust I, a Delaware business
trust (the "Issuer"), created pursuant to a Trust Agreement between Public
Service Electric and Gas Company ("PSE&G"), First Union National Bank, as
Property Trustee, the Delaware Trustee named therein and the Administrative
Trustee named therein. The payment of distributions on the Preferred Securities
and payments due upon liquidation of the Issuer or redemption of the Preferred
Securities are guaranteed by PSE&G, to the extent the Issuer has funds available
for the payment thereof and to the extent set forth in a Guarantee Agreement
dated as of June 26, 1996 by PSE&G and backup undertakings relating thereto with
respect to the Preferred Securities. The Issuer proposes to sell the Preferred
Securities to certain Underwriters (the "Underwriters") pursuant to an
Underwriting Agreement dated June 21, 1996 by and among the Underwriters, the
Issuer and PSE&G and the Underwriters wish to take delivery of the Preferred
Securities through DTC. First Union National Bank is acting as transfer agent
and registrar with respect to the Preferred Securities (the "Transfer Agent and
Registrar").

     To induce DTC to accept the Preferred Securities as eligible for deposit at
DTC, and to act in accordance with DTC's Rules with respect to the Preferred
Securities, the Issuer and the Transfer Agent and Registrar make the following
representations to DTC:

                                      B-1


     1. Prior to the closing of the sale of the Preferred Securities to the
Underwriters, which is expected to occur on or about June 26, 1996, there shall
be deposited with DTC one or more global certificates (individually and
collectively, the "Global Certificate") registered in the name of DTC's nominee,
Cede & Co., representing an aggregate of 8,320,000 Preferred Securities and
bearing the following legend:

     Unless this certificate is presented by an authorized representative of The
     Depository Trust Company, a New York corporation ("DTC"), to the Issuer or
     its agent for registration of transfer, exchange or payment, and any
     certificate issued is registered in the name of Cede & Co. or in such other
     name as is requested by an authorized representative of DTC (and any
     payment hereon is made to Cede & Co. or to such other entity as is
     requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE, OR
     OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL
     inasmuch as the registered owner hereof, Cede & Co., has an interest
     herein.

     2. The Amended and Restated Trust Agreement of the Issuer provides for the
voting by holders of the Preferred Securities under certain limited
circumstances. The Issuer shall establish a record date for such purposes and
shall, to the extent possible, give DTC notice of such record date not less than
15 calendar days in advance of such record date.

     3. In the event of a stock split, conversion, recapitalization,
reorganization or any other similar transaction resulting in the cancellation of
all or any part of the Preferred Securities outstanding, the Issuer or the
Transfer Agent and Registrar shall send DTC a notice of such event at least 5
business days prior to the effective date of such event.

     4. In the event of distribution on, or an offering or issuance of rights
with respect to, the Preferred Securities outstanding, the Issuer or the
Transfer Agent and Registrar shall send DTC a notice specifying: (a) the amount
of and conditions, if any, applicable to the payment of any such distribution or
any such offering or issuance of rights; (b) any applicable expiration or
deadline date or any date by which any action on the part of the holders of
Preferred Securities is required; and (c) the date any required notice is to be
mailed by or on behalf of the Issuer to holders of Preferred Securities or
published by or on behalf of the Issuer (whether by mail or publication, the
"Publication Date"). Such notice shall be sent to DTC by a secure means (e.g.,
legible telecopy, registered or certified mail, overnight delivery) in a


                                       B-2


timely manner designed to assure that such notice is in DTC's possession no
later than the close of business on the business day before the Publication
Date. The Issuer or the Transfer Agent and Registrar will forward such notice
either in a separate secure transmission for each CUSIP number or in a secure
transmission of multiple CUSIP numbers (if applicable) that includes a manifest
or list of each CUSIP number submitted in that transmission. (The party sending
such notice shall have a method to verify subsequently the use of such means and
the timeliness of such notice.) The Publication Date shall be not less than 20
calendar days nor more than 90 calendar days prior to the payment of any such
distribution or any such offering or issuance of rights with respect to the
Preferred Securities. After establishing the amount of payment to be made on the
Preferred Securities, the Issuer or the Transfer Agent and Registrar will notify
DTC's Dividend Department of such payment 5 business days prior to payment date.
Notices to DTC's Dividend Department by telecopy shall be sent to (212)
709-1723. Such notices by mail or by any other means shall be sent to:

                Manager, Announcements
                Dividend Department
                The Depository Trust Company
                7 Hanover Square, 22nd Floor
                New York, New York 10004-2695

     The Issuer or the Transfer Agent and Registrar shall confirm DTC's receipt
of such telecopy by telephoning the Dividend Department at (212) 709-1270.

     5. In the event of a redemption by the Issuer of the Preferred Securities,
notice specifying the terms of the redemption and the Publication Date of such
notice shall be sent by the Issuer or the Transfer Agent and Registrar to DTC
not less than 30 calendar days prior to such event by a secure means in the
manner set forth in paragraph 4. Such redemption notice shall be sent to DTC's
Call Notification Department at (516) 227-4164 or (516) 227-4190, and receipt of
such notice shall be confirmed by telephoning (516) 227-4070. Notice by mail or
by any other means shall be sent to:

                Call Notification Department
                The Depository Trust Company
                711 Stewart Avenue
                Garden City, New York  11530-4719

     6. In the event of any invitation to tender the Preferred Securities,
notice specifying the terms of the tender and


                                       B-3


the Publication Date of such notice shall be sent by the Issuer or the Transfer
Agent and Registrar to DTC by a secure means and in a timely manner as described
in paragraph 4. Notices to DTC pursuant to this paragraph and notices of other
corporate actions (including mandatory tenders, exchanges and capital changes)
shall be sent, unless notification to another department is expressly provided
for herein, by telecopy to DTC's Reorganization Department at (212) 709-1093 or
(212) 709-1094 and receipt of such notice shall be confirmed by telephoning
(212) 709-6884, or by mail or any other means to:

                Manager, Reorganization Department
                Reorganization Window
                The Depository Trust Company
                7 Hanover Square, 23rd Floor
                New York, New York 10004-2695

     7. All notices and payment advances sent to DTC shall contain the CUSIP
number or numbers of the Preferred Securities and the accompanying designation
of the Preferred Securities, which, as of the date of this letter, is "PSE&G
Capital Trust I 8.625% Cumulative Quarterly Income Preferred Securities, Series
A".

     8. Issuer or Agent shall provide automated notification of CUSIP-level
detail for dividend payments to DTC no later than noon (Eastern Time) on the
payment date.

     9. Dividend payments shall be received by Cede & Co. as nominee of DTC, or
its registered assigns in same-day funds or the equivalent no later than 2:30
p.m. (Eastern Time) on each payment date. Absent any other arrangements between
Issuer or Trustee and DTC, such funds shall be wired as follows:

                Chemical Bank
                ABA 021000128
                For credit to A/C The Depository Trust Company
                Dividend Deposit Account 066-026776

Issuer or Agent shall provide dividend payment information to a standard
announcement service subscribed to by DTC. In the unlikely event that no such
service exists, Issuer agrees that it or Agent shall provide this information
directly to DTC in advance of the dividend payment date as soon as the
information is available. This information should be conveyed directly to DTC
electronically. If electronic transmission is not available, such information
should be sent by telecopy to DTC's Dividend Department at (212) 709-1723 or
(212) 709-1886, and receipt of such notices shall be confirmed by telephoning
(212) 709-1270. Notices to DTC pursuant to the above by mail or by any other
means shall be sent


                                       B-4


to:

                Manager Announcements
                Dividend Department
                The Depository Trust Company
                7 Hanover Square, 22nd Floor
                New York, NY 10004-2695

     10. DTC shall receive maturity and redemption and CUSIP-level detail on the
payable date in same-day funds by 2:30 p.m. (Eastern Time). Absent any other
arrangements between Agent and DTC, such payments shall be wired as follows:

                Chemical Bank
                ABA 021000126
                For credit to A/C The Depository Trust Company
                Redemption Account 066-027306

in accordance with existing SDFS payment procedures in the manner set forth in
DTC's SDFS Paying Agent Operating Procedures, a copy of which has previously
been furnished to Agent.

     11. DTC shall receive all reorganization payments and CUSIP-level detail
resulting from corporate actions (such as tender offers or mergers) on the first
payable date in same-day funds by 2:30 p.m. (Eastern Time). Absent any other
arrangements between Agent and DTC, such payments shall be wired as follows:

                Chemical Bank
                ABA 021000126
                For credit to A/C The Depository Trust Company
                Reorganization Account 066-027608

     12. DTC may by prior written notice direct the Issuer and the Transfer
Agent and Registrar to use any other telecopy number or address of DTC as the
number or address to which notices or payments may be sent.

     13. In the event of a conversion, redemption, or any other similar
transaction (e.g., tender made and accepted in response to the Issuer's or the
Transfer Agent and Registrar's invitation) necessitating a reduction in the
aggregate number of Preferred Securities outstanding evidenced by a global
certificate, DTC, in its discretion: (a) may request the Issuer or the Transfer
Agent and Registrar to issue and countersign a new global certificate; or (b)
may make an appropriate notation on such global certificate indicating the date
and amount of such reduction.

     14. DTC may discontinue its services as a securities


                                       B-5


depositary with respect to the Preferred Securities at any time by giving
reasonable prior written notice to the Issuer and the Transfer Agent and
Registrar (at which time DTC will confirm with the Issuer or the Transfer Agent
and Registrar the aggregate number of Preferred Securities deposited with it)
and discharging its responsibilities with respect thereto under applicable law.
Under such circumstances, the Issuer may determine to make alternative
arrangements for book-entry settlement for the Preferred Securities, make
available one or more separate global certificates evidencing Preferred
Securities to any Participant having Preferred Securities credited to its DTC
account, or issue definitive Preferred Securities to the beneficial owners
thereof, and in any such case, DTC agrees to cooperate fully with the Issuer and
the Transfer Agent and Registrar and to return the global certificates duly
endorsed for transfer as directed by the Issuer or the Transfer Agent and
Registrar, together with any other documents of transfer reasonably requested by
the Issuer or the Transfer Agent and Registrar.

     15. In the event that the Issuer determines that beneficial owners of the
global certificate(s) evidencing Preferred Securities shall be able to obtain
definitive Preferred Securities, the Issuer or the Transfer Agent and Registrar
shall notify DTC of the availability of such definitive Preferred Securities. In
such event, the Issuer or the Transfer Agent and Registrar shall issue, transfer
and exchange definitive Preferred Securities in appropriate amounts, as required
by DTC and others, and DTC agrees to cooperate fully with the Issuer and the
Transfer Agent and Registrar and to return the global certificate(s), duly
endorsed for transfer as directed by the Issuer or the Transfer Agent and
Registrar, together with any other documents of transfer reasonably requested by
the Issuer or the Transfer Agent and Registrar.

     16. Issuer: (a) understands that DTC has no obligation to, and will not,
communicate to its Participants or to any person having an interest in the
Securities any information contained in the Security certificate(s); and (b)
acknowledges that neither DTC's Participants nor any person having an interest
in the Securities shall be deemed to have notice of the provisions of the
Security certificate(s) by virtue of submission of such certificate(s) to DTC.

     17. This letter may be executed in any number of counterparts, each of
which when so executed shall be deemed to be an original, but all such
counterparts shall together constitute but one and the same instrument.


                                       B-6


     Nothing herein shall be deemed to require the Transfer Agent and Registrar
to advance funds on behalf of the Issuer.

                                                  Very truly yours,

                                                  PSE&G CAPITAL TRUST I
                                                  (As Issuer)


                                                  By:
                                                  Name: Fred F. Saunders, as
                                                        Administrative Trustee

                                                  FIRST UNION NATIONAL BANK
                                                  (As Transfer Agent and
                                                  Registrar)


                                                  By:
                                                     ---------------------------
                                                       Name:
                                                       Title:

RECEIVED AND ACCEPTED:

THE DEPOSITORY TRUST COMPANY


By:
         Authorized Officer


                                      B-7


                                                                       EXHIBIT C

                      THIS CERTIFICATE IS NOT TRANSFERABLE

                               Certificate Number
                                       C-1

                                                     Number of Common Securities

                                                                         257,320

                    Certificate Evidencing Common Securities
                                       of
                              PSE&G Capital Trust I

                            8.625% Common Securities
                  (liquidation amount $25 per Common Security)

     PSE&G Capital Trust I, a statutory business trust created under the laws of
the State of Delaware (the "Trust"), hereby certifies that Public Service
Electric and Gas Company (the "Holder") is the registered owner of two hundred
fifty-seven thousand three hundred twenty (257,320) common securities of the
Trust representing undivided beneficial interests in the assets of the Trust and
designated as the 8.625% Common Securities (liquidation amount $25 per Common
Security) (the "Common Securities"). In accordance with Section 5.10 of the
Trust Agreement (as defined below) the Common Securities are not transferable
and any attempted transfer hereof shall be void. The designations, rights,
privileges, restrictions, preferences and other terms and provisions of the
Common Securities are set forth in, and this certificate and the Common
Securities represented hereby are issued and shall in all respects be subject to
the terms and provisions of, the Amended and Restated Trust Agreement of the
Trust dated as of June 21, 1996, as the same may be amended from time to time
(the "Trust Agreement"). The Trust will furnish a copy of the Trust Agreement to
the Holder without charge upon written request to the Trust at its principal
place of business or registered office.

     Upon receipt of this certificate, the Holder is bound by the Trust
Agreement and is entitled to the benefits thereunder.


                                      C-1


     IN WITNESS WHEREOF, the Administrative Trustee of the Trust has executed
this certificate this 26th day of June, 1996.

                                                    PSE&G CAPITAL TRUST I


                                                    By:
                                                       -------------------------
                                                         Name:  Fred F. Saunders
                                                         Administrative Trustee


                                      C-2


                                                                       EXHIBIT D

                               Certificate Number

                                      -----

                                        Number of Preferred Securities CUSIP NO.

                                                         CUSIP NO. _____________

                   Certificate Evidencing Preferred Securities
                                       of
                              PSE&G Capital Trust I

            8.625% Cumulative Quarterly Income Preferred Securities,
                                    Series A
                 (liquidation amount $25 per Preferred Security)

     PSE&G Capital Trust I, a statutory business trust created under the laws of
the State of Delaware (the "Trust"), hereby certifies that Cede & Co. (the
"Holder") is the registered owner of _________, _________________________
(_________) preferred securities of the Trust representing an undivided
beneficial interest in the assets of the Trust and designated the PSE&G Capital
Trust I 8.625% Cumulative Quarterly Income Preferred Securities, Series A
(liquidation amount $25 per Preferred Security) (the "Preferred Securities").
The Preferred Securities are transferable on the books and records of the Trust,
in person or by a duly authorized attorney, upon surrender of this certificate
duly endorsed and in proper form for transfer as provided in Section 5.04 of the
Trust Agreement (as defined below). The designations, rights, privileges,
restrictions, preferences and other terms and provisions of the Preferred
Securities are set forth in, and this certificate and the Preferred Securities
represented hereby are issued and shall in all respects be subject to the terms
and provisions of, the Amended and Restated Trust Agreement of the Trust dated
as of June 21, 1996, as the same may be amended from time to time (the "Trust
Agreement"). The Holder is entitled to the benefits of the Guarantee Agreement
entered into by Public Service Electric and Gas Company, a New Jersey
corporation, and First Union National Bank as guarantee trustee, dated as of
June 26, 1996 (the "Guarantee") to the extent provided therein, together with
the obligations of Public Service Electric and Gas Company under the Trust
Agreement, its Deferrable Interest Subordinated Debentures, Series A and the
Indenture related to such Deferrable Interest Subordinated Debentures. The Trust
will furnish a copy of the aforementioned agreements and instruments to


                                       D-1


the Holder without charge upon written request to the Trust at its principal
place of business or registered office.

     Upon receipt of this certificate, the Holder is bound by the Trust
Agreement and is entitled to the benefits thereunder.

     IN WITNESS WHEREOF, the Administrative Trustee of the Trust has executed
this certificate this 26th day of June, 1996.

                                                   PSE&G CAPITAL TRUST I


                                                   By:
                                                      --------------------------
                                                        Name:  Fred F. Saunders
                                                        Administrative Trustee

         [To be included in Book-Entry Preferred Securities Certificate]

This Preferred Security is a Book-Entry Preferred Securities Certificate within
the meaning of the Trust Agreement and is registered in the name of The
Depository Trust Company (the "Depository") or a nominee of the Depository. This
Preferred Security is exchangeable for Preferred Securities registered in the
name of a person other than the Depository or its nominee only in the limited
circumstances described in the Trust Agreement and no transfer of this Preferred
Security (other than a transfer of this Preferred Security as a whole by the
Depository to a nominee of the Depository or by a nominee of the Depository to
the Depository or another nominee of the Depository) may be registered except in
limited circumstances.

Unless this Preferred Security is presented by an authorized representative of
The Depository Trust Company, a New York corporation, (55 Water Street, New
York) to PSE&G Capital Trust I or its agent for registration of transfer,
exchange or payment, and any Preferred Security issued is registered in the name
of Cede & Co. or such other name as requested by an authorized representative of
The Depository Trust Company and any payment hereon is made to Cede & Co. or to
such other entity as is requested by an authorized representative of The
Depository Trust Company, ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY A PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede
& Co., has an interest herein.


                                       D-2


                                   ASSIGNMENT

FOR VALUE RECEIVED, the undersigned assigns and transfers to: (Insert assignee's
social security or tax identification number) (Insert address and zip code of
assignee)

__________ Preferred Securities represented by this Preferred Securities
Certificate and irrevocably appoints

agent to transfer said Preferred Securities on the books of the Trust. The agent
may substitute another to act for him or her.

Date:

Signature:
(Sign exactly as your name appears on the other side of this Preferred Security
Certificate)

EX-3.D

                              Amended and Restated
                 Trust Agreement for Enterprise Capital Trust I

                                      among

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                                 (as Depositor)

                            FIRST UNION NATIONAL BANK
                              (as Property Trustee)

                          FIRST UNION BANK OF DELAWARE
                              (as Delaware Trustee)

                                       and

                     THE ADMINISTRATIVE TRUSTEE NAMED HEREIN

                          Dated as of January 20, 1998


                                       2


                                TABLE OF CONTENTS

                                                                            Page

ARTICLE I

                                  Defined Terms

Section 1.01.  Definitions...................................................  1

ARTICLE II

                            Continuation of the Trust

Section 2.01.  Name..........................................................  8
Section 2.02.  Office of the Delaware Trustee; Principal Place of Business...  8
Section 2.03.  Initial Contribution of Trust Property; Expenses of the Trust.  9
Section 2.04.  Issuance of the Trust Securities..............................  9
Section 2.05.  Purchase of Debentures........................................ 10
Section 2.06.  Declaration of Trust.......................................... 10
Section 2.07.  Authorization to Enter into Certain Transactions.............. 10
Section 2.08.  Assets of Trust............................................... 13
Section 2.09.  Title to Trust Property....................................... 13

ARTICLE III

                                 Payment Account

Section 3.01.  Payment Account............................................... 14


                                   ARTICLE IV

                            Distributions; Redemption

Section 4.01.  Distributions................................................. 14
Section 4.02.  Redemption.................................................... 15
Section 4.03.  Subordination of Common Securities............................ 17
Section 4.04.  Payment Procedures............................................ 17
Section 4.05.  Tax Returns and Reports....................................... 18

ARTICLE V

                          Trust Securities Certificates

Section 5.01.  Initial Ownership............................................. 18
Section 5.02.  The Trust Securities Certificates............................. 18
Section 5.03.  Delivery of Trust Securities Certificates..................... 19
Section 5.04.  Registration of Transfer and Exchange of Preferred
               Securities Certificates....................................... 19
Section 5.05.  Mutilated, Destroyed, Lost or Stolen Trust Securities
               Certificates.................................................. 20


                                      (1)


Section 5.06.  Persons Deemed Securityholders................................ 20
Section 5.07.  Access to List of Securityholders' Names and Addresses........ 20
Section 5.08.  Maintenance of Office or Agency............................... 21
Section 5.09.  Appointment of Paying Agent................................... 21
Section 5.10.  No Transfer of Common Securities by Depositor................. 22
Section 5.11.  Book-Entry Preferred Securities Certificates; Common
               Securities Certificate........................................ 22
Section 5.12.  Definitive Preferred Securities Certificates.................. 22
Section 5.13.  Rights of Securityholders..................................... 23

ARTICLE VI

                    Acts of Securityholders; Meetings; Voting

Section 6.01.  Limitations on Voting Rights.................................. 23
Section 6.02.  Notice of Meetings............................................ 24
Section 6.03.  Meetings of Preferred Securityholders......................... 24
Section 6.04.  Voting Rights................................................. 25
Section 6.05.  Proxies, etc.................................................. 25
Section 6.06.  Securityholder Action by Written Consent...................... 25
Section 6.07.  Record Date for Voting and Other Purposes..................... 25
Section 6.08.  Acts of Securityholders....................................... 25
Section 6.09.  Inspection of Records......................................... 26

ARTICLE VII

                                  The Trustees

Section 7.01.  Certain Duties and Responsibilities........................... 26
Section 7.02.  Notice of Defaults; Direct Action by Securityholders.......... 27
Section 7.03.  Certain Rights of Property Trustee............................ 28
Section 7.04.  Not Responsible for Recitals or Issuance of Securities........ 29
Section 7.05.  May Hold Securities........................................... 29
Section 7.06.  Compensation; Indemnity; Fees................................. 29
Section 7.07.  Corporate Property Trustee Required; Eligibility of Trustees.. 30
Section 7.08.  Conflicting Interests......................................... 31
Section 7.09.  Co-Trustees and Separate Trustee.............................. 31
Section 7.10.  Resignation and Removal; Appointment of Successor............. 32
Section 7.11.  Acceptance of Appointment by Successor........................ 33
Section 7.12.  Merger, Conversion, Consolidation or Succession to Business... 34
Section 7.13.  Preferential Collection of Claims Against Depositor or Trust.. 34
Section 7.14.  Reports by Property Trustee................................... 35
Section 7.15.  Reports to the Property Trustee............................... 35

                                      (2)


Section 7.16.  Evidence of Compliance with Conditions Precedent.............. 35
Section 7.17.  Statements Required in Officer's Certificate and Opinion of
               Counsel....................................................... 35
Section 7.18.  Number of Trustees............................................ 36
Section 7.19.  Delegation of Power........................................... 36
Section 7.20.  Voting........................................................ 36

ARTICLE VIII

                           Dissolution and Liquidation

Section 8.01.  Dissolution Upon Expiration Date.............................. 36
Section 8.02.  Early Dissolution............................................. 37
Section 8.03.  Dissolution................................................... 37
Section 8.04.  Liquidation................................................... 37

ARTICLE IX

                                  Mergers, Etc.

Section 9.01.  Mergers, Consolidations, Amalgamations or Replacements
               of the Trust.................................................. 39

ARTICLE X

                            Miscellaneous Provisions

Section 10.01. Limitation of Rights of Securityholders....................... 40
Section 10.02. Amendment..................................................... 40
Section 10.03. Severability.................................................. 41
Section 10.04. Governing Law................................................. 41
Section 10.05. Payments Due on Non-Business Day.............................. 42
Section 10.06. Successors and Assigns........................................ 42
Section 10.07. Headings...................................................... 42
Section 10.08. Reports, Notices and Demands.................................. 42
Section 10.09. Agreement Not to Petition..................................... 43
Section 10.10. Trust Indenture Act; Conflict with Trust Indenture Act........ 43
Section 10.11. Acceptance of Terms of Trust Agreement, Guarantee and
               Indenture..................................................... 43


                                      (3)


                           Enterprise Capital Trust I

              Certain Sections of this Trust Agreement relating to
                         Sections 310 through 318 of the
                           Trust Indenture Act of 1939


Trust Indenture                                                  Trust Agreement
  Act Section                                                        Section
- ---------------                                                  ---------------

ss.310(a)(1)................................................................7.07
      (a)(2)................................................................7.07
      (a)(3)................................................................7.09
      (a)(4).........................................................2.07(a)(ii)
      (b)...................................................................7.08
ss.311(a)...................................................................7.13
      (b)...................................................................7.13
ss.312(a)...................................................................5.07
      (b)...................................................................5.07
      (c)...................................................................5.07
ss.313(a)...................................................................7.14
      (b)...................................................................7.14
      (c)...................................................................7.14
      (d)...................................................................7.14
ss.314(a)...................................................................7.15
      (b).........................................................Not Applicable
      (c)(1)..........................................................7.16, 7.17
      (c)(2)..........................................................7.16, 7.17
      (c)(3)......................................................Not Applicable
      (d).........................................................Not Applicable
      (e).................................................................. 7.17
ss.315(a).......................................................7.01(a), 7.03(a)
      (b)............................................................7.02, 10.08
      (c)................................................................7.01(a)
      (d).............................................................7.01, 7.03
      (e).........................................................Not Applicable
ss.316(a).........................................................Not Applicable
      (a)(1)(A)...................................................Not Applicable
      (a)(1)(B)...................................................Not Applicable
      (a)(2)......................................................Not Applicable
      (b).........................................................Not Applicable
      (c).........................................................Not Applicable
ss.317(a)(1)......................................................Not Applicable
      (a)(2)......................................................Not Applicable
      (b)...................................................................5.09
ss.318(a)..................................................................10.10

- ------------------
     Note: This reconciliation and tie sheet shall not, for any purpose, be
deemed to be a part of the Trust Agreement.



     AMENDED AND RESTATED TRUST AGREEMENT of Enterprise Capital Trust I (the
"Trust"), dated as of January 20, 1998 among (i) Public Service Enterprise Group
Incorporated, a New Jersey corporation (the "Depositor"), (ii) First Union
National Bank, a national banking association, as trustee (the "Property
Trustee"), (iii) First Union Bank of Delaware, whose address in Delaware is One
Rodney Square, 920 King Street, Wilmington, Delaware 19801, as Delaware trustee
(the "Delaware Trustee"), (iv) Fred F. Saunders, an individual whose address is
c/o Public Service Electric and Gas Company, 80 Park Plaza, P.O. Box 570,
Newark, New Jersey 07101 (the "Administrative Trustee") (the Property Trustee,
the Delaware Trustee and the Administrative Trustee are referred to collectively
as the "Trustees"), and (v) the several Holders, as hereinafter defined.

                                   WITNESSETH:

     WHEREAS, the Depositor, the Property Trustee, the Delaware Trustee and the
Administrative Trustee have heretofore duly declared and established a business
trust pursuant to the Delaware Business Trust Act by entering into a Trust
Agreement, dated as of December 22, 1997 (the "Original Trust Agreement"), and
by executing and filing with the Secretary of State of the State of Delaware a
Certificate of Trust on December 22, 1997, a form of which is attached hereto as
Exhibit A; and

     WHEREAS, the Depositor, the Property Trustee, the Delaware Trustee and the
Administrative Trustee desire to amend and restate the Original Trust Agreement
in its entirety as set forth herein to provide for, among other things, (i) the
issuance of the Common Securities, as hereinafter defined, by the Trust to the
Depositor, (ii) the issuance and sale of the Preferred Securities, as
hereinafter defined, by the Trust pursuant to the Underwriting Agreement, as
hereinafter defined, and (iii) the acquisition by the Trust from the Depositor
of the Debentures, as hereinafter defined.

     NOW, THEREFORE, in consideration of the agreements and obligations set
forth herein and for other good and valuable consideration, the sufficiency of
which is hereby acknowledged, each party, for the benefit of the other party and
for the benefit of the Securityholders, as hereinafter defined, hereby amends
and restates the Original Trust Agreement in its entirety and agrees as follows:

                                    ARTICLE I

                                  Defined Terms

     Section 1.01. Definitions. For all purposes of this Trust Agreement, except
as otherwise expressly provided or unless the context otherwise requires:

          (a) each term defined in this Article I has the meaning assigned to it
     in this Article I and includes the plural as well as the singular;



          (b) each of the other terms used herein that is defined in the Trust
     Indenture Act, either directly or by reference therein, has the meaning
     assigned to it therein;

          (c) unless the context otherwise requires, any reference to an
     "Article" or a "Section" refers to an Article or a Section, as the case may
     be, of this Trust Agreement; and

          (d) the words "herein", "hereof" and "hereunder" and other words of
     similar import refer to this Trust Agreement as a whole and not to any
     particular Article, Section or other subdivision.

     "Act" has the meaning specified in Section 6.08.

     "Administrative Trustee" means the individual identified as the
"Administrative Trustee" in the preamble to this Trust Agreement, solely in
his/her capacity as Administrative Trustee of the Trust and not in his/her
individual capacity, or such Administrative Trustee's successor in interest in
such capacity, or any successor trustee appointed as herein provided.

     "Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.

     "Bankruptcy Event" means, with respect to any Person, the occurrence of any
of the following events:

          (a) Such Person, pursuant to or within the meaning of any Bankruptcy
     Law:

(i)   commences a voluntary case or proceeding;

(ii)  consents to the entry of an order for relief against it in an involuntary
      case or proceeding;

(iii) consents to the appointment of a Custodian, as hereinafter defined, of it
      or for all or substantially all of its property, and such Custodian is not
      discharged within 60 days;

(iv)  makes a general assignment for the benefit of its creditors; or

(v)   admits in writing its inability to pay its debts generally as they become
      due; or

          (b) A court of competent jurisdiction enters an order or decree under
     any Bankruptcy Law that:

(i)  is for relief against such Person in an involuntary case


                                        2


      or proceeding;

(ii)  appoints a Custodian of such Person for all or substantially all of its
      properties; or

(iii) orders the liquidation of such Person.

and in each case the order or decree remains unstayed and in effect for 60 days.

     "Bankruptcy Laws" means Title 11 of the United States Code, or similar
federal or state law for the relief of debtors. "Custodian" means any receiver,
trustee, assignee, liquidator, sequestrator, custodian or similar official under
any Bankruptcy Law.

     "Board Resolution" means (i) a copy of a resolution certified by the
Secretary or an Assistant Secretary of the Depositor to have been duly adopted
by the Depositor's Board of Directors or a committee established thereby and to
be in full force and effect on the date of such certification or (ii) a
certificate signed by the authorized officer or officers of the Depositor to
whom the Depositor's Board of Directors or a committee established thereby has
delegated its authority, and in each case, delivered to the Trustees.

     "Book-Entry Preferred Securities Certificates" means certificates
representing Preferred Securities issued in global, fully registered form with
the Clearing Agency as described in Section 5.11.

     "Business Day" means a day other than (a) a Saturday or Sunday, or (b) a
day on which banking institutions in The City of New York or the State of New
Jersey are required by law or executive order to remain closed.

     "Certificate Depository Agreement" means the agreement among the Trust, the
Property Trustee and The Depository Trust Company, as the initial Clearing
Agency, dated as of the Closing Date, relating to the Book-Entry Preferred
Securities Certificates, substantially in the form attached hereto as Exhibit B,
as the same may be amended and supplemented from time to time.

     "Clearing Agency" means an organization registered as a "clearing agency"
pursuant to Section 17A of the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder. The Depository Trust Company
will be the initial Clearing Agency.

     "Closing Date" means the Time of Delivery as defined in the Underwriting
Agreement, which date is also the date of execution and delivery of this Trust
Agreement.

     "Code" means the Internal Revenue Code of 1986, as amended.

     "Commission" means the Securities and Exchange Commission, as from time to
time constituted, created under the Securities Exchange Act of 1934, as amended,
or, if at any time after the execution of


                                       3


this Trust Agreement such Commission is not existing and performing the duties
now assigned to it under the Trust Indenture Act, then the body performing such
duties at such time.

     "Common Security" means an undivided beneficial interest in the assets of
the Trust, having a Liquidation Amount of $25 and having the rights provided
therefor in this Trust Agreement, including the right to receive Distributions
and a Liquidation Distribution as provided herein.

     "Common Securities Certificate" means a certificate evidencing ownership of
Common Securities, substantially in the form attached hereto as Exhibit C.

     "Corporate Trust Office" means the principal corporate office of the
Property Trustee located in the State of New Jersey which at the date hereof is
765 Broad Street, Newark, New Jersey 07107.

     "Creditor" has the meaning specified in Section 2.03.

     "Debenture Event of Default" means an "Event of Default" as defined in the
Indenture with respect to the Debentures.

     "Debenture Redemption Date" means "Redemption Date" as defined in the
Indenture with respect to the Debentures.

     "Debenture Trustee" means First Union National Bank, a national banking
association, in its capacity as trustee under the Indenture, or any successor
thereto appointed in accordance with the terms and provisions of the Indenture.

     "Debentures" means the Depositor's 7.44% Deferrable Interest Subordinated
Debentures, Series A, issued pursuant to the Indenture.

     "Definitive Preferred Securities Certificates" means certificates
representing Preferred Securities issued in certificated, fully registered form
as described in Section 5.12.

     "Delaware Business Trust Act" means Chapter 38 of Title 12 of the Delaware
Code, 12 Del. C.ss. 3801, et seq., as it may be amended from time to time.

     "Delaware Trustee" means the entity identified as the "Delaware Trustee" in
the preamble to this Trust Agreement solely in its capacity as Delaware Trustee
of the Trust and not in its individual capacity, or its successor in interest in
such capacity, or any successor trustee appointed as herein provided.

     "Depositor" has the meaning specified in the preamble to this Trust
Agreement.

     "Distribution Date" has the meaning specified in Section 4.01(a).

     "Distributions" means amounts payable in respect of the Trust


                                       4


Securities as provided in Section 4.01.

     "Event of Default" means the occurrence of a Debenture Event of Default
(whatever the reason for such Event of Default and whether it shall be voluntary
or involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body).

     "Expiration Date" has the meaning specified in Section 8.01.

     "Extension Period" means the period or periods in which pursuant to the
Indenture payments of interest on the Debentures are deferred by extending the
interest payment periods thereof.

     "Guarantee" means the Guarantee Agreement executed and delivered by the
Depositor to First Union National Bank, a national banking association, as
trustee thereunder, contemporaneously with the execution and delivery of this
Trust Agreement, for the benefit of the Holders of the Preferred Securities, as
amended from time to time.

     "Indenture" means the Indenture, dated as of January 1, 1998 between the
Depositor and the Debenture Trustee, as trustee thereunder, as amended or
supplemented from time to time.

     "Lien" means any lien, pledge, charge, encumbrance,
mortgage, deed of trust, adverse ownership interest, hypothecation, assignment,
security interest or preference, priority or other security agreement or
preferential arrangement of any kind or nature whatsoever.

     "Like Amount" means (a) with respect to a redemption of Trust Securities,
Trust Securities having an aggregate Liquidation Amount equal to the principal
amount of Debentures to be paid in accordance with the Indenture and (b) with
respect to a distribution of Debentures to Holders of Trust Securities in
connection with a dissolution and liquidation of the Trust, Debentures having a
principal amount equal to the aggregate Liquidation Amount of the Trust
Securities in exchange for which such Debentures are distributed.

     "Liquidation Amount" means the stated amount of $25 per Trust Security.

     "Liquidation Date" means the date on which Debentures are to be distributed
to Holders of Trust Securities in connection with a dissolution and liquidation
of the Trust pursuant to Section 8.04(a).

     "Liquidation Distribution" has the meaning specified in Section 8.04(d).

     "1940 Act" means the Investment Company Act of 1940, as amended.

"Officers' Certificate" means a certificate signed by the Chairman, the
President, any Vice President, the Treasurer, any Assistant Treasurer, the
Secretary or any Assistant Secretary of the


                                       5


Depositor.

     "Opinion of Counsel" means a written opinion of counsel, who may be counsel
for the Trust, the Property Trustee or the Depositor or an Affiliate of the
Depositor, but not an employee of any thereof, and who shall be acceptable to
the Property Trustee.

     "Original Trust Agreement" has the meaning specified in the recitals to
this Trust Agreement.

     "Outstanding", when used with respect to Trust Securities, means, as of the
date of determination, all Trust Securities theretofore executed and delivered
under this Trust Agreement, except:

          (a) Trust Securities theretofore cancelled by the Administrative
     Trustee or delivered to the Administrative Trustee for cancellation;

          (b) Trust Securities for whose redemption money in the necessary
     amount has been theretofore deposited with the Property Trustee or any
     Paying Agent for the Holders of such Trust Securities; provided that, if
     such Trust Securities are to be redeemed, notice of such redemption has
     been duly given pursuant to this Trust Agreement;

          (c) Trust Securities which have been paid or in exchange for or in
     lieu of which other Trust Securities have been executed and delivered
     pursuant to Section 5.05, other than any such Trust Securities in respect
     of which there shall have been presented to the Property Trustee proof
     satisfactory to it that such Trust Securities are held by a bona fide
     purchaser; and

          (d) as provided in Section 8.04(c);

provided, however, that in determining whether the Holders of the requisite
Liquidation Amount of the Outstanding Preferred Securities have given any
request, demand, authorization, direction, notice, consent or waiver hereunder,
Preferred Securities owned by the Depositor, any Trustee or any Affiliate of the
Depositor or any Trustee shall be disregarded and deemed not to be Outstanding,
except that (a) in determining whether any Trustee shall be protected in relying
upon any such request, demand, authorization, direction, notice, consent or
waiver, only Preferred Securities which such Trustee actually knows to be so
owned shall be so disregarded and (b) the foregoing shall not apply at any time
when all of the Outstanding Preferred Securities are owned by the Depositor, one
or more of the Trustees and/or any such Affiliate. Preferred Securities so owned
which have been pledged in good faith may be regarded as Outstanding if the
pledgee establishes to the satisfaction of the Administrative Trustee the
pledgee's right so to act with respect to such Preferred Securities and that the
pledgee is not the Depositor or any Affiliate of the Depositor.

     "Paying Agent" means the Property Trustee and any co-paying agent appointed
pursuant to Section 5.09.


                                       6


     "Payment Account" means a segregated non-interest-bearing corporate trust
account maintained by the Property Trustee in its trust department for the
benefit of the Securityholders in which all amounts paid to the Property Trustee
in respect of the Debentures or the Guarantee will be held and from which the
Property Trustee or such other Paying Agent shall make payments to the
Securityholders in accordance with Article 4.

     "Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.

     "Preferred Security" means a 7.44% Trust Originated Preferred Security
issued by the Trust, and having an undivided beneficial interest in the assets
of the Trust, having a Liquidation Amount of $25 and having rights provided
therefor in this Trust Agreement, including the right to receive Distributions
and a Liquidation Distribution as provided herein.

     "Preferred Securities Certificate" means a certificate evidencing ownership
of one or more Preferred Securities, substantially in the form attached hereto
as Exhibit D.

     "Property Trustee" means the commercial bank or trust company identified as
the "Property Trustee" in the preamble to this Trust Agreement solely in its
capacity as Property Trustee of the Trust and not in its individual capacity, or
its successor in interest in such capacity, or any successor property trustee
appointed as herein provided.

     "Redemption Date" means, with respect to any Trust Security to be redeemed,
the date fixed for such redemption by or pursuant to this Trust Agreement;
provided that each Debenture Redemption Date and the stated maturity of the
Debentures shall be a Redemption Date for a Like Amount of Trust Securities.

     "Redemption Price" means, with respect to any Trust Security, the
Liquidation Amount of such Trust Security, plus accumulated and unpaid
Distributions thereon to the Redemption Date.

     "Securities Register" and "Securities Registrar" have the respective
meanings specified in Section 5.04.

     "Securityholder" or "Holder" means a Person in whose name a Trust Security
or Securities is registered in the Securities Register; any such Person is a
beneficial owner within the meaning of the Delaware Business Trust Act.

     "Successor Securities" has the meaning specified in Section 9.01.

     "Trust" means the Delaware business trust created and continued hereby and
identified on the cover page to this Trust Agreement.


                                       7


     "Trust Agreement" means this Amended and Restated Trust Agreement, as the
same may be modified, amended or supplemented in accordance with the applicable
provisions hereof, including all exhibits hereto, including, for all purposes of
this Trust Agreement and any such modification, amendment or supplement, the
provisions of the Trust Indenture Act that are deemed to be a part of and govern
this Trust Agreement and any such modification, amendment or supplement,
respectively.

     "Trust Indenture Act" means the Trust Indenture Act of 1939 as in force at
the date as of which this Trust Agreement was executed; provided, however, that
in the event the Trust Indenture Act of 1939 is amended after such date, "Trust
Indenture Act" means, to the extent required by any such amendment, the Trust
Indenture Act of 1939 as so amended.

     "Trust Property" means (a) the Debentures, (b) any cash on deposit in, or
owing to, the Payment Account and (c) all proceeds and rights in respect of the
foregoing and any other property and assets for the time being held or deemed to
be held by the Property Trustee pursuant to the trusts of this Trust Agreement.

     "Trust Security" means any one of the Common Securities or the Preferred
Securities.

     "Trust Securities Certificate" means any one of the Common Securities
Certificates or the Preferred Securities Certificates.

     "Underwriting Agreement" means the Underwriting Agreement, dated January
14, 1998 among the Trust, the Depositor and the Underwriters named therein.

                                   ARTICLE II

                            Continuation of the Trust

     Section 2.01. Name. The Trust continued hereby shall be known as
"Enterprise Capital Trust I" as such name may be modified from time to time by
the Administrative Trustee following written notice to the Holders of Trust
Securities and the other Trustees, in which name the Trustees may conduct the
business of the Trust, make and execute contracts and other instruments on
behalf of the Trust and sue and be sued.

     Section 2.02. Office of the Delaware Trustee; Principal Place of Business.
The address of the Delaware Trustee in the State of Delaware is One Rodney
Square, 920 King Street, Wilmington, Delaware 19801 or such other address in the
State of Delaware as the Delaware Trustee may designate by written notice to the
Securityholders and the Depositor. The principal place of business of the Trust
is 80 Park Plaza, Newark, New Jersey 07101.


                                       8


     Section 2.03. Initial Contribution of Trust Property; Expenses of the
Trust.

          (a) The Property Trustee acknowledges receipt in trust from the
     Depositor in connection with the Original Trust Agreement of the sum of
     $10, which constituted the initial Trust Property.

          (b) The Depositor shall be responsible for and shall pay for all
     obligations (other than with respect to the Trust Securities) and all costs
     and expenses of the Trust (including, but not limited to, costs and
     expenses relating to the organization of the Trust, the issuance and sale
     of the Preferred Securities, the fees and expenses (including reasonable
     counsel fees and expenses) of the Trustees as provided in Section 7.06, the
     costs and expenses of accountants, attorneys, statistical or bookkeeping
     services, expenses for printing and engraving and computing or accounting
     equipment, Paying Agent(s), Securities Registrar, duplication, travel and
     telephone and other telecommunications expenses and costs and expenses
     incurred in connection with the disposition of Trust assets).

          (c) The Depositor will pay any and all taxes (other than United States
     withholding taxes attributable to the Trust or its assets) and all
     liabilities, costs and expenses with respect to such taxes of the Trust.

          (d) The Depositor's obligations under this Section 2.03 shall be for
     the benefit of, and shall be enforceable by, the Property Trustee and any
     Person to whom any such obligations, costs, expenses and taxes are owed (a
     "Creditor") whether or not such Creditor has received notice hereof. The
     Property Trustee and any such Creditor may enforce the Depositor's
     obligations under this Section 2.03 directly against the Depositor and the
     Depositor irrevocably waives any right or remedy to require that the
     Property Trustee or any such Creditor take any action against the Trust or
     any other Person before proceeding against the Depositor. The Depositor
     agrees to execute such additional agreements as may be necessary or
     desirable in order to give full effect to the provisions of this Section
     2.03.

          (e) The Depositor shall make no claim upon the Trust Property for the
     payment of such expenses.

     Section 2.04. Issuance of the Trust Securities. The Depositor, on behalf of
the Trust and pursuant to the Original Trust Agreement, executed and delivered
the Underwriting Agreement. Contemporaneously with the execution and delivery of
this Trust Agreement, the Administrative Trustee, on behalf of the Trust, shall
execute in accordance with Section 5.02 and deliver to the Underwriters named in
the Underwriting Agreement one or more Book-Entry Preferred Securities
Certificates, registered in the name of the nominee of the initial Clearing
Agency, representing 9,000,000 Preferred Securities having an aggregate
Liquidation Amount of $225,000,000, against receipt by the Property Trustee of
the aggregate purchase price of such Preferred Securities of $225,000,000, which
amount the Administrative Trustee shall promptly deliver to the Property
Trustee.


                                       9


Contemporaneously therewith, the Administrative Trustee, on behalf of the Trust,
shall execute in accordance with Section 5.02 and deliver to the Depositor a
Common Securities Certificate, registered in the name of the Depositor,
representing 278,351 Common Securities having an aggregate Liquidation Amount of
$6,958,775, and in satisfaction of the purchase price of such Common Securities
the Depositor shall deliver to the Property Trustee the sum of $6,958,775.

     Section 2.05. Purchase of Debentures. Contemporaneously with the execution
and delivery of this Trust Agreement (i) the Administrative Trustee, on behalf
of the Trust, shall purchase $231,958,775 aggregate principal amount of
Debentures from the Depositor, registered in the name of the Trust and (ii) in
satisfaction of the purchase price for such Debentures, the Property Trustee, on
behalf of the Trust, shall deliver to the Depositor the sum of $231,958,775.

     Section 2.06. Declaration of Trust. The exclusive purposes and functions of
the Trust are (a) to issue and sell Trust Securities and use the proceeds from
such sale to acquire the Debentures, (b) to maintain the status of the Trust as
a grantor trust for United States Federal income tax purposes, and (c) except as
otherwise limited herein, to engage in only those activities necessary,
convenient or incidental thereto. The Depositor hereby appoints the Trustees as
trustees of the Trust, to have all the rights, powers and duties to the extent
set forth herein, and the Trustees hereby accept such appointment. The Property
Trustee hereby declares that it will hold the Trust Property in trust upon and
subject to the conditions set forth herein for the benefit of the
Securityholders. The Administrative Trustee shall have all rights, powers and
duties set forth herein. The Delaware Trustee shall not be entitled to exercise
any powers, nor shall the Delaware Trustee have any of the duties and
responsibilities of the Property Trustee or the Administrative Trustee set forth
herein. The Delaware Trustee shall be one of the Trustees of the Trust for the
sole and limited purpose of fulfilling the requirements of Section 3807 of the
Delaware Business Trust Act.

     Section 2.07. Authorization to Enter into Certain Transactions.

     (a) The Trustees shall conduct the affairs of the Trust in accordance with
the terms of this Trust Agreement. Subject to the limitations set forth in
paragraph (b) of this Section, and in accordance with the following provisions
(i) and (ii), the Trustees shall have the authority to enter into all
transactions and agreements determined by the Trustees to be appropriate in
exercising the authority, express or implied, otherwise granted to the Trustees
under this Trust Agreement, and to perform all acts in furtherance thereof,
including without limitation, the following:

          (i) As among the Trustees, the Administrative Trustee shall have the
     power and authority to act on behalf of the Trust with respect to the
     following matters:

               (A) executing and delivering the Trust


                                       10


          Securities on behalf of the Trust;

               (B) causing the Trust to enter into, and executing, delivering
          and performing on behalf of the Trust, the Certificate Depository
          Agreement and such other agreements as may be necessary or desirable
          in connection with the purposes and function of the Trust, including
          the appointment of a successor depositary;

               (C) assisting in registering the Preferred Securities under the
          Securities Act of 1933, as amended, and under state securities or blue
          sky laws, and qualifying this Trust Agreement as a trust indenture
          under the Trust Indenture Act;

               (D) assisting in the listing of the Preferred Securities upon
          such securities exchange or exchanges as the Depositor shall determine
          and the registration of the Preferred Securities under the Securities
          Exchange Act of 1934, as amended, and the preparation and filing of
          all periodic and other reports and other documents pursuant to the
          foregoing;

               (E) to the extent provided in this Trust Agreement, dissolving
          and liquidating the Trust and preparing, executing and filing the
          certificate of cancellation with the Secretary of State of the State
          of Delaware;

               (F) sending notices or assisting the Property Trustee in sending
          notices and other information regarding the Trust Securities and the
          Debentures to Securityholders in accordance with this Trust Agreement;
          and

               (G) taking any action incidental to the foregoing as the
          Administrative Trustee may from time to time determine is necessary or
          advisable to give effect to the terms of this Trust Agreement for the
          benefit of the Securityholders (without consideration of the effect of
          any such action on any particular Securityholder).

          (ii) As among the Trustees, the Property Trustee shall have the power,
     duty and authority to act on behalf of the Trust with respect to the
     following matters:

               (A) establishing and maintaining the Payment Account and
          appointing Paying Agents (subject to Section 5.09);

               (B) receiving payment of the purchase price of the Trust
          Securities;

               (C) receiving and holding the Debentures;

               (D) collecting interest and principal payments on the Debentures
          and depositing them in the Payment Account;

               (E) making Distributions and other payments to the
          Securityholders in respect of the Trust Securities;

               (F) exercising all of the rights, powers and


                                       11


          privileges of a holder of the Debentures;

               (G) sending notices of defaults, redemptions, Extension Periods,
          liquidations and other information regarding the Trust Securities and
          the Debentures to the Securityholders in accordance with this Trust
          Agreement;

               (H) to the extent provided in this Trust Agreement, dissolving
          and liquidating the Trust, including distributing the Trust Property
          in accordance with the terms of this Trust Agreement, and preparing,
          executing and filing the certificate of cancellation with the
          Secretary of State of the State of Delaware;

               (I) after an Event of Default, taking any action incidental to
          the foregoing as the Property Trustee may from time to time determine
          is necessary or advisable to give effect to the terms of this Trust
          Agreement and protect and conserve the Trust Property for the benefit
          of the Securityholders (without consideration of the effect of any
          such action on any particular Securityholder); and

               (J) registering transfers and exchanges of the Preferred
          Securities in accordance with this Trust Agreement (but only if at
          such time the Property Trustee shall be the Securities Registrar).

     (b)So long as this Trust Agreement remains in effect, the Trust (or the
Trustees acting on behalf of the Trust) shall not undertake any business,
activities or transaction except as expressly provided herein or contemplated
hereby. In particular, the Trustees acting on behalf of the Trust shall not (i)
acquire any assets or investments (other than the Debentures), reinvest the
proceeds derived from investments, possess any power or otherwise act in such a
way as to vary the Trust Property or engage in any activities not authorized by
this Trust Agreement, (ii) sell, assign, transfer, exchange, mortgage, pledge,
set-off or otherwise dispose of any of the Trust Property or interests therein,
including to Securityholders, except as expressly provided herein, (iii) take
any action that would cause the Trust to fail or cease to qualify as a grantor
trust for United States Federal income tax purposes, (iv) incur any indebtedness
for borrowed money or issue any other debt, (v) issue any securities or other
evidences of beneficial ownership of, or beneficial interests in, the Trust
other than the Trust Securities, or (vi) take or consent to any action that
would result in the placement of a Lien on any of the Trust Property. The
Administrative Trustee shall defend all claims and demands of all Persons at any
time claiming any Lien on any of the Trust Property adverse to the interest of
the Trust or the Securityholders in their capacity as Securityholders.

     (c) In connection with the issue and sale of the Preferred Securities, the
Depositor shall have the right and responsibility to assist the Trust with
respect to, or effect on behalf of the Trust, the following (and any actions
taken by the Depositor in furtherance of the following prior to the date of this
Trust Agreement are hereby ratified and confirmed in all respects):

          (i) preparing for filing with the


                                       12


     Commission and executing on behalf of the Trust a registration statement on
     Form S-3 in relation to the Preferred Securities, including any amendments
     thereto;

          (ii) determining the States in which to take appropriate action to
     qualify or register for sale all or part of the Preferred Securities and
     doing any and all such acts, other than actions which must be taken by or
     on behalf of the Trust, and advising the Trustees of actions they must take
     on behalf of the Trust, and preparing for execution and filing any
     documents to be executed and filed by the Trust or on behalf of the Trust,
     as the Depositor deems necessary or advisable in order to comply with the
     applicable laws of any such States;

          (iii) preparing for filing and executing on behalf of the Trust an
     application to the New York Stock Exchange or any other national stock
     exchange or The Nasdaq National Market for listing upon notice of issuance
     of any Preferred Securities;

          (iv) preparing for filing with the Commission and executing on behalf
     of the Trust a registration statement on Form 8-A relating to the
     registration of the Preferred Securities under Section 12(b) or 12(g) of
     the Securities Exchange Act of 1934, as amended, including any amendments
     thereto;

          (v) negotiating the terms of, and executing and delivering, the
     Underwriting Agreement providing for the sale of the Preferred Securities;
     and

          (vi) taking any other actions necessary or desirable to carry out any
     of the foregoing activities.

     (d) Notwithstanding anything herein to the contrary, the Administrative
Trustee is authorized and directed to conduct the affairs of the Trust and to
operate the Trust so that (i) the Trust will not be deemed to be an "investment
company" required to be registered under the 1940 Act, or taxed as a corporation
or a partnership for United States Federal income tax purposes (ii) the Trust
will qualify as a grantor trust for United States Federal income tax purposes
and (iii) the Debentures will be treated as indebtedness of the Depositor for
United States Federal income tax purposes. In this connection, the Depositor and
the Administrative Trustee are authorized to take any action, not inconsistent
with applicable law, the Certificate of Trust, as amended from time to time, or
this Trust Agreement, that each of the Depositor and the Administrative Trustee
determines in their discretion to be necessary or desirable for such purposes.

     Section 2.08. Assets of Trust. The assets of the Trust shall consist of the
Trust Property.

     Section 2.09. Title to Trust Property. Legal title to all Trust Property
shall be vested at all times in the Property Trustee (in its capacity as such)
and shall be held and administered by the Property Trustee for the benefit of
the Securityholders in accordance


                                       13


with this Trust Agreement.

                                   ARTICLE III

                                 Payment Account

                         Section 3.01. Payment Account.

     (a) On or prior to the Closing Date, the Property Trustee shall establish
the Payment Account. All monies and other property deposited or held from time
to time in the Payment Account shall be held by the Property Trustee for the
exclusive benefit of the Securityholders. The Property Trustee shall have
exclusive control of the Payment Account for the purpose of making deposits in
and withdrawals from the Payment Account in accordance with this Trust
Agreement; provided that any Paying Agent shall have the right of withdrawal
with respect to the Payment Account solely for the purpose of making the
payments contemplated under Article 4.

     (b) The Property Trustee shall deposit in the Payment Account, promptly
upon receipt, all payments of principal of or interest on the Debentures and any
amounts paid to the Property Trustee pursuant to the Guarantee. Amounts held in
the Payment Account shall not be invested pending distribution thereof.

                                   ARTICLE IV

                            Distributions; Redemption

                        Section 4.01.  Distributions.

     (a) Distributions on the Trust Securities shall be cumulative, and will
accumulate whether or not there are funds of the Trust available for the payment
of Distributions. Distributions shall accumulate from January 20, 1998 and,
except during an Extension Period for the Debentures pursuant to the Indenture,
shall be payable quarterly in arrears on March 31, June 30, September 30 and
December 31 of each year, commencing on March 31, 1998. If any date on which
Distributions are otherwise payable on the Trust Securities is not a Business
Day, then the payment of such Distributions shall be made on the next succeeding
day which is a Business Day (and without any interest or other payment in
respect of any such delay), except that, if such Business Day is in the next
succeeding calendar year, payment of such Distributions shall be made on the
immediately preceding Business Day, in each case with the same force and effect
as if made on such date (each date on which Distributions are payable in
accordance with this Section 4.01(a) is referred to as a "Distribution Date").

     Within two Business Days after receipt by the Property Trustee of notice of
an Extension Period pursuant to Section 4.01 of the Indenture, the Property
Trustee shall give notice thereof to the Securityholders by first class mail,
postage prepaid.

     (b) The Trust Securities represent undivided


                                       14


beneficial interests in the Trust Property, and, subject to Sections 4.03 and
4.06 hereof, all Distributions will be made pro rata on each of the Trust
Securities. Distributions on the Trust Securities shall be payable at a rate of
7.44% per annum of the Liquidation Amount of the Trust Securities. The amount of
Distributions payable for any full quarterly period shall be computed on the
basis of a 360-day year of twelve 30-day months. During an Extension Period for
the Debentures, the rate per annum at which Distributions on the Trust
Securities accumulate shall be increased by an amount such that the aggregate
amount of Distributions that accumulate on all Trust Securities during any such
Extension Period is equal to the aggregate amount of interest (including
interest payable on unpaid interest at the rate per annum set forth above,
compounded quarterly) that accrues during any such Extension Period on the
Debentures.

     (c) Distributions on the Trust Securities shall be made from the Payment
Account by the Property Trustee or any Paying Agent and shall be payable on each
Distribution Date only to the extent that the Trust has funds then available in
the Payment Account for the payment of such Distributions.

     (d) Distributions on the Trust Securities on each Distribution Date shall
be payable to the Holders thereof as they appear on the Securities Register for
the Trust Securities on the relevant record date, which shall be one Business
Day prior to such Distribution Date; provided, however, that in the event that
the Preferred Securities are not in book-entry-only form, the relevant record
date shall be the 15th day of the last month of each calendar quarter, whether
or not a Business Day.

     Section 4.02. Redemption.

     (a) Upon receipt by the Trust of a notice of redemption of Debentures, the
Trust will call for redemption a Like Amount of Trust Securities at the
Redemption Price on the Debenture Redemption Date and will call for redemption
all Outstanding Trust Securities on the stated maturity date of the Debentures.

     (b) Notice of redemption shall be given by the Property Trustee by
first-class mail, postage prepaid, mailed not less than 30 nor more than 60 days
prior to the Redemption Date to each Holder of Trust Securities to be redeemed,
at such Holder's address appearing in the Securities Register. All notices of
redemption shall state:

          (i) the Redemption Date;

          (ii) the Redemption Price;

          (iii) the CUSIP number;

          (iv) the place or places where Trust Securities Certificates are to be
     surrendered for payment of the Redemption Price;


                                       15


          (v) that on the Redemption Date the Redemption Price will become
     payable upon each such Trust Security to be redeemed and that Distributions
     thereon will cease to accumulate on and after such date; and

          (vi) if less than all of the Outstanding Trust Securities are to be
     redeemed, the identification and total Liquidation Amount of the particular
     Trust Securities to be redeemed.

     (c) The Trust Securities redeemed on each Redemption Date shall be redeemed
at the Redemption Price with the proceeds from the contemporaneous redemption or
payment at maturity of Debentures. Redemptions of the Trust Securities shall be
made and the Redemption Price shall be payable on each Redemption Date only to
the extent that the Trust has funds then available in the Payment Account for
the payment of such Redemption Price.

     (d) If the Trust, by action of the Property Trustee, gives a notice of
redemption in respect of any Preferred Securities, then, on the Redemption Date,
subject to Section 4.02(c), the Property Trustee will irrevocably deposit with
the Paying Agent funds sufficient to pay the Redemption Price for the Preferred
Securities being redeemed on such date and will give the Paying Agent
irrevocable instructions and authority to pay the Redemption Price to the
Holders of such Preferred Securities upon surrender of their Preferred
Securities Certificates. Notwithstanding the foregoing, Distributions payable on
or prior to the Redemption Date for any Trust Securities called for redemption
shall be payable to the Holders of such Trust Securities as they appear on the
Securities Register for the Trust Securities on the record dates for the related
Distribution Dates. If notice of redemption shall have been given and funds
irrevocably deposited as required, then upon the date of such deposit, all
rights of Securityholders holding Trust Securities so called for redemption will
cease, except the right of such Securityholders to receive the Redemption Price,
but without interest, and such Trust Securities will cease to be Outstanding. In
the event that any date on which any Redemption Price is payable is not a
Business Day, then payment of the Redemption Price payable on such date will be
made on the next succeeding day which is a Business Day (and without any
interest or other payment in respect of any such delay), except that, if such
Business Day is in the next succeeding calendar year, such payment will be made
on the immediately preceding Business Day, in each case, with the same force and
effect as if made on such date. In the event that payment of the Redemption
Price in respect of any Trust Securities called for redemption is improperly
withheld or refused, and not paid either by the Trust or by the Depositor
pursuant to the Guarantee, Distributions on such Trust Securities will continue
to accumulate, at the then applicable rate, from the Redemption Date originally
established by the Trust for such Trust Securities to the date such Redemption
Price is actually paid, in which case the actual payment date will be the date
fixed for redemption for purposes of calculating the Redemption Price.

     (e) If less than all the Outstanding Trust Securities are to be redeemed on
a Redemption Date, then the aggregate Liquidation


                                       16


Amount of Trust Securities to be redeemed shall be allocated 3% to the Common
Securities and 97% to the Preferred Securities. The particular Preferred
Securities to be redeemed shall be selected by the Property Trustee from the
Outstanding Preferred Securities not previously called for redemption, by such
method as the Property Trustee shall deem fair and appropriate. The Property
Trustee shall promptly notify the Securities Registrar in writing of the
Preferred Securities selected for redemption. If fewer than all of the Trust
Securities represented by a Trust Securities Certificate are redeemed, the
Administrative Trustee shall execute for the Holder a new Trust Securities
Certificate representing the unredeemed Trust Securities. For all purposes of
this Trust Agreement, unless the context otherwise requires, all provisions
relating to the redemption of Preferred Securities shall relate, in the case of
any Preferred Securities redeemed or to be redeemed only in part, to the portion
of the Liquidation Amount of Preferred Securities which has been or is to be
redeemed.

     Section 4.03. Subordination of Common Securities.

     (a) Payment of Distributions on, and the Redemption Price of, the Trust
Securities, as applicable, shall be made pro rata based on the Liquidation
Amount of the Trust Securities; provided, however, that if on any Distribution
Date or Redemption Date, a Debenture Event of Default shall have occurred and be
continuing, no payment of any Distribution on, or Redemption Price of, any
Common Security, and no other payment on account of the liquidation of Common
Securities, shall be made unless payment in full in cash of all accumulated and
unpaid Distributions on all Outstanding Preferred Securities for all
distribution periods terminating on or prior thereto, or in the case of payment
of the Redemption Price, the full amount of such Redemption Price on all
Outstanding Preferred Securities then being redeemed, shall have been made or
provided for, and all funds immediately available to the Property Trustee shall
first be applied to the payment in full in cash of all Distributions on, or the
Redemption Price of, Preferred Securities then due and payable.

     (b) In the case of the occurrence of any Debenture Event of Default, the
Holder of Common Securities will be deemed to have waived any right to act with
respect to any related Event of Default under this Trust Agreement and such
Debenture Event of Default until the effect of such related Event of Default and
such Debenture Event of Default has been cured, waived or otherwise eliminated.
Until any such Event of Default under this Trust Agreement and such Debenture
Event of Default has been so cured, waived or otherwise eliminated, the Property
Trustee shall act solely on behalf of the Holders of the Preferred Securities
and not the Holder of the Common Securities, and only the Holders of the
Preferred Securities will have the right to direct the Property Trustee to act
on their behalf.

     Section 4.04. Payment Procedures. Payments of Distributions pursuant to
Section 4.01 in respect of the Preferred Securities shall be made by check
mailed to the address of the Holder thereof as such address shall appear on the
Securities Register or, if the Preferred Securities are held by a Clearing
Agency, such Distributions shall


                                       17


be made to the Clearing Agency by wire transfer in immediately available funds.
Payments of Distributions pursuant to Section 4.01 in respect of the Common
Securities shall be made in such manner as shall be mutually agreed between the
Property Trustee and the Holder of the Common Securities. Payment of the
Redemption Price or Liquidation Distribution of the Trust Securities shall be
made in immediately available funds upon surrender of the Trust Securities
Certificate representing such Trust Securities at the Corporate Trust Office of
the Property Trustee.

     Section 4.05. Tax Returns and Reports. The Administrative Trustee shall
prepare (or cause to be prepared), at the Depositor's expense, and file all
Federal, State and local tax and information returns and reports required to be
filed by or in respect of the Trust. In this regard, the Administrative Trustee
shall (a) prepare and file (or cause to be prepared or filed) the appropriate
Internal Revenue Service Form required to be filed in respect of the Trust in
each taxable year of the Trust and (b) prepare and furnish (or cause to be
prepared and furnished) to each Securityholder the related Internal Revenue
Service Form 1099 OID, or any successor form or the information required to be
provided on such form. The Administrative Trustee shall provide the Depositor
and the Property Trustee with a copy of all such returns, reports and schedules
promptly after such filing or furnishing. The Trustees shall comply with United
States Federal withholding and backup withholding tax laws and information
reporting requirements with respect to any payments to Securityholders under the
Trust Securities.

     Section 4.06. Payments under Indenture. Any amount payable hereunder to any
Holder of Preferred Securities shall be reduced by the amount of any
corresponding payment such Holder has directly received pursuant to Section 6.07
of the Indenture or pursuant to the Guarantee. Notwithstanding the provisions
hereunder to the contrary, Securityholders acknowledge that any Holder of
Preferred Securities that receives payment under Section 6.07 of the Indenture
may receive amounts greater than the amount such Holder may be entitled to
receive pursuant to the other provisions of this Trust Agreement.

                                    ARTICLE V

                          Trust Securities Certificates

     Section 5.01. Initial Ownership. Upon the creation of the Trust and the
contribution by the Depositor pursuant to Section 2.03 and until the issuance of
the Trust Securities, and at any time during which no Trust Securities are
Outstanding, the Depositor shall be the sole beneficial owner of the Trust.

     Section 5.02. The Trust Securities Certificates. The Trust Securities
Certificates shall be issued representing one or more Trust Securities. Trust
Securities Certificates representing fractional interests shall not be issued.
The Trust Securities Certificates shall be executed on behalf of the Trust by
manual signature of the Administrative Trustee or by a facsimile signature of
the Administrative Trustee countersigned by the Securities Registrar.


                                       18


Trust Securities Certificates bearing the manual signatures of individuals who
were, at the time when such signatures shall have been affixed, authorized to
sign on behalf of the Trust, shall be validly issued and entitled to the
benefits of this Trust Agreement, notwithstanding that such individuals or any
of them shall have ceased to be so authorized prior to the delivery of such
Trust Securities Certificates or did not hold such offices at the date of
delivery of such Trust Securities Certificates. A transferee of a Trust
Securities Certificate shall become a Securityholder, and shall be entitled to
the rights and subject to the obligations of a Securityholder hereunder, upon
due registration of such Trust Securities Certificate in such transferee's name
pursuant to Section 5.04.

     Section 5.03. Delivery of Trust Securities Certificates. On the Closing
Date, the Administrative Trustee shall cause Trust Securities Certificates, in
an aggregate Liquidation Amount as provided in Sections 2.04 and 2.05, to be
executed on behalf of the Trust as provided in Section 5.02 and delivered to or
upon a written order of the Depositor signed by its Chairman of the Board, its
President, any Vice President or the Treasurer, without further corporate action
by the Depositor, in authorized denominations. The written order of the
Depositor shall be accompanied by an Officer's Certificate and an Opinion of
Counsel.

     Section 5.04. Registration of Transfer and Exchange of Preferred Securities
Certificates. A registrar appointed by the Depositor (the "Securities
Registrar") shall keep or cause to be kept, at the office or agency maintained
pursuant to Section 5.08, a register (the "Securities Register") in which,
subject to such reasonable regulations as it may prescribe, the Securities
Registrar shall provide for the registration of Trust Securities Certificates
(subject to Section 5.10 in the case of the Common Securities Certificates) and
registration of transfers and exchanges of Preferred Securities Certificates as
herein provided. The Property Trustee shall be the initial Securities Registrar;
any successor Securities Registrar shall be appointed by the Administrative
Trustee.

     Upon surrender for registration of transfer of any Preferred Securities
Certificate at the office or agency maintained pursuant to Section 5.08, the
Administrative Trustee shall execute and deliver, in the name of the designated
transferee or transferees, one or more new Preferred Securities Certificates
representing the same number of Preferred Securities dated the date of execution
by the Administrative Trustee. At the option of a Holder, Preferred Securities
Certificates may be exchanged for other Preferred Securities Certificates upon
surrender of the Preferred Securities Certificates to be exchanged at the office
or agency maintained pursuant to Section 5.08. The Securities Registrar shall
not be required to register the transfer of any Preferred Securities that have
been called for redemption or after the Liquidation Date.

     Preferred Securities presented or surrendered for registration of transfer
or exchange shall be accompanied by a written instrument of transfer in form
satisfactory to the Administrative Trustee and the Securities Registrar duly
executed by the Holder or


                                       19


such Holder's attorney duly authorized in writing. Each Preferred Securities
Certificate surrendered for registration of transfer or exchange shall be
cancelled and subsequently disposed of by the Securities Registrar in accordance
with its customary practice.

     No service charge shall be made for any registration of transfer or
exchange of Preferred Securities, but the Securities Registrar may require
payment of a sum sufficient to cover any tax or governmental charge that may be
imposed in connection with any transfer or exchange of Preferred Securities.

     Section 5.05. Mutilated, Destroyed, Lost or Stolen Trust Securities
Certificates. If (a) any mutilated Trust Securities Certificate shall be
surrendered to the Securities Registrar, or if the Securities Registrar shall
receive evidence to its satisfaction of the destruction, loss or theft of any
Trust Securities Certificate, and (b) there shall be delivered to the Securities
Registrar and the Administrative Trustee such security or indemnity as may be
required by them to hold the Securities Registrar and the Trust harmless, then
in the absence of notice that such Trust Securities Certificate shall have been
acquired by a bona fide purchaser, the Administrative Trustee, on behalf of the
Trust shall execute and make available for delivery, in exchange for or in lieu
of any such mutilated, destroyed, lost or stolen Trust Securities Certificate, a
new Trust Securities Certificate of like tenor. In connection with the issuance
of any new Trust Securities Certificate under this Section, the Administrative
Trustee or the Securities Registrar may require the payment of a sum sufficient
to cover any tax or other governmental charge that may be imposed in connection
therewith. Any duplicate Trust Securities Certificate issued pursuant to this
Section shall constitute conclusive evidence of an undivided beneficial interest
in the assets of the Trust, as if originally issued, whether or not the lost,
stolen or destroyed Trust Securities Certificate shall be found at any time.

     Section 5.06. Persons Deemed Securityholders. Prior to due presentation of
a Trust Security Certificate for registration of transfer, the Administrative
Trustee, the Paying Agent or the Securities Registrar shall treat the Person in
whose name any Trust Securities Certificate shall be registered in the
Securities Register as the owner and Holder of such Trust Securities Certificate
for the purpose of receiving Distributions and for all other purposes
whatsoever, and neither the Trustees, the Paying Agent nor the Securities
Registrar shall be bound by any notice to the contrary.

     Section 5.07. Access to List of Securityholders' Names and Addresses. In
the event that the Property Trustee is no longer the Securities Registrar, the
Administrative Trustee or the Depositor shall furnish or cause to be furnished a
list, in such form as the Property Trustee may reasonably require, of the names
and addresses of the Securityholders as of the most recent record date and (a)
to the Property Trustee, quarterly not later than 10 days prior to a
Distribution Date and (b) to the Property Trustee, promptly after receipt by the
Administrative Trustee or the Depositor of a request therefor from the Property
Trustee in order to enable the Paying Agent to pay Distributions in accordance
with Section 4.01 hereof in each case to


                                       20


the extent such information is in the possession or control of the
Administrative Trustee or the Depositor and is not identical to a previously
supplied list or has not otherwise been received by the Property Trustee. The
rights of Securityholders to communicate with other Securityholders with respect
to their rights under this Trust Agreement or under the Trust Securities, and
the corresponding rights of the Property Trustee shall be as provided in the
Trust Indenture Act. Each Holder, by receiving and holding a Trust Securities
Certificate, shall be deemed to have agreed not to hold the Depositor, the
Property Trustee, the Administrative Trustee or the Delaware Trustee accountable
by reason of the disclosure of its name and address, regardless of the source
from which such information was derived.

     Section 5.08. Maintenance of Office or Agency. The Property Trustee shall
maintain in Newark, New Jersey, an office or offices or agency or agencies where
Preferred Securities may be surrendered for registration of transfer or exchange
and where notices and demands to or upon the Trustees in respect of the Trust
Securities Certificates may be served. The Property Trustee shall give prompt
written notice to the Depositor and to the Securityholders of any change in the
location of the Securities Register or any such office or agency, which shall
initially be at the Corporate Trust Office of the Property Trustee.

     Section 5.09. Appointment of Paying Agent. The Paying Agent shall make
Distributions to Securityholders from the Payment Account and shall report the
amounts of such Distributions to the Property Trustee and the Administrative
Trustee. Any Paying Agent shall have the revocable power to withdraw funds from
the Payment Account for the purpose of making Distributions. The Administrative
Trustee may revoke such power and remove the Paying Agent, provided that such
revocation and removal with respect to the sole Paying Agent shall not become
effective until the appointment of a successor. The Paying Agent shall initially
be the Property Trustee, and any co-paying agent chosen by the Property Trustee
and acceptable to the Administrative Trustee and the Depositor. Any Person
acting as Paying Agent shall be permitted to resign as Paying Agent upon 30
days' written notice to the Administrative Trustee and the Depositor, and, if
applicable, the Property Trustee, provided that such resignation with respect to
the sole Paying Agent shall not become effective until the appointment of a
successor. In the event that the Property Trustee shall no longer be the Paying
Agent or a successor Paying Agent shall resign or its authority to act be
revoked, the Administrative Trustee shall appoint a successor that is acceptable
to the Property Trustee (in the case of any other Paying Agent) and the
Depositor to act as Paying Agent (which shall be a bank or trust company and
have a combined capital and surplus of at least $50,000,000). The Administrative
Trustee shall cause such successor Paying Agent or any additional Paying Agent
appointed by the Administrative Trustee to execute and deliver to the Trustees
an instrument in which such successor Paying Agent or additional Paying Agent
shall agree with the Trustees that as Paying Agent, such successor Paying Agent
or additional Paying Agent will hold all sums, if any, held by it for payment to
the Securityholders in trust for the benefit of the Securityholders entitled
thereto until such sums shall be paid to such Securityholders. The Paying Agent


                                       21


shall return all of such sums remaining unclaimed to the Property Trustee and
upon removal of a Paying Agent such Paying Agent shall also return such sums in
its possession to the Property Trustee. The provisions of Sections 7.01, 7.03
and 7.06 shall apply to the Property Trustee also in its role as Paying Agent,
for so long as the Property Trustee shall act as Paying Agent and, to the extent
applicable, to any other Paying Agent appointed hereunder. Any reference in this
Trust Agreement to the Paying Agent shall include any co-paying agent unless the
context requires otherwise.

     Section 5.10. No Transfer of Common Securities by Depositor. To the fullest
extent permitted by law and except as contemplated by Section 5.01 of the
Indenture, any attempted transfer of the Common Securities shall be void. The
Administrative Trustee shall cause each Common Securities Certificate issued to
the Depositor to contain a legend stating "THIS CERTIFICATE IS NOT TRANSFERABLE
EXCEPT AS PROVIDED IN THE TRUST AGREEMENT". By execution of this Trust
Agreement, the Depositor agrees to the foregoing provisions.

     Section 5.11. Book-Entry Preferred Securities Certificates; Common
Securities Certificate.

          (a) The Preferred Securities, upon original issuance on the Closing
     Date, will not be engraved but will be issued in the form of one or more
     printed or typewritten Book-Entry Preferred Securities Certificates, to be
     delivered to The Depository Trust Company, the initial Clearing Agency, by,
     or on behalf of, the Trust. Such Book-Entry Preferred Securities
     Certificate or Certificates shall initially be registered on the Securities
     Register in the name of Cede & Co., the nominee of the initial Clearing
     Agency.

          (b) A single Common Securities Certificate representing the Common
     Securities shall be issued to the Depositor in the form of a definitive
     Common Securities Certificate.

     Section 5.12. Definitive Preferred Securities Certificates. If (a) the
Depositor advises the Trustees in writing that the Clearing Agency is no longer
willing or able to properly discharge its responsibilities with respect to the
Preferred Securities Certificates or the Clearing Agency is no longer registered
or in good standing under the Securities Exchange Act of 1934, as amended, or
other applicable statute or regulation, and the Depositor is unable to locate a
qualified successor within 90 days, (b) the Depositor at its option advises the
Trustees in writing that it elects to terminate the book-entry system through
the Clearing Agency or (c) an Event of Default occurs and is continuing, then
the Administrative Trustee shall issue Definitive Preferred Securities
Certificates. Upon surrender to the Administrative Trustee of the Book-Entry
Preferred Securities Certificates by the Clearing Agency, accompanied by
registration instructions, the Administrative Trustee shall execute and deliver
the Definitive Preferred Securities Certificates in accordance with the
instructions of the Clearing Agency. Neither the Securities Registrar nor the
Trustees shall be liable for any delay in delivery of such instructions and may
conclusively rely on, and shall be protected in relying on, such instructions.
The Definitive Preferred


                                       22


Securities Certificates shall be printed, lithographed or engraved or may be
produced in any other manner as is reasonably acceptable to the Administrative
Trustee, as evidenced by the execution thereof by the Administrative Trustee.

     Section 5.13. Rights of Securityholders. The Securityholders shall not have
any right or title to the Trust Property other than the undivided beneficial
interest in the assets of the Trust conferred by their Trust Securities and they
shall have no right to call for any partition or division of property, profits
or rights of the Trust except as described below. The Trust Securities shall be
personal property giving only the rights specifically set forth therein and in
this Trust Agreement. The Trust Securities shall have no preemptive or similar
rights and when issued and delivered to Securityholders against payment of the
purchase price therefor will be fully paid and nonassessable by the Trust. The
Holders of the Trust Securities, in their capacities as such, shall be entitled
to the same limitation of personal liability extended to stockholders of private
corporations for profit organized under the General Corporation Law of the State
of Delaware.

                                   ARTICLE VI

                    Acts of Securityholders; Meetings; Voting

                   Section 6.01. Limitations on Voting Rights.

     (a) Except as provided herein and in the Indenture and as otherwise
required by law, no Holder of Trust Securities shall have any right to vote or
in any manner otherwise control the administration, operation and management of
the Trust or the obligations of the parties hereto, nor shall anything herein
set forth, or contained in the terms of the Trust Securities Certificates, be
construed so as to constitute the Securityholders from time to time as partners
or members of an association.

     (b) The Trustees shall not (i) direct the time, method and place of
conducting any proceeding for any remedy available to the Debenture Trustee or
executing any trust or power conferred on the Debenture Trustee with respect to
such Debentures, (ii) waive any past default which may be waived under Section
6.04 of the Indenture, (iii) exercise any right to rescind or annul an
acceleration of the principal of all the Debentures or (iv) consent to any
amendment or modification of the Indenture, where such consent shall be
required, without, in each case, obtaining the prior consent of the Holders of
at least a majority in aggregate Liquidation Amount of all Outstanding Preferred
Securities; provided, however, that where such consent under the Indenture would
require the consent of each holder of Debentures affected thereby, no such
consent shall be given by the Property Trustee without the prior written consent
of each Holder of Outstanding Preferred Securities. The Trustees shall not
revoke any action previously authorized or approved by a vote of the Holders of
Preferred Securities, except by a subsequent vote of the Holders of Preferred
Securities. The Property Trustee shall notify all Holders of the


                                       23


Preferred Securities of any notice received from the Debenture Trustee as a
result of the Trust being the holder of the Debentures. In addition to obtaining
the consent of the Holders of the Preferred Securities, prior to taking any of
the foregoing actions, the Trustees shall, at the expense of the Depositor,
obtain an Opinion of Counsel experienced in such matters to the effect that the
Trust will not be classified as an association taxable as a corporation or
partnership for United States Federal income tax purposes on account of such
action and will continue to be classified as a grantor trust for United States
Federal income tax purposes.

     (c) Subject to Section 10.02(c) hereof, if any proposed amendment to the
Trust Agreement provides for, or the Trustees otherwise propose to effect, (i)
any action that would adversely affect in any material respect the powers,
preferences or special rights of the Preferred Securities, whether by way of
amendment to this Trust Agreement or otherwise, or (ii) the dissolution or
liquidation of the Trust, other than pursuant to the terms of this Trust
Agreement, then the Holders of Outstanding Preferred Securities will be entitled
to vote on such amendment or proposal and such amendment or proposal shall not
be effective except with the approval of the Holders of at least a majority in
aggregate Liquidation Amount of the Outstanding Preferred Securities.

     Section 6.02. Notice of Meetings. Notice of all meetings of the Preferred
Securityholders, stating the time, place and purpose of the meeting, shall be
given by the Property Trustee pursuant to Section 10.08 to each Preferred
Securityholder of record, at his/her registered address, at least 15 days and
not more than 90 days before the meeting. At any such meeting, any business
properly before the meeting may be so considered whether or not stated in the
notice of the meeting. Any adjourned meeting may be held as adjourned without
further notice.

     Section 6.03. Meetings of Preferred Securityholders. No annual meeting of
Securityholders is required to be held. The Administrative Trustee, however,
shall call a meeting of Securityholders to vote on any matter upon the written
request of the Holders of at least 25% of the aggregate Liquidation Amount of
the Outstanding Preferred Securities and the Administrative Trustee or the
Property Trustee may, at any time in their discretion, call a meeting of
Preferred Securityholders to vote on any matters as to which the Preferred
Securityholders are entitled to vote.

     Holders of at least 50% of the aggregate Liquidation Amount of the
Outstanding Preferred Securities, present in person or by proxy, shall
constitute a quorum at any meeting of Preferred Securityholders.

     If a quorum is present at a meeting, an affirmative vote of the Holders of
at least a majority of the aggregate Liquidation Amount of the Outstanding
Preferred Securities present, either in person or by proxy, at such meeting
shall constitute the action of the Preferred Securityholders, unless this Trust
Agreement requires a greater number of affirmative votes.


                                       24


     Section 6.04. Voting Rights. A Securityholder shall be entitled to one vote
for each Trust Security in respect of any matter as to which such Securityholder
is entitled to vote.

     Section 6.05. Proxies, etc. At any meeting of Securityholders, any
Securityholder entitled to vote thereat may vote by proxy, provided that no
proxy shall be voted at any meeting unless it shall have been placed on file
with the Administrative Trustee, or with such other officer or agent of the
Trust as the Administrative Trustee may direct, for verification prior to the
time at which such vote shall be taken. Pursuant to a resolution of the Property
Trustee, proxies may be solicited in the name of the Property Trustee or one or
more officers of the Property Trustee. Only Securityholders of record shall be
entitled to vote. When Trust Securities are held jointly by several Persons, any
one of them may vote at any meeting in person or by proxy in respect of such
Trust Securities, but if more than one of them shall be present at such meeting
in person or by proxy, and such joint owners or their proxies so present
disagree as to any vote to be cast, such vote shall not be received in respect
of such Trust Securities. A proxy purporting to be executed by or on behalf of a
Securityholder shall be deemed valid unless challenged at or prior to its
exercise, and the burden of proving invalidity shall rest on the challenger. No
proxy shall be valid more than three years after its date of execution.

     Section 6.06. Securityholder Action by Written Consent. Any action which
may be taken by Securityholders at a meeting may be taken without a meeting if
Holders of the proportion of the Outstanding Securities required to approve such
action shall consent to the action in writing.

     Section 6.07. Record Date for Voting and Other Purposes. For the purposes
of determining the Securityholders who are entitled to notice of and to vote at
any meeting or by written consent, or for the purpose of any other action, the
Administrative Trustee may from time to time fix a date, not more than 90 days
prior to the date of any meeting of Securityholders, as a record date for the
determination of the identity of the Securityholders for such purposes.

     Section 6.08. Acts of Securityholders. Any request, demand, authorization,
direction, notice, consent, waiver or other action provided or permitted by this
Trust Agreement to be given, made or taken by Securityholders may be embodied in
and evidenced by one or more instruments of substantially similar tenor signed
by such Securityholders in person or by an agent duly appointed in writing; and,
except as otherwise expressly provided herein, such action shall become
effective when such instrument or instruments are delivered to the
Administrative Trustee. Such instrument or instruments (and the action embodied
therein and evidenced thereby) are herein sometimes referred to as the "Act" of
the Securityholders signing such instrument or instruments. Proof of execution
of any such instrument or of a writing appointing any such agent shall be
sufficient for any purpose of this Trust Agreement and (subject to Section 7.02)
conclusive, if made in the manner provided in this Section.


                                       25


     The fact and date of the execution by any Person of any such instrument or
writing may be proved by the affidavit of a witness of such execution or by a
certificate of a notary public or other officer authorized by law to take
acknowledgments of deeds, certifying that the individual signing such instrument
or writing acknowledged to him/her the execution thereof. Where such execution
is by a signer acting in a capacity other than his/her individual capacity, such
certificate or affidavit shall also constitute sufficient proof of his/her
authority. The fact and date of the execution of any such instrument or writing,
or the authority of the Person executing the same, may also be proved in any
other manner which any Trustee receiving the same deems sufficient.

     The ownership of Trust Securities shall be proved by the Securities
Register.

     Any request, demand, authorization, direction, notice, consent, waiver or
other act of the Securityholder of any Trust Security shall bind every future
Securityholder of the same Trust Security and the Securityholder of every Trust
Security issued upon the registration of transfer thereof or in exchange
therefor or in lieu thereof in respect of anything done, omitted or suffered to
be done by the Trustees or the Trust in reliance thereon, whether or not
notation of such action is made upon such Trust Security.

     Without limiting the foregoing, a Securityholder entitled hereunder to take
any action hereunder with regard to any particular Trust Security may do so with
regard to all or any part of the Liquidation Amount of such Trust Security or by
one or more duly appointed agents, each of which may do so pursuant to such
appointment with regard to all or any part of such Liquidation Amount.

     If any dispute shall arise between the Securityholders and the
Administrative Trustee or among such Securityholders or Trustees with respect to
the authenticity, validity or binding nature of any request, demand,
authorization, direction, consent, waiver or other Act of such Securityholder or
Trustee under this Article VI, then the determination of such matter by the
Property Trustee shall be conclusive with respect to such matter.

     Section 6.09. Inspection of Records. Upon reasonable notice to the
Administrative Trustee and the Property Trustee, the records -of the Trust shall
be open to inspection by Securityholders during normal business hours for any
purpose reasonably related to such Securityholder's interest as a
Securityholder.

                                   ARTICLE VII

                                  The Trustees

               Section 7.01. Certain Duties and Responsibilities.

     (a) The duties and responsibilities of the Trustees shall be as provided by
this Trust Agreement and, in the case of the


                                       26


Property Trustee, also by the Trust Indenture Act. The Property Trustee, other
than during the occurrence and continuance of an Event of Default, undertakes to
perform only such duties as are specifically set forth in this Trust Agreement
and, upon an Event of Default, must exercise the same degree of care and skill
as a prudent person would exercise or use in the conduct of his/her own affairs.
The Trustees shall have all the privileges, rights and immunities provided by
the Delaware Business Trust Act. Notwithstanding the foregoing, no provision of
this Trust Agreement shall require the Trustees to expend or risk their own
funds or otherwise incur any financial liability in the performance of any of
their duties hereunder, or in the exercise of any of their rights or powers, if
they shall have reasonable grounds for believing that repayment of such funds or
adequate indemnity against such risk or liability is not reasonably assured to
it. Whether or not therein expressly so provided, every provision of this Trust
Agreement relating to the conduct or affecting the liability of or affording
protection to the Trustees shall be subject to the provisions of this Section.
Nothing in this Trust Agreement shall be construed to release the Property
Trustee from liability for its own negligent action, its own negligent failure
to act, or its own willful misconduct. To the extent that, at law or in equity,
the Administrative Trustee has duties (including fiduciary duties) and
liabilities relating thereto to the Trust or to the Securityholders, the
Administrative Trustee shall not be liable to the Trust or to any Securityholder
for the Administrative Trustee's good faith reliance on the provisions of this
Trust Agreement. The provisions of this Trust Agreement, to the extent that they
restrict the duties and liabilities of the Administrative Trustee otherwise
existing at law or in equity, are agreed by the Depositor and the
Securityholders to replace such other duties and liabilities of the
Administrative Trustee.

     (b) All payments made by the Property Trustee or any other Paying Agent in
respect of the Trust Securities shall be made only from the income and proceeds
from the Trust Property. Each Securityholder, by its acceptance of a Trust
Security, agrees that (i) it will look solely to the income and proceeds from
the Trust Property to the extent available for distribution to it as herein
provided and (ii) the Trustees are not personally liable to it for any amount
distributable in respect of any Trust Security or for any other liability in
respect of any Trust Security. This Section 7.01(b) does not limit the liability
of the Trustees expressly set forth elsewhere in this Trust Agreement or, in the
case of the Property Trustee, in the Trust Indenture Act.

     Section 7.02. Notice of Defaults; Direct Action by Securityholders. Within
90 days after the occurrence of any Event of Default actually known to the
Property Trustee, the Property Trustee shall transmit, in the manner and to the
extent provided in Section 10.08, notice of such Event of Default to the
Securityholders, the Administrative Trustee and the Depositor, unless such Event
of Default shall have been cured or waived. If the Property Trustee has failed
to enforce its rights under this Trust Agreement or the Indenture to the fullest
extent permitted by law and subject to the terms of this Trust Agreement and the
Indenture, any Securityholder may institute a legal proceeding directly against
any Person to enforce the Property


                                       27


Trustee's rights under this Trust Agreement or the Indenture with respect to
Debentures having a principal amount equal to the aggregate Liquidation Amount
of the Preferred Securities of such Securityholder without first instituting a
legal proceeding against the Property Trustee or any other Person. To the extent
that any action under the Indenture is entitled to be taken by the holders of at
least a specified percentage of the principal amount of the outstanding
Debentures, Holders of at least the same percentage of the Liquidation Amount of
the Outstanding Preferred Securities may also take such action in the name of
the Trust if such action has not been taken by the Property Trustee.
Notwithstanding the foregoing, if a Debenture Event of Default relating to the
Depositor's failure to pay the principal of or interest on the Debentures has
occurred and is continuing thereby resulting in an Event of Default hereunder,
then each Holder of Preferred Securities may institute a legal proceeding
directly against the Depositor for enforcement of payment to such Holder, as
provided in Section 6.07 of the Indenture.

     Section 7.03. Certain Rights of Property Trustee. Subject to the provisions
of Section 7.01:

     (a) the Property Trustee may rely and shall be protected in acting or
refraining from acting in good faith upon any resolution, Opinion of Counsel,
certificate, written representation of a Holder or transferee, certificate of
auditors or any other certificate, statement, instrument, opinion, report,
notice, request, consent, order, appraisal, bond, debenture, note, other
evidence of indebtedness or other paper or document believed by it to be genuine
and to have been signed or presented by the proper party or parties;

     (b) if, other than during the occurrence and continuance of an Event of
Default, (i) in performing its duties under this Trust Agreement, the Property
Trustee is required to decide between alternative courses of action or (ii) in
construing any of the provisions in this Trust Agreement, the Property Trustee
finds the same ambiguous or inconsistent with any other provisions contained
herein or (iii) the Property Trustee is unsure of the application of any
provision of this Trust Agreement, then, except as to any matter as to which the
Preferred Securityholders are entitled to vote under the terms of this Trust
Agreement, the Property Trustee shall deliver a notice to the Depositor
requesting written instructions of the Depositor as to the course of action to
be taken. The Property Trustee shall take such action, or refrain from taking
such action, as the Property Trustee shall be instructed in writing to take, or
to refrain from taking, by the Depositor; provided, however, that if the
Property Trustee does not receive such instructions of the Depositor within ten
Business Days after it has delivered such notice, or such reasonably shorter
period of time set forth in such notice (which to the extent practicable shall
not be less than two Business Days), it may, but shall be under no duty to, take
or refrain from taking such action not inconsistent with this Trust Agreement as
it shall deem advisable and in the best interests of the Securityholders, in
which event the Property Trustee shall have no liability except for its own
negligent action, its own negligent failure to act or its own willful
misconduct;


                                       28


     (c) the Property Trustee may consult with counsel or other experts of its
selection and the advice or opinion of such counsel or other experts with
respect to legal matters or advice within the scope of such experts' area of
expertise shall be full and complete authorization and protection in respect of
any action taken, suffered or omitted by it hereunder in good faith and in
reliance thereon;

     (d) the Property Trustee shall be under no obligation to exercise any of
the rights or powers vested in it by this Trust Agreement at the request or
direction of any of the Securityholders pursuant to this Trust Agreement, unless
such Securityholders shall have offered to the Property Trustee reasonable
security or indemnity against the costs, expenses and liabilities which might be
incurred by it in compliance with such request or direction;

     (e) the Property Trustee shall not be bound to make any investigation into
the facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order,
approval, bond, debenture, note or other evidence of indebtedness or other paper
or document, but the Property Trustee, in its discretion, may make such further
inquiry or investigation into such facts or matters as it may see fit; and

     (f) the Property Trustee may execute any of the trusts or powers hereunder
or perform any duties hereunder either directly or by or through its agents or
attorneys and the Property Trustee shall not be responsible for any misconduct
or negligence on the part of any agent or attorney appointed with due care by it
hereunder.

     Section 7.04. Not Responsible for Recitals or Issuance of Securities. The
recitals contained herein and in the Trust Securities Certificates shall be
taken as the statements of the Trust, and the Trustees do not assume any
responsibility for their correctness. The Trustees shall not be accountable for
the use or application by the Depositor of the proceeds of the Debentures.

     Section 7.05. May Hold Securities. Any Trustee or any other agent of any
Trustee or the Trust, in its individual or any other capacity, may become the
owner or pledgee of Trust Securities and, subject to Sections 7.08 and 7.13 and,
except as provided in the definition of the term Outstanding in Article I, may
otherwise deal with the Trust with the same rights it would have if it were not
a Trustee or such other agent.

     Section 7.06. Compensation; Indemnity; Fees. The Depositor agrees:

               (a) to pay to the Trustees from time to time such compensation as
          shall have been agreed in writing with the Depositor for all services
          rendered by them hereunder (which compensation shall not be limited by
          any provision of law in regard to the compensation of a trustee of an
          express trust);

               (b) except as otherwise expressly provided herein, to reimburse
          the Trustees upon request for all reasonable expenses,


                                       29


          disbursements and advances incurred or made by the Trustees in
          accordance with any provision of this Trust Agreement (including the
          reasonable compensation and the expenses and disbursements of its
          agents and counsel), except any such expense, disbursement or advance
          as may be attributable to its own negligent action, its own negligent
          failure to act or its own wilful misconduct (or, in the case of the
          Administrative Trustee, any such expense, disbursement or advance as
          may be attributable to his/her gross negligence); and

               (c) to indemnify each of the Trustees or any predecessor Trustee
          for, and to hold the Trustees harmless against, any and all loss,
          damage, claims, liability, penalty or expense including taxes (other
          than taxes based on the income of such Trustee) incurred without its
          own negligent action, its own negligent failure to act or its wilful
          misconduct (or, in the case of the Administrative Trustees, incurred
          without gross negligence or bad faith), arising out of or in
          connection with the acceptance or administration of this Trust
          Agreement, including the costs and expenses of defending itself
          against any claim or liability in connection with the exercise or
          performance of any of its powers or duties hereunder.

     No Trustee may claim any Lien or charge on any Trust Property as a result
of any amount due pursuant to this Section 7.06.

     The provisions of this Section 7.06 shall survive the termination of this
Trust Agreement.

     Section 7.07. Corporate Property Trustee Required; Eligibility of Trustees.

               (a) There shall at all times be a Property Trustee hereunder. The
          Property Trustee shall be a Person that is eligible pursuant to the
          Trust Indenture Act to act as such and has a combined capital and
          surplus of at least $50,000,000. If any such Person publishes reports
          of condition at least annually, pursuant to law or to the requirements
          of its supervising or examining authority, then for the purposes of
          this Section, the combined capital and surplus of such Person shall be
          deemed to be its combined capital and surplus as set forth in its most
          recent report of condition so published. If at any time the Property
          Trustee with respect to the Trust Securities shall cease to be
          eligible in accordance with the provisions of this Section, it shall
          resign immediately in the manner and with the effect hereinafter
          specified in this Article.

               (b) There shall at all times be one or more Administrative
          Trustees hereunder. Each Administrative Trustee shall be either a
          natural person who is at least 21 years of age or a legal entity that
          shall act through one or more persons authorized to bind that entity.

               (c) There shall at all times be a Delaware Trustee. The Delaware
          Trustee shall either be (i) a natural person who is at least 21 years
          of age and a resident of the State of Delaware or (ii) a legal entity
          with its principal place of business in the State of Delaware and that
          otherwise meets the requirements of applicable


                                       30


          Delaware law that shall act through one or more persons authorized to
          bind such entity.

     Section 7.08. Conflicting Interests. If the Property Trustee has or shall
acquire a conflicting interest within the meaning of the Trust Indenture Act,
the Property Trustee shall either eliminate such interest or resign, to the
extent and in the manner provided by, and subject to the provisions of, the
Trust Indenture Act and this Trust Agreement.

     Section 7.09. Co-Trustees and Separate Trustee. Unless an Event of Default
shall have occurred and be continuing, at any time or times, for the purpose of
meeting the legal requirements of the Trust Indenture Act or of any jurisdiction
in which any part of the Trust Property may at the time be located, the
Depositor and the Administrative Trustee (and if more than one Administrative
Trustee, by agreed action of the majority of such Trustees) shall have power (i)
to appoint, and upon the written request of the Administrative Trustee the
Depositor shall for such purpose join with the Administrative Trustee in the
execution, delivery, and performance of all instruments and agreements necessary
or proper to appoint one or more Persons approved by the Property Trustee either
to act as co-trustee, jointly with the Property Trustee, of all or any part of
such Trust Property, or to the extent required by law to act as separate trustee
of any such property, in either case with such powers as may be provided in the
instrument of appointment, and (ii) to vest in such Person or Persons in the
capacity aforesaid, any property, title, right or power deemed necessary or
desirable, subject to the other provisions of this Section. If the Depositor
does not join in such appointment within 15 days after the receipt by it of a
request so to do, or in case a Debenture Event of Default has occurred and is
continuing, the Property Trustee alone shall have power to make such
appointment. Any co-trustee or separate trustee appointed pursuant to this
Section shall either be (i) a natural person who is at least 21 years of age and
a resident of the United States or (ii) a legal entity with its principal place
of business in the United States that shall act through one or more persons
authorized to bind such entity.

     Should any written instrument from the Depositor be required by any
co-trustee or separate trustee so appointed for more fully confirming to such
co-trustee or separate trustee such property, title, right, or power, any and
all such instruments shall, on request, be executed, acknowledged, and delivered
by the Depositor.

     Every co-trustee or separate trustee shall, to the extent permitted by law,
but to such extent only, be appointed subject to the following terms, namely:

               (a) The Trust Securities shall be executed and delivered and all
          rights, powers, duties, and obligations hereunder in respect of the
          custody of securities, cash and other personal property held by, or
          required to be deposited or pledged with, the Trustees specified
          hereunder, shall be exercised, solely by such Trustees and not by such
          co-trustee or separate trustee.


                                       31


               (b) The rights, powers, duties, and obligations hereby conferred
          or imposed upon the Property Trustee in respect of any property
          covered by such appointment shall be conferred or imposed upon and
          exercised or performed by the Property Trustee or by the Property
          Trustee and such co-trustee or separate trustee jointly, as shall be
          provided in the instrument appointing such co-trustee or separate
          trustee, except to the extent that under any law of any jurisdiction
          in which any particular act is to be performed, the Property Trustee
          shall be incompetent or unqualified to perform such act, in which
          event such rights, powers, duties and obligations shall be exercised
          and performed by such co-trustee or separate trustee.

               (c) The Property Trustee at any time, by an instrument in writing
          executed by it, with the written concurrence of the Depositor, may
          accept the resignation of or remove any co-trustee or separate trustee
          appointed under this Section, and, in case a Debenture Event of
          Default has occurred and is continuing, the Property Trustee shall
          have power to accept the resignation of, or remove, any such
          co-trustee or separate trustee without the concurrence of the
          Depositor. Upon the written request of the Property Trustee, the
          Depositor shall join with the Property Trustee in the execution,
          delivery, and performance of all instruments and agreements necessary
          or proper to effectuate such resignation or removal. A successor to
          any co-trustee or separate trustee so resigned or removed may be
          appointed in the manner provided in this Section.

               (d) No co-trustee or separate trustee hereunder shall be
          personally liable by reason of any act or omission of the Property
          Trustee, or any other trustee hereunder.

               (e) The Property Trustee shall not be liable by reason of any act
          of a co-trustee or separate trustee.

               (f) Any Act of Holders delivered to the Property Trustee shall be
          deemed to have been delivered to each such co-trustee and separate
          trustee.

     Section 7.10. Resignation and Removal; Appointment of Successor. No
resignation or removal of any Trustee and no appointment of a successor Trustee
pursuant to this Article shall become effective until the acceptance of
appointment by the successor Trustee in accordance with the applicable
requirements of Section 7.11.

     Subject to the immediately preceding paragraph, any Trustee may resign at
any time with respect to the Trust Securities by giving written notice thereof
to the Securityholders.

     Unless an Event of Default shall have occurred and be continuing, any
Trustee may be removed at any time by Act of the Holder of the Common
Securities. If an Event of Default shall have occurred and be continuing, the
Property Trustee or the Delaware Trustee, or both of them, may be removed at
such time only by Act of the Holders of at least a majority in Liquidation
Amount of the Outstanding Preferred Securities, delivered to such Trustee (in
its individual capacity and on behalf of the Trust). The Administrative Trustee
may


                                       32


only be removed by the Holder of Common Securities at any time.

     If the instrument of acceptance by the successor Trustee required by
Section 7.11 shall not have been delivered to the Trustee within 30 days after
the giving of such notice of resignation or removal, the Trustee may petition,
at the expense of the Depositor, any court of competent jurisdiction for the
appointment of a successor Trustee.

     If any Trustee shall resign, be removed or become incapable of acting as
Trustee, or if a vacancy shall occur in the office of any Trustee for any cause,
at a time when no Event of Default shall have occurred and be continuing, the
Holder of Common Securities, by Act of the Holder of Common Securities delivered
to the retiring Trustee, shall promptly appoint a successor Trustee or Trustees
and the Trust, and the retiring Trustee shall comply with the applicable
requirements of Section 7.11. If the Property Trustee or the Delaware Trustee
shall resign, be removed or become incapable of continuing to act as the
Property Trustee or the Delaware Trustee, as the case may be, at a time when an
Event of Default has occurred and is continuing, the Holders of Preferred
Securities, by Act of the Securityholders of at least a majority in Liquidation
Amount of the Outstanding Preferred Securities delivered to the retiring
Trustee, shall promptly appoint a successor Trustee or Trustees, and such
successor Trustee shall comply with the applicable requirements of Section 7.11.
If any Administrative Trustee shall resign, be removed or become incapable of
acting as Administrative Trustee at a time when an Event of Default shall have
occurred and be continuing, the Holder of Common Securities shall appoint a
successor Administrative Trustee. If no successor Trustee shall have been so
appointed by the Holder of Common Securities or the Holders of Preferred
Securities and accepted appointment in the manner required by Section 7.11, any
Securityholder who has been a Securityholder of Trust Securities for at least
six months may, on behalf of himself and all others similarly situated, petition
any court of competent jurisdiction for the appointment of a successor Trustee.

     The Property Trustee shall give notice of each resignation and each removal
of a Trustee and each appointment of a successor Trustee to all Securityholders
in the manner provided in Section 10.08 and shall give notice to the Depositor.
Each notice shall include the name of the successor Trustee and the address of
its Corporate Trust Office if it is the Property Trustee.

     Notwithstanding the foregoing or any other provision of this Trust
Agreement, in the event any Administrative Trustee or Delaware Trustee who is a
natural person dies or becomes, in the opinion of the Depositor, incompetent or
incapacitated, the vacancy created by such death, incompetence or incapacity may
be filled by (a) the unanimous act of the remaining Administrative Trustees if
there are at least two of them or (b) otherwise by the Depositor (with the
successor in each case being a Person who satisfies the eligibility requirements
for Administrative Trustee or for the Delaware Trustee, as the case may be, set
forth in Section 7.07).

     Section 7.11. Acceptance of Appointment by Successor. In case of the
appointment hereunder of a successor Trustee, the retiring


                                       33


Trustee and each successor Trustee shall execute and deliver to the Trust and
the retiring Trustee an amendment hereto wherein each successor Trustee shall
accept such appointment and which (a) shall contain such provisions as shall be
necessary or desirable to transfer and confirm to, and to vest in, each
successor Trustee all the rights, powers, trusts and duties of the retiring
Trustee and (b) shall add to or change any of the provisions of this Trust
Agreement as shall be necessary to provide for or facilitate the administration
of the trusts hereunder by more than one Trustee, it being understood that
nothing herein or in such amendment shall constitute such Trustees co-trustees
of the same trust and that each such Trustee shall be trustee of a trust or
trusts hereunder separate and apart from any trust or trusts hereunder
administered by any other such Trustee and upon the execution and delivery of
such amendment the resignation or removal of the retiring Trustee shall become
effective to the extent provided therein and each such successor Trustee,
without any further act, deed or conveyance, shall become vested with all the
rights, powers, trusts and duties of the retiring Trustee and the Trust; but, on
request of the Trust or any successor Trustee, such retiring Trustee shall duly
assign, transfer and deliver to such successor Trustee all Trust Property, all
proceeds thereof and money held by such retiring Trustee hereunder.

     Upon request of any such successor Trustee, the Trust shall execute any and
all instruments for more fully and certainly vesting in and confirming to such
successor Trustee all such rights, powers and trusts referred to in the first or
second preceding paragraph, as the case may be.

     No successor Trustee shall accept its appointment unless at the time of
such acceptance such successor Trustee shall be qualified and eligible under
this Article.

     Section 7.12. Merger, Conversion, Consolidation or Succession to Business.
Any Person into which any of the Trustees may be merged or converted or with
which it may be consolidated, or any Person resulting from any merger,
conversion or consolidation to which such Trustee shall be a party, or any
Person succeeding to all or substantially all the corporate trust business of
such Trustee, shall be the successor of such Trustee hereunder, provided such
Person shall be otherwise qualified and eligible under this Article, without the
execution or filing of any paper or any further act on the part of any of the
parties hereto.

     Section 7.13. Preferential Collection of Claims Against Depositor or Trust.
If and when the Property Trustee or the Delaware Trustee shall be or become a
creditor (whether directly or indirectly, secured or unsecured) of the Depositor
or the Trust (or any other obligor upon the Debentures or the Trust Securities),
including under the terms of Section 7.05 hereof, the Property Trustee or the
Delaware Trustee, as the case may be, shall be subject to and shall take all
actions necessary in order to comply with the provisions of the Trust Indenture
Act regarding the collection of claims against the Depositor or Trust (or any
such other obligor).


                                       34


     Section 7.14. Reports by Property Trustee. The Property Trustee shall
transmit to Holders such reports concerning the Property Trustee and its actions
under this Trust Agreement as may be required pursuant to the Trust Indenture
Act at the times and in the manner provided pursuant thereto. If required by
Section 313(a) of the Trust Indenture Act, the Property Trustee shall, within 60
days after each May 31 following the date of this Trust Agreement deliver to
Holders a brief report, dated as of such May 31, which complies with the
provisions of such Section 313(a).

     A copy of each such report shall, at the time of such transmission to
Holders, be filed by the Property Trustee with each stock exchange upon which
any Preferred Securities are then listed, with the Commission and with the
Trust. The Trust will promptly notify the Property Trustee when any Preferred
Securities are listed on any stock exchange.

     Section 7.15. Reports to the Property Trustee. The Depositor and the
Administrative Trustee on behalf of the Trust shall provide to the Property
Trustee such documents, reports and information as required by Section 314 of
the Trust Indenture Act (if any) and the compliance certificate required by
Section 314(a) of the Trust Indenture Act in the form, in the manner and at the
times required by Section 314 of the Trust Indenture Act.

     Section 7.16. Evidence of Compliance with Conditions Precedent. The
Depositor and the Administrative Trustee on behalf of the Trust shall provide to
the Property Trustee evidence of compliance with the conditions precedent, if
any, provided for in this Trust Agreement that relate to any of the matters set
forth in Section 314(c) of the Trust Indenture Act.

     Section 7.17. Statements Required in Officer's Certificate and Opinion of
Counsel.

     Each Officer's Certificate and Opinion of Counsel with respect to
compliance with a covenant or condition provided for in this Trust Agreement
shall include:

     (1) a statement that each Person making such Officer's Certificate or
Opinion of Counsel has read such covenant or condition;

     (2) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such Officer's
Certificate or Opinion of Counsel are based;

     (3) a statement that, in the opinion of each such Person, such Person has
made such examination or investigation as is
necessary to enable such Person to express an informed opinion as to whether or
not such covenant or condition has been complied with; and

     (4) a statement that, in the opinion of such Person, such covenant or
condition has been complied with; provided, however, that with respect to
matters of fact not involving any legal conclusion, an Opinion of Counsel may
rely on an Officer's Certificate or


                                       35


certificates of public officials.

     Section 7.18. Number of Trustees.

     (a) The number of Trustees shall be three, provided that the Holder of all
of the Common Securities by written instrument may increase and, if increased,
may decrease the number of Administrative Trustees.

     (b) If a Trustee ceases to hold office for any reason and the number of
Administrative Trustees is not reduced pursuant to Section 7.18(a), or if the
number of Trustees is increased pursuant to Section 7.18(a), a vacancy shall
occur. The vacancy shall be filled with a Trustee appointed in accordance with
Section 7.10.

     (c) The death, resignation, retirement, removal, bankruptcy, dissolution,
termination, incompetence or incapacity to perform the duties of a Trustee shall
not operate to dissolve, terminate or annul the Trust. Whenever a vacancy shall
occur, until such vacancy is filled by the appointment of an Administrative
Trustee in accordance with Section 7.10, the Administrative Trustees in office,
regardless of their number (and notwithstanding any other provision of this
Trust Agreement), shall have all the powers granted to the Administrative
Trustee and shall discharge all the duties imposed upon the Administrative
Trustees by this Trust Agreement.

     Section 7.19. Delegation of Power.

     (a) Any Administrative Trustee may, by power of attorney consistent with
applicable law, delegate to any natural person over the age of 21 his/her power
for the purpose of executing any documents contemplated in Section 2.07(a),
including any registration statement or amendment thereto filed with the
Commission, or making any other governmental filing; and

     (b) the Administrative Trustees shall have power to delegate from time to
time to such of their number, if there is more than one Administrative Trustee,
or to the Depositor the doing of such things and the execution of such
instruments either in the name of the Trust or the names of the Administrative
Trustees or otherwise as the Administrative Trustees may deem expedient, to the
extent such delegation is not prohibited by applicable law or contrary to the
provisions of the Trust, as set forth herein.

     Section 7.20. Voting. Except as otherwise provided in this Trust Agreement,
the consent or vote of the Trustees shall be approved by not less than a
majority of the Administrative Trustees.

                                  ARTICLE VIII

                           Dissolution and Liquidation

     Section 8.01. Dissolution Upon Expiration Date. Unless earlier dissolved,
the Trust shall automatically dissolve on December


                                       36


22, 051 (the "Expiration Date").

     Section 8.02. Early Dissolution. The earliest to occur of any of the
following events is an "Early Dissolution Event" upon the occurrence of which
the Trust shall be dissolved:

     (a) the occurrence of a Bankruptcy Event in respect of, or the dissolution
or liquidation of the Depositor or an acceleration of the maturity of the
Debentures pursuant to Section 6.02 of the Indenture;

     (b) upon the election of the Depositor to dissolve the Trust and cause the
distribution of a Like Amount of Debentures to the Holders of the Trust
Securities;

     (c) the redemption of all of the Trust Securities; and

     (d) an order for dissolution of the Trust shall have been entered by a
court of competent jurisdiction.

     The election of the Depositor pursuant to Section 8.02(b) shall be made by
the Depositor giving written notice to the Trustees not less than 30 days prior
to the date of distribution of the Debentures. Such notice shall specify the
date of distribution of the Debentures and shall be accompanied by an Opinion of
Counsel that such event will not be a taxable event to the Holders of the Trust
Securities for Federal income tax purposes.

     Section 8.03. Dissolution. The respective obligations and responsibilities
of the Trustees and the Trust continued hereby shall terminate upon the latest
to occur of the following: (a) the distribution by the Property Trustee to
Securityholders upon the liquidation of the Trust pursuant to Section 8.04, or
upon the redemption of all of the Trust Securities pursuant to Section 4.02, of
all amounts required to be distributed hereunder upon the final payment of the
Trust Securities; (b) the payment of any expenses owed by the Trust; and (c) the
discharge of all administrative duties of the Administrative Trustee, including
the performance of any tax reporting obligations with respect to the Trust or
the Securityholders.

     Section 8.04. Liquidation.

     (a) If an Early Dissolution Event specified in clause (a), (c) or (d) of
Section 8.02 occurs or upon the Expiration Date, the Trust shall be liquidated
by the Trustees as expeditiously as the Trustees determine to be possible by
distributing, after satisfaction of liabilities to creditors of the Trust as
provided by applicable law, to each Securityholder a Like Amount of Debentures,
subject to Section 8.04(d). If an Early Dissolution Event specified in clause
(b) occurs, the Trust shall be liquidated by the Trustee on the date of
distribution of the Debentures specified by the Depositor in its notice
delivered pursuant to Section 8.02. Notice of liquidation shall be given by the
Property Trustee by first-class mail, postage prepaid, mailed not later than 30
nor more than 60 days prior to the Liquidation


                                       37


Date to each Holder of Trust Securities at such Holder's address appearing in
the Securities Register. All notices of liquidation shall:

     (i) state the Liquidation Date;

     (ii) state that from and after the Liquidation Date, the Trust Securities
will no longer be deemed to be Outstanding and any Trust Securities Certificates
not surrendered for exchange will be deemed to represent a Like Amount of
Debentures; and

     (iii) provide such information with respect to the mechanics by which
Holders may exchange Trust Securities Certificates for certificates evidencing
Debentures, or, if Section 8.04(d) applies, receive a Liquidation Distribution,
as the Administrative Trustee or the Property Trustee shall deem appropriate.

     (b) In order to effect the liquidation of the Trust and distribution of the
Debentures to Securityholders, the Property Trustee, either itself acting as
exchange agent or through the appointment of a separate exchange agent, shall
establish such procedures as it shall deem appropriate to effect the
distribution of Debentures in exchange for the Outstanding Trust Securities
Certificates.

     (c) Except where Section 8.02(c) or 8.04(d) applies, on or after the
Liquidation Date, (i) the Trust Securities will no longer be deemed to be
Outstanding, (ii) certificates representing a Like Amount of Debentures will be
issued to Holders of Trust Securities Certificates, upon surrender of such
certificates to the Administrative Trustee or its agent for exchange, (iii) the
Depositor shall use its best efforts to have the Debentures listed on the New
York Stock Exchange or such other exchange as the Preferred Securities are then
listed and shall take any reasonable action necessary to effect the distribution
of the Debentures, (iv) any Trust Securities Certificates not so surrendered for
exchange will be deemed to represent a Like Amount of Debentures, accruing
interest at the rate provided for in the Debentures from the last Distribution
Date on which a Distribution was made on such Trust Securities Certificates
until such certificates are so surrendered (and until such certificates are so
surrendered, no payments or interest or principal will be made to Holders of
Trust Securities Certificates with respect to such Debentures) and (v) all
rights of Securityholders holding Trust Securities will cease, except the right
of such Securityholders to receive Debentures upon surrender of Trust Securities
Certificates.

     (d) In the event that, notwithstanding the other provisions of this Section
8.04, whether because of an order for dissolution entered by a court of
competent jurisdiction or otherwise, distribution of the Debentures in the
manner provided herein is determined by the Property Trustee not to be
practical, the Trust Property shall be liquidated, and the Trust shall be
dissolved, by the Property Trustee in such manner as the Property Trustee
determines. In such event, on the date of the dissolution of the Trust,
Securityholders will be entitled to receive out of the assets of the Trust
available for distribution to Securityholders, after


                                       38


satisfaction of liabilities to creditors of the Trust as provided by applicable
law, an amount equal to the Liquidation Amount per Trust Security plus
accumulated and unpaid Distributions thereon to the date of payment (such amount
being the "Liquidation Distribution"). If, upon any such dissolution, the
Liquidation Distribution can be paid only in part because the Trust has
insufficient assets available to pay in full the aggregate Liquidation
Distribution, then, subject to the next succeeding sentence, the amounts payable
by the Trust on the Trust Securities shall be paid on a pro rata basis (based
upon Liquidation Amounts). The Holder of the Common Securities will be entitled
to receive Liquidation Distributions upon any such dissolution pro rata
(determined as aforesaid) with Holders of Preferred Securities, except that, if
a Debenture Event of Default has occurred and is continuing, the Preferred
Securities shall have a priority over the Common Securities, and no Liquidation
Distribution will be paid to the Holders of the Common Securities unless and
until receipt by all Holders of the Preferred Securities of the entire
Liquidation Distribution payable in respect thereof.

                                   ARTICLE IX

                                  Mergers, Etc.

     Section 9.01. Mergers, Consolidations, Amalgamations or Replacements of the
Trust. The Trust may not merge with or into, consolidate, amalgamate, or be
replaced by, or convey, transfer or lease its properties and assets as an
entirety or substantially as an entirety to any Person, except as described
below or under Article VIII. The Trust may, at the request of the Depositor,
with the consent of the Administrative Trustee and without the consent of the
Holders of the Preferred Securities, merge with or into, consolidate,
amalgamate, or be replaced by, a trust organized as such under the laws of any
State; provided, that (i) such successor entity either (a) expressly assumes all
of the obligations of the Trust with respect to the Preferred Securities or (b)
substitutes for the Preferred Securities other securities having substantially
the same terms as the Preferred Securities (the "Successor Securities") so long
as the Successor Securities rank the same as the Preferred Securities rank with
respect to the payment of Distributions and payments upon liquidation and
redemption, (ii) the Depositor expressly appoints a trustee of such successor
entity possessing the same powers and duties as the Property Trustee with
respect to the Debentures, (iii) the Successor Securities are listed, or any
Successor Securities will be listed upon notification of issuance, on any
national securities exchange or other organization on which the Preferred
Securities are then listed, (iv) such merger, consolidation, amalgamation or


                                       39


replacement does not cause the Preferred Securities (including any Successor
Securities) to be downgraded by any nationally recognized statistical rating
organization, (v) such merger, consolidation, amalgamation or replacement does
not adversely affect the rights, preferences and privileges of the Holders of
the Preferred Securities (including any Successor Securities) in any material
respect, (vi) such successor entity has a purpose substantially similar to that
of the Trust, (vii) prior to such merger, consolidation, amalgamation or
replacement, the Depositor has received an Opinion of Counsel to the effect that
(a) such merger, consolidation, amalgamation or replacement does not adversely
affect the rights, preferences and privileges of the Holders of the Preferred
Securities (including any Successor Securities) in any material respect, and (b)
following such merger, consolidation, amalgamation or replacement, neither the
Trust nor such successor entity will be required to register as an investment
company under the 1940 Act and (viii) the Depositor or any permitted successor
assignee owns all of the common securities of such successor entity and
guarantees the obligations of such successor entity under the Successor
Securities at least to the extent provided by the Guarantee and this Trust
Agreement. Notwithstanding the foregoing, the Trust shall not, except with the
consent of all Holders of the Preferred Securities, merge with or into,
consolidate, amalgamate, or be replaced by, any other entity or permit any other
entity to consolidate, amalgamate, merge with or into, or replace it if such
consolidation, amalgamation, merger or replacement would cause the Trust or the
successor entity not to be classified as a grantor trust for United States
Federal income tax purposes.

                                    ARTICLE X

                            Miscellaneous Provisions

     Section 10.01. Limitation of Rights of Securityholders. The death,
incapacity, bankruptcy, dissolution and termination of any Person having an
interest, beneficial or otherwise, in Trust Securities shall not operate to
terminate this Trust Agreement or dissolve, terminate or annul the Trust, nor
entitle the legal representatives or heirs of such Person or any Securityholder
for such Person, to claim an accounting, take any action or bring any proceeding
in any court for a partition or winding-up of the arrangements contemplated
hereby, nor otherwise affect the rights, obligations and liabilities of the
parties hereto or any of them.

     Section 10.02. Amendment.

     (a) This Trust Agreement may be amended from time to time by the Trustees
and the Depositor, without the consent of any Securityholders, to cure any
ambiguity, defect or inconsistency or make any other change which does not
adversely affect in any material respect the interests of any Holder of
Preferred Securities. Any amendments of this Trust Agreement pursuant to Section
10.02(a) shall become effective when notice thereof is given to the
Securityholders.

     (b) Except as provided in Section 10.02(a) and 10.02(c) hereof, any
provision of this Trust Agreement may be amended by the Trustees and the
Depositor with the consent of Holders of at least a majority of the aggregate
Liquidation Amount of the Outstanding Preferred Securities.

     (c) In addition to and notwithstanding any other provision in this Trust
Agreement, without the consent of each affected Securityholder (such consent
being obtained in accordance with Section


                                       40


6.03 or 6.06 hereof), this Trust Agreement may not be amended to (i) change the
amount, timing or currency of any Distribution or Liquidation Distribution on
the Trust Securities or otherwise adversely affect the method of payment of any
Distribution or Liquidation Distribution required to be made in respect of the
Trust Securities as of a specified date; (ii) change the redemption provisions
of the Trust Securities; (iii) restrict the right of a Securityholder to
institute suit for the enforcement of any such payment contemplated in (i) or
(ii) above on or after the related date; (iv) modify the first sentence of
Section 2.06 hereof; (v) authorize or issue any beneficial interest in the Trust
other than as contemplated by this Trust Agreement as of the date hereof; (vi)
change the conditions precedent for the Depositor to elect to dissolve the Trust
and distribute the Debentures to Holders of Trust Securities as set forth in
Section 8.02; or (vii) affect the limited liability of any Holder of Preferred
Securities, and, notwithstanding any other provision herein, without the
unanimous consent of the Securityholders (such consent being obtained in
accordance with Section 6.03 or 6.06 hereof), paragraphs (b) and (c) of this
Section 10.02 may not be amended.

     (d) Notwithstanding any other provisions of this Trust Agreement, no
amendment to this Trust Agreement shall be made without receipt by the Trust of
an Opinion of Counsel experienced in such matters to the effect that such
amendment will not affect the Trust's status as a grantor trust for United
States Federal income tax purposes or its exemption from regulation as an
"investment company" under the 1940 Act.

     (e) Notwithstanding anything in this Trust Agreement to the contrary,
without the consent of the Depositor, this Trust Agreement may not be amended in
a manner which imposes any additional obligation on the Depositor.

     (f) In the event that any amendment to this Trust Agreement is made, the
Administrative Trustee shall promptly provide to the Depositor a copy of such
amendment.

     (g) In executing any amendment to this Trust Agreement, the Property
Trustee shall be entitled to receive, and (subject to Section 7.01) shall be
fully protected in relying upon, an Opinion of Counsel stating that the
execution of such amendment is authorized or permitted by this Trust Agreement.
Except as contemplated by Section 7.11, a Trustee may, but shall not be
obligated to, enter into any amendment to this Trust Agreement which affects
such Trustee's own rights, duties or immunities under this Trust Agreement or
otherwise.

     Section 10.03. Severability. In case any provision in this Trust Agreement
or in the Trust Securities Certificates shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.

     Section 10.04. Governing Law. THIS TRUST AGREEMENT AND THE RIGHTS AND
OBLIGATIONS OF EACH OF THE SECURITYHOLDERS, THE TRUST AND THE TRUSTEES WITH
RESPECT TO THIS TRUST AGREEMENT AND THE TRUST


                                       41


SECURITIES SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE
STATE OF DELAWARE, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES.

     Section 10.05. Payments Due on Non-Business Day. If the date fixed for any
payment on any Trust Security shall be a day which is not a Business Day, then
such payment need not be made on such date but may be made on the next
succeeding day which is a Business Day (except as otherwise provided therein,
with the same force and effect as though made on the date fixed for such
payment), and no interest shall accumulate thereon for the period after such
date to the date of payment on such succeeding day.

     Section 10.06. Successors and Assigns. This Trust Agreement shall be
binding upon and shall inure to the benefit of any successor to the Trust or
successor Trustee or both, including any successor by operation of law. Except
in connection with a consolidation, merger or sale involving the Depositor that
is permitted under Article V of the Indenture and pursuant to which the assignee
agrees in writing to perform the Depositor's obligations hereunder, the
Depositor shall not assign its obligations hereunder.

     Section 10.07. Headings. The Article and Section headings are for
convenience only and shall not affect the construction of this Trust Agreement.

     Section 10.08. Reports, Notices and Demands. Any report, notice, demand or
other communication which by any provision of this Trust Agreement is required
or permitted to be given or served to or upon any Securityholder or the
Depositor may be given or served in writing by deposit thereof, first-class
postage prepaid in the United States mail, hand delivery or facsimile
transmission, in each case, addressed, (a) in the case of a Holder of a
Preferred Security, to such Holder of a Preferred Security as such
Securityholder's name and address may appear on the Securities Register; and (b)
in the case of the Holder of a Common Security or the Depositor, to Public
Service Enterprise Group Incorporated, 80 Park Plaza, Newark, New Jersey 07101,
Attention: Treasurer, facsimile no.: (973) 596-6309. Such notice, demand or
other communication to or upon a Securityholder or the Depositor shall be deemed
to have been sufficiently given or made, for all purposes, upon hand delivery,
mailing or transmission.

     Any notice, demand or other communication which by any provision of this
Trust Agreement is required or permitted to be given or served to or upon the
Trust, the Property Trustee or the Administrative Trustee shall be given in
writing addressed (until another address is published by the Trust) as follows:
(a) with respect to the Property Trustee to First Union National Bank, 765 Broad
Street, Newark, New Jersey 07101, Attention: Corporate Trust Office; (b) with
respect to the Delaware Trustee, to One Rodney Square, 920 King Street,
Wilmington, Delaware 19801 Attention: Corporate Trust Department; and (c) with
respect to the Administrative Trustee, to the address above for notices to the
Depositor, marked "Attention: Administrative Trustee of Enterprise Capital Trust
I c/o Treasurer." Such notice, demand or other communication to or upon the
Trust, the Delaware Trustee or


                                       42


the Property Trustee shall be deemed to have been sufficiently given or made
only upon actual receipt of the writing by the Trust, the Delaware Trustee or
the Property Trustee.

     Section 10.09. Agreement Not to Petition. Each of the Trustees and the
Depositor agree for the benefit of the Securityholders that, until at least one
year and one day after the Trust has been terminated in accordance with Article
VIII, they shall not file, or join in the filing of, a petition against the
Trust under any Bankruptcy Laws or otherwise join in the commencement of any
proceeding against the Trust under any Bankruptcy Law. In the event the
Depositor or any of the Trustees takes action in violation of this Section
10.09, the Property Trustee agrees, for the benefit of Securityholders, that at
the expense of the Depositor or Trustee, as applicable, it shall file an answer
with the bankruptcy court or otherwise properly contest the filing of such
petition by the Depositor or any of the Trustees, as applicable, against the
Trust or the commencement of such action and raise the defense that the
Depositor or Trustee, as applicable, has agreed in writing not to take such
action and should be stopped and precluded therefrom and such other defenses, if
any, as counsel for the Property Trustee or the Trust may assert. The provisions
of this Section 10.09 shall survive the termination of this Trust Agreement.

     Section 10.10. Trust Indenture Act; Conflict with Trust Indenture Act.

     (a) This Trust Agreement is subject to the provisions of the Trust
Indenture Act that are required to be part of this Trust Agreement and shall, to
the extent applicable, be governed by such provisions.

     (b) The Property Trustee shall be the only Trustee which is a trustee for
the purposes of the Trust Indenture Act.

     (c) If any provision hereof limits, qualifies or conflicts with another
provision hereof which is required to be included in this Trust Agreement by any
of the provisions of the Trust Indenture Act, such required provision shall
control. If any provision of this Trust Agreement modifies or excludes any
provision of the Trust Indenture Act which may be so modified or excluded, the
latter provision shall be deemed to apply to this Trust Agreement as so modified
or excluded, as the case may be.

     (d) The application of the Trust Indenture Act to this Trust Agreement
shall not affect the nature of the Trust Securities as equity securities
representing undivided beneficial interests in the assets of the Trust.

     Section 10.11. Acceptance of Terms of Trust Agreement, Guarantee and
Indenture. THE RECEIPT AND ACCEPTANCE OF A TRUST SECURITY OR ANY INTEREST
THEREIN BY OR ON BEHALF OF A SECURITYHOLDER OR ANY BENEFICIAL OWNER, WITHOUT ANY
SIGNATURE OR FURTHER MANIFESTATION OF ASSENT, SHALL CONSTITUTE THE UNCONDITIONAL
ACCEPTANCE BY THE


                                       43


SECURITYHOLDER AND ALL OTHERS HAVING A BENEFICIAL INTEREST IN SUCH TRUST
SECURITY OF ALL THE TERMS AND PROVISIONS OF THIS TRUST AGREEMENT AND AGREEMENT
TO THE SUBORDINATION PROVISIONS AND OTHER TERMS OF THE GUARANTEE AND THE
INDENTURE, AND SHALL CONSTITUTE THE AGREEMENT OF THE TRUST, SUCH SECURITYHOLDER
AND SUCH OTHERS THAT THE TERMS AND PROVISIONS OF THIS TRUST AGREEMENT SHALL BE
BINDING, OPERATIVE AND EFFECTIVE AS BETWEEN THE TRUST AND SUCH SECURITYHOLDER
AND SUCH OTHERS.

PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED, as Depositor

                                                   By:
                                                      --------------------------
                                                        Name:
                                                        Title:

FIRST UNION NATIONAL BANK, as Property Trustee

                                                   By:
                                                      --------------------------
                                                        Name:
                                                        Title:

FIRST UNION BANK OF DELAWARE, as Delaware Trustee

                                                   By:
                                                      --------------------------
                                                        Name:
                                                        Title:

                                                   Fred F. Saunders,
                                                   as Administrative Trustee

                                                   -----------------------------


                                       44


                                                                       EXHIBIT A

                              CERTIFICATE OF TRUST
                                       OF
                           ENTERPRISE CAPITAL TRUST I

     THIS CERTIFICATE OF TRUST of Enterprise Capital Trust I (the "Trust"),
dated as of December 22, 1997 is being duly executed and filed by the
undersigned, as trustees, to form a business trust under the Delaware Business
Trust Act (12 Del. C.ss. 3801 et seq.).

     (i) Name. The name of the business trust being formed hereby is Enterprise
Capital Trust I.

     (ii) Delaware Trustee. The name and business address of the trustee of the
Trust in the State of Delaware are First Union Bank of Delaware, One Rodney
Square, 920 King Street, Wilmington DE 19801; attn: Corporate Trust Department.

     (iii) Counterparts. This Certificate of Trust may be executed in one or
more counterparts, all of which together shall constitute one and the same
instrument.

     (iv) Effective Date. This Certificate of Trust shall be effective as of its
filing.

     IN WITNESS WHEREOF, the undersigned, being the trustees of the Trust, have
executed this Certificate of Trust as of the date first above written.

FIRST UNION NATIONAL BANK, as Trustee


                                          By:  /s/ Frank Gallagher
                                             -----------------------------------
                                               Name:  Frank Gallagher
                                               Title: Vice President

FIRST UNION BANK OF DELAWARE, as Trustee


                                          By:  /s/ Frank Gallagher
                                             -----------------------------------
                                               Name:  Frank Gallagher
                                               Title: Vice President


                                            /s/ Fred F. Saunders               ,
                                          --------------------------------------
                                          as Trustee
                                               Name:  Fred F. Saunders


                                      A-1


                                                                       EXHIBIT B

                                  -------------


The Depository Trust Company
55 Water Street, 49th Floor
New York, New York  10041-0099

Attention:   General Counsel's Office

     Re: Enterprise Capital Trust I Preferred Securities

Ladies and Gentlemen:

     The purpose of this letter is to set forth certain matters relating to the
issuance and deposit with The Depository Trust Company ("DTC") of the Enterprise
Capital Trust I 7.44% Trust Originated Preferred Securities (the "Preferred
Securities"), of Enterprise Capital Trust I, a Delaware business trust (the
"Issuer"), created pursuant to a Trust Agreement between Public Service
Enterprise Group Incorporated ("Enterprise"), First Union National Bank, as
Property Trustee, the Delaware Trustee named therein and the Administrative
Trustee named therein. The payment of distributions on the Preferred Securities
and payments due upon liquidation of the Issuer or redemption of the Preferred
Securities are guaranteed by Enterprise, to the extent the Issuer has funds
available for the payment thereof and to the extent set forth in a Guarantee
Agreement dated _____________, 1998 by Enterprise and backup undertakings
relating thereto with respect to the Preferred Securities. The Issuer proposes
to sell the Preferred Securities to certain Underwriters (the "Underwriters")
pursuant to an Underwriting Agreement dated _____________, 1998 by and among the
Underwriters, the Issuer and Enterprise and the Underwriters wish to take
delivery of the Preferred Securities through DTC. First Union National Bank is
acting as transfer agent and registrar with respect to the Preferred Securities
(the "Transfer Agent and Registrar").

     To induce DTC to accept the Preferred Securities as eligible for deposit at
DTC, and to act in accordance with DTC's Rules with respect to the Preferred
Securities, the Issuer and the Transfer Agent and Registrar make the following
representations to DTC:

     1. Prior to the closing of the sale of the Preferred Securities to the
Underwriters, which is expected to occur on or about _____________, 1998 there
shall be deposited with DTC one or more global certificates (individually and
collectively, the "Global Certificate") registered in the name of DTC's nominee,
Cede & Co., representing an aggregate of $___________ Preferred Securities and
bearing the following legend:

Unless this certificate is presented by an authorized representative


                                      B-1


     of The Depository Trust Company, a New York corporation ("DTC"), to the
     Issuer or its agent for registration of transfer, exchange or payment, and
     any certificate issued is registered in the name of Cede & Co. or in such
     other name as is requested by an authorized representative of DTC (and any
     payment hereon is made to Cede & Co. or to such other entity as is
     requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE, OR
     OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL
     inasmuch as the registered owner hereof, Cede & Co., has an interest
     herein.

     2. The Amended and Restated Trust Agreement of the Issuer provides for the
voting by holders of the Preferred Securities under certain limited
circumstances. The Issuer shall establish a record date for such purposes and
shall, to the extent possible, give DTC notice of such record date not less than
15 calendar days in advance of such record date.

     3. In the event of a stock split, conversion, recapitalization,
reorganization or any other similar transaction resulting in the cancellation of
all or any part of the Preferred Securities outstanding, the Issuer or the
Transfer Agent and Registrar shall send DTC a notice of such event at least 5
business days prior to the effective date of such event.

     4. In the event of distribution on, or an offering or issuance of rights
with respect to, the Preferred Securities outstanding, the Issuer or the
Transfer Agent and Registrar shall send DTC a notice specifying: (a) the amount
of and conditions, if any, applicable to the payment of any such distribution or
any such offering or issuance of rights; (b) any applicable expiration or
deadline date or any date by which any action on the part of the holders of
Preferred Securities is required; and (c) the date any required notice is to be
mailed by or on behalf of the Issuer to holders of Preferred Securities or
published by or on behalf of the Issuer (whether by mail or publication, the
"Publication Date"). Such notice shall be sent to DTC by a secure means (e.g.,
legible telecopy, registered or certified mail, overnight delivery) in a timely
manner designed to assure that such notice is in DTC's possession no later than
the close of business on the business day before the Publication Date. The
Issuer or the Transfer Agent and Registrar will forward such notice either in a
separate secure transmission for each CUSIP number or in a secure transmission
of multiple CUSIP numbers (if applicable) that includes a manifest or list of
each CUSIP number submitted in that transmission. (The party sending such notice
shall have a method to verify subsequently the use of such means and the
timeliness of such notice.) The Publication Date shall be not less than 20
calendar days nor more than 90 calendar days prior to the payment of any such
distribution or any such offering or issuance of rights with respect to the
Preferred Securities. After establishing the amount of payment to be made on the
Preferred Securities, the Issuer or the Transfer Agent and Registrar will notify
DTC's Dividend Department of such payment 5 business days prior to payment date.
Notices to DTC's Dividend Department by telecopy shall be sent to (212)
709-1723. Such notices by mail or by any other means shall be sent to:


                                       B-2


                Manager, Announcements
                Dividend Department
                The Depository Trust Company
                7 Hanover Square, 22nd Floor
                New York, New York  10004-2695

     The Issuer or the Transfer Agent and Registrar shall confirm DTC's receipt
of such telecopy by telephoning the Dividend Department at (212) 709-1270.

     5. In the event of a redemption by the Issuer of the Preferred Securities,
notice specifying the terms of the redemption and the Publication Date of such
notice shall be sent by the Issuer or the Transfer Agent and Registrar to DTC
not less than 30 calendar days prior to such event by a secure means in the
manner set forth in paragraph 4. Such redemption notice shall be sent to DTC's
Call Notification Department at (516) 227-4164 or (516) 227-4190, and receipt of
such notice shall be confirmed by telephoning (516) 227-4070. Notice by mail or
by any other means shall be sent to:

                Call Notification Department
                The Depository Trust Company
                711 Stewart Avenue
                Garden City, New York  11530-4719

     6. In the event of any invitation to tender the Preferred Securities,
notice specifying the terms of the tender and the Publication Date of such
notice shall be sent by the Issuer or the Transfer Agent and Registrar to DTC by
a secure means and in a timely manner as described in paragraph 4. Notices to
DTC pursuant to this paragraph and notices of other corporate actions (including
mandatory tenders, exchanges and capital changes) shall be sent, unless
notification to another department is expressly provided for herein, by telecopy
to DTC's Reorganization Department at (212) 709-1093 or (212) 709-1094 and
receipt of such notice shall be confirmed by telephoning (212) 709-6884, or by
mail or any other means to:

                Manager, Reorganization Department
                Reorganization Window
                The Depository Trust Company
                7 Hanover Square, 23rd Floor
                New York, New York  10004-2695

     7. All notices and payment advances sent to DTC shall contain the CUSIP
number or numbers of the Preferred Securities and the accompanying designation
of the Preferred Securities, which, as of the date of this letter, is
"Enterprise Capital Trust I 7.44% Trust Originated Preferred Securities".

     8. Issuer or Agent shall provide automated notification of CUSIP-level
detail for dividend payments to DTC no later than noon (Eastern Time) on the
payment date.


                                       B-3


     9. Dividend payments shall be received by Cede & Co. as nominee of DTC, or
its registered assigns in same-day funds or the equivalent no later than 2:30
p.m. (Eastern Time) on each payment date. Absent any other arrangements between
Issuer or Trustee and DTC, such funds shall be wired as follows:

                The Chase Manhattan Bank
                ABA 012000021
                For credit to A/C The Depository Trust Company
                Dividend Deposit Account 066-026776

Issuer or Agent shall provide dividend payment information to a standard
announcement service subscribed to by DTC. In the unlikely event that no such
service exists, Issuer agrees that it or Agent shall provide this information
directly to DTC in advance of the dividend payment date as soon as the
information is available. This information should be conveyed directly to DTC
electronically. If electronic transmission is not available, such information
should be sent by telecopy to DTC's Dividend Department at (212) 709-1723 or
(212) 709-1886, and receipt of such notices shall be confirmed by telephoning
(212) 709-1270. Notices to DTC pursuant to the above by mail or by any other
means shall be sent to:

                Manager Announcements
                Dividend Department
                The Depository Trust Company
                7 Hanover Square, 22nd Floor
                New York, NY  10004-2695

     10. DTC shall receive maturity and redemption and CUSIP-level detail on the
payable date in same-day funds by 2:30 p.m. (Eastern Time). Absent any other
arrangements between Agent and DTC, such payments shall be wired as follows:

                The Chase Manhattan Bank
                ABA 012000021
                For credit to A/C The Depository Trust Company
                Redemption Account 066-027306

in accordance with existing SDFS payment procedures in the manner set forth in
DTC's SDFS Paying Agent Operating Procedures, a copy of which has previously
been furnished to Agent.

     11. DTC shall receive all reorganization payments and CUSIP-level detail
resulting from corporate actions (such as tender offers or mergers) on the first
payable date in same-day funds by 2:30 p.m. (Eastern Time). Absent any other
arrangements between Agent and DTC, such payments shall be wired as follows:

                The Chase Manhattan Bank
                ABA 012000021
                For credit to A/C The Depository Trust Company
                Reorganization Account 066-027608


                                      B-4


     12. DTC may by prior written notice direct the Issuer and the Transfer
Agent and Registrar to use any other telecopy number or address of DTC as the
number or address to which notices or payments may be sent.

     13. In the event of a conversion, redemption, or any other similar
transaction (e.g., tender made and accepted in response ---- to the Issuer's or
the Transfer Agent and Registrar's invitation) necessitating a reduction in the
aggregate number of Preferred Securities outstanding evidenced by a global
certificate, DTC, in its discretion: (a) may request the Issuer or the Transfer
Agent and Registrar to issue and countersign a new global certificate; or (b)
may make an appropriate notation on such global certificate indicating the date
and amount of such reduction.

     14. DTC may discontinue its services as a securities depositary with
respect to the Preferred Securities at any time by giving reasonable prior
written notice to the Issuer and the Transfer Agent and Registrar (at which time
DTC will confirm with the Issuer or the Transfer Agent and Registrar the
aggregate number of Preferred Securities deposited with it) and discharging its
responsibilities with respect thereto under applicable law. Under such
circumstances, the Issuer may determine to make alternative arrangements for
book-entry settlement for the Preferred Securities, make available one or more
separate global certificates evidencing Preferred Securities to any Participant
having Preferred Securities credited to its DTC account, or issue definitive
Preferred Securities to the beneficial owners thereof, and in any such case, DTC
agrees to cooperate fully with the Issuer and the Transfer Agent and Registrar
and to return the global certificates duly endorsed for transfer as directed by
the Issuer or the Transfer Agent and Registrar, together with any other
documents of transfer reasonably requested by the Issuer or the Transfer Agent
and Registrar.

     15. In the event that the Issuer determines that beneficial owners of the
global certificate(s) evidencing Preferred Securities shall be able to obtain
definitive Preferred Securities, the Issuer or the Transfer Agent and Registrar
shall notify DTC of the availability of such definitive Preferred Securities. In
such event, the Issuer or the Transfer Agent and Registrar shall issue, transfer
and exchange definitive Preferred Securities in appropriate amounts, as required
by DTC and others, and DTC agrees to cooperate fully with the Issuer and the
Transfer Agent and Registrar and to return the global certificate(s), duly
endorsed for transfer as directed by the Issuer or the Transfer Agent and
Registrar, together with any other documents of transfer reasonably requested by
the Issuer or the Transfer Agent and Registrar.

     16. Issuer: (a) understands that DTC has no obligation to, and will not,
communicate to its Participants or to any person having an interest in the
Securities any information contained in the Security certificate(s); and (b)
acknowledges that neither DTC's Participants nor any person having an interest
in the Securities shall be deemed to have notice of the provisions of the
Security certificate(s) by


                                      B-5


virtue of submission of such certificate(s) to DTC.

     17. This letter may be executed in any number of counterparts, each of
which when so executed shall be deemed to be an original, but all such
counterparts shall together constitute but one and the same instrument.


                                      B-6


     Nothing herein shall be deemed to require the Transfer Agent and Registrar
to advance funds on behalf of the Issuer.

                                              Very truly yours,

                                              ENTERPRISE CAPITAL TRUST I
                                              (As Issuer)

By:
                                              Name:  Fred F. Saunders, as
                                                Administrative Trustee

                                              FIRST UNION NATIONAL BANK

                                              ------------------------------
(As Transfer Agent and Registrar)

                                              By:
                                                 ---------------------------
                                                   Name:
                                                   Title:

RECEIVED AND ACCEPTED:

THE DEPOSITORY TRUST COMPANY


By:
            Authorized Officer


                                      B-7


                                                                       EXHIBIT C

                      THIS CERTIFICATE IS NOT TRANSFERABLE
                    EXCEPT AS PROVIDED IN THE TRUST AGREEMENT

                               Certificate Number
                                       C-1

                                                     Number of Common Securities

                                                                         278,351

                    Certificate Evidencing Common Securities
                                       of
                           Enterprise Capital Trust I

                             7.44% Common Securities
                  (liquidation amount $25 per Common Security)

     Enterprise Capital Trust I, a statutory business trust created under the
laws of the State of Delaware (the "Trust"), hereby certifies that Public
Service Enterprise Group Incorporated (the "Holder") is the registered owner of
two hundred seventy-eight thousand three hundred fifty-one (278,351) common
securities of the Trust representing undivided beneficial interests in the
assets of the Trust and designated as the 7.44% Common Securities (liquidation
amount $25 per Common Security) (the "Common Securities"). In accordance with
Section 5.10 of the Trust Agreement (as defined below) the Common Securities are
not transferable and any attempted transfer hereof shall be void. The
designations, rights, privileges, restrictions, preferences and other terms and
provisions of the Common Securities are set forth in, and this certificate and
the Common Securities represented hereby are issued and shall in all respects be
subject to the terms and provisions of, the Amended and Restated Trust Agreement
of the Trust dated as of January 20, 1998 as the same may be amended from time
to time (the "Trust Agreement"). The Trust will furnish a copy of the Trust
Agreement to the Holder without charge upon written request to the Trust at its
principal place of business or registered office.

     Upon receipt of this certificate, the Holder is bound by the Trust
Agreement and is entitled to the benefits thereunder.

     IN WITNESS WHEREOF, the Administrative Trustee of the Trust has executed
this certificate this 20th day of January, 1998.

ENTERPRISE CAPITAL TRUST I

                                                   By:
                                                      --------------------------
                                                        Name:  Fred F. Saunders
                                                        Administrative Trustee


                                      C-1


                                                                       EXHIBIT D

                               Certificate Number

                                      -----

                                                  Number of Preferred Securities
                                                              CUSIP NO. 29370120

                   Certificate Evidencing Preferred Securities
                                       of
                           Enterprise Capital Trust I

                   7.44% Trust Originated Preferred Securities
                 (liquidation amount $25 per Preferred Security)

     Enterprise Capital Trust I, a statutory business trust created under the
laws of the State of Delaware (the "Trust"), hereby certifies that Cede & Co.
(the "Holder") is the registered owner of _________, _________________________
(_________) preferred securities of the Trust representing an undivided
beneficial interest in the assets of the Trust and designated the Enterprise
Capital Trust I 7.44% Trust Originated Preferred Securities (liquidation amount
$25 per Preferred Security) (the "Preferred Securities"). The Preferred
Securities are transferable on the books and records of the Trust, in person or
by a duly authorized attorney, upon surrender of this certificate duly endorsed
and in proper form for transfer as provided in Section 5.04 of the Trust
Agreement (as defined below). The designations, rights, privileges,
restrictions, preferences and other terms and provisions of the Preferred
Securities are set forth in, and this certificate and the Preferred Securities
represented hereby are issued and shall in all respects be subject to the terms
and provisions of, the Amended and Restated Trust Agreement of the Trust dated
as of January 20, 1998 as the same may be amended from time to time (the "Trust
Agreement"). The Holder is entitled to the benefits of the Guarantee Agreement
entered into by Public Service Enterprise Group Incorporated, a New Jersey
corporation, and First Union National Bank as guarantee trustee, dated as of
January 20, 1998 (the "Guarantee") to the extent provided therein, together with
the obligations of Public Service Enterprise Group Incorporated under the Trust
Agreement, its Deferrable Interest Subordinated Debentures, Series A and the
Indenture related to such Deferrable Interest Subordinated Debentures. The Trust
will furnish a copy of the aforementioned agreements and instruments to the
Holder without charge upon written request to the Trust at its principal place
of business or registered office.


                                      D-1



     Upon receipt of this certificate, the Holder is bound by the Trust
Agreement and is entitled to the benefits thereunder.

     IN WITNESS WHEREOF, the Administrative Trustee of the Trust has executed
this certificate this 20th day of January, 1998.

                                                    ENTERPRISE CAPITAL TRUST I


                                                    By:
                                                       -------------------------
                                                         Name: Fred F. Saunders
                                                         Administrative Trustee

         [To be included in Book-Entry Preferred Securities Certificate]

This Preferred Security is a Book-Entry Preferred Securities Certificate within
the meaning of the Trust Agreement previously referred to and is registered in
the name of The Depository Trust Company (the "Depository") or a nominee of the
Depository. This Preferred Security is exchangeable for Preferred Securities
registered in the name of a person other than the Depository or its nominee only
in the limited circumstances described in the Trust Agreement and no transfer of
this Preferred Security (other than a transfer of this Preferred Security as a
whole by the Depository to a nominee of the Depository or by a nominee of the
Depository to the Depository or another nominee of the Depository) may be
registered except in limited circumstances.

Unless this Preferred Security is presented by an authorized representative of
The Depository Trust Company, a New York corporation, (55 Water Street, New
York) to Enterprise Capital Trust I or its agent for registration of transfer,
exchange or payment, and any Preferred Security issued is registered in the name
of Cede & Co. or such other name as requested by an authorized representative of
The Depository Trust Company and any payment hereon is made to Cede & Co. or to
such other entity as is requested by an authorized representative of The
Depository Trust Company, ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY A PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede
& Co., has an interest herein.


                                      D-2


                                   ASSIGNMENT

FOR VALUE RECEIVED, the undersigned assigns and transfers to: (Insert assignee's
social security or tax identification number) (Insert address and zip code of
assignee)

__________ Preferred Securities represented by this Preferred Securities
Certificate and irrevocably appoints

agent to transfer said Preferred Securities on the books of the Trust. The agent
may substitute another to act for him or her.

Date:

Signature:
(Sign exactly as your name appears on the other side of this Preferred Security
Certificate)

EX-3.D1

                              Amended and Restated
                   Trust Agreement for PSE&G Capital Trust II

                                      among

                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
                                 (as Depositor)

                            FIRST UNION NATIONAL BANK
                              (as Property Trustee)

                          FIRST UNION BANK OF DELAWARE
                              (as Delaware Trustee)

                                       and

                     THE ADMINISTRATIVE TRUSTEE NAMED HEREIN

                                   Dated as of
                                February 7, 1997



                                      (vii)
                                TABLE OF CONTENTS

                                                                            Page
                                                                            ----

                                    ARTICLE I

                                  Defined Terms

Section 1.01.  Definitions...................................................  2

                                   ARTICLE II

                            Continuation of the Trust

Section 2.01.  Name.......................................................... 10
Section 2.02.  Office of the Delaware Trustee; Principal Place
               of Business................................................... 10
Section 2.03.  Initial Contribution of Trust Property; Expenses
               of the Trust.................................................. 10
Section 2.04.  Issuance of the Trust Securities.............................. 11
Section 2.05.  Purchase of Debentures........................................ 11
Section 2.06.  Declaration of Trust.......................................... 12
Section 2.07.  Authorization to Enter into Certain
               Transactions.................................................. 12
Section 2.08.  Assets of Trust............................................... 16
Section 2.09.  Title to Trust Property....................................... 16

                                   ARTICLE III

                                 Payment Account

Section 3.01.  Payment Account............................................... 16

                                   ARTICLE IV

                            Distributions; Redemption

Section 4.01.  Distributions................................................. 17
Section 4.02.  Redemption.................................................... 18
Section 4.03.  Subordination of Common Securities............................ 20
Section 4.04.  Payment Procedures............................................ 21
Section 4.05.  Tax Returns and Reports....................................... 21

                                    ARTICLE V

                          Trust Securities Certificates

Section 5.01.  Initial Ownership............................................. 22
Section 5.02.  The Trust Securities Certificates............................. 22


                                      (i)


Section 5.03.  Delivery of Trust Securities Certificates..................... 22
Section 5.04.  Registration of Transfer and Exchange of
               Preferred Securities Certificates............................. 23
Section 5.05.  Mutilated, Destroyed, Lost or Stolen Trust
               Securities Certificates....................................... 24
Section 5.06.  Persons Deemed Securityholders................................ 24
Section 5.07.  Access to List of Securityholders' Names
               and Addresses................................................. 24
Section 5.08.  Maintenance of Office or Agency............................... 25
Section 5.09.  Appointment of Paying Agent................................... 25
Section 5.10.  No Transfer of Common Securities by Depositor................. 26
Section 5.11.  Book-Entry Preferred Securities Certificates;
                                    Common Securities Certificate............ 26
Section 5.12.  Definitive Preferred Securities Certificates.................. 26
Section 5.13.  Rights of Securityholders..................................... 27

                                   ARTICLE VI

                    Acts of Securityholders; Meetings; Voting

Section 6.01.  Limitations on Voting Rights.................................. 28
Section 6.02.  Notice of Meetings............................................ 29
Section 6.03.  Meetings of Preferred Securityholders......................... 29
Section 6.04.  Voting Rights................................................. 29
Section 6.05.  Proxies, etc.................................................. 29
Section 6.06.  Securityholder Action by Written Consent...................... 30
Section 6.07.  Record Date for Voting and Other Purposes..................... 30
Section 6.08.  Acts of Securityholders....................................... 30
Section 6.09.  Inspection of Records......................................... 31

                                   ARTICLE VII

                                  The Trustees

Section 7.01.  Certain Duties and Responsibilities........................... 32
Section 7.02.  Notice of Defaults; Direct Action by
               Securityholders............................................... 33
Section 7.03.  Certain Rights of Property Trustee............................ 33
Section 7.04.  Not Responsible for Recitals or Issuance of
               Securities.................................................... 35
Section 7.05.  May Hold Securities........................................... 35
Section 7.06.  Compensation; Indemnity; Fees................................. 35
Section 7.07.  Corporate Property Trustee Required; Eligibility
               of Trustees................................................... 36
Section 7.08.  Conflicting Interests......................................... 36
Section 7.09.  Co-Trustees and Separate Trustee.............................. 37
Section 7.10.  Resignation and Removal; Appointment of
               Successor..................................................... 38
Section 7.11.  Acceptance of Appointment by Successor........................ 40


                                      (ii)


Section 7.12.  Merger, Conversion, Consolidation or Succession
               to Business................................................... 41
Section 7.13.  Preferential Collection of Claims Against
               Depositor or Trust............................................ 41
Section 7.14.  Reports by Property Trustee................................... 41
Section 7.15.  Reports to the Property Trustee............................... 42
Section 7.16.  Evidence of Compliance with Conditions
               Precedent..................................................... 42
Section 7.17.  Statements Required in Officer's Certificate
               and Opinion of Counsel........................................ 42
Section 7.18.  Number of Trustees............................................ 42
Section 7.19.  Delegation of Power........................................... 43
Section 7.20.  Voting........................................................ 43

                                  ARTICLE VIII

                           Termination and Liquidation

Section 8.01.  Termination Upon Expiration Date.............................. 44
Section 8.02.  Early Termination............................................. 44
Section 8.03.  Termination................................................... 44
Section 8.04.  Liquidation................................................... 44

                                   ARTICLE IX

                                  Mergers, Etc.

Section 9.01.  Mergers, Consolidations, Amalgamations or
               Replacements of the Trust..................................... 46

                                   ARTICLE X

                           Miscellaneous Provisions

Section 10.01. Limitation of Rights of Securityholders....................... 48
Section 10.02. Amendment..................................................... 48
Section 10.03. Severability.................................................. 49
Section 10.04. Governing Law................................................. 49
Section 10.05. Payments Due on Non-Business Day.............................. 50
Section 10.06. Successors and Assigns........................................ 50
Section 10.07. Headings...................................................... 50
Section 10.08. Reports, Notices and Demands.................................. 50
Section 10.09. Agreement Not to Petition..................................... 51
Section 10.10. Trust Indenture Act; Conflict with Trust
               Indenture Act................................................. 51
Section 10.11. Acceptance of Terms of Trust Agreement,
               Guarantee and Indenture....................................... 52


                                     (iii)


                                                                            Page
                                                                            ----


                                      (iv)


                                                                            Page
                                                                            ----


                                       (v)


                             PSE&G Capital Trust II

              Certain Sections of this Trust Agreement relating to
                         Sections 310 through 318 of the
                           Trust Indenture Act of 1939


Trust Indenture                                                  Trust Agreement
  Act Section                                                        Section
- ---------------                                                  ---------------

ss.310(a)(1)................................................................7.07
      (a)(2)................................................................7.07
      (a)(3)................................................................7.09
      (a)(4).........................................................2.07(a)(ii)
      (b)...................................................................7.08
ss.311(a)...................................................................7.13
      (b)...................................................................7.13
ss.312(a)...................................................................5.07
      (b)...................................................................5.07
      (c)...................................................................5.07
ss.313(a)...................................................................7.14
      (b)...................................................................7.14
      (c)...................................................................7.14
      (d)...................................................................7.14
ss.314(a)...................................................................7.15
      (b).........................................................Not Applicable
      (c)(1)..........................................................7.16, 7.17
      (c)(2)..........................................................7.16, 7.17
      (c)(3)......................................................Not Applicable
      (d).........................................................Not Applicable
      (e).................................................................. 7.17
ss.315(a).......................................................7.01(a), 7.03(a)
      (b)............................................................7.02, 10.08
      (c)................................................................7.01(a)
      (d).............................................................7.01, 7.03
      (e).........................................................Not Applicable
ss.316(a).........................................................Not Applicable
      (a)(1)(A)...................................................Not Applicable
      (a)(1)(B)...................................................Not Applicable
      (a)(2)......................................................Not Applicable
      (b).........................................................Not Applicable
      (c).........................................................Not Applicable
ss.317(a)(1)......................................................Not Applicable
      (a)(2)......................................................Not Applicable
      (b)...................................................................5.09
ss.318(a)..................................................................10.10

- ------------------

Note: This reconciliation and tie sheet shall not, for any
purpose, be deemed to be a part of the Trust Agreement.


                                      (vi)


     AMENDED AND RESTATED TRUST AGREEMENT of PSE&G Capital Trust II (the
"Trust"), dated as of February 7, 1997, among (i) Public Service Electric and
Gas Company, a New Jersey corporation (the "Depositor"), (ii) First Union
National Bank, a national banking association, as trustee (the "Property
Trustee"), (iii) First Union Bank of Delaware, whose address in Delaware is 1225
King Street, Wilmington, Delaware 19801, as Delaware trustee (the "Delaware
Trustee"), (iv) Fred F. Saunders, an individual whose address is c/o Public
Service Electric and Gas Company, 80 Park Plaza, P.O. Box 570, Newark, New
Jersey 07101 (the "Administrative Trustee") (the Property Trustee, the Delaware
Trustee and the Administrative Trustee are referred to collectively as the
"Trustees"), and (v) the several Holders, as hereinafter defined.

                                   WITNESSETH:

     WHEREAS, the Depositor, the Property Trustee, the Delaware Trustee and the
Administrative Trustee have heretofore duly declared and established a business
trust pursuant to the Delaware Business Trust Act by entering into a Trust
Agreement, dated as of April 19, 1996 (the "Original Trust Agreement"), and by
executing and filing with the Secretary of State of the State of Delaware a
Certificate of Trust on April 19, 1996, a form of which is attached hereto as
Exhibit A; and

     WHEREAS, the Depositor, the Property Trustee, the Delaware Trustee and the
Administrative Trustee desire to amend and restate the Original Trust Agreement
in its entirety as set forth herein to provide for, among other things, (i) the
issuance of the Common Securities, as hereinafter defined, by the Trust to the
Depositor, (ii) the issuance and sale of the Preferred Securities, as
hereinafter defined, by the Trust pursuant to the Underwriting Agreement, as
hereinafter defined, and (iii) the acquisition by the Trust from the Depositor
of the Debentures, as hereinafter defined.

     NOW, THEREFORE, in consideration of the agreements and obligations set
forth herein and for other good and valuable consideration, the sufficiency of
which is hereby acknowledged, each party, for the benefit of the other party and
for the benefit of the Securityholders, as hereinafter defined, hereby amends
and restates the Original Trust Agreement in its entirety and agrees as follows:



                                    ARTICLE I

                                  Defined Terms

     Section 1.01. Definitions. For all purposes of this Trust Agreement, except
as otherwise expressly provided or unless the context otherwise requires:

          (a) each term defined in this Article I has the meaning assigned to it
     in this Article I and includes the plural as well as the singular;

          (b) each of the other terms used herein that is defined in the Trust
     Indenture Act, either directly or by reference therein, has the meaning
     assigned to it therein;

          (c) unless the context otherwise requires, any reference to an
     "Article" or a "Section" refers to an Article or a Section, as the case may
     be, of this Trust Agreement; and

          (d) the words "herein", "hereof" and "hereunder" and other words of
     similar import refer to this Trust Agreement as a whole and not to any
     particular Article, Section or other subdivision.

     "Act" has the meaning specified in Section 6.08.

     "Administrative Trustee" means the individual identified as the
"Administrative Trustee" in the preamble to this Trust Agreement, solely in
his/her capacity as Administrative Trustee of the Trust created and continued
hereunder and not in his/her individual capacity, or such Administrative
Trustee's successor in interest in such capacity, or any successor trustee
appointed as herein provided.

     "Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.

     "Bankruptcy Event" means, with respect to any Person, the occurrence of any
of the following events:

     (a) Such Person, pursuant to or within the meaning of


                                       2


any Bankruptcy Law:

     (i)   commences a voluntary case or proceeding;

     (ii)  consents to the entry of an order for relief against it in an
           involuntary case or proceeding;

     (iii) consents to the appointment of a Custodian, as hereinafter defined,
           of it or for all or substantially all of its property, and such
           Custodian is not discharged within 60 days;

     (iv)  makes a general assignment for the benefit of its creditors; or

     (v)   admits in writing its inability to pay its debts generally as they
           become due; or

     (b) A court of competent jurisdiction enters an order or decree under any
Bankruptcy Law that:

     (i)   is for relief against such Person in an involuntary case or
           proceeding;

     (ii)  appoints a Custodian of such Person for all or substantially all of
           its properties;

     (iii) orders the liquidation of such Person;

     (iv)  and in each case the order or decree remains unstayed and in effect
           for 60 days.

     "Bankruptcy Laws" means Title 11 of the United States Code, or similar
federal or state law for the relief of debtors. "Custodian" means any receiver,
trustee, assignee, liquidator, sequestrator, custodian or similar official under
any Bankruptcy Law.

     "Board Resolution" means (i) a copy of a resolution certified by the
Secretary or an Assistant Secretary of the Depositor to have been duly adopted
by the Depositor's Board of Directors or a committee established thereby and to
be in full force and effect on the date of such certification or (ii) a
certificate signed by the authorized officer or officers of the


                                       3


Depositor to whom the Depositor's Board of Directors or a committee established
thereby has delegated its authority, and in each case, delivered to the
Trustees.

     "Book-Entry Preferred Securities Certificates" means certificates
representing Preferred Securities issued in global, fully registered form with
the Clearing Agency as described in Section 5.11.

     "Business Day" means a day other than (a) a Saturday or Sunday, or (b) a
day on which banking institutions in The City of New York or the State of New
Jersey are required by law or executive order to remain closed.

     "Certificate Depository Agreement" means the agreement among the Trust, the
Property Trustee and The Depository Trust Company, as the initial Clearing
Agency, dated as of the Closing Date, relating to the Book-Entry Preferred
Securities Certificates, substantially in the form attached hereto as Exhibit B,
as the same may be amended and supplemented from time to time.

     "Clearing Agency" means an organization registered as a "clearing agency"
pursuant to Section 17A of the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder. The Depository Trust Company
will be the initial Clearing Agency.

     "Closing Date" means the Time of Delivery as defined in the Underwriting
Agreement, which date is also the date of execution and delivery of this Trust
Agreement.

     "Code" means the Internal Revenue Code of 1986, as amended.

     "Commission" means the Securities and Exchange Commission, as from time to
time constituted, created under the Securities Exchange Act of 1934, as amended,
or, if at any time after the execution of this Trust Agreement such Commission
is not existing and performing the duties now assigned to it under the Trust
Indenture Act, then the body performing such duties at such time.

     "Common Security" means an undivided beneficial interest in the assets of
the Trust, having a Liquidation Amount of $25 and having the rights provided
therefor in this Trust Agreement, including the right to receive Distributions
and a Liquidation Distribution as provided herein.

     "Common Securities Certificate" means a certificate


                                       4


evidencing ownership of Common Securities, substantially in the form attached
hereto as Exhibit C.

     "Corporate Trust Office" means the principal corporate trust office of the
Property Trustee located in the State of New Jersey which at the date hereof is
765 Broad Street, Newark, New Jersey 07107.

     "Creditor" has the meaning specified in Section 2.03.

     "Debenture Event of Default" means an "Event of Default" as defined in the
Indenture with respect to the Debentures.

     "Debenture Redemption Date" means "Redemption Date" as defined in the
Indenture with respect to the Debentures.

     "Debenture Trustee" means First Union National Bank, a national banking
association, in its capacity as trustee under the Indenture, or any successor
thereto, appointed in accordance with the terms and provisions of the Indenture.

     "Debentures" means the Depositor's 8.125% Deferrable Interest Subordinated
Debentures, Series B, issued pursuant to the Indenture.

     "Definitive Preferred Securities Certificates" means certificates
representing Preferred Securities issued in certificated, fully registered form
as described in Section 5.12.

     "Delaware Business Trust Act" means Chapter 38 of Title 12 of the Delaware
Code, 12 Del. C.ss. 3801, et seq., as it may be amended from time to time.

     "Delaware Trustee" means the entity identified as the "Delaware Trustee" in
the preamble to this Trust Agreement solely in its capacity as Delaware Trustee
of the Trust created and continued hereunder and not in its individual capacity,
or its successor in interest in such capacity, or any successor trustee
appointed as herein provided.

     "Depositor" has the meaning specified in the preamble to this Trust
Agreement.

     "Distribution Date" has the meaning specified in Section 4.01(a).

     "Distributions" means amounts payable in respect of the Trust Securities as
provided in Section 4.01.


                                       5


     "Event of Default" means the occurrence of a Debenture Event of Default
(whatever the reason for such Event of Default and whether it shall be voluntary
or involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body).

     "Expiration Date" has the meaning specified in Section 8.01.

     "Extension Period" means the period or periods in which pursuant to the
Indenture payments of interest on the Debentures are deferred by extending the
interest payment periods thereof.

     "Guarantee" means the Guarantee Agreement executed and delivered by the
Depositor to First Union National Bank, a national banking association, as
trustee thereunder, contemporaneously with the execution and delivery of this
Trust Agreement, for the benefit of the Holders of the Preferred Securities, as
amended from time to time.

     "Indenture" means the Indenture, dated as of June 1, 1996, between the
Depositor and the Debenture Trustee, as trustee thereunder, as amended or
supplemented from time to time.

     "Lien" means any lien, pledge, charge, encumbrance, mortgage, deed of
trust, adverse ownership interest, hypothecation, assignment, security interest
or preference, priority or other security agreement or preferential arrangement
of any kind or nature whatsoever.

     "Like Amount" means (a) with respect to a redemption of Trust Securities,
Trust Securities having an aggregate Liquidation Amount equal to the principal
amount of Debentures to be paid in accordance with the Indenture and (b) with
respect to a distribution of Debentures to Holders of Trust Securities in
connection with a termination and liquidation of the Trust, Debentures having a
principal amount equal to the aggregate Liquidation Amount of the Trust
Securities in exchange for which such Debentures are distributed.

     "Liquidation Amount" means the stated amount of $25 per Trust Security.

     "Liquidation Date" means the date on which Debentures are to be distributed
to Holders of Trust Securities in connection with a termination and liquidation
of the Trust pursuant to Section 8.04(a).


                                       6


     "Liquidation Distribution" has the meaning specified in Section 8.04(d).

     "1940 Act" means the Investment Company Act of 1940, as amended.

     "Officers' Certificate" means a certificate signed by the Chairman, the
President, any Vice President, the Treasurer, any Assistant Treasurer, the
Secretary or any Assistant Secretary of the Depositor.

     "Opinion of Counsel" means a written opinion of counsel, who may be counsel
for the Trust, the Property Trustee or the Depositor or an Affiliate of the
Depositor, but not an employee of any thereof, and who shall be acceptable to
the Property Trustee.

     "Original Trust Agreement" has the meaning specified in the recitals to
this Trust Agreement.

     "Outstanding", when used with respect to Trust Securities, means, as of the
date of determination, all Trust Securities theretofore executed and delivered
under this Trust Agreement, except:

          (a) Trust Securities theretofore cancelled by the Administrative
     Trustee or delivered to the Administrative Trustee for cancellation;

          (b) Trust Securities for whose redemption money in the necessary
     amount has been theretofore deposited with the Property Trustee or any
     Paying Agent for the Holders of such Trust Securities; provided that, if
     such Trust Securities are to be redeemed, notice of such redemption has
     been duly given pursuant to this Trust Agreement;

          (c) Trust Securities which have been paid or in exchange for or in
     lieu of which other Trust Securities have been executed and delivered
     pursuant to Section 5.05, other than any such Trust Securities in respect
     of which there shall have been presented to the Property Trustee proof
     satisfactory to it that such Trust Securities are held by a bona fide
     purchaser; and

          (d) as provided in Section 8.04(c);

provided, however, that in determining whether the Holders of the requisite
Liquidation Amount of the Outstanding Preferred Securities have given any
request, demand, authorization, direction, notice, consent or waiver hereunder,
Preferred


                                       7


Securities owned by the Depositor, any Trustee or any Affiliate of the Depositor
or any Trustee shall be disregarded and deemed not to be Outstanding, except
that (a) in determining whether any Trustee shall be protected in relying upon
any such request, demand, authorization, direction, notice, consent or waiver,
only Preferred Securities which such Trustee actually knows to be so owned shall
be so disregarded and (b) the foregoing shall not apply at any time when all of
the Outstanding Preferred Securities are owned by the Depositor, one or more of
the Trustees and/or any such Affiliate. Preferred Securities so owned which have
been pledged in good faith may be regarded as Outstanding if the pledgee
establishes to the satisfaction of the Administrative Trustee the pledgee's
right so to act with respect to such Preferred Securities and that the pledgee
is not the Depositor or any Affiliate of the Depositor.

     "Paying Agent" means the Property Trustee and any co-paying agent appointed
pursuant to Section 5.09.

     "Payment Account" means a segregated non-interest-bearing corporate trust
account maintained by the Property Trustee in its trust department for the
benefit of the Securityholders in which all amounts paid to the Property Trustee
in respect of the Debentures or the Guarantee will be held and from which the
Property Trustee or such other Paying Agent shall make payments to the
Securityholders in accordance with Article 4.

     "Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.

     "Preferred Security" means a 8.125% Cumulative Quarterly Income Preferred
Security, Series B issued by the Trust, and having an undivided beneficial
interest in the assets of the Trust, having a Liquidation Amount of $25 and
having rights provided therefor in this Trust Agreement, including the right to
receive Distributions and a Liquidation Distribution as provided herein.

     "Preferred Securities Certificate" means a certificate evidencing ownership
of one or more Preferred Securities, substantially in the form attached hereto
as Exhibit D.

     "Property Trustee" means the commercial bank or trust company identified as
the "Property Trustee" in the preamble to this Trust Agreement solely in its
capacity as Property Trustee of the Trust heretofore created and continued
hereunder and not in its individual capacity, or its successor in interest in
such capacity, or any successor property trustee appointed as herein provided.


                                       8


     "Redemption Date" means, with respect to any Trust Security to be redeemed,
the date fixed for such redemption by or pursuant to this Trust Agreement;
provided that each Debenture Redemption Date and the stated maturity of the
Debentures shall be a Redemption Date for a Like Amount of Trust Securities.

     "Redemption Price" means, with respect to any Trust Security, the
Liquidation Amount of such Trust Security, plus accumulated and unpaid
Distributions thereon to the Redemption Date.

     "Securities Register" and "Securities Registrar" have the respective
meanings specified in Section 5.04.

     "Securityholder" or "Holder" means a Person in whose name a Trust Security
or Securities is registered in the Securities Register; any such Person is a
beneficial owner within the meaning of the Delaware Business Trust Act.

     "Successor Securities" has the meaning specified in Section 8.05.

     "Trust" means the Delaware business trust created and continued hereby and
identified on the cover page to this Trust Agreement.

     "Trust Agreement" means this Amended and Restated Trust Agreement, as the
same may be modified, amended or supplemented in accordance with the applicable
provisions hereof, including all exhibits hereto, including, for all purposes of
this Trust Agreement and any such modification, amendment or supplement, the
provisions of the Trust Indenture Act that are deemed to be a part of and govern
this Trust Agreement and any such modification, amendment or supplement,
respectively.

     "Trust Indenture Act" means the Trust Indenture Act of 1939 as in force at
the date as of which this Trust Agreement was executed; provided, however, that
in the event the Trust Indenture Act of 1939 is amended after such date, "Trust
Indenture Act" means, to the extent required by any such amendment, the Trust
Indenture Act of 1939 as so amended.

     "Trust Property" means (a) the Debentures, (b) any cash on deposit in, or
owing to, the Payment Account and (c) all proceeds and rights in respect of the
foregoing and any other property and assets for the time being held or deemed to
be held by the Property Trustee pursuant to the trusts of this Trust Agreement.


                                       9


     "Trust Security" means any one of the Common Securities or the Preferred
Securities.

     "Trust Securities Certificate" means any one of the Common Securities
Certificates or the Preferred Securities Certificates.

     "Underwriting Agreement" means the Underwriting Agreement, dated February
4, 1997, among the Trust, the Depositor and the Underwriters named therein.

                                   ARTICLE II

                            Continuation of the Trust

     Section 2.01. Name. The Trust created and continued hereby shall be known
as "PSE&G Capital Trust II" as such name may be modified from time to time by
the Administrative Trustee following written notice to the Holders of Trust
Securities and the other Trustees, in which name the Trustees may conduct the
business of the Trust, make and execute contracts and other instruments on
behalf of the Trust and sue and be sued.

     Section 2.02. Office of the Delaware Trustee; Principal Place of Business.
The address of the Delaware Trustee in the State of Delaware is 1225 King
Street, Wilmington, Delaware 19801 or such other address in the State of
Delaware as the Delaware Trustee may designate by written notice to the
Securityholders and the Depositor. The principal place of business of the Trust
is 80 Park Plaza, Newark, New Jersey 07101.

     Section 2.03. Initial Contribution of Trust Property; Expenses of the
Trust.

     (a) The Property Trustee acknowledges receipt in trust from the Depositor
in connection with the Original Trust Agreement of the sum of $10, which
constituted the initial Trust Property.

     (b) The Depositor shall be responsible for and shall pay for all
obligations (other than with respect to the Trust Securities) and all costs and
expenses of the Trust (including, but not limited to, costs and expenses
relating to the organization of the Trust, the issuance and sale of the
Preferred Securities, the fees and expenses (including reasonable counsel fees
and expenses) of the Trustees as provided in Section 7.06, the costs and
expenses of accountants, attorneys, statistical or bookkeeping services,
expenses for printing and engraving and computing or accounting equipment,
Paying Agent(s), Securities Registrar, duplication, travel and telephone and
other telecommunications expenses and


                                       10


costs and expenses incurred in connection with the disposition of Trust assets).

     (c) The Depositor will pay any and all taxes (other than United States
withholding taxes attributable to the Trust or its assets) and all liabilities,
costs and expenses with respect to such taxes of the Trust.

     (d) The Depositor's obligations under this Section 2.03 shall be for the
benefit of, and shall be enforceable by, the Property Trustee and any Person to
whom any such obligations, costs, expenses and taxes are owed (a "Creditor")
whether or not such Creditor has received notice hereof. The Property Trustee
and any such Creditor may enforce the Depositor's obligations under this Section
2.03 directly against the Depositor and the Depositor irrevocably waives any
right or remedy to require that the Property Trustee or any such Creditor take
any action against the Trust or any other Person before proceeding against the
Depositor. The Depositor agrees to execute such additional agreements as may be
necessary or desirable in order to give full effect to the provisions of this
Section 2.03.

     (e) The Depositor shall make no claim upon the Trust Property for the
payment of such expenses.

     Section 2.04. Issuance of the Trust Securities. The Depositor, on behalf of
the Trust and pursuant to the Original Trust Agreement, executed and delivered
the Underwriting Agreement. Contemporaneously with the execution and delivery of
this Trust Agreement, the Administrative Trustee, on behalf of the Trust, shall
execute in accordance with Section 5.02 and deliver to the Underwriters named in
the Underwriting Agreement one or more Book-Entry Preferred Securities
Certificates, registered in the name of the nominee of the initial Clearing
Agency, representing 3,800,000 Preferred Securities having an aggregate
Liquidation Amount of $95,000,000, against receipt by the Property Trustee of
the aggregate purchase price of such Preferred Securities of $95,000,000, which
amount the Administrative Trustee shall promptly deliver to the Property
Trustee. Contemporaneously therewith, the Administrative Trustee, on behalf of
the Trust, shall execute in accordance with Section 5.02 and deliver to the
Depositor a Common Securities Certificate, registered in the name of the
Depositor, representing 117,526 Common Securities having an aggregate
Liquidation Amount of $2,938,150, and in satisfaction of the purchase price of
such Common Securities the Depositor shall deliver to the Property Trustee the
sum of $2,938,150.

     Section 2.05. Purchase of Debentures. Contemporaneously with the execution
and delivery of this Trust Agreement (i) the


                                       11


Administrative Trustee, on behalf of the Trust, shall purchase $97,938,150
aggregate principal amount of Debentures from the Depositor, registered in the
name of the Trust and (ii) in satisfaction of the purchase price for such
Debentures, the Property Trustee, on behalf of the Trust, shall deliver to the
Depositor the sum of $97,938,150.

     Section 2.06. Declaration of Trust. The exclusive purposes and functions of
the Trust are (a) to issue and sell Trust Securities and use the proceeds from
such sale to acquire the Debentures, (b) to maintain the status of the Trust as
a grantor trust for United States Federal income tax purposes, and (c) except as
otherwise limited herein, to engage in only those activities necessary,
convenient or incidental thereto. The Depositor hereby appoints the Trustees as
trustees of the Trust, to have all the rights, powers and duties to the extent
set forth herein, and the Trustees hereby accept such appointment. The Property
Trustee hereby declares that it will hold the Trust Property in trust upon and
subject to the conditions set forth herein for the benefit of the
Securityholders. The Administrative Trustee shall have all rights, powers and
duties set forth herein. The Delaware Trustee shall not be entitled to exercise
any powers, nor shall the Delaware Trustee have any of the duties and
responsibilities of the Property Trustee or the Administrative Trustee set forth
herein. The Delaware Trustee shall be one of the Trustees of the Trust for the
sole and limited purpose of fulfilling the requirements of Section 3807 of the
Delaware Business Trust Act.

     Section 2.07. Authorization to Enter into Certain Transactions.

     (a) The Trustees shall conduct the affairs of the Trust in accordance with
the terms of this Trust Agreement. Subject to the limitations set forth in
paragraph (b) of this Section, and in accordance with the following provisions
(i) and (ii), the Trustees shall have the authority to enter into all
transactions and agreements determined by the Trustees to be appropriate in
exercising the authority, express or implied, otherwise granted to the Trustees
under this Trust Agreement, and to perform all acts in furtherance thereof,
including without limitation, the following:

          (i) As among the Trustees, the Administrative Trustee shall have the
     power and authority to act on behalf of the Trust with respect to the
     following matters:

               (A) executing and delivering the Trust Securities on behalf of
          the Trust;

               (B) causing the Trust to enter into, and


                                       12


          executing, delivering and performing on behalf of the Trust, the
          Certificate Depository Agreement and such other agreements as may be
          necessary or desirable in connection with the purposes and function of
          the Trust, including the appointment of a successor depositary;

               (C) assisting in registering the Preferred Securities under the
          Securities Act of 1933, as amended, and under state securities or blue
          sky laws, and qualifying this Trust Agreement as a trust indenture
          under the Trust Indenture Act;

               (D) assisting in the listing of the Preferred Securities upon
          such securities exchange or exchanges as the Depositor shall determine
          and the registration of the Preferred Securities under the Securities
          Exchange Act of 1934, as amended, and the preparation and filing of
          all periodic and other reports and other documents pursuant to the
          foregoing;

               (E) to the extent provided in this Trust Agreement, terminating
          and liquidating the Trust and preparing, executing and filing the
          certificate of cancellation with the Secretary of State of the State
          of Delaware;

               (F) sending notices or assisting the Property Trustee in sending
          notices and other information regarding the Trust Securities and the
          Debentures to Securityholders in accordance with this Trust Agreement;
          and

               (G) taking any action incidental to the foregoing as the
          Administrative Trustee may from time to time determine is necessary or
          advisable to give effect to the terms of this Trust Agreement for the
          benefit of the Securityholders (without consideration of the effect of
          any such action on any particular Securityholder).

          (ii) As among the Trustees, the Property Trustee shall have the power,
     duty and authority to act on behalf of the Trust with respect to the
     following matters:

               (A) establishing and maintaining the Payment Account and
          appointing Paying Agents (subject to Section 5.09);

               (B) receiving payment of the purchase price of the Trust
          Securities;

               (C) receiving and holding the Debentures;

               (D) collecting interest and principal payments on the Debentures
          and depositing them in the Payment Account;


                                       13


               (E) making Distributions and other payments to the
          Securityholders in respect of the Trust Securities;

               (F) exercising all of the rights, powers and privileges of a
          holder of the Debentures;

               (G) sending notices of defaults, redemptions, Extension Periods,
          liquidations and other information regarding the Trust Securities and
          the Debentures to the Securityholders in accordance with this Trust
          Agreement;

               (H) to the extent provided in this Trust Agreement, terminating
          and liquidating the Trust, including distributing the Trust Property
          in accordance with the terms of this Trust Agreement, and preparing,
          executing and filing the certificate of cancellation with the
          Secretary of State of the State of Delaware;

               (I) after an Event of Default, taking any action incidental to
          the foregoing as the Property Trustee may from time to time determine
          is necessary or advisable to give effect to the terms of this Trust
          Agreement and protect and conserve the Trust Property for the benefit
          of the Securityholders (without consideration of the effect of any
          such action on any particular Securityholder); and

               (J) registering transfers and exchanges of the Preferred
          Securities in accordance with this Trust Agreement (but only if at
          such time the Property Trustee shall be the Securities Registrar).

     (b) So long as this Trust Agreement remains in effect, the Trust (or the
Trustees acting on behalf of the Trust) shall not undertake any business,
activities or transaction except as expressly provided herein or contemplated
hereby. In particular, the Trustees acting on behalf of the Trust shall not (i)
acquire any assets or investments (other than the Debentures), reinvest the
proceeds derived from investments, possess any power or otherwise act in such a
way as to vary the Trust Property or engage in any activities not authorized by
this Trust Agreement, (ii) sell, assign, transfer, exchange, mortgage, pledge,
set-off or otherwise dispose of any of the Trust Property or interests therein,
including to Securityholders, except as expressly provided herein, (iii) take
any action that would cause the Trust to fail or cease to qualify as a grantor
trust for United States Federal income tax purposes, (iv) incur any indebtedness
for borrowed money or issue any other debt, (v) issue any securities or other
evidences of beneficial ownership of, or beneficial interests in, the Trust
other than the Trust Securities, or (vi) take or consent to any


                                       14


action that would result in the placement of a Lien on any of the Trust
Property. The Administrative Trustee shall defend all claims and demands of all
Persons at any time claiming any Lien on any of the Trust Property adverse to
the interest of the Trust or the Securityholders in their capacity as
Securityholders.

     (c) In connection with the issue and sale of the Preferred Securities, the
Depositor shall have the right and responsibility to assist the Trust with
respect to, or effect on behalf of the Trust, the following (and any actions
taken by the Depositor in furtherance of the following prior to the date of this
Trust Agreement are hereby ratified and confirmed in all respects):

          (i) preparing for filing with the Commission and executing on behalf
     of the Trust a registration statement on Form S-3 in relation to the
     Preferred Securities, including any amendments thereto;

          (ii) determining the States in which to take appropriate action to
     qualify or register for sale all or part of the Preferred Securities and
     doing any and all such acts, other than actions which must be taken by or
     on behalf of the Trust, and advising the Trustees of actions they must take
     on behalf of the Trust, and preparing for execution and filing any
     documents to be executed and filed by the Trust or on behalf of the Trust,
     as the Depositor deems necessary or advisable in order to comply with the
     applicable laws of any such States;

          (iii) preparing for filing and executing on behalf of the Trust an
     application to the New York Stock Exchange or any other national stock
     exchange or The Nasdaq National Market for listing upon notice of issuance
     of any Preferred Securities;

          (iv) preparing for filing with the Commission and executing on behalf
     of the Trust a registration statement on Form 8-A relating to the
     registration of the Preferred Securities under Section 12(b) or 12(g) of
     the Securities Exchange Act of 1934, as amended, including any amendments
     thereto;

          (v) negotiating the terms of, and executing and delivering, the
     Underwriting Agreement providing for the sale of the Preferred Securities;
     and

          (vi) taking any other actions necessary or desirable to carry out any
     of the foregoing activities.

     (d) Notwithstanding anything herein to the contrary, the Administrative
Trustee is authorized and directed to conduct the affairs of the Trust and to
operate the Trust so that (i) the Trust


                                       15


will not be deemed to be an "investment company" required to be registered under
the 1940 Act, or taxed as a corporation or a partnership for United States
Federal income tax purposes (ii) the Trust will qualify as a grantor trust for
United States Federal income tax purposes and (iii) the Debentures will be
treated as indebtedness of the Depositor for United States Federal income tax
purposes. In this connection, the Depositor and the Administrative Trustee are
authorized to take any action, not inconsistent with applicable law, the
Certificate of Trust, as amended from time to time, or this Trust Agreement,
that each of the Depositor and the Administrative Trustee determines in their
discretion to be necessary or desirable for such purposes.

     Section 2.08. Assets of Trust. The assets of the Trust shall consist of the
Trust Property.

     Section 2.09. Title to Trust Property. Legal title to all Trust Property
shall be vested at all times in the Property Trustee (in its capacity as such)
and shall be held and administered by the Property Trustee for the benefit of
the Securityholders in accordance with this Trust Agreement.

                                   ARTICLE III

                                 Payment Account

     Section 3.01. Payment Account.

     (a) On or prior to the Closing Date, the Property Trustee shall establish
the Payment Account. All monies and other property deposited or held from time
to time in the Payment Account shall be held by the Property Trustee for the
exclusive benefit of the Securityholders. The Property Trustee shall have
exclusive control of the Payment Account for the purpose of making deposits in
and withdrawals from the Payment Account in accordance with this Trust
Agreement; provided that any Paying Agent shall have the right of withdrawal
with respect to the Payment Account solely for the purpose of making the
payments contemplated under Article 4.

     (b) The Property Trustee shall deposit in the Payment Account, promptly
upon receipt, all payments of principal of or interest on the Debentures and any
amounts paid to the Property Trustee pursuant to the Guarantee. Amounts held in
the Payment Account shall not be invested pending distribution thereof.


                                       16


                                   ARTICLE IV

                            Distributions; Redemption

                          Section 4.01. Distributions.

     (a) Distributions on the Trust Securities shall be cumulative, and will
accumulate whether or not there are funds of the Trust available for the payment
of Distributions. Distributions shall accumulate from February 7, 1997 and,
except during an Extension Period for the Debentures pursuant to the Indenture,
shall be payable quarterly in arrears on March 31, June 30, September 30 and
December 31 of each year, commencing on March 31, 1997. If any date on which
Distributions are otherwise payable on the Trust Securities is not a Business
Date then the payment of such Distributions shall be made on the next succeeding
day which is a Business Day (and without any interest or other payment in
respect of any such delay), except that, if such Business Day is in the next
succeeding calendar year, payment of such Distributions shall be made on the
immediately preceding Business Day, in each case with the same force and effect
as if made on such date (each date on which Distributions are payable in
accordance with this Section 4.01(a) is referred to as a "Distribution Date").

     Within two Business Days after receipt by the Property Trustee of notice of
an Extension Period pursuant to Section 4.01 of the Indenture, the Property
Trustee shall give notice thereof to the Securityholders by first class mail,
postage prepaid.

     (b) The Trust Securities represent undivided beneficial interests in the
Trust Property, and, subject to Sections 4.03 and 4.06 hereof, all Distributions
will be made pro rata on each of the Trust Securities. Distributions on the
Trust Securities shall be payable at a rate of 8.125% per annum of the
Liquidation Amount of the Trust Securities. The amount of Distributions payable
for any full quarterly period shall be computed on the basis of a 360-day year
of twelve 30-day months. During an Extension Period for the Debentures, the rate
per annum at which Distributions on the Trust Securities accumulate shall be
increased by an amount such that the aggregate amount of Distributions that
accumulate on all Trust Securities during any such Extension Period is equal to
the aggregate amount of interest (including interest payable on unpaid interest
at the rate per annum set forth above, compounded quarterly) that accrues during
any such Extension Period on the Debentures.

     (c) Distributions on the Trust Securities shall be made from the Payment
Account by the Property Trustee or any Paying


                                       17


Agent and shall be payable on each Distribution Date only to the extent that the
Trust has funds then available in the Payment Account for the payment of such
Distributions.

     (d) Distributions on the Trust Securities on each Distribution Date shall
be payable to the Holders thereof as they appear on the Securities Register for
the Trust Securities on the relevant record date, which shall be one Business
Day prior to such Distribution Date; provided, however, that in the event that
the Preferred Securities are not in book-entry-only form, the relevant record
date shall be the 15th day of the last month of each calendar quarter, whether
or not a Business Day.

     Section 4.02. Redemption.

     (a) Upon receipt by the Trust of a notice of redemption of Debentures, the
Trust will call for redemption a Like Amount of Trust Securities at the
Redemption Price on the Debenture Redemption Date and will call for redemption
all Outstanding Trust Securities on the stated maturity date of the Debentures.

     (b) Notice of redemption shall be given by the Property Trustee by
first-class mail, postage prepaid, mailed not less than 30 nor more than 60 days
prior to the Redemption Date to each Holder of Trust Securities to be redeemed,
at such Holder's address appearing in the Securities Register. All notices of
redemption shall state:


                                       18


          (i) the Redemption Date;

          (ii) the Redemption Price;

          (iii) the CUSIP number;

          (iv) the place or places where Trust Securities Certificates are to be
     surrendered for payment of the Redemption Price;

          (v) that on the Redemption Date the Redemption Price will become
     payable upon each such Trust Security to be redeemed and that Distributions
     thereon will cease to accumulate on and after such date; and

          (vi) if less than all of the Outstanding Trust Securities are to be
     redeemed, the identification and total Liquidation Amount of the particular
     Trust Securities to be redeemed.

     (c) The Trust Securities redeemed on each Redemption Date shall be redeemed
at the Redemption Price with the proceeds from the contemporaneous redemption or
payment at maturity of Debentures. Redemptions of the Trust Securities shall be
made and the Redemption Price shall be payable on each Redemption Date only to
the extent that the Trust has funds then available in the Payment Account for
the payment of such Redemption Price.

     (d) If the Trust, by action of the Property Trustee, gives a notice of
redemption in respect of any Preferred Securities, then, on the Redemption Date,
subject to Section 4.02(c), the Property Trustee will irrevocably deposit with
the Paying Agent funds sufficient to pay the Redemption Price for the Preferred
Securities being redeemed on such date and will give the Paying Agent
irrevocable instructions and authority to pay the Redemption Price to the
Holders of such Preferred Securities upon surrender of their Preferred
Securities Certificates. Notwithstanding the foregoing, Distributions payable on
or prior to the Redemption Date for any Trust Securities called for redemption
shall be payable to the Holders of such Trust Securities as they appear on the
Securities Register for the Trust Securities on the record dates for the related
Distribution Dates. If notice of redemption shall have been given and funds
irrevocably deposited as required, then upon the date of such deposit, all
rights of Securityholders holding Trust Securities so called for redemption will
cease, except the right of such Securityholders to receive the Redemption Price,
but without interest, and such Trust Securities will cease to be Outstanding. In
the event that any date on which any Redemption Price is payable is not a
Business Day, then payment


                                       19


of the Redemption Price payable on such date will be made on the next succeeding
day which is a Business Day (and without any interest or other payment in
respect of any such delay), except that, if such Business Day is in the next
succeeding calendar year, such payment will be made on the immediately preceding
Business Day, in each case, with the same force and effect as if made on such
date. In the event that payment of the Redemption Price in respect of any Trust
Securities called for redemption is improperly withheld or refused, and not paid
either by the Trust or by the Depositor pursuant to the Guarantee, Distributions
on such Trust Securities will continue to accumulate, at the then applicable
rate, from the Redemption Date originally established by the Trust for such
Trust Securities to the date such Redemption Price is actually paid, in which
case the actual payment date will be the date fixed for redemption for purposes
of calculating the Redemption Price.

     (e) If less than all the Outstanding Trust Securities are to be redeemed on
a Redemption Date, then the aggregate Liquidation Amount of Trust Securities to
be redeemed shall be allocated 3% to the Common Securities and 97% to the
Preferred Securities. The particular Preferred Securities to be redeemed shall
be selected by the Property Trustee from the Outstanding Preferred Securities
not previously called for redemption, by such method as the Property Trustee
shall deem fair and appropriate. The Property Trustee shall promptly notify the
Securities Registrar in writing of the Preferred Securities selected for
redemption. If fewer than all of the Trust Securities represented by a Trust
Securities Certificate are redeemed, the Administrative Trustee shall execute
for the Holder a new Trust Securities Certificate representing the unredeemed
Trust Securities. For all purposes of this Trust Agreement, unless the context
otherwise requires, all provisions relating to the redemption of Preferred
Securities shall relate, in the case of any Preferred Securities redeemed or to
be redeemed only in part, to the portion of the Liquidation Amount of Preferred
Securities which has been or is to be redeemed.

     Section 4.03. Subordination of Common Securities.

     (a) Payment of Distributions on, and the Redemption Price of, the Trust
Securities, as applicable, shall be made pro rata based on the Liquidation
Amount of the Trust Securities; provided, however, that if on any Distribution
Date or Redemption Date, a Debenture Event of Default shall have occurred and be
continuing, no payment of any Distribution on, or Redemption Price of, any
Common Security, and no other payment on account of the liquidation of Common
Securities, shall be made unless payment in full in cash of all accumulated and
unpaid Distributions on all Outstanding Preferred Securities for all
distribution periods terminating on or prior thereto, or in the case of payment
of the Redemption Price, the full amount of such Redemption Price on all
Outstanding Preferred Securities then being redeemed, shall have


                                       20


been made or provided for, and all funds immediately available to the Property
Trustee shall first be applied to the payment in full in cash of all
Distributions on, or the Redemption Price of, Preferred Securities then due and
payable.

     (b) In the case of the occurrence of any Debenture Event of Default, the
Holder of Common Securities will be deemed to have waived any right to act with
respect to any related Event of Default under this Trust Agreement and such
Debenture Event of Default until the effect of such related Event of Default and
such Debenture Event of Default has been cured, waived or otherwise eliminated.
Until any such Event of Default under this Trust Agreement and such Debenture
Event of Default has been so cured, waived or otherwise eliminated, the Property
Trustee shall act solely on behalf of the Holders of the Preferred Securities
and not the Holder of the Common Securities, and only the Holders of the
Preferred Securities will have the right to direct the Property Trustee to act
on their behalf.

     Section 4.04. Payment Procedures. Payments of Distributions pursuant to
Section 4.01 in respect of the Preferred Securities shall be made by check
mailed to the address of the Holder thereof as such address shall appear on the
Securities Register or, if the Preferred Securities are held by a Clearing
Agency, such Distributions shall be made to the Clearing Agency by wire transfer
in immediately available funds. Payments of Distributions pursuant to Section
4.01 in respect of the Common Securities shall be made in such manner as shall
be mutually agreed between the Property Trustee and the Holder of the Common
Securities. Payment of the Redemption Price or Liquidation Distribution of the
Trust Securities shall be made in immediately available funds upon surrender of
the Preferred Securities Certificate representing such Preferred Securities at
the Corporate Trust Office of the Property Trustee.

     Section 4.05. Tax Returns and Reports. The Administrative Trustee shall
prepare (or cause to be prepared), at the Depositor's expense, and file all
Federal, State and local tax and information returns and reports required to be
filed by or in respect of the Trust. In this regard, the Administrative Trustee
shall (a) prepare and file (or cause to be prepared or filed) the appropriate
Internal Revenue Service Form required to be filed in respect of the Trust in
each taxable year of the Trust and (b) prepare and furnish (or cause to be
prepared and furnished) to each Securityholder the related Internal Revenue
Service Form 1099 OID, or any successor form or the information required to be
provided on such form. The Administrative Trustee shall provide the Depositor
and the Property Trustee with a copy of all such returns, reports and schedules
promptly after such filing or furnishing. The


                                       21


Trustees shall comply with United States Federal withholding and backup
withholding tax laws and information reporting requirements with respect to any
payments to Securityholders under the Trust Securities.

     Section 4.06. Payments under Indenture. Any amount payable hereunder to any
Holder of Preferred Securities shall be reduced by the amount of any
corresponding payment such Holder has directly received pursuant to Section 6.07
of the Indenture or pursuant to the Guarantee. Notwithstanding the provisions
hereunder to the contrary, Securityholders acknowledge that any Holder of
Preferred Securities that receives payment under Section 6.07 of the Indenture
may receive amounts greater than the amount such Holder may be entitled to
receive pursuant to the other provisions of this Trust Agreement.

                                    ARTICLE V

                          Trust Securities Certificates

     Section 5.01. Initial Ownership. Upon the creation of the Trust and the
contribution by the Depositor pursuant to Section 2.03 and until the issuance of
the Trust Securities, and at any time during which no Trust Securities are
outstanding, the Depositor shall be the sole beneficial owner of the Trust.

     Section 5.02. The Trust Securities Certificates. The Trust Securities
Certificates shall be issued representing one or more Preferred Securities.
Preferred Securities Certificates representing fractional interests shall not be
issued. The Trust Securities Certificates shall be executed on behalf of the
Trust by manual signature of the Administrative Trustee or by a facsimile
signature of the Administrative Trustee countersigned by the Securities
Registrar. Trust Securities Certificates bearing the manual signatures of
individuals who were, at the time when such signatures shall have been affixed,
authorized to sign on behalf of the Trust, shall be validly issued and entitled
to the benefits of this Trust Agreement, notwithstanding that such individuals
or any of them shall have ceased to be so authorized prior to the delivery of
such Trust Securities Certificates or did not hold such offices at the date of
delivery of such Trust Securities Certificates. A transferee of a Trust
Securities Certificate shall become a Securityholder, and shall be entitled to
the rights and subject to the obligations of a Securityholder hereunder, upon
due registration of such Trust Securities Certificate in such transferee's name
pursuant to Section 5.04.

     Section 5.03. Delivery of Trust Securities Certificates.


                                       22


On the Closing Date, the Administrative Trustee shall cause Trust Securities
Certificates, in an aggregate Liquidation Amount as provided in Sections 2.04
and 2.05, to be executed on behalf of the Trust as provided in Section 5.02 and
delivered to or upon a written order of the Depositor signed by its Chairman of
the Board, its President, any Vice President or the Treasurer, without further
corporate action by the Depositor, in authorized denominations. The written
order of the Depositor shall be accompanied by an Officer's Certificate and an
Opinion of Counsel.

     Section 5.04. Registration of Transfer and Exchange of Preferred Securities
Certificates. A registrar appointed by the Depositor (the "Securities
Registrar") shall keep or cause to be kept, at the office or agency maintained
pursuant to Section 5.08, a register (the "Securities Register") in which,
subject to such reasonable regulations as it may prescribe, the Securities
Registrar shall provide for the registration of Trust Securities Certificates
(subject to Section 5.10 in the case of the Common Securities Certificates) and
registration of transfers and exchanges of Preferred Securities Certificates as
herein provided. The Property Trustee shall be the initial Securities Registrar;
any successor Securities Registrar shall be appointed by the Administrative
Trustee.

     Upon surrender for registration of transfer of any Preferred Securities
Certificate at the office or agency maintained pursuant to Section 5.08, the
Administrative Trustee shall execute and deliver, in the name of the designated
transferee or transferees, one or more new Preferred Securities Certificates
representing the same number of Preferred Securities dated the date of execution
by the Administrative Trustee. At the option of a Holder, Preferred Securities
Certificates may be exchanged for other Preferred Securities Certificates upon
surrender of the Preferred Securities Certificates to be exchanged at the office
or agency maintained pursuant to Section 5.08. The Securities Registrar shall
not be required to register the transfer of any Preferred Securities that have
been called for redemption or after the Liquidation Date.

     Preferred Securities presented or surrendered for registration of transfer
or exchange shall be accompanied by a written instrument of transfer in form
satisfactory to the Administrative Trustee and the Securities Registrar duly
executed by the Holder or such Holder's attorney duly authorized in writing.
Each Preferred Securities Certificate surrendered for registration of transfer
or exchange shall be cancelled and subsequently disposed of by the Property
Trustee in accordance with its customary practice.


                                       23


     No service charge shall be made for any registration of transfer or
exchange of Preferred Securities, but the Securities Registrar may require
payment of a sum sufficient to cover any tax or governmental charge that may be
imposed in connection with any transfer or exchange of Preferred Securities.

     Section 5.05. Mutilated, Destroyed, Lost or Stolen Trust Securities
Certificates. If (a) any mutilated Trust Securities Certificate shall be
surrendered to the Securities Registrar, or if the Securities Registrar shall
receive evidence to its satisfaction of the destruction, loss or theft of any
Trust Securities Certificate, and (b) there shall be delivered to the Securities
Registrar and the Administrative Trustee such security or indemnity as may be
required by them to hold the Securities Registrar and the Trust harmless, then
in the absence of notice that such Trust Securities Certificate shall have been
acquired by a bona fide purchaser, the Administrative Trustee, on behalf of the
Trust shall execute and make available for delivery, in exchange for or in lieu
of any such mutilated, destroyed, lost or stolen Trust Securities Certificate, a
new Trust Securities Certificate of like tenor. In connection with the issuance
of any new Trust Securities Certificate under this Section, the Administrative
Trustee or the Securities Registrar may require the payment of a sum sufficient
to cover any tax or other governmental charge that may be imposed in connection
therewith. Any duplicate Trust Securities Certificate issued pursuant to this
Section shall constitute conclusive evidence of an undivided beneficial interest
in the assets of the Trust, as if originally issued, whether or not the lost,
stolen or destroyed Trust Securities Certificate shall be found at any time.

     Section 5.06. Persons Deemed Securityholders. Prior to due presentation of
a Trust Security Certificate for registration of transfer, the Administrative
Trustee or the Securities Registrar shall treat the Person in whose name any
Trust Securities Certificate shall be registered in the Securities Register as
the owner and Holder of such Trust Securities Certificate for the purpose of
receiving Distributions and for all other purposes whatsoever, and neither the
Trustees nor the Securities Registrar shall be bound by any notice to the
contrary.

     Section 5.07. Access to List of Securityholders' Names and Addresses. In
the event that the Property Trustee is no longer the Securities Registrar, the
Administrative Trustee or the Depositor shall furnish or cause to be furnished
(a) to the Property Trustee, quarterly not later than 10 days prior to a
Distribution Date, a list, in such form as the Property Trustee may reasonably
require, of the names and addresses of the Securityholders as of the most recent
record date and (b) to the Property Trustee, promptly after receipt by the
Administrative


                                       24


Trustee or the Depositor of a request therefor from the Property Trustee in
order to enable the Paying Agent to pay Distributions in accordance with Section
4.01 hereof), in each case to the extent such information is in the possession
or control of the Administrative Trustee or the Depositor and is not identical
to a previously supplied list or has not otherwise been received by the Property
Trustee. The rights of Securityholders to communicate with other Securityholders
with respect to their rights under this Trust Agreement or under the Trust
Securities, and the corresponding rights of the Property Trustee shall be as
provided in the Trust Indenture Act. Each Holder, by receiving and holding a
Trust Securities Certificate, shall be deemed to have agreed not to hold the
Depositor, the Property Trustee, the Administrative Trustee or the Delaware
Trustee accountable by reason of the disclosure of its name and address,
regardless of the source from which such information was derived.

     Section 5.08. Maintenance of Office or Agency. The Property Trustee shall
maintain in Newark, New Jersey, an office or offices or agency or agencies where
Preferred Securities may be surrendered for registration of transfer or exchange
and where notices and demands to or upon the Trustees in respect of the Trust
Securities Certificates may be served. The Property Trustee shall give prompt
written notice to the Depositor and to the Securityholders of any change in the
location of the Securities Register or any such office or agency, which shall
initially be at the Corporate Trust Office of the Property Trustee.

     Section 5.09. Appointment of Paying Agent. The Paying Agent shall make
Distributions to Securityholders from the Payment Account and shall report the
amounts of such Distributions to the Property Trustee and the Administrative
Trustee. Any Paying Agent shall have the revocable power to withdraw funds from
the Payment Account for the purpose of making Distributions. The Administrative
Trustee may revoke such power and remove the Paying Agent, provided that such
revocation and removal with respect to the sole Paying Agent shall not become
effective until the appointment of a successor. The Paying Agent shall initially
be the Property Trustee, and any co-paying agent chosen by the Property Trustee
and acceptable to the Administrative Trustee and the Depositor. Any Person
acting as Paying Agent shall be permitted to resign as Paying Agent upon 30
days' written notice to the Administrative Trustee and the Depositor, and, if
applicable, the Property Trustee, provided that such resignation with respect to
the sole Paying Agent shall not become effective until the appointment of a
successor. In the event that the Property Trustee shall no longer be the Paying
Agent or a successor Paying Agent shall resign or its authority to act be
revoked, the Administrative Trustee shall appoint a successor that is acceptable
to the


                                       25


Property Trustee (in the case of any other Paying Agent) and the Depositor to
act as Paying Agent (which shall be a bank or trust company and have a combined
capital and surplus of at least $50,000,000). The Administrative Trustee shall
cause such successor Paying Agent or any additional Paying Agent appointed by
the Administrative Trustee to execute and deliver to the Trustees an instrument
in which such successor Paying Agent or additional Paying Agent shall agree with
the Trustees that as Paying Agent, such successor Paying Agent or additional
Paying Agent will hold all sums, if any, held by it for payment to the
Securityholders in trust for the benefit of the Securityholders entitled thereto
until such sums shall be paid to such Securityholders. The Paying Agent shall
return all of such sums remaining unclaimed to the Property Trustee and upon
removal of a Paying Agent such Paying Agent shall also return such sums in its
possession to the Property Trustee. The provisions of Sections 7.01, 7.03 and
7.06 shall apply to the Property Trustee also in its role as Paying Agent, for
so long as the Property Trustee shall act as Paying Agent and, to the extent
applicable, to any other Paying Agent appointed hereunder. Any reference in this
Trust Agreement to the Paying Agent shall include any co-paying agent unless the
context requires otherwise.

     Section 5.10. No Transfer of Common Securities by Depositor. To the fullest
extent permitted by law, any attempted transfer of the Common Securities shall
be void. The Administrative Trustee shall cause each Common Securities
Certificate issued to the Depositor to contain a legend stating "THIS
CERTIFICATE IS NOT TRANSFERABLE". By execution of this Trust Agreement, the
Depositor agrees to the foregoing provisions.

     Section 5.11. Book-Entry Preferred Securities Certificates; Common
Securities Certificate.

     (a) The Preferred Securities, upon original issuance on the Closing Date,
will not be engraved but will be issued in the form of one or more printed or
typewritten Book-Entry Preferred Securities Certificates, to be delivered to The
Depository Trust Company, the initial Clearing Agency, by, or on behalf of, the
Trust. Such Book-Entry Preferred Securities Certificate or Certificates shall
initially be registered on the Securities Register in the name of Cede & Co.,
the nominee of the initial Clearing Agency.

     (b) A single Common Securities Certificate representing the Common
Securities shall be issued to the Depositor in the form of a definitive Common
Securities Certificate.

     Section 5.12. Definitive Preferred Securities Certificates. If (a) the
Depositor advises the Trustees in writing


                                       26


that the Clearing Agency is no longer willing or able to properly discharge its
responsibilities with respect to the Preferred Securities Certificates or the
Clearing Agency is no longer registered or in good standing under the Securities
Exchange Act of 1934, as amended, or other applicable statute or regulation, and
the Depositor is unable to locate a qualified successor within 90 days, (b) the
Depositor at its option advises the Trustees in writing that it elects to
terminate the book-entry system through the Clearing Agency or (c) an Event of
Default occurs and is continuing, then the Administrative Trustee shall issue
Definitive Preferred Securities Certificates. Upon surrender to the
Administrative Trustee of the Book-Entry Preferred Securities Certificates by
the Clearing Agency, accompanied by registration instructions, the
Administrative Trustee shall execute and deliver the Definitive Preferred
Securities Certificates in accordance with the instructions of the Clearing
Agency. Neither the Securities Registrar nor the Trustees shall be liable for
any delay in delivery of such instructions and may conclusively rely on, and
shall be protected in relying on, such instructions. The Definitive Preferred
Securities Certificates shall be printed, lithographed or engraved or may be
produced in any other manner as is reasonably acceptable to the Administrative
Trustee, as evidenced by the execution thereof by the Administrative Trustee.

     Section 5.13. Rights of Securityholders. The Securityholders shall not have
any right or title to the Trust Property other than the undivided beneficial
interest in the assets of the Trust conferred by their Trust Securities and they
shall have no right to call for any partition or division of property, profits
or rights of the Trust except as described below. The Trust Securities shall be
personal property giving only the rights specifically set forth therein and in
this Trust Agreement. The Trust Securities shall have no preemptive or similar
rights and when issued and delivered to Securityholders against payment of the
purchase price therefor will be fully paid and nonassessable by the Trust. The
Holders of the Trust Securities, in their capacities as such, shall be entitled
to the same limitation of personal liability extended to stockholders of private
corporations for profit organized under the General Corporation Law of the State
of Delaware.


                                       27


                                   ARTICLE VI

                    Acts of Securityholders; Meetings; Voting

                   Section 6.01. Limitations on Voting Rights.

     (a) Except as provided herein and in the Indenture and as otherwise
required by law, no Holder of Trust Securities shall have any right to vote or
in any manner otherwise control the administration, operation and management of
the Trust or the obligations of the parties hereto, nor shall anything herein
set forth, or contained in the terms of the Trust Securities Certificates, be
construed so as to constitute the Securityholders from time to time as partners
or members of an association.

     (b) The Trustees shall not (i) direct the time, method and place of
conducting any proceeding for any remedy available to the Debenture Trustee or
executing any trust or power conferred on the Debenture Trustee with respect to
such Debentures, (ii) waive any past default which may be waived under Section
6.04 of the Indenture, (iii) exercise any right to rescind or annul an
acceleration of the principal of all the Debentures or (iv) consent to any
amendment or modification of the Indenture, where such consent shall be
required, without, in each case, obtaining the prior consent of the Holders of
at least a majority in aggregate Liquidation Amount of all Outstanding Preferred
Securities; provided, however, that where such consent under the Indenture would
require the consent of each holder of Debentures affected thereby, no such
consent shall be given by the Property Trustee without the prior written consent
of each Holder of Outstanding Preferred Securities. The Trustees shall not
revoke any action previously authorized or approved by a vote of the Holders of
Preferred Securities, except by a subsequent vote of the Holders of Preferred
Securities. The Property Trustee shall notify all Holders of the Preferred
Securities of any notice received from the Debenture Trustee as a result of the
Trust being the holder of the Debentures. In addition to obtaining the consent
of the Holders of the Preferred Securities, prior to taking any of the foregoing
actions, the Trustees shall, at the expense of the Depositor, obtain an Opinion
of Counsel experienced in such matters to the effect that the Trust will not be
classified as an association taxable as a corporation or partnership for United
States Federal income tax purposes on account of such action and will continue
to be classified as a grantor trust for United States Federal income tax
purposes.

     (c) Subject to Section 10.02(c) hereof, if any proposed amendment to the
Trust Agreement provides for, or the Trustees otherwise propose to effect, (i)
any action that would adversely


                                       28


affect in any material respect the powers, preferences or special rights of the
Preferred Securities, whether by way of amendment to this Trust Agreement or
otherwise, or (ii) the termination or liquidation of the Trust, other than
pursuant to the terms of this Trust Agreement, then the Holders of Outstanding
Preferred Securities will be entitled to vote on such amendment or proposal and
such amendment or proposal shall not be effective except with the approval of
the Holders of at least a majority in aggregate Liquidation Amount of the
Outstanding Preferred Securities.

     Section 6.02. Notice of Meetings. Notice of all meetings of the Preferred
Securityholders, stating the time, place and purpose of the meeting, shall be
given by the Property Trustee pursuant to Section 10.08 to each Preferred
Securityholder of record, at his/her registered address, at least 15 days and
not more than 90 days before the meeting. At any such meeting, any business
properly before the meeting may be so considered whether or not stated in the
notice of the meeting. Any adjourned meeting may be held as adjourned without
further notice.

     Section 6.03. Meetings of Preferred Securityholders. No annual meeting of
Securityholders is required to be held. The Administrative Trustee, however,
shall call a meeting of Securityholders to vote on any matter upon the written
request of the Holders of at least 25% of the aggregate Liquidation Amount of
the Outstanding Preferred Securities and the Administrative Trustee or the
Property Trustee may, at any time in their discretion, call a meeting of
Preferred Securityholders to vote on any matters as to which the Preferred
Securityholders are entitled to vote.

     Holders of at least 50% of the aggregate Liquidation Amount of the
Outstanding Preferred Securities, present in person or by proxy, shall
constitute a quorum at any meeting of Securityholders.

     If a quorum is present at a meeting, an affirmative vote of the Holders of
at least a majority of the aggregate Liquidation Amount of the Outstanding
Preferred Securities present, either in person or by proxy, at such meeting
shall constitute the action of the Securityholders, unless this Trust Agreement
requires a greater number of affirmative votes.

     Section 6.04. Voting Rights. A Securityholder shall be entitled to one vote
for each Trust Security in respect of any matter as to which such Securityholder
is entitled to vote.

     Section 6.05. Proxies, etc. At any meeting of Securityholders, any
Securityholder entitled to vote thereat may vote by proxy, provided that no
proxy shall be voted at any meeting


                                       29


unless it shall have been placed on file with the Administrative Trustee, or
with such other officer or agent of the Trust as the Administrative Trustee may
direct, for verification prior to the time at which such vote shall be taken.
Pursuant to a resolution of the Property Trustee, proxies may be solicited in
the name of the Property Trustee or one or more officers of the Property
Trustee. Only Securityholders of record shall be entitled to vote. When Trust
Securities are held jointly by several Persons, any one of them may vote at any
meeting in person or by proxy in respect of such Trust Securities, but if more
than one of them shall be present at such meeting in person or by proxy, and
such joint owners or their proxies so present disagree as to any vote to be
cast, such vote shall not be received in respect of such Trust Securities. A
proxy purporting to be executed by or on behalf of a Securityholder shall be
deemed valid unless challenged at or prior to its exercise, and the burden of
proving invalidity shall rest on the challenger. No proxy shall be valid more
than three years after its date of execution.

     Section 6.06. Securityholder Action by Written Consent. Any action which
may be taken by Securityholders at a meeting may be taken without a meeting if
Holders of the proportion of the Outstanding Preferred Securities required to
approve such action shall consent to the action in writing.

     Section 6.07. Record Date for Voting and Other Purposes. For the purposes
of determining the Securityholders who are entitled to notice of and to vote at
any meeting or by written consent, or for the purpose of any other action, the
Administrative Trustee may from time to time fix a date, not more than 90 days
prior to the date of any meeting of Securityholders, as a record date for the
determination of the identity of the Securityholders for such purposes.

     Section 6.08. Acts of Securityholders. Any request, demand, authorization,
direction, notice, consent, waiver or other action provided or permitted by this
Trust Agreement to be given, made or taken by Securityholders may be embodied in
and evidenced by one or more instruments of substantially similar tenor signed
by such Securityholders in person or by an agent duly appointed in writing; and,
except as otherwise expressly provided herein, such action shall become
effective when such instrument or instruments are delivered to the
Administrative Trustee. Such instrument or instruments (and the action embodied
therein and evidenced thereby) are herein sometimes referred to as the "Act" of
the Securityholders signing such instrument or instruments. Proof of execution
of any such instrument or of a writing appointing any such agent shall be
sufficient for any purpose of this Trust Agreement and (subject to Section 7.02)
conclusive, if made in the


                                       30


manner provided in this Section.

     The fact and date of the execution by any Person of any such instrument or
writing may be proved by the affidavit of a witness of such execution or by a
certificate of a notary public or other officer authorized by law to take
acknowledgments of deeds, certifying that the individual signing such instrument
or writing acknowledged to him/her the execution thereof. Where such execution
is by a signer acting in a capacity other than his/her individual capacity, such
certificate or affidavit shall also constitute sufficient proof of his/her
authority. The fact and date of the execution of any such instrument or writing,
or the authority of the Person executing the same, may also be proved in any
other manner which any Trustee receiving the same deems sufficient.

     The ownership of Preferred Securities shall be proved by the Securities
Register.

     Any request, demand, authorization, direction, notice, consent, waiver or
other act of the Securityholder of any Trust Security shall bind every future
Securityholder of the same Trust Security and the Securityholder of every Trust
Security issued upon the registration of transfer thereof or in exchange
therefor or in lieu thereof in respect of anything done, omitted or suffered to
be done by the Trustees or the Trust in reliance thereon, whether or not
notation of such action is made upon such Trust Security.

     Without limiting the foregoing, a Securityholder entitled hereunder to take
any action hereunder with regard to any particular Trust Security may do so with
regard to all or any part of the Liquidation Amount of such Trust Security or by
one or more duly appointed agents, each of which may do so pursuant to such
appointment with regard to all or any part of such Liquidation Amount.

     If any dispute shall arise between the Securityholders and the
Administrative Trustee or among such Securityholders or Trustees with respect to
the authenticity, validity or binding nature of any request, demand,
authorization, direction, consent, waiver or other Act of such Securityholder or
Trustee under this Article VI, then the determination of such matter by the
Property Trustee shall be conclusive with respect to such matter.

     Section 6.09. Inspection of Records. Upon reasonable notice to the
Administrative Trustee and the Property Trustee, the records of the Trust shall
be open to inspection by Securityholders during normal business hours for any
purpose reasonably related to such Securityholder's interest as a
Securityholder.


                                       31


                                   ARTICLE VII

                                  The Trustees

                        Section 7.01.  Certain Duties and Responsibilities.

     (a) The duties and responsibilities of the Trustees shall be as provided by
this Trust Agreement and, in the case of the Property Trustee, also by the Trust
Indenture Act. The Property Trustee, other than during the occurrence and
continuance of an Event of Default, undertakes to perform only such duties as
are specifically set forth in this Trust Agreement and, upon an Event of
Default, must exercise the same degree of care and skill as a prudent person
would exercise or use in the conduct of his/her own affairs. The Trustees shall
have all the privileges, rights and immunities provided by the Delaware Business
Trust Act. Notwithstanding the foregoing, no provision of this Trust Agreement
shall require the Trustees to expend or risk their own funds or otherwise incur
any financial liability in the performance of any of their duties hereunder, or
in the exercise of any of their rights or powers, if they shall have reasonable
grounds for believing that repayment of such funds or adequate indemnity against
such risk or liability is not reasonably assured to it. Whether or not therein
expressly so provided, every provision of this Trust Agreement relating to the
conduct or affecting the liability of or affording protection to the Trustees
shall be subject to the provisions of this Section. Nothing in this Trust
Agreement shall be construed to release the Property Trustee from liability for
its own negligent action, its own negligent failure to act, or its own willful
misconduct. To the extent that, at law or in equity, the Administrative Trustee
has duties (including fiduciary duties) and liabilities relating thereto to the
Trust or to the Securityholders, the Administrative Trustee shall not be liable
to the Trust or to any Securityholder for the Administrative Trustee's good
faith reliance on the provisions of this Trust Agreement. The provisions of this
Trust Agreement, to the extent that they restrict the duties and liabilities of
the Administrative Trustee otherwise existing at law or in equity, are agreed by
the Depositor and the Securityholders to replace such other duties and
liabilities of the Administrative Trustee.

     (b) All payments made by the Property Trustee or any other Paying Agent in
respect of the Trust Securities shall be made only from the income and proceeds
from the Trust Property. Each Securityholder, by its acceptance of a Trust
Security, agrees that (i) it will look solely to the income and proceeds from
the Trust Property to the extent available for distribution to it as herein
provided and (ii) the Trustees are not personally liable to it for


                                       32


any amount distributable in respect of any Trust Security or for any other
liability in respect of any Trust Security. This Section 7.01(b) does not limit
the liability of the Trustees expressly set forth elsewhere in this Trust
Agreement or, in the case of the Property Trustee, in the Trust Indenture Act.

     Section 7.02. Notice of Defaults; Direct Action by Securityholders. Within
90 days after the occurrence of any Event of Default actually known to the
Property Trustee, the Property Trustee shall transmit, in the manner and to the
extent provided in Section 10.08, notice of such Event of Default to the
Securityholders, the Administrative Trustee and the Depositor, unless such Event
of Default shall have been cured or waived. If the Property Trustee has failed
to enforce its rights under this Trust Agreement or the Indenture to the fullest
extent permitted by law and subject to the terms of this Trust Agreement and the
Indenture, any Securityholder may institute a legal proceeding directly against
any Person to enforce the Property Trustee's rights under this Trust Agreement
or the Indenture with respect to Debentures having a principal amount equal to
the aggregate Liquidation Amount of the Preferred Securities of such
Securityholder without first instituting a legal proceeding against the Property
Trustee or any other Person. To the extent that any action under the Indenture
is entitled to be taken by the holders of at least a specified percentage of the
principal amount of the outstanding Debentures, Holders of at least the same
percentage of the Liquidation Amount of the Outstanding Preferred Securities may
also take such action in the name of the Trust if such action has not been taken
by the Property Trustee. Notwithstanding the foregoing, if a Debenture Event of
Default relating to the Depositor's failure to pay the principal of or interest
on the Debentures has occurred and is continuing thereby resulting in an Event
of Default hereunder, then each Holder of Preferred Securities may institute a
legal proceeding directly against the Depositor for enforcement of payment to
such Holder, as provided in Section 6.07 of the Indenture.

     Section 7.03. Certain Rights of Property Trustee. Subject to the provisions
of Section 7.01:

     (a) the Property Trustee may rely and shall be protected in acting or
refraining from acting in good faith upon any resolution, Opinion of Counsel,
certificate, written representation of a Holder or transferee, certificate of
auditors or any other certificate, statement, instrument, opinion, report,
notice, request, consent, order, appraisal, bond, debenture, note, other
evidence of indebtedness or other paper or document believed by it to be genuine
and to have been signed or presented by the proper party or parties;


                                       33


     (b) if, other than during the occurrence and continuance of an Event of
Default, (i) in performing its duties under this Trust Agreement, the Property
Trustee is required to decide between alternative courses of action or (ii) in
construing any of the provisions in this Trust Agreement, the Property Trustee
finds the same ambiguous or inconsistent with any other provisions contained
herein or (iii) the Property Trustee is unsure of the application of any
provision of this Trust Agreement, then, except as to any matter as to which the
Preferred Securityholders are entitled to vote under the terms of this Trust
Agreement, the Property Trustee shall deliver a notice to the Depositor
requesting written instructions of the Depositor as to the course of action to
be taken. The Property Trustee shall take such action, or refrain from taking
such action, as the Property Trustee shall be instructed in writing to take, or
to refrain from taking, by the Depositor; provided, however, that if the
Property Trustee does not receive such instructions of the Depositor within ten
Business Days after it has delivered such notice, or such reasonably shorter
period of time set forth in such notice (which to the extent practicable shall
not be less than two Business Days), it may, but shall be under no duty to, take
or refrain from taking such action not inconsistent with this Trust Agreement as
it shall deem advisable and in the best interests of the Securityholders, in
which event the Property Trustee shall have no liability except for its own
negligent action, its own negligent failure to act or its own willful
misconduct;

     (c) the Property Trustee may consult with counsel or other experts of its
selection and the advice or opinion of such counsel or other experts with
respect to legal matters or advice within the scope of such experts' area of
expertise shall be full and complete authorization and protection in respect of
any action taken, suffered or omitted by it hereunder in good faith and in
reliance thereon;

     (d) the Property Trustee shall be under no obligation to exercise any of
the rights or powers vested in it by this Trust Agreement at the request or
direction of any of the Securityholders pursuant to this Trust Agreement, unless
such Securityholders shall have offered to the Property Trustee reasonable
security or indemnity against the costs, expenses and liabilities which might be
incurred by it in compliance with such request or direction;

     (e) the Property Trustee shall not be bound to make any investigation into
the facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order,
approval, bond, debenture, note or other evidence of indebtedness or other paper
or document, but


                                       34


the Property Trustee, in its discretion, may make such further inquiry or
investigation into such facts or matters as it may see fit; and

     (f) the Property Trustee may execute any of the trusts or powers hereunder
or perform any duties hereunder either directly or by or through its agents or
attorneys and the Property Trustee shall not be responsible for any misconduct
or negligence on the part of any agent or attorney appointed with due care by it
hereunder.

     Section 7.04. Not Responsible for Recitals or Issuance of Securities. The
recitals contained herein and in the Trust Securities Certificates shall be
taken as the statements of the Trust, and the Trustees do not assume any
responsibility for their correctness. The Trustees shall not be accountable for
the use or application by the Depositor of the proceeds of the Debentures.

     Section 7.05. May Hold Securities. Any Trustee or any other agent of any
Trustee or the Trust, in its individual or any other capacity, may become the
owner or pledgee of Trust Securities and, subject to Sections 7.08 and 7.13 and,
except as provided in the definition of the term Outstanding in Article I, may
otherwise deal with the Trust with the same rights it would have if it were not
a Trustee or such other agent.

     Section 7.06. Compensation; Indemnity; Fees. The Depositor agrees:

     (a) to pay to the Trustees from time to time such compensation as shall
have been agreed in writing with the Depositor for all services rendered by them
hereunder (which compensation shall not be limited by any provision of law in
regard to the compensation of a trustee of an express trust);

     (b) except as otherwise expressly provided herein, to reimburse the
Trustees upon request for all reasonable expenses, disbursements and advances
incurred or made by the Trustees in accordance with any provision of this Trust
Agreement (including the reasonable compensation and the expenses and
disbursements of its agents and counsel), except any such expense, disbursement
or advance as may be attributable to its own negligent action, its own negligent
failure to act or its own wilful misconduct (or, in the case of the
Administrative Trustee, any such expense, disbursement or advance as may be
attributable to his/her gross negligence); and

     (c) to indemnify each of the Trustees or any predecessor Trustee for, and
to hold the Trustees harmless against, any and all loss, damage, claims,
liability, penalty or expense including taxes


                                       35


(other than taxes based on the income of such Trustee) incurred without its own
negligent action, its own negligent failure to act or its wilful misconduct (or,
in the case of the Administrative Trustees, incurred without gross negligence or
bad faith), arising out of or in connection with the acceptance or
administration of this Trust Agreement, including the costs and expenses of
defending itself against any claim or liability in connection with the exercise
or performance of any of its powers or duties hereunder.

     No Trustee may claim any Lien or charge on any Trust Property as a result
of any amount due pursuant to this Section 7.06.

     The provisions of this Section 7.06 shall survive the termination of this
Trust Agreement.

     Section 7.07. Corporate Property Trustee Required; Eligibility of Trustees.

     (a) There shall at all times be a Property Trustee hereunder. The Property
Trustee shall be a Person that is eligible pursuant to the Trust Indenture Act
to act as such and has a combined capital and surplus of at least $50,000,000.
If any such Person publishes reports of condition at least annually, pursuant to
law or to the requirements of its supervising or examining authority, then for
the purposes of this Section, the combined capital and surplus of such Person
shall be deemed to be its combined capital and surplus as set forth in its most
recent report of condition so published. If at any time the Property Trustee
with respect to the Trust Securities shall cease to be eligible in accordance
with the provisions of this Section, it shall resign immediately in the manner
and with the effect hereinafter specified in this Article.

     (b) There shall at all times be one or more Administrative Trustees
hereunder. Each Administrative Trustee shall be either a natural person who is
at least 21 years of age or a legal entity that shall act through one or more
persons authorized to bind that entity.

     (c) There shall at all times be a Delaware Trustee. The Delaware Trustee
shall either be (i) a natural person who is at least 21 years of age and a
resident of the State of Delaware or (ii) a legal entity with its principal
place of business in the State of Delaware and that otherwise meets the
requirements of applicable Delaware law that shall act through one or more
persons authorized to bind such entity.

     Section 7.08. Conflicting Interests. If the Property


                                       36


Trustee has or shall acquire a conflicting interest within the meaning of the
Trust Indenture Act, the Property Trustee shall either eliminate such interest
or resign, to the extent and in the manner provided by, and subject to the
provisions of, the Trust Indenture Act and this Trust Agreement.

     Section 7.09. Co-Trustees and Separate Trustee. Unless an Event of Default
shall have occurred and be continuing, at any time or times, for the purpose of
meeting the legal requirements of the Trust Indenture Act or of any jurisdiction
in which any part of the Trust Property may at the time be located, the
Depositor and the Administrative Trustee (and if more than one Administrative
Trustee, by agreed action of the majority of such Trustees) shall have power (i)
to appoint, and upon the written request of the Administrative Trustee the
Depositor shall for such purpose join with the Administrative Trustee in the
execution, delivery, and performance of all instruments and agreements necessary
or proper to appoint one or more Persons approved by the Property Trustee either
to act as co-trustee, jointly with the Property Trustee, of all or any part of
such Trust Property, or to the extent required by law to act as separate trustee
of any such property, in either case with such powers as may be provided in the
instrument of appointment, and (ii) to vest in such Person or Persons in the
capacity aforesaid, any property, title, right or power deemed necessary or
desirable, subject to the other provisions of this Section. If the Depositor
does not join in such appointment within 15 days after the receipt by it of a
request so to do, or in case a Debenture Event of Default has occurred and is
continuing, the Property Trustee alone shall have power to make such
appointment. Any co-trustee or separate trustee appointed pursuant to this
Section shall either be (i) a natural person who is at least 21 years of age and
a resident of the United States or (ii) a legal entity with its principal place
of business in the United States that shall act through one or more persons
authorized to bind such entity.

     Should any written instrument from the Depositor be required by any
co-trustee or separate trustee so appointed for more fully confirming to such
co-trustee or separate trustee such property, title, right, or power, any and
all such instruments shall, on request, be executed, acknowledged, and delivered
by the Depositor.

     Every co-trustee or separate trustee shall, to the extent permitted by law,
but to such extent only, be appointed subject to the following terms, namely:

     (a) The Trust Securities shall be executed and delivered and all rights,
powers, duties, and obligations hereunder in


                                       37


respect of the custody of securities, cash and other personal property held by,
or required to be deposited or pledged with, the Trustees specified hereunder,
shall be exercised, solely by such Trustees and not by such co-trustee or
separate trustee.

     (b) The rights, powers, duties, and obligations hereby conferred or imposed
upon the Property Trustee in respect of any property covered by such appointment
shall be conferred or imposed upon and exercised or performed by the Property
Trustee or by the Property Trustee and such co-trustee or separate trustee
jointly, as shall be provided in the instrument appointing such co-trustee or
separate trustee, except to the extent that under any law of any jurisdiction in
which any particular act is to be performed, the Property Trustee shall be
incompetent or unqualified to perform such act, in which event such rights,
powers, duties and obligations shall be exercised and performed by such
co-trustee or separate trustee.

     (c) The Property Trustee at any time, by an instrument in writing executed
by it, with the written concurrence of the Depositor, may accept the resignation
of or remove any co-trustee or separate trustee appointed under this Section,
and, in case an Event of Default under the Indenture has occurred and is
continuing, the Property Trustee shall have power to accept the resignation of,
or remove, any such co-trustee or separate trustee without the concurrence of
the Depositor. Upon the written request of the Property Trustee, the Depositor
shall join with the Property Trustee in the execution, delivery, and performance
of all instruments and agreements necessary or proper to effectuate such
resignation or removal. A successor to any co-trustee or separate trustee so
resigned or removed may be appointed in the manner provided in this Section.

     (d) No co-trustee or separate trustee hereunder shall be personally liable
by reason of any act or omission of the Property Trustee, or any other trustee
hereunder.

     (e) The Property Trustee shall not be liable by reason of any act of a
co-trustee or separate trustee.

     (f) Any Act of Holders delivered to the Property Trustee shall be deemed to
have been delivered to each such co-trustee and separate trustee.

     Section 7.10. Resignation and Removal; Appointment of Successor. No
resignation or removal of any Trustee and no appointment of a successor Trustee
pursuant to this Article shall become effective until the acceptance of
appointment by the successor Trustee in accordance with the applicable
requirements of


                                       38


Section 7.11.

     Subject to the immediately preceding paragraph, any Trustee may resign at
any time with respect to the Trust Securities by giving written notice thereof
to the Securityholders.

     Unless an Event of Default shall have occurred and be continuing, any
Trustee may be removed at any time by Act of the Holder of the Common
Securities. If an Event of Default shall have occurred and be continuing, the
Property Trustee or the Delaware Trustee, or both of them, may be removed at
such time only by Act of the Holders of at least a majority in Liquidation
Amount of the Outstanding Preferred Securities, delivered to such Trustee (in
its individual capacity and on behalf of the Trust). The Administrative Trustee
may only be removed by the Holder of Common Securities at any time.

     If the instrument of acceptance by the successor Trustee required by
Section 7.11 shall not have been delivered to the Trustee within 30 days after
the giving of such notice of resignation or removal, the Trustee may petition,
at the expense of the Depositor, any court of competent jurisdiction for the
appointment of a successor Trustee.

     If any Trustee shall resign, be removed or become incapable of acting as
Trustee, or if a vacancy shall occur in the office of any Trustee for any cause,
at a time when no Event of Default shall have occurred and be continuing, the
Holder of Common Securities, by Act of the Holder of Common Securities delivered
to the retiring Trustee, shall promptly appoint a successor Trustee or Trustees
and the Trust, and the retiring Trustee shall comply with the applicable
requirements of Section 7.11. If the Property Trustee or the Delaware Trustee
shall resign, be removed or become incapable of continuing to act as the
Property Trustee or the Delaware Trustee, as the case may be, at a time when an
Event of Default has occurred and is continuing, the Holders of Preferred
Securities, by Act of the Securityholders of at least a majority in Liquidation
Amount of the Outstanding Preferred Securities delivered to the retiring
Trustee, shall promptly appoint a successor Trustee or Trustees, and such
successor Trustee shall comply with the applicable requirements of Section 7.11.
If any Administrative Trustee shall resign, be removed or become incapable of
acting as Administrative Trustee at a time when an Event of Default shall have
occurred and be continuing, the Holder of Common Securities shall appoint a
successor Administrative Trustee. If no successor Trustee shall have been so
appointed by the Holder of Common Securities or the Holders of Preferred
Securities and accepted appointment in the manner required by Section 7.11, any
Securityholder who has been a Securityholder of Trust Securities


                                       39


for at least six months may, on behalf of himself and all others similarly
situated, petition any court of competent jurisdiction for the appointment of a
successor Trustee.

     The Property Trustee shall give notice of each resignation and each removal
of a Trustee and each appointment of a successor Trustee to all Securityholders
in the manner provided in Section 10.08 and shall give notice to the Depositor.
Each notice shall include the name of the successor Trustee and the address of
its Corporate Trust Office if it is the Property Trustee.

     Notwithstanding the foregoing or any other provision of this Trust
Agreement, in the event any Administrative Trustee or Delaware Trustee who is a
natural person dies or becomes, in the opinion of the Depositor, incompetent or
incapacitated, the vacancy created by such death, incompetence or incapacity may
be filled by (a) the unanimous act of the remaining Administrative Trustees if
there are at least two of them or (b) otherwise by the Depositor (with the
successor in each case being a Person who satisfies the eligibility requirements
for Administrative Trustee or for the Delaware Trustee, as the case may be, set
forth in Section 7.07).

     Section 7.11. Acceptance of Appointment by Successor. In case of the
appointment hereunder of a successor Trustee, the retiring Trustee and each
successor Trustee shall execute and deliver to the Trust and the retiring
Trustee an amendment hereto wherein each successor Trustee shall accept such
appointment and which (a) shall contain such provisions as shall be necessary or
desirable to transfer and confirm to, and to vest in, each successor Trustee all
the rights, powers, trusts and duties of the retiring Trustee and (b) shall add
to or change any of the provisions of this Trust Agreement as shall be necessary
to provide for or facilitate the administration of the trusts hereunder by more
than one Trustee, it being understood that nothing herein or in such amendment
shall constitute such Trustees co-trustees of the same trust and that each such
Trustee shall be trustee of a trust or trusts hereunder separate and apart from
any trust or trusts hereunder administered by any other such Trustee and upon
the execution and delivery of such amendment the resignation or removal of the
retiring Trustee shall become effective to the extent provided therein and each
such successor Trustee, without any further act, deed or conveyance, shall
become vested with all the rights, powers, trusts and duties of the retiring
Trustee and the Trust; but, on request of the Trust or any successor Trustee,
such retiring Trustee shall duly assign, transfer and deliver to such successor
Trustee all Trust Property, all proceeds thereof and money held by such retiring
Trustee hereunder.

     Upon request of any such successor Trustee, the Trust


                                       40


shall execute any and all instruments for more fully and certainly vesting in
and confirming to such successor Trustee all such rights, powers and trusts
referred to in the first or second preceding paragraph, as the case may be.

     No successor Trustee shall accept its appointment unless at the time of
such acceptance such successor Trustee shall be qualified and eligible under
this Article.

     Section 7.12. Merger, Conversion, Consolidation or Succession to Business.
Any Person into which any of the Trustees may be merged or converted or with
which it may be consolidated, or any Person resulting from any merger,
conversion or consolidation to which such Trustee shall be a party, or any
Person succeeding to all or substantially all the corporate trust business of
such Trustee, shall be the successor of such Trustee hereunder, provided such
Person shall be otherwise qualified and eligible under this Article, without the
execution or filing of any paper or any further act on the part of any of the
parties hereto.

     Section 7.13. Preferential Collection of Claims Against Depositor or Trust.
If and when the Property Trustee or the Delaware Trustee shall be or become a
creditor (whether directly or indirectly, secured or unsecured) of the Depositor
or the Trust (or any other obligor upon the Debentures or the Trust Securities),
including under the terms of Section 7.05 hereof, the Property Trustee or the
Delaware Trustee, as the case may be, shall be subject to and shall take all
actions necessary in order to comply with the provisions of the Trust Indenture
Act regarding the collection of claims against the Depositor or Trust (or any
such other obligor).

     Section 7.14. Reports by Property Trustee. The Property Trustee shall
transmit to Holders such reports concerning the Property Trustee and its actions
under this Trust Agreement as may be required pursuant to the Trust Indenture
Act at the times and in the manner provided pursuant thereto. If required by
Section 313(a) of the Trust Indenture Act, the Property Trustee shall, within 60
days after each May 31 following the date of this Trust Agreement deliver to
Holders a brief report, dated as of such May 31, which complies with the
provisions of such Section 313(a).

     A copy of each such report shall, at the time of such transmission to
Holders, be filed by the Property Trustee with each stock exchange upon which
any Preferred Securities are then listed, with the Commission and with the
Trust. The Trust will promptly notify the Property Trustee when any Preferred
Securities are listed on any stock exchange.


                                       41


     Section 7.15. Reports to the Property Trustee. The Depositor and the
Administrative Trustee on behalf of the Trust shall provide to the Property
Trustee such documents, reports and information as required by Section 314 of
the Trust Indenture Act (if any) and the compliance certificate required by
Section 314(a) of the Trust Indenture Act in the form, in the manner and at the
times required by Section 314 of the Trust Indenture Act.

     Section 7.16. Evidence of Compliance with Conditions Precedent. The
Depositor and the Administrative Trustee on behalf of the Trust shall provide to
the Property Trustee evidence of compliance with the conditions precedent, if
any, provided for in this Trust Agreement that relate to any of the matters set
forth in Section 314(c) of the Trust Indenture Act.

     Section 7.17. Statements Required in Officer's Certificate and Opinion of
Counsel.

     Each Officer's Certificate and Opinion of Counsel with respect to
compliance with a covenant or condition provided for in this Trust Agreement
shall include:

     (1) a statement that each Person making such Officer's Certificate or
Opinion of Counsel has read such covenant or condition;

     (2) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such Officer's
Certificate or Opinion of Counsel are based;

     (3) a statement that, in the opinion of each such Person, such Person has
made such examination or investigation as is necessary to enable such Person to
express an informed opinion as to whether or not such covenant or condition has
been complied with; and

     (4) a statement that, in the opinion of such Person, such covenant or
condition has been complied with; provided, however, that with respect to
matters of fact not involving any legal conclusion, an Opinion of Counsel may
rely on an Officer's Certificate or certificates of public officials.

     Section 7.18. Number of Trustees.

     (a) The number of Trustees shall be three, provided that the Holder of all
of the Common Securities by written instrument may increase and, if increased,
may decrease the number of Administrative Trustees.


                                       42


     (b) If a Trustee ceases to hold office for any reason and the number of
Administrative Trustees is not reduced pursuant to Section 7.18(a), or if the
number of Trustees is increased pursuant to Section 7.18(a), a vacancy shall
occur. The vacancy shall be filled with a Trustee appointed in accordance with
Section 7.10.

     (c) The death, resignation, retirement, removal, bankruptcy, incompetence
or incapacity to perform the duties of a Trustee shall not operate to annul the
Trust. Whenever a vacancy shall occur, until such vacancy is filled by the
appointment of an Administrative Trustee in accordance with Section 7.10, the
Administrative Trustees in office, regardless of their number (and
notwithstanding any other provision of this Trust Agreement), shall have all the
powers granted to the Administrative Trustee and shall discharge all the duties
imposed upon the Administrative Trustees by this Trust Agreement.

     Section 7.19. Delegation of Power.

     (a) Any Administrative Trustee may, by power of attorney consistent with
applicable law, delegate to any natural person over the age of 21 his/her power
for the purpose of executing any documents contemplated in Section 2.07(a),
including any registration statement or amendment thereto filed with the
Commission, or making any other governmental filing; and

     (b) the Administrative Trustees shall have power to delegate from time to
time to such of their number, if there is more than one Administrative Trustee,
or to the Depositor the doing of such things and the execution of such
instruments either in the name of the Trust or the names of the Administrative
Trustees or otherwise as the Administrative Trustees may deem expedient, to the
extent such delegation is not prohibited by applicable law or contrary to the
provisions of the Trust, as set forth herein.

     Section 7.20. Voting. Except as otherwise provided in this Trust Agreement,
the consent or vote of the Trustees shall be approved by not less than a
majority of the Administrative Trustees.


                                       43


                                  ARTICLE VIII

                           Termination and Liquidation

     Section 8.01. Termination Upon Expiration Date. Unless earlier terminated,
the Trust shall automatically terminate on February 7, 2051 (the "Expiration
Date"), following the distribution of the Trust Property in accordance with
Section 8.04.

     Section 8.02. Early Termination. The earliest to occur of any of the
following events is an "Early Termination Event":

     (a) the occurrence of a Bankruptcy Event in respect of, or the dissolution
or liquidation of the Depositor or an acceleration of the maturity of the
Debentures pursuant to Section 6.02 of the Indenture;

     (b) upon the election of the Depositor to liquidate the Trust and cause the
distribution of a Like Amount of Debentures to the Holders of the Trust
Securities;

     (c) the redemption of all of the Trust Securities; and

     (d) an order for termination of the Trust shall have been entered by a
court of competent jurisdiction.

     The election of the Depositor pursuant to Section 8.02(b) shall be made by
the Depositor giving written notice to the Trustees not less than 30 days prior
to the date of distribution of the Debentures. Such notice shall specify the
date of distribution of the Debentures and shall be accompanied by an Opinion of
Counsel that such event will not be a taxable event to the Holders of the Trust
Securities for Federal income tax purposes.

     Section 8.03. Termination. The respective obligations and responsibilities
of the Trustees and the Trust created and continued hereby shall terminate upon
the latest to occur of the following: (a) the distribution by the Property
Trustee to Securityholders upon the liquidation of the Trust pursuant to Section
8.04, or upon the redemption of all of the Trust Securities pursuant to Section
4.02, of all amounts required to be distributed hereunder upon the final payment
of the Trust Securities; (b) the payment of any expenses owed by the Trust; and
(c) the discharge of all administrative duties of the Administrative Trustee,
including the performance of any tax reporting obligations with respect to the
Trust or the Securityholders.

     Section 8.04. Liquidation.


                                       44


     (a) If an Early Termination Event specified in clause (a), (c) or (d) of
Section 8.02 occurs or upon the Expiration Date, the Trust shall be liquidated
by the Trustees as expeditiously as the Trustees determine to be possible by
distributing, after satisfaction of liabilities to creditors of the Trust as
provided by applicable law, to each Securityholder a Like Amount of Debentures,
subject to Section 8.04(d). If an Early Termination Event specified in clause
(b) occurs, the Trust shall be liquidated by the Trustee on the date of
distribution of the Debentures specified by the Depositor in its notice
delivered pursuant to Section 8.02. Notice of liquidation shall be given by the
Property Trustee by first-class mail, postage prepaid, mailed not later than 30
nor more than 60 days prior to the Liquidation Date to each Holder of Trust
Securities at such Holder's address appearing in the Securities Register. All
notices of liquidation shall:

          (i) state the Liquidation Date;

          (ii) state that from and after the Liquidation Date, the Trust
     Securities will no longer be deemed to be Outstanding and any Trust
     Securities Certificates not surrendered for exchange will be deemed to
     represent a Like Amount of Debentures; and

          (iii) provide such information with respect to the mechanics by which
     Holders may exchange Trust Securities Certificates for certificates
     evidencing Debentures, or, if Section 8.04(d) applies, receive a
     Liquidation Distribution, as the Administrative Trustee or the Property
     Trustee shall deem appropriate.

     (b) In order to effect the liquidation of the Trust and distribution of the
Debentures to Securityholders, the Property Trustee, either itself acting as
exchange agent or through the appointment of a separate exchange agent, shall
establish such procedures as it shall deem appropriate to effect the
distribution of Debentures in exchange for the Outstanding Trust Securities
Certificates.

     (c) Except where Section 8.02(c) or 8.04(d) applies, on or after the
Liquidation Date, (i) the Trust Securities will no longer be deemed to be
Outstanding, (ii) certificates representing a Like Amount of Debentures will be
issued to Holders of Trust Securities Certificates, upon surrender of such
certificates to the Administrative Trustee or its agent for exchange, (iii) the
Depositor shall use its best efforts to have the Debentures listed on the New
York Stock Exchange or such other exchange as the Preferred Securities are then
listed and shall take any reasonable action necessary to effect the distribution
of the Debentures, (iv)


                                       45


any Trust Securities Certificates not so surrendered for exchange will be deemed
to represent a Like Amount of Debentures, accruing interest at the rate provided
for in the Debentures from the last Distribution Date on which a Distribution
was made on such Trust Certificates until such certificates are so surrendered
(and until such certificates are so surrendered, no payments or interest or
principal will be made to Holders of Trust Securities Certificates with respect
to such Debentures) and (v) all rights of Securityholders holding Trust
Securities will cease, except the right of such Securityholders to receive
Debentures upon surrender of Trust Securities Certificates.

     (d) In the event that, notwithstanding the other provisions of this Section
8.04, whether because of an order for termination entered by a court of
competent jurisdiction or otherwise, distribution of the Debentures in the
manner provided herein is determined by the Property Trustee not to be
practical, the Trust Property shall be liquidated, and the Trust shall be
terminated, by the Property Trustee in such manner as the Property Trustee
determines. In such event, on the date of the termination of the Trust,
Securityholders will be entitled to receive out of the assets of the Trust
available for distribution to Securityholders, after satisfaction of liabilities
to creditors of the Trust as provided by applicable law, an amount equal to the
Liquidation Amount per Trust Security plus accumulated and unpaid Distributions
thereon to the date of payment (such amount being the "Liquidation
Distribution"). If, upon any such termination, the Liquidation Distribution can
be paid only in part because the Trust has insufficient assets available to pay
in full the aggregate Liquidation Distribution, then, subject to the next
succeeding sentence, the amounts payable by the Trust on the Trust Securities
shall be paid on a pro rata basis (based upon Liquidation Amounts). The Holder
of the Common Securities will be entitled to receive Liquidation Distributions
upon any such termination pro rata (determined as aforesaid) with Holders of
Preferred Securities, except that, if a Debenture Event of Default has occurred
and is continuing, the Preferred Securities shall have a priority over the
Common Securities, and no Liquidation Distribution will be paid to the Holders
of the Common Securities unless and until receipt by all Holders of the
Preferred Securities of the entire Liquidation Distribution payable in respect
thereof.

                                   ARTICLE IX

                                  Mergers, Etc.

     Section 9.01. Mergers, Consolidations, Amalgamations or Replacements of the
Trust. The Trust may not merge with or into,


                                       46


consolidate, amalgamate, or be replaced by, or convey, transfer or lease its
properties and assets as an entirety or substantially as an entirety to any
corporation or other entity, except as described below. The Trust may, at the
request of the Depositor, with the consent of the Administrative Trustee and
without the consent of the Holders of the Preferred Securities, merge with or
into, consolidate, amalgamate, or be replaced by, a trust organized as such
under the laws of any State; provided, that (i) such successor entity either (a)
expressly assumes all of the obligations of the Trust with respect to the
Preferred Securities or (b) substitutes for the Preferred Securities other
securities having substantially the same terms as the Preferred Securities (the
"Successor Securities") so long as the Successor Securities rank the same as the
Preferred Securities rank with respect to the payment of Distributions and
payments upon liquidation and redemption, (ii) the Depositor expressly appoints
a trustee of such successor entity possessing the same powers and duties as the
Property Trustee with respect to the Debentures, (iii) the Successor Securities
are listed, or any Successor Securities will be listed upon notification of
issuance, on any national securities exchange or other organization on which the
Preferred Securities are then listed, (iv) such merger, consolidation,
amalgamation or replacement does not cause the Preferred Securities (including
any Successor Securities) to be downgraded by any nationally recognized
statistical rating organization, (v) such merger, consolidation, amalgamation or
replacement does not adversely affect the rights, preferences and privileges of
the Holders of the Preferred Securities (including any Successor Securities) in
any material respect, (vi) such successor entity has a purpose substantially
similar to that of the Trust, (vii) prior to such merger, consolidation,
amalgamation or replacement, the Depositor has received an Opinion of Counsel to
the effect that (a) such merger, consolidation, amalgamation or replacement does
not adversely affect the rights, preferences and privileges of the Holders of
the Preferred Securities (including any Successor Securities) in any material
respect, and (b) following such merger, consolidation, amalgamation or
replacement, neither the Trust nor such successor entity will be required to
register as an investment company under the 1940 Act and (viii) the Depositor or
any permitted successor assignee owns all of the common securities of such
successor entity and guarantees the obligations of such successor entity under
the Successor Securities at least to the extent provided by the Guarantee and
this Trust Agreement. Notwithstanding the foregoing, the Trust shall not, except
with the consent of all Holders of the Preferred Securities, merge with or into,
consolidate, amalgamate, or be replaced by, any other entity or permit any other
entity to consolidate, amalgamate, merge with or into, or replace it if such
consolidation, amalgamation, merger or replacement would cause the Trust or the
successor entity not to be classified as a grantor


                                       47


trust for United States Federal income tax purposes.

                                    ARTICLE X

                            Miscellaneous Provisions

     Section 10.01. Limitation of Rights of Securityholders. The death or
incapacity of any Person having an interest, beneficial or otherwise, in Trust
Securities shall not operate to terminate this Trust Agreement, nor entitle the
legal representatives or heirs of such Person or any Securityholder for such
Person, to claim an accounting, take any action or bring any proceeding in any
court for a partition or winding-up of the arrangements contemplated hereby, nor
otherwise affect the rights, obligations and liabilities of the parties hereto
or any of them.

     Section 10.02. Amendment.

     (a) This Trust Agreement may be amended from time to time by the Trustees
and the Depositor, without the consent of any Securityholders, to cure any
ambiguity, defect or inconsistency or make any other change which does not
adversely affect in any material respect the interests of any Holder of
Preferred Securities. Any amendments of this Trust Agreement pursuant to Section
10.02(a) shall become effective when notice thereof is given to the
Securityholders.

     (b) Except as provided in Section 10.02(a) and 10.02(c) hereof, any
provision of this Trust Agreement may be amended by the Trustees and the
Depositor with the consent of Holders of at least a majority of the aggregate
Liquidation Amount of the Outstanding Preferred Securities.

     (c) In addition to and notwithstanding any other provision in this Trust
Agreement, without the consent of each affected Securityholder (such consent
being obtained in accordance with Section 6.03 or 6.06 hereof), this Trust
Agreement may not be amended to (i) change the amount, timing or currency of any
Distribution or Liquidation Distribution on the Trust Securities or otherwise
adversely affect the method of payment of any Distribution or Liquidation
Distribution required to be made in respect of the Trust Securities as of a
specified date; (ii) change the redemption provisions of the Trust Securities;
(iii) restrict the right of a Securityholder to institute suit for the
enforcement of any such payment contemplated in (i) or (ii) above on or after
the related date; (iv) modify the first sentence of Section 2.06 hereof; (v)
authorize or issue any beneficial interest in the Trust other than as
contemplated by this Trust Agreement as of the date


                                       48


hereof; (vi) change the conditions precedent for the Depositor to elect to
terminate the Trust and distribute the Debentures to Holders of Preferred
Securities as set forth in Section 8.02; or (vii) affect the limited liability
of any Holder of Preferred Securities, and, notwithstanding any other provision
herein, without the unanimous consent of the Securityholders (such consent being
obtained in accordance with Section 6.03 or 6.06 hereof), paragraphs (b) and (c)
of this Section 10.02 may not be amended.

     (d) Notwithstanding any other provisions of this Trust Agreement, no
amendment to this Trust Agreement shall be made without receipt by the Trust of
an Opinion of Counsel experienced in such matters to the effect that such
amendment will not affect the Trust's status as a grantor trust for United
States Federal income tax purposes or its exemption from regulation as an
"investment company" under the 1940 Act.

     (e) Notwithstanding anything in this Trust Agreement to the contrary,
without the consent of the Depositor, this Trust Agreement may not be amended in
a manner which imposes any additional obligation on the Depositor.

     (f) In the event that any amendment to this Trust Agreement is made, the
Administrative Trustee shall promptly provide to the Depositor a copy of such
amendment.

     (g) In executing any amendment to the Trust Agreement, the Property Trustee
shall be entitled to receive, and (subject to Section 8.01) shall be fully
protected in relying upon, an Opinion of Counsel stating that the execution of
such amendment is authorized or permitted by this Trust Agreement. Except as
contemplated by Section 7.11, the Trustee may, but shall not be obligated to,
enter into any amendment to this Trust Agreement which affects the Trustee's own
rights, duties or immunities under this Trust Agreement or otherwise.

     Section 10.03. Severability. In case any provision in this Trust Agreement
or in the Trust Securities Certificates shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.

     Section 10.04. Governing Law. THIS TRUST AGREEMENT AND THE RIGHTS AND
OBLIGATIONS OF EACH OF THE SECURITYHOLDERS, THE TRUST AND THE TRUSTEES WITH
RESPECT TO THIS TRUST AGREEMENT AND THE TRUST SECURITIES SHALL BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF DELAWARE, WITHOUT
REGARD TO CONFLICT OF LAWS PRINCIPLES.


                                       49


     Section 10.05. Payments Due on Non-Business Day. If the date fixed for any
payment on any Trust Security shall be a day which is not a Business Day, then
such payment need not be made on such date but may be made on the next
succeeding day which is a Business Day (except as otherwise provided therein,
with the same force and effect as though made on the date fixed for such
payment), and no interest shall accumulate thereon for the period after such
date to the date of payment on such succeeding day.

     Section 10.06. Successors and Assigns. This Trust Agreement shall be
binding upon and shall inure to the benefit of any successor to the Trust or
successor Trustee or both, including any successor by operation of law. Except
in connection with a consolidation, merger or sale involving the Depositor that
is permitted under Article V of the Indenture and pursuant to which the assignee
agrees in writing to perform the Depositor's obligations hereunder, the
Depositor shall not assign its obligations hereunder.

     Section 10.07. Headings. The Article and Section headings are for
convenience only and shall not affect the construction of this Trust Agreement.

     Section 10.08. Reports, Notices and Demands. Any report, notice, demand or
other communication which by any provision of this Trust Agreement is required
or permitted to be given or served to or upon any Securityholder or the
Depositor may be given or served in writing by deposit thereof, first-class
postage prepaid in the United States mail, hand delivery or facsimile
transmission, in each case, addressed, (a) in the case of a Holder of a
Preferred Security, to such Holder of a Preferred Security as such
Securityholder's name and address may appear on the Securities Register; and (b)
in the case of the Holder of a Common Security or the Depositor, to Public
Service Electric and Gas Company, 80 Park Plaza, Newark, New Jersey 07101,
Attention: Treasurer, facsimile no.: 201-596-6309. Such notice, demand or other
communication to or upon a Securityholder shall be deemed to have been
sufficiently given or made, for all purposes, upon hand delivery, mailing or
transmission.

     Any notice, demand or other communication which by any provision of this
Trust Agreement is required or permitted to be given or served to or upon the
Trust, the Property Trustee or the Administrative Trustee shall be given in
writing addressed (until another address is published by the Trust) as follows:
(a) with respect to the Property Trustee to First Union National Bank, 765 Broad
Street, Newark, New Jersey 07101, Attention: Corporate Trust Office; (b) with
respect to the Delaware Trustee, to 1225 King Street, Wilmington, Delaware 19801
Attention: Corporate Trust


                                       50


Department; and (c) with respect to the Administrative Trustee, to the address
above for notices to the Depositor, marked "Attention: Administrative Trustee of
PSE&G Capital Trust II c/o Treasurer." Such notice, demand or other
communication to or upon the Trust or the Property Trustee shall be deemed to
have been sufficiently given or made only upon actual receipt of the writing by
the Trust or the Property Trustee.

     Section 10.09. Agreement Not to Petition. Each of the Trustees and the
Depositor agree for the benefit of the Securityholders that, until at least one
year and one day after the Trust has been terminated in accordance with Article
VIII, they shall not file, or join in the filing of, a petition against the
Trust under any Bankruptcy Laws or otherwise join in the commencement of any
proceeding against the Trust under any Bankruptcy Law. In the event the
Depositor or any of the Trustees takes action in violation of this Section
10.09, the Property Trustee agrees, for the benefit of Securityholders, that at
the expense of the Depositor, it shall file an answer with the bankruptcy court
or otherwise properly contest the filing of such petition by the Depositor or
any of the Trustees, as applicable, against the Trust or the commencement of
such action and raise the defense that the Depositor has agreed in writing not
to take such action and should be stopped and precluded therefrom and such other
defenses, if any, as counsel for the Property Trustee or the Trust may assert.
The provisions of this Section 10.09 shall survive the termination of this Trust
Agreement.

     Section 10.10. Trust Indenture Act; Conflict with Trust Indenture Act.

     (a) This Trust Agreement is subject to the provisions of the Trust
Indenture Act that are required to be part of this Trust Agreement and shall, to
the extent applicable, be governed by such provisions.

     (b) The Property Trustee shall be the only Trustee which is a trustee for
the purposes of the Trust Indenture Act.

     (c) If any provision hereof limits, qualifies or conflicts with another
provision hereof which is required to be included in this Trust Agreement by any
of the provisions of the Trust Indenture Act, such required provision shall
control. If any provision of this Trust Agreement modifies or excludes any
provision of the Trust Indenture Act which may be so modified or excluded, the
latter provision shall be deemed to apply to this Trust Agreement as so modified
or excluded, as the case may be.

     (d) The application of the Trust Indenture Act to this


                                       51


Trust Agreement shall not affect the nature of the Trust Securities as equity
securities representing undivided beneficial interests in the assets of the
Trust.

     Section 10.11. Acceptance of Terms of Trust Agreement, Guarantee and
Indenture. THE RECEIPT AND ACCEPTANCE OF A TRUST SECURITY OR ANY INTEREST
THEREIN BY OR ON BEHALF OF A SECURITYHOLDER OR ANY BENEFICIAL OWNER, WITHOUT ANY
SIGNATURE OR FURTHER MANIFESTATION OF ASSENT, SHALL CONSTITUTE THE UNCONDITIONAL
ACCEPTANCE BY THE SECURITYHOLDER AND ALL OTHERS HAVING A BENEFICIAL INTEREST IN
SUCH TRUST SECURITY OF ALL THE TERMS AND PROVISIONS OF THIS TRUST AGREEMENT AND
AGREEMENT TO THE SUBORDINATION PROVISIONS AND OTHER TERMS OF THE GUARANTEE AND
THE INDENTURE, AND SHALL CONSTITUTE THE AGREEMENT OF THE TRUST, SUCH
SECURITYHOLDER AND SUCH OTHERS THAT THE TERMS AND PROVISIONS OF THIS TRUST
AGREEMENT SHALL BE BINDING, OPERATIVE AND EFFECTIVE AS BETWEEN THE TRUST AND
SUCH SECURITYHOLDER AND SUCH OTHERS.

                                               PUBLIC SERVICE ELECTRIC AND GAS
                                               COMPANY, as Depositor


                                               By:
                                                  -----------------------------
                                                    Name:
                                                    Title:

                                               FIRST UNION NATIONAL BANK, as
                                               Property Trustee


                                               By:
                                                  -----------------------------
                                                    Name:
                                                    Title:

                                               FIRST UNION BANK OF DELAWARE,
                                               as Delaware Trustee


                                               By:
                                                  -----------------------------
                                                    Name:
                                                    Title:


                                                  -----------------------------,
                                                  Fred F. Saunders, as
                                                  Administrative Trustee



                                       52


                                                                       Exhibit A

                              CERTIFICATE OF TRUST
                                       OF
                             PSE&G CAPITAL TRUST II

     THIS CERTIFICATE OF TRUST of PSE&G Capital Trust II (the "Trust"), dated
April 19, 1996, is being duly executed and filed by the undersigned, as
trustees, to form a business trust under the Delaware Business Trust Act (12
Del. C.ss. 3801 et seq.).

     (i) Name. The name of the business trust being formed hereby is PSE&G
Capital Trust II.

     (ii) Delaware Trustee. The name and business address of the trustee of the
Trust in the State of Delaware are First Union Bank of Delaware, 1225 King
Street, Wilmington DE 19801; attn: Corporate Trust Department.

     (iii) Counterparts. This Certificate of Trust may be executed in one or
more counterparts, all of which together shall constitute one and the same
instrument.

     (iv) Effective Date. This Certificate of Trust shall be effective as of its
filing.

     IN WITNESS WHEREOF, the undersigned, being the trustees of the Trust, have
executed this Certificate of Trust as of the date first above written.

                                                  FIRST UNION NATIONAL BANK, as
                                                  Trustee


                                                  By:
                                                     ---------------------------
                                                  Name:
                                                  Title:

                                                  FIRST UNION BANK OF DELAWARE,
                                                  as Trustee


                                                  By:
                                                     ---------------------------
                                                  Name:
                                                  Title:


                                                  -----------------------------,
                                                  as Trustee
                                                  Name:  Fred F. Saunders


                                      A-1


                                                                       EXHIBIT B

                                               February _, 1997

The Depository Trust Company
55 Water Street, 49th Floor
New York, New York  10041-0099

Attention:
            General Counsel's Office

            Re: PSE&G Capital Trust II Preferred Securities

Ladies and Gentlemen:

     The purpose of this letter is to set forth certain matters relating to the
issuance and deposit with The Depository Trust Company ("DTC") of the PSE&G
Capital Trust II _____% Cumulative Quarterly Income Preferred Securities, Series
B (the "Preferred Securities"), of PSE&G Capital Trust II, a Delaware business
trust (the "Issuer"), created pursuant to a Trust Agreement between Public
Service Electric and Gas Company ("PSE&G"), First Union National Bank, as
Property Trustee, the Delaware Trustee named therein and the Administrative
Trustee named therein. The payment of distributions on the Preferred Securities
and payments due upon liquidation of the Issuer or redemption of the Preferred
Securities are guaranteed by PSE&G, to the extent the Issuer has funds available
for the payment thereof and to the extent set forth in a Guarantee Agreement
dated February _, 1997 by PSE&G and backup undertakings relating thereto with
respect to the Preferred Securities. The Issuer proposes to sell the Preferred
Securities to certain Underwriters (the "Underwriters") pursuant to an
Underwriting Agreement dated February __, 1997 by and among the Underwriters,
the Issuer and PSE&G and the Underwriters wish to take delivery of the Preferred
Securities through DTC. First Union National Bank is acting as transfer agent
and registrar with respect to the Preferred Securities (the "Transfer Agent and
Registrar").

     To induce DTC to accept the Preferred Securities as eligible for deposit at
DTC, and to act in accordance with DTC's Rules with respect to the Preferred
Securities, the Issuer and the



Transfer Agent and Registrar make the following representations to DTC:

     1. Prior to the closing of the sale of the Preferred Securities to the
Underwriters, which is expected to occur on or about February _, 1997, there
shall be deposited with DTC one or more global certificates (individually and
collectively, the "Global Certificate") registered in the name of DTC's nominee,
Cede & Co., representing an aggregate of __________ Preferred Securities and
bearing the following legend:

     Unless this certificate is presented by an authorized representative of The
     Depository Trust Company, a New York corporation ("DTC"), to the Issuer or
     its agent for registration of transfer, exchange or payment, and any
     certificate issued is registered in the name of Cede & Co. or in such other
     name as is requested by an authorized representative of DTC (and any
     payment hereon is made to Cede & Co. or to such other entity as is
     requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE, OR
     OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL
     inasmuch as the registered owner hereof, Cede & Co., has an interest
     herein.

     2. The Amended and Restated Trust Agreement of the Issuer provides for the
voting by holders of the Preferred Securities under certain limited
circumstances. The Issuer shall establish a record date for such purposes and
shall, to the extent possible, give DTC notice of such record date not less than
15 calendar days in advance of such record date.

     3. In the event of a stock split, conversion, recapitalization,
reorganization or any other similar transaction resulting in the cancellation of
all or any part of the Preferred Securities outstanding, the Issuer or the
Transfer Agent and Registrar shall send DTC a notice of such event at least 5
business days prior to the effective date of such event.

     4. In the event of distribution on, or an offering or issuance of rights
with respect to, the Preferred Securities outstanding, the Issuer or the
Transfer Agent and Registrar shall send DTC a notice specifying: (a) the amount
of and conditions, if any, applicable to the payment of any such distribution or
any such offering or issuance of rights; (b) any applicable expiration or
deadline date or any date by which any action on the part of the holders of
Preferred Securities is required; and (c) the date any



required notice is to be mailed by or on behalf of the Issuer to holders of
Preferred Securities or published by or on behalf of the Issuer (whether by mail
or publication, the "Publication Date"). Such notice shall be sent to DTC by a
secure means (e.g., legible telecopy, registered or certified mail, overnight
delivery) in a timely manner designed to assure that such notice is in DTC's
possession no later than the close of business on the business day before the
Publication Date. The Issuer or the Transfer Agent and Registrar will forward
such notice either in a separate secure transmission for each CUSIP number or in
a secure transmission of multiple CUSIP numbers (if applicable) that includes a
manifest or list of each CUSIP number submitted in that transmission. (The party
sending such notice shall have a method to verify subsequently the use of such
means and the timeliness of such notice.) The Publication Date shall be not less
than 20 calendar days nor more than 90 calendar days prior to the payment of any
such distribution or any such offering or issuance of rights with respect to the
Preferred Securities. After establishing the amount of payment to be made on the
Preferred Securities, the Issuer or the Transfer Agent and Registrar will notify
DTC's Dividend Department of such payment 5 business days prior to payment date.
Notices to DTC's Dividend Department by telecopy shall be sent to (212)
709-1723. Such notices by mail or by any other means shall be sent to:

                Manager, Announcements
                Dividend Department
                The Depository Trust Company
                7 Hanover Square, 22nd Floor
                New York, New York  10004-2695

     The Issuer or the Transfer Agent and Registrar shall confirm DTC's receipt
of such telecopy by telephoning the Dividend Department at (212) 709-1270.

     5. In the event of a redemption by the Issuer of the Preferred Securities,
notice specifying the terms of the redemption and the Publication Date of such
notice shall be sent by the Issuer or the Transfer Agent and Registrar to DTC
not less than 30 calendar days prior to such event by a secure means in the
manner set forth in paragraph 4. Such redemption notice shall be sent to DTC's
Call Notification Department at (516) 227-4039 or (516) 227-4190, and receipt of
such notice shall be confirmed by telephoning (516) 227-4070. Notice by mail or
by any other means shall be sent to:


                                       3


                Call Notification Department
                The Depository Trust Company
                711 Stewart Avenue
                Garden City, New York  11530-4719

     6. In the event of any invitation to tender the Preferred Securities,
notice specifying the terms of the tender and the Publication Date of such
notice shall be sent by the Issuer or the Transfer Agent and Registrar to DTC by
a secure means and in a timely manner as described in paragraph 4. Notices to
DTC pursuant to this paragraph and notices of other corporate actions (including
mandatory tenders, exchanges and capital changes) shall be sent, unless
notification to another department is expressly provided for herein, by telecopy
to DTC's Reorganization Department at (212) 709-1093 or (212) 709-1094 and
receipt of such notice shall be confirmed by telephoning (212) 709-6884, or by
mail or any other means to:

                Manager, Reorganization Department
                Reorganization Window
                The Depository Trust Company
                7 Hanover Square, 23rd Floor
                New York, New York  10004-2695

     7. All notices and payment advances sent to DTC shall contain the CUSIP
number or numbers of the Preferred Securities and the accompanying designation
of the Preferred Securities, which, as of the date of this letter, is "PSE&G
Capital Trust II _____% Cumulative Quarterly Income Preferred Securities, Series
B".

     8. Issuer or Agent shall provide automated notification of CUSIP-level
detail for dividend payments to DTC no later than noon (Eastern Time) on the
payment date.

     9. Dividend payments shall be received by Cede & Co. as nominee of DTC, or
its registered assigns in same-day funds or the equivalent no later than 2:30
p.m. (Eastern Time) on each payment date. Absent any other arrangements between
Issuer or Trustee and DTC, such funds shall be wired as follows:

                The Chase Manhattan Bank
                ABA 021000021
                For credit to A/C The Depository Trust Company
                Dividend Deposit Account 066-026776

Issuer or Agent shall provide dividend payment information to a standard
announcement service subscribed to by DTC. In the unlikely event that no such
service exists, Issuer agrees that it


                                       4


or Agent shall provide this information directly to DTC in advance of the
dividend payment date as soon as the information is available. This information
should be conveyed directly to DTC electronically. If electronic transmission is
not available, such information should be sent by telecopy to DTC's Dividend
Department at (212) 709-1723 or (212) 709-1886, and receipt of such notices
shall be confirmed by telephoning (212) 709-1270. Notices to DTC pursuant to the
above by mail or by any other means shall be sent to:

                Manager Announcements
                Dividend Department
                The Depository Trust Company
                7 Hanover Square, 22nd Floor
                New York, NY  10004-2695

     10. DTC shall receive maturity and redemption and CUSIP-level detail on the
payable date in same-day funds by 2:30 p.m. (Eastern Time). Absent any other
arrangements between Agent and DTC, such payments shall be wired as follows:

                The Chase Manhattan Bank
                ABA 021000021
                For credit to A/C The Depository Trust Company
                Redemption Account 066-027306

in accordance with existing SDFS payment procedures in the manner set forth in
DTC's SDFS Paying Agent Operating Procedures, a copy of which has previously
been furnished to Agent.

     11. DTC shall receive all reorganization payments and CUSIP-level detail
resulting from corporate actions (such as tender offers or mergers) on the first
payable date in same-day funds by 2:30 p.m. (Eastern Time). Absent any other
arrangements between Agent and DTC, such payments shall be wired as follows:

                The Chase Manhattan Bank
                ABA 021000021
                For credit to A/C The Depository Trust Company
                Reorganization Account 066-027608

     12. DTC may by prior written notice direct the Issuer and the Transfer
Agent and Registrar to use any other telecopy number or address of DTC as the
number or address to which notices or payments may be sent.

     13. In the event of a conversion, redemption, or any other similar
transaction (e.g., tender made and accepted in response to the Issuer's or the
Transfer Agent and Registrar's


                                       5


invitation) necessitating a reduction in the aggregate number of Preferred
Securities outstanding evidenced by a global certificate, DTC, in its
discretion: (a) may request the Issuer or the Transfer Agent and Registrar to
issue and countersign a new global certificate; or (b) may make an appropriate
notation on such global certificate indicating the date and amount of such
reduction.

     14. DTC may discontinue its services as a securities depositary with
respect to the Preferred Securities at any time by giving reasonable prior
written notice to the Issuer and the Transfer Agent and Registrar (at which time
DTC will confirm with the Issuer or the Transfer Agent and Registrar the
aggregate number of Preferred Securities deposited with it) and discharging its
responsibilities with respect thereto under applicable law. Under such
circumstances, the Issuer may determine to make alternative arrangements for
book-entry settlement for the Preferred Securities, make available one or more
separate global certificates evidencing Preferred Securities to any Participant
having Preferred Securities credited to its DTC account, or issue definitive
Preferred Securities to the beneficial owners thereof, and in any such case, DTC
agrees to cooperate fully with the Issuer and the Transfer Agent and Registrar
and to return the global certificates duly endorsed for transfer as directed by
the Issuer or the Transfer Agent and Registrar, together with any other
documents of transfer reasonably requested by the Issuer or the Transfer Agent
and Registrar.

     15. In the event that the Issuer determines that beneficial owners of the
global certificate(s) evidencing Preferred Securities shall be able to obtain
definitive Preferred Securities, the Issuer or the Transfer Agent and Registrar
shall notify DTC of the availability of such definitive Preferred Securities. In
such event, the Issuer or the Transfer Agent and Registrar shall issue, transfer
and exchange definitive Preferred Securities in appropriate amounts, as required
by DTC and others, and DTC agrees to cooperate fully with the Issuer and the
Transfer Agent and Registrar and to return the global certificate(s), duly
endorsed for transfer as directed by the Issuer or the Transfer Agent and
Registrar, together with any other documents of transfer reasonably requested by
the Issuer or the Transfer Agent and Registrar.

     16. Issuer: (a) understands that DTC has no obligation to, and will not,
communicate to its Participants or to any person having an interest in the
Securities any information contained in the Security certificate(s); and (b)
acknowledges that neither DTC's Participants nor any person having an interest
in the Securities shall be deemed to have notice of the provisions of the
Security certificate(s) by virtue of submission of such certificate(s) to DTC.


                                       6


     17. This letter may be executed in any number of counterparts, each of
which when so executed shall be deemed to be an original, but all such
counterparts shall together constitute but one and the same instrument.

     Nothing herein shall be deemed to require the Transfer Agent and Registrar
to advance funds on behalf of the Issuer.

                                                     Very truly yours,

                                                     PSE&G CAPITAL TRUST II
                                                     (As Issuer)


                                                     By:
                                                        ------------------------
                                                          Fred F. Saunders, as
                                                          Administrative Trustee

                                                     FIRST UNION NATIONAL BANK


                                                     ---------------------------
                                                     (As Transfer Agent and
                                                     Registrar)


                                                     By:
                                                        ------------------------
                                                          Name:
                                                          Title:


RECEIVED AND ACCEPTED:

THE DEPOSITORY TRUST COMPANY


By:
   ------------------------------
     Authorized Officer


                                       7


                                                                       EXHIBIT C

                      THIS CERTIFICATE IS NOT TRANSFERABLE

                               Certificate Number
                                       C-1

                                                     Number of Common Securities

                                                                         117,526

                    Certificate Evidencing Common Securities
                                       of
                             PSE&G Capital Trust II

                            8.125% Common Securities
                  (liquidation amount $25 per Common Security)

     PSE&G Capital Trust II, a statutory business trust created under the laws
of the State of Delaware (the "Trust"), hereby certifies that Public Service
Electric and Gas Company (the "Holder") is the registered owner of
____________________ (__________) common securities of the Trust representing
undivided beneficial interests in the assets of the Trust and designated as the
8.125% Common Securities (liquidation amount $25 per Common Security) (the
"Common Securities"). In accordance with Section 5.10 of the Trust Agreement (as
defined below) the Common Securities are not transferable and any attempted
transfer hereof shall be void. The designations, rights, privileges,
restrictions, preferences and other terms and provisions of the Common
Securities are set forth in, and this certificate and the Common Securities
represented hereby are issued and shall in all respects be subject to the terms
and provisions of, the Amended and Restated Trust Agreement of the Trust dated
as of February 7, 1997, as the same may be amended from time to time (the "Trust
Agreement"). The Trust will furnish a copy of the Trust Agreement to the Holder
without charge upon written request to the Trust at its principal place of
business or registered office.

     Upon receipt of this certificate, the Holder is bound by the Trust
Agreement and is entitled to the benefits thereunder.



     IN WITNESS WHEREOF, the Administrative Trustee of the Trust has executed
this certificate this 7th day of February, 1997.

                                                   PSE&G CAPITAL TRUST II

                                                   By:
                                                      --------------------------
                                                        Fred F. Saunders, as
                                                        Administrative Trustee


                                       2


                                                                       EXHIBIT D

                               Certificate Number

                                        1

                                                  Number of Preferred Securities
                                                       CUSIP NO. __________

                   Certificate Evidencing Preferred Securities
                                       of
                             PSE&G Capital Trust II

            8.125% Cumulative Quarterly Income Preferred Securities,
                                    Series B
                 (liquidation amount $25 per Preferred Security)

     PSE&G Capital Trust II, a statutory business trust created under the laws
of the State of Delaware (the "Trust"), hereby certifies that Cede & Co. (the
"Holder") is the registered owner of _________, _________________________
(_________) preferred securities of the Trust representing an undivided
beneficial interest in the assets of the Trust and designated the PSE&G Capital
Trust II 8.125% Cumulative Quarterly Income Preferred Securities, Series B
(liquidation amount $25 per Preferred Security) (the "Preferred Securities").
The Preferred Securities are transferable on the books and records of the Trust,
in person or by a duly authorized attorney, upon surrender of this certificate
duly endorsed and in proper form for transfer as provided in Section 5.04 of the
Trust Agreement (as defined below). The designations, rights, privileges,
restrictions, preferences and other terms and provisions of the Preferred
Securities are set forth in, and this certificate and the Preferred Securities
represented hereby are issued and shall in all respects be subject to the terms
and provisions of, the Amended and Restated Trust Agreement of the Trust dated
as of February 7, 1997, as the same may be amended from time to time (the "Trust
Agreement"). The Holder is entitled to the benefits of the Guarantee Agreement
entered into by Public Service Electric and Gas Company, a New Jersey
corporation, and First Union National Bank as guarantee trustee, dated as of
February 7, 1997 (the "Guarantee") to the extent provided therein, together with
the obligations of Public Service Electric and Gas Company under the Trust
Agreement, its Deferrable Interest Subordinated Debentures and the Indenture



related to such Deferrable Interest Subordinated Debentures. The Trust will
furnish a copy of the aforementioned agreements and instruments to the Holder
without charge upon written request to the Trust at its principal place of
business or registered office.

     Upon receipt of this certificate, the Holder is bound by the Trust
Agreement and is entitled to the benefits thereunder.

     IN WITNESS WHEREOF, the Administrative Trustee of the Trust has executed
this certificate this 7th day of February, 1997.

                                               PSE&G CAPITAL TRUST II


                                               By:
                                                  -----------------------------
                                                    Fred F. Saunders, as
                                                    Administrative Trustee

[To be included in Book-Entry Preferred Securities Certificate]

This Preferred Security is a Book-Entry Preferred Securities Certificate within
the meaning of the Trust Agreement previously referred to and is registered in
the name of The Depository Trust Company (the "Depository") or a nominee of the
Depository. This Preferred Security is exchangeable for Preferred Securities
registered in the name of a person other than the Depository or its nominee only
in the limited circumstances described in the Trust Agreement and no transfer of
this Preferred Security (other than a transfer of this Preferred Security as a
whole by the Depository to a nominee of the Depository or by a nominee of the
Depository to the Depository or another nominee of the Depository) may be
registered except in limited circumstances.

Unless this Preferred Security is presented by an authorized representative of
The Depository Trust Company, a New York corporation, (55 Water Street, New
York) to PSE&G Capital Trust II or its agent for registration of transfer,
exchange or payment, and any Preferred Security issued is registered in the name
of Cede & Co. or such other name as requested by an authorized representative of
The Depository Trust Company and any payment hereon is made to Cede & Co. or to
such other entity as is requested by an authorized representative of The
Depository Trust Company, ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY A PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede
& Co., has an interest herein.



                                   ASSIGNMENT

FOR VALUE RECEIVED, the undersigned assigns and transfers to: (Insert assignee's
social security or tax identification number) (Insert address and zip code of
assignee)

__________ Preferred Securities represented by this Preferred Securities
Certificate and irrevocably appoints

agent to transfer said Preferred Securities on the books of the Trust. The agent
may substitute another to act for him or her.

Date:

Signature:
(Sign exactly as your name appears on the other side of this Preferred Security
Certificate)

EX-3

                                                                       Exhibit F

                              Amended and Restated
                Trust Agreement for Enterprise Capital Trust III

                                      among

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                                 (as Depositor)

                            FIRST UNION NATIONAL BANK
                              (as Property Trustee)

                          FIRST UNION BANK OF DELAWARE
                              (as Delaware Trustee)

                                       and

                     THE ADMINISTRATIVE TRUSTEE NAMED HEREIN

                            Dated as of July 6, 1998



                                TABLE OF CONTENTS

                                                                            Page

                                    ARTICLE I

                                  Defined Terms

Section 1.01.  Definitions...................................................  1

                                   ARTICLE II

                            Continuation of the Trust

Section 2.01.  Name..........................................................  9
Section 2.02.  Office of the Delaware Trustee; Principal Place of Business...  9
Section 2.03.  Initial Contribution of Trust Property; Expenses of the Trust. 9
Section 2.04.  Issuance of the Trust Securities.............................. 10
Section 2.05.  Purchase of Debentures........................................ 10
Section 2.06.  Declaration of Trust.......................................... 11
Section 2.07.  Authorization to Enter into Certain Transactions.............. 11
Section 2.08.  Assets of Trust............................................... 14
Section 2.09.  Title to Trust Property....................................... 14

                                   ARTICLE III

                                 Payment Account

Section 3.01.  Payment Account............................................... 15

                                   ARTICLE IV

                            Distributions; Redemption

Section 4.01.  Distributions................................................. 15
Section 4.02.  Redemption.................................................... 16
Section 4.03.  Subordination of Common Securities............................ 18
Section 4.04.  Payment Procedures............................................ 19
Section 4.05.  Tax Returns and Reports....................................... 19
Section 4.06.  Payments under Indenture.......................................19

                                    ARTICLE V

                          Trust Securities Certificates

Section 5.01.  Initial Ownership............................................. 20
Section 5.02.  The Trust Securities Certificates............................. 20
Section 5.03.  Delivery of Trust Securities Certificates..................... 20
Section 5.04.  Registration of Transfer and Exchange of Preferred Securities
               Certificates.................................................. 20


                                      (i)


Section 5.05.  Mutilated, Destroyed, Lost or Stolen Trust Securities
               Certificates.................................................. 21
Section 5.06.  Persons Deemed Securityholders................................ 22
Section 5.07.  Access to List of Securityholders' Names and Addresses........ 22
Section 5.08.  Maintenance of Office or Agency............................... 22
Section 5.09.  Appointment of Paying Agent................................... 23
Section 5.10.  No Transfer of Common Securities by Depositor................. 23
Section 5.11.  Book-Entry Preferred Securities Certificates; Common
               Securities Certificate........................................ 23
Section 5.12.  Definitive Preferred Securities Certificates.................. 24
Section 5.13.  Rights of Securityholders..................................... 24

                                   ARTICLE VI

                    Acts of Securityholders; Meetings; Voting

Section 6.01.  Limitations on Voting Rights.................................. 25
Section 6.02.  Notice of Meetings............................................ 26
Section 6.03.  Meetings of Preferred Securityholders......................... 26
Section 6.04.  Voting Rights................................................. 26
Section 6.05.  Proxies, etc.................................................. 26
Section 6.06.  Securityholder Action by Written Consent...................... 27
Section 6.07.  Record Date for Voting and Other Purposes..................... 27
Section 6.08.  Acts of Securityholders....................................... 27
Section 6.09.  Inspection of Records......................................... 28

                                   ARTICLE VII

                                  The Trustees

Section 7.01.  Certain Duties and Responsibilities........................... 28
Section 7.02.  Notice of Defaults; Direct Action by Securityholders.......... 29
Section 7.03.  Certain Rights of Property Trustee............................ 30
Section 7.04.  Not Responsible for Recitals or Issuance of Securities........ 31
Section 7.05.  May Hold Securities........................................... 31
Section 7.06.  Compensation; Indemnity; Fees................................. 31
Section 7.07.  Corporate Property Trustee Required; Eligibility of Trustees.. 32
Section 7.08.  Conflicting Interests......................................... 33
Section 7.09.  Co-Trustees and Separate Trustee.............................. 33
Section 7.10.  Resignation and Removal; Appointment of Successor............. 35
Section 7.11.  Acceptance of Appointment by Successor........................ 36
Section 7.12.  Merger, Conversion, Consolidation or Succession to Business... 37


                                      (ii)


Section 7.13.  Preferential Collection of Claims Against Depositor or Trust.. 37
Section 7.14.  Reports by Property Trustee................................... 37
Section 7.15.  Reports to the Property Trustee............................... 37
Section 7.16.  Evidence of Compliance with Conditions Precedent.............. 38
Section 7.17.  Statements Required in Officer's Certificate and Opinion of
               Counsel....................................................... 38
Section 7.18.  Number of Trustees............................................ 38
Section 7.19.  Delegation of Power........................................... 39
Section 7.20.  Voting........................................................ 39

                                  ARTICLE VIII

                           Dissolution and Liquidation

Section 8.01.  Dissolution Upon Expiration Date.............................. 39
Section 8.02.  Early Dissolution............................................. 39
Section 8.03.  Dissolution................................................... 40
Section 8.04.  Liquidation................................................... 40

                                   ARTICLE IX

                                  Mergers, Etc.

Section 9.01.  Mergers, Consolidations, Amalgamations or Replacements
               of the Trust.................................................. 42

                                    ARTICLE X

                            Miscellaneous Provisions

Section 10.01. Limitation of Rights of Securityholders....................... 43
Section 10.02. Amendment..................................................... 43
Section 10.03. Severability.................................................. 44
Section 10.04. Governing Law................................................. 45
Section 10.05. Payments Due on Non-Business Day.............................. 45
Section 10.06. Successors and Assigns........................................ 45
Section 10.07. Headings...................................................... 45
Section 10.08. Reports, Notices and Demands.................................. 45
Section 10.09. Agreement Not to Petition..................................... 46
Section 10.10. Trust Indenture Act; Conflict with Trust Indenture Act........ 46
Section 10.11. Acceptance of Terms of Trust Agreement, Guarantee and
               Indenture..................................................... 47


                                     (iii)


                          Enterprise Capital Trust III

              Certain Sections of this Trust Agreement relating to
          Sections 310 through 318 of the Trust Indenture Act of 1939

Trust Indenture                                                  Trust Agreement
  Act Section                                                        Section
- ---------------                                                  ---------------

ss. 310(a)(1)...............................................................7.07
       (a)(2)...............................................................7.07
       (a)(3)...............................................................7.09
       (a)(4)........................................................2.07(a)(ii)
       (b)..................................................................7.08
ss. 311(a)..................................................................7.13
       (b)..................................................................7.13
ss. 312(a)..................................................................5.07
       (b)..................................................................5.07
       (c)..................................................................5.07
ss. 313(a)..................................................................7.14
       (b)..................................................................7.14
       (c)..................................................................7.14
       (d)..................................................................7.14
ss. 314(a)..................................................................7.15
       (b)........................................................Not Applicable
       (c)(1).........................................................7.16, 7.17
       (c)(2).........................................................7.16, 7.17
       (c)(3).....................................................Not Applicable
       (d)........................................................Not Applicable
       (e)................................................................. 7.17
ss. 315(a)......................................................7.01(a), 7.03(a)
       (b)...........................................................7.02, 10.08
       (c)...............................................................7.01(a)
       (d)............................................................7.01, 7.03
       (e)........................................................Not Applicable
ss. 316(a)........................................................Not Applicable
       (a)(1)(A)..................................................Not Applicable
       (a)(1)(B)..................................................Not Applicable
       (a)(2).....................................................Not Applicable
       (b)........................................................Not Applicable
       (c)........................................................Not Applicable
ss. 317(a)(1).....................................................Not Applicable
       (a)(2).....................................................Not Applicable
       (b)..................................................................5.09
ss. 318(a).................................................................10.10

- ------------------
     Note: This reconciliation and tie sheet shall not, for any purpose, be
deemed to be a part of the Trust Agreement.


                                      (iv)


     AMENDED AND RESTATED TRUST AGREEMENT of Enterprise Capital Trust III (the
"Trust"), dated as of July 6, 1998 among (i) Public Service Enterprise Group
Incorporated, a New Jersey corporation (the "Depositor"), (ii) First Union
National Bank, a national banking association, as trustee (the "Property
Trustee"), (iii) First Union Bank of Delaware, whose address in Delaware is 1225
King Street, Wilmington, Delaware 19801, as Delaware trustee (the "Delaware
Trustee"), (iv) Morton A. Plawner, an individual whose address is c/o Public
Service Electric and Gas Company, 80 Park Plaza, P.O. Box 570, Newark, New
Jersey 07101 (the "Administrative Trustee") (the Property Trustee, the Delaware
Trustee and the Administrative Trustee are referred to collectively as the
"Trustees"), and (v) the several Holders, as hereinafter defined.

                                   WITNESSETH:

     WHEREAS, the Depositor, the Property Trustee, the Delaware Trustee and the
Administrative Trustee have heretofore duly declared and established a business
trust pursuant to the Delaware Business Trust Act by entering into a Trust
Agreement, dated as of December 22, 1997 (the "Original Trust Agreement"), and
by executing and filing with the Secretary of State of the State of Delaware a
Certificate of Trust on December 22, 1997, a form of which is attached hereto as
Exhibit A; and

     WHEREAS, the Depositor, the Property Trustee, the Delaware Trustee and the
Administrative Trustee desire to amend and restate the Original Trust Agreement
in its entirety as set forth herein to provide for, among other things, (i) the
issuance of the Common Securities, as hereinafter defined, by the Trust to the
Depositor, (ii) the issuance and sale of the Preferred Securities, as
hereinafter defined, by the Trust pursuant to the Underwriting Agreement, as
hereinafter defined, and (iii) the acquisition by the Trust from the Depositor
of the Debentures, as hereinafter defined.

     NOW, THEREFORE, in consideration of the agreements and obligations set
forth herein and for other good and valuable consideration, the sufficiency of
which is hereby acknowledged, each party, for the benefit of the other party and
for the benefit of the Securityholders, as hereinafter defined, hereby amends
and restates the Original Trust Agreement in its entirety and agrees as follows:

                                    ARTICLE I

                                  Defined Terms

     Section 1.01. Definitions. For all purposes of this Trust Agreement, except
as otherwise expressly provided or unless the context otherwise requires:

     (a) each term defined in this Article I has the meaning assigned to it in
this Article I and includes the plural as well as the singular;



     (b) each of the other terms used herein that is defined in the Trust
Indenture Act, either directly or by reference therein, has the meaning assigned
to it therein;

     (c) unless the context otherwise requires, any reference to an "Article" or
a "Section" refers to an Article or a Section, as the case may be, of this Trust
Agreement; and

     (d) the words "herein", "hereof" and "hereunder" and other words of similar
import refer to this Trust Agreement as a whole and not to any particular
Article, Section or other subdivision.

     "Act" has the meaning specified in Section 6.08.

     "Administrative Trustee" means the individual identified as the
"Administrative Trustee" in the preamble to this Trust Agreement, solely in
his/her capacity as Administrative Trustee of the Trust and not in his/her
individual capacity, or such Administrative Trustee's successor in interest in
such capacity, or any successor trustee appointed as herein provided.

     "Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.

     "Bankruptcy Event" means, with respect to any Person, the occurrence of any
of the following events:

     (a) Such Person, pursuant to or within the meaning of any Bankruptcy Law:

          (i)  commences a voluntary case or proceeding;

          (ii) consents to the entry of an order for relief against it in an
               involuntary case or proceeding;

          (iii) consents to the appointment of a Custodian, as hereinafter
               defined, of it or for all or substantially all of its property,
               and such Custodian is not discharged within 60 days;

          (iv) makes a general assignment for the benefit of its creditors; or


                                        2


          (v)  admits in writing its inability to pay its debts generally as
               they become due; or

     (b) A court of competent jurisdiction enters an order or decree under any
Bankruptcy Law that:

          (i)  is for relief against such Person in an involuntary case or
               proceeding;

          (ii) appoints a Custodian of such Person for all or substantially all
               of its properties; or

          (iii) orders the liquidation of such Person.

and in each case the order or decree remains unstayed and in effect for 60 days.

     "Bankruptcy Laws" means Title 11 of the United States Code, or similar
federal or state law for the relief of debtors. "Custodian" means any receiver,
trustee, assignee, liquidator, sequestrator, custodian or similar official under
any Bankruptcy Law.

     "Board Resolution" means (i) a copy of a resolution certified by the
Secretary or an Assistant Secretary of the Depositor to have been duly adopted
by the Depositor's Board of Directors or a committee established thereby and to
be in full force and effect on the date of such certification or (ii) a
certificate signed by the authorized officer or officers of the Depositor to
whom the Depositor's Board of Directors or a committee established thereby has
delegated its authority, and in each case, delivered to the Trustees.

     "Book-Entry Preferred Securities Certificates" means certificates
representing Preferred Securities issued in global, fully registered form with
the Clearing Agency as described in Section 5.11.

     "Business Day" means a day other than (a) a Saturday or Sunday, or (b) a
day on which banking institutions in The City of New York or the State of New
Jersey are authorized or required by law or executive order to close.

     "Certificate Depository Agreement" means the agreement among the Trust, the
Property Trustee and The Depository Trust Company, as the initial Clearing
Agency, dated as of the Closing Date, relating to the Book-Entry Preferred
Securities Certificates, substantially in the form attached hereto as Exhibit B,
as the same may be amended and supplemented from time to time.

     "Clearing Agency" means an organization registered as a "clearing agency"
pursuant to Section 17A of the Securities


                                       3


Exchange Act of 1934, as amended, and the rules and regulations promulgated
thereunder. The Depository Trust Company will be the initial Clearing Agency.

     "Closing Date" means the Time of Delivery as defined in the Underwriting
Agreement, which date is also the date of execution and delivery of this Trust
Agreement.

     "Code" means the Internal Revenue Code of 1986, as amended.

     "Commission" means the Securities and Exchange Commission, as from time to
time constituted, created under the Securities Exchange Act of 1934, as amended,
or, if at any time after the execution of this Trust Agreement such Commission
is not existing and performing the duties now assigned to it under the Trust
Indenture Act, then the body performing such duties at such time.

     "Common Security" means an undivided beneficial interest in the assets of
the Trust, having a Liquidation Amount of $25 and having the rights provided
therefor in this Trust Agreement, including the right to receive Distributions
and a Liquidation Distribution as provided herein.

     "Common Securities Certificate" means a certificate evidencing ownership of
Common Securities, substantially in the form attached hereto as Exhibit C.

     "Corporate Trust Office" means the principal corporate office of the
Property Trustee located in the State of New Jersey which at the date hereof is
765 Broad Street, Newark, New Jersey 07107.

     "Creditor" has the meaning specified in Section 2.03.

     "Debenture Event of Default" means an "Event of Default" as defined in the
Indenture with respect to the Debentures.

     "Debenture Redemption Date" means "Redemption Date" as defined in the
Indenture with respect to the Debentures.

     "Debenture Trustee" means First Union National Bank, a national banking
association, in its capacity as trustee under the Indenture, or any successor
thereto appointed in accordance with the terms and provisions of the Indenture.

     "Debentures" means the Depositor's 7-1/4% Deferrable Interest Subordinated
Debentures, Series C, issued pursuant to the Indenture.

     "Definitive Preferred Securities Certificates" means certificates
representing Preferred Securities issued in certificated, fully registered form
as described in Section 5.12.


                                       4


     "Delaware Business Trust Act" means Chapter 38 of Title 12 of the Delaware
Code, 12 Del. C.ss. 3801, et seq., as it may be amended from time to time.

     "Delaware Trustee" means the entity identified as the "Delaware Trustee" in
the preamble to this Trust Agreement solely in its capacity as Delaware Trustee
of the Trust and not in its individual capacity, or its successor in interest in
such capacity, or any successor trustee appointed as herein provided.

     "Depositor" has the meaning specified in the preamble to this Trust
Agreement.

     "Distribution Date" has the meaning specified in Section 4.01(a).

     "Distributions" means amounts payable in respect of the Trust Securities as
provided in Section 4.01.

     "Event of Default" means the occurrence of a Debenture Event of Default
(whatever the reason for such Event of Default and whether it shall be voluntary
or involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body).

     "Expiration Date" has the meaning specified in Section 8.01.

     "Extension Period" means the period or periods in which, pursuant to the
Indenture, payments of interest on the Debentures are deferred by extending the
interest payment periods thereof.

     "Guarantee" means the Guarantee Agreement executed and delivered by the
Depositor to First Union National Bank, a national banking association, as
trustee thereunder, contemporaneously with the execution and delivery of this
Trust Agreement, for the benefit of the Holders of the Preferred Securities, as
amended from time to time.

     "Indenture" means the Indenture, dated as of January 1, 1998 between the
Depositor and the Debenture Trustee, as trustee thereunder, as amended on June
1, 1998 and July 1, 1998 and as amended or supplemented from time to time.

     "Lien" means any lien, pledge, charge, encumbrance, mortgage, deed of
trust, adverse ownership interest, hypothecation, assignment, security interest
or preference, priority or other security agreement or preferential arrangement
of any kind or nature whatsoever.

     "Like Amount" means (a) with respect to a redemption of Trust Securities,
Trust Securities having an aggregate Liquidation Amount equal to the principal
amount of Debentures to be paid in


                                       5


accordance with the Indenture and (b) with respect to a distribution of
Debentures to Holders of Trust Securities in connection with a dissolution and
liquidation of the Trust, Debentures having a principal amount equal to the
aggregate Liquidation Amount of the Trust Securities in exchange for which such
Debentures are distributed.

     "Liquidation Amount" means the stated amount of $25 per Trust Security.

     "Liquidation Date" means the date on which Debentures are to be distributed
to Holders of Trust Securities in connection with a dissolution and liquidation
of the Trust pursuant to Section 8.04(a).

     "Liquidation Distribution" has the meaning specified in Section 8.04(d).

     "1940 Act" means the Investment Company Act of 1940, as amended.

     "Officers' Certificate" means a certificate signed by the Chairman, the
President, any Vice President, the Treasurer, any Assistant Treasurer, the
Secretary or any Assistant Secretary of the Depositor.

     "Opinion of Counsel" means a written opinion of counsel, who may be counsel
for the Trust, the Property Trustee or the Depositor or an Affiliate of the
Depositor, but not an employee of any thereof, and who shall be acceptable to
the Property Trustee.

     "Original Trust Agreement" has the meaning specified in the recitals to
this Trust Agreement.

     "Outstanding", when used with respect to Trust Securities, means, as of the
date of determination, all Trust Securities theretofore executed and delivered
under this Trust Agreement, except:

     (a) Trust Securities theretofore canceled by the Administrative Trustee or
delivered to the Administrative Trustee for cancellation;

     (b) Trust Securities for which redemption money in the necessary amount has
been theretofore deposited with the Property Trustee or any Paying Agent for the
Holders of such Trust Securities; provided that, if such Trust Securities are to
be redeemed, notice of such redemption has been duly given pursuant to this
Trust Agreement;

     (c) Trust Securities which have been paid or in exchange for or in lieu of
which other Trust Securities have been executed and delivered pursuant to
Section 5.05, other than any such Trust Securities in respect of which there
shall have been


                                       6


presented to the Property Trustee proof satisfactory to it that such Trust
Securities are held by a bona fide purchaser; and

     (d) as provided in Section 8.04(c);

provided, however, that in determining whether the Holders of the requisite
Liquidation Amount of the Outstanding Preferred Securities have given any
request, demand, authorization, direction, notice, consent or waiver hereunder,
Preferred Securities owned by the Depositor, any Trustee or any Affiliate of the
Depositor or any Trustee shall be disregarded and deemed not to be Outstanding,
except that (a) in determining whether any Trustee shall be protected in relying
upon any such request, demand, authorization, direction, notice, consent or
waiver, only Preferred Securities which such Trustee actually knows to be so
owned shall be so disregarded and (b) the foregoing shall not apply at any time
when all of the Outstanding Preferred Securities are owned by the Depositor, one
or more of the Trustees and/or any such Affiliate. Preferred Securities so owned
which have been pledged in good faith may be regarded as Outstanding if the
pledgee establishes to the satisfaction of the Administrative Trustee the
pledgee's right so to act with respect to such Preferred Securities and that the
pledgee is not the Depositor or any Affiliate of the Depositor.

     "Paying Agent" means the Property Trustee and any co-paying agent appointed
pursuant to Section 5.09.

     "Payment Account" means a segregated non-interest-bearing corporate trust
account maintained by the Property Trustee in its trust department for the
benefit of the Securityholders in which all amounts paid to the Property Trustee
in respect of the Debentures or the Guarantee will be held and from which the
Property Trustee or such other Paying Agent shall make payments to the
Securityholders in accordance with Article 4.

     "Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.

     "Preferred Security" means a 7-1/4% Trust Originated Preferred Security,
Series C, issued by the Trust, and having an undivided beneficial interest in
the assets of the Trust, having a Liquidation Amount of $25 and having rights
provided therefor in this Trust Agreement, including the right to receive
Distributions and a Liquidation Distribution as provided herein.

     "Preferred Securities Certificate" means a certificate evidencing ownership
of one or more Preferred Securities, substantially in the form attached hereto
as Exhibit D.

     "Property Trustee" means the commercial bank or trust company identified as
the "Property Trustee" in the preamble to this Trust Agreement solely in its
capacity as Property Trustee of the Trust and not in its individual capacity, or
its successor in


                                       7


interest in such capacity, or any successor property trustee appointed as herein
provided.

     "Redemption Date" means, with respect to any Trust Security to be redeemed,
the date fixed for such redemption by or pursuant to this Trust Agreement;
provided that each Debenture Redemption Date and the stated maturity of the
Debentures shall be a Redemption Date for a Like Amount of Trust Securities.

     "Redemption Price" means, with respect to any Trust Security, the
Liquidation Amount of such Trust Security, plus accumulated and unpaid
Distributions thereon to the Redemption Date.

     "Securities Register" and "Securities Registrar" have the respective
meanings specified in Section 5.04.

     "Securityholder" or "Holder" means a Person in whose name a Trust Security
or Securities is registered in the Securities Register; any such Person is a
beneficial owner within the meaning of the Delaware Business Trust Act.

     "Successor Securities" has the meaning specified in Section 9.01.

     "Trust" means the Delaware business trust created and continued hereby and
identified on the cover page to this Trust Agreement.

     "Trust Agreement" means this Amended and Restated Trust Agreement, as the
same may be modified, amended or supplemented in accordance with the applicable
provisions hereof, including all exhibits hereto, including, for all purposes of
this Trust Agreement and any such modification, amendment or supplement, the
provisions of the Trust Indenture Act that are deemed to be a part of and govern
this Trust Agreement and any such modification, amendment or supplement,
respectively.

     "Trust Indenture Act" means the Trust Indenture Act of 1939 as in force on
the date on which this Trust Agreement was executed; provided, however, that in
the event the Trust Indenture Act of 1939 is amended after such date, "Trust
Indenture Act" means, to the extent required by any such amendment, the Trust
Indenture Act of 1939 as so amended.

     "Trust Property" means (a) the Debentures, (b) any cash on deposit in, or
owing to, the Payment Account and (c) all proceeds and rights in respect of the
foregoing and any other property and assets for the time being held or deemed to
be held by the Property Trustee pursuant to the trusts of this Trust Agreement.

     "Trust Security" means any one of the Common Securities or the Preferred
Securities.


                                       8


     "Trust Securities Certificate" means any one of the Common Securities
Certificates or the Preferred Securities Certificates.

     "Underwriting Agreement" means the Underwriting Agreement, dated June 30,
1998 among the Trust, the Depositor and the Underwriters named therein.

                                   ARTICLE II

                            Continuation of the Trust

     Section 2.01. Name. The Trust continued hereby shall be known as
"Enterprise Capital Trust III " as such name may be modified from time to time
by the Administrative Trustee following written notice to the Holders of Trust
Securities and the other Trustees, in which name the Trustees may conduct the
business of the Trust, make and execute contracts and other instruments on
behalf of the Trust and sue and be sued.

     Section 2.02. Office of the Delaware Trustee; Principal Place of Business.
The address of the Delaware Trustee in the State of Delaware is One Rodney
Square, 920 King Street, Wilmington, Delaware 19801 or such other address in the
State of Delaware as the Delaware Trustee may designate by written notice to the
Securityholders and the Depositor. The principal place of business of the Trust
is 80 Park Plaza, Newark, New Jersey 07101.

     Section 2.03. Initial Contribution of Trust Property; Expenses of the
Trust.

     (a) The Property Trustee acknowledges receipt in trust from the Depositor
in connection with the Original Trust Agreement of the sum of $10, which
constituted the initial Trust Property.

     (b) The Depositor shall be responsible for and shall pay for all
obligations (other than with respect to the Trust Securities) and all costs and
expenses of the Trust (including, but not limited to, costs and expenses
relating to the organization of the Trust, the issuance and sale of the
Preferred Securities, the fees and expenses (including reasonable counsel fees
and expenses) of the Trustees as provided in Section 7.06, the costs and
expenses of accountants, attorneys, statistical or bookkeeping services,
expenses for printing and engraving and computing or accounting equipment,
Paying Agent(s), Securities Registrar, duplication, travel and telephone and
other telecommunications expenses and costs and expenses incurred in connection
with the disposition of Trust assets).

     (c) The Depositor will pay any and all taxes (other than United States
withholding taxes attributable to the Trust or its assets) and all liabilities,
costs and expenses with respect to such taxes of the Trust.


                                       9


     (d) The Depositor's obligations under this Section 2.03 shall be for the
benefit of, and shall be enforceable by, the Property Trustee and any Person to
whom any such obligations, costs, expenses and taxes are owed (a "Creditor")
whether or not such Creditor has received notice hereof. The Property Trustee
and any such Creditor may enforce the Depositor's obligations under this Section
2.03 directly against the Depositor and the Depositor irrevocably waives any
right or remedy to require that the Property Trustee or any such Creditor take
any action against the Trust or any other Person before proceeding against the
Depositor. The Depositor agrees to execute such additional agreements as may be
necessary or desirable in order to give full effect to the provisions of this
Section 2.03.

     (e) The Depositor shall make no claim upon the Trust Property for the
payment of such expenses.

     Section 2.04. Issuance of the Trust Securities. The Depositor, on behalf of
the Trust and pursuant to the Original Trust Agreement, executed and delivered
the Underwriting Agreement. Contemporaneously with the execution and delivery of
this Trust Agreement, the Administrative Trustee, on behalf of the Trust, shall
execute in accordance with Section 5.02 and deliver to the Underwriters named in
the Underwriting Agreement one or more Book-Entry Preferred Securities
Certificates, registered in the name of the nominee of the initial Clearing
Agency, representing 6,000,000 Preferred Securities having an aggregate
Liquidation Amount of $150,000,000, against receipt by the Property Trustee of
the aggregate purchase price of such Preferred Securities of $150,000,000, which
amount the Administrative Trustee shall promptly deliver to the Property
Trustee. Contemporaneously therewith, the Administrative Trustee, on behalf of
the Trust, shall execute in accordance with Section 5.02 and deliver to the
Depositor a Common Securities Certificate, registered in the name of the
Depositor, representing 185,568 Common Securities having an aggregate
Liquidation Amount of $4,639,200, and in satisfaction of the purchase price of
such Common Securities the Depositor shall deliver to the Property Trustee the
sum of $4,639,200.

     Section 2.05. Purchase of Debentures. Contemporaneously with the execution
and delivery of this Trust Agreement (i) the Administrative Trustee, on behalf
of the Trust, shall purchase $154,639,200 aggregate principal amount of
Debentures from the Depositor, registered in the name of the Property Trustee
and (ii) in satisfaction of the purchase price for such Debentures, the Property
Trustee, on behalf of the Trust, shall deliver to the Depositor the sum of
$154,639,200.

     Section 2.06. Declaration of Trust. The exclusive purposes and functions of
the Trust are (a) to issue and sell Trust Securities and use the proceeds from
such sale to acquire the Debentures, (b) to maintain the status of the Trust as
a grantor trust for United States Federal income tax purposes, and (c) except as
otherwise limited herein, to engage in only those activities


                                       10


necessary, convenient or incidental thereto. The Depositor hereby appoints the
Trustees as trustees of the Trust, to have all the rights, powers and duties to
the extent set forth herein, and the Trustees hereby accept such appointment.
The Property Trustee hereby declares that it will hold the Trust Property in
trust upon and subject to the conditions set forth herein for the benefit of the
Securityholders. The Administrative Trustee shall have all rights, powers and
duties set forth herein. The Delaware Trustee shall not be entitled to exercise
any powers, nor shall the Delaware Trustee have any of the duties and
responsibilities of the Property Trustee or the Administrative Trustee set forth
herein. The Delaware Trustee shall be one of the Trustees of the Trust for the
sole and limited purpose of fulfilling the requirements of Section 3807 of the
Delaware Business Trust Act.

     Section 2.07. Authorization to Enter into Certain Transactions.

     (a) The Trustees shall conduct the affairs of the Trust in accordance with
the terms of this Trust Agreement. Subject to the limitations set forth in
paragraph (b) of this Section, and in accordance with the following provisions
(i) and (ii), the Trustees shall have the authority to enter into all
transactions and agreements determined by the Trustees to be appropriate in
exercising the authority, express or implied, otherwise granted to the Trustees
under this Trust Agreement, and to perform all acts in furtherance thereof,
including without limitation, the following:

     (i) As among the Trustees, the Administrative Trustee shall have the power
and authority to act on behalf of the Trust with respect to the following
matters:

     (A) executing and delivering the Trust Securities on behalf of the Trust;

     (B) causing the Trust to enter into, and executing, delivering and
performing on behalf of the Trust, the Certificate Depository Agreement and such
other agreements as may be necessary or desirable in connection with the
purposes and function of the Trust, including the appointment of a successor
depositary;

     (C) assisting in registering the Preferred Securities under the Securities
Act of 1933, as amended, and under state securities or blue sky laws, and
qualifying this Trust Agreement as a trust indenture under the Trust Indenture
Act;

     (D) assisting in the listing of the Preferred Securities upon such
securities exchange or exchanges as the Depositor shall determine and the
registration of the Preferred Securities under the Securities Exchange Act of
1934, as amended, and the preparation and filing of all periodic and other
reports and other documents pursuant to the foregoing;


                                       11


     (E) to the extent provided in this Trust Agreement, terminating and
liquidating the Trust and preparing, executing and filing the certificate of
cancellation with the Secretary of State of the State of Delaware;

     (F) sending notices or assisting the Property Trustee in sending notices
and other information regarding the Trust Securities and the Debentures to
Securityholders in accordance with this Trust Agreement; and

     (G) taking any action incidental to the foregoing as the Administrative
Trustee may from time to time determine is necessary or advisable to give effect
to the terms of this Trust Agreement for the benefit of the Securityholders
(without consideration of the effect of any such action on any particular
Securityholder).

     (ii) As among the Trustees, the Property Trustee shall have the power, duty
and authority to act on behalf of the Trust with respect to the following
matters:

     (A) establishing and maintaining the Payment Account and appointing Paying
Agents (subject to Section 5.09);

     (B) receiving payment of the purchase price of the Trust Securities;

     (C) receiving and holding the Debentures;

     (D) collecting interest and principal payments on the Debentures and
depositing them in the Payment Account;

     (E) making Distributions and other payments to the Securityholders in
respect of the Trust Securities;

     (F) exercising all of the rights, powers and privileges of a holder of the
Debentures;

     (G) sending notices of defaults, redemptions, Extension Periods,
liquidations and other information regarding the Trust Securities and the
Debentures to the Securityholders in accordance with this Trust Agreement;

     (H) to the extent provided in this Trust Agreement, terminating and
liquidating the Trust, including distributing the Trust Property in accordance
with the terms of this Trust Agreement, and preparing, executing and filing the
certificate of cancellation with the Secretary of State of the State of
Delaware;

     (I) after an Event of Default, taking any action incidental to the
foregoing as the Property Trustee may from time to time determine is necessary
or advisable to give effect to the terms of this Trust Agreement and protect and
conserve the


                                       12


Trust Property for the benefit of the Securityholders (without consideration of
the effect of any such action on any particular Securityholder); and

     (J) registering transfers and exchanges of the Preferred Securities in
accordance with this Trust Agreement (but only if at such time the Property
Trustee shall be the Securities Registrar).

     (b) So long as this Trust Agreement remains in effect, the Trust (or the
Trustees acting on behalf of the Trust) shall not undertake any business,
activities or transaction except as expressly provided herein or contemplated
hereby. In particular, the Trustees acting on behalf of the Trust shall not (i)
acquire any assets or investments (other than the Debentures), reinvest the
proceeds derived from investments, possess any power or otherwise act in such a
way as to vary the Trust Property or engage in any activities not authorized by
this Trust Agreement, (ii) sell, assign, transfer, exchange, mortgage, pledge,
set-off or otherwise dispose of any of the Trust Property or interests therein,
including to Securityholders, except as expressly provided herein, (iii) take
any action that would cause the Trust to fail or cease to qualify as a grantor
trust for United States Federal income tax purposes, (iv) incur any indebtedness
for borrowed money or issue any other debt, (v) issue any securities or other
evidences of beneficial ownership of, or beneficial interests in, the Trust
other than the Trust Securities, or (vi) take or consent to any action that
would result in the placement of a Lien on any of the Trust Property. The
Administrative Trustee shall defend all claims and demands of all Persons at any
time claiming any Lien on any of the Trust Property adverse to the interest of
the Trust or the Securityholders in their capacity as Securityholders.

     (c) In connection with the issue and sale of the Preferred Securities, the
Depositor shall have the right and responsibility to assist the Trust with
respect to, or effect on behalf of the Trust, the following (and any actions
taken by the Depositor in furtherance of the following prior to the date of this
Trust Agreement are hereby ratified and confirmed in all respects):

     (i) preparing for filing with the Commission and executing on behalf of the
Trust a registration statement on Form S-3 in relation to the Preferred
Securities, including any amendments thereto;

     (ii) determining the States in which to take appropriate action to qualify
or register for sale all or part of the Preferred Securities and doing any and
all such acts, other than actions which must be taken by or on behalf of the
Trust, and advising the Trustees of actions they must take on behalf of the
Trust, and preparing for execution and filing any documents to be executed and
filed by the Trust or on behalf of the Trust, as the Depositor deems necessary
or advisable in order to comply with the applicable laws of any such States;


                                       13


     (iii) preparing for filing and executing on behalf of the Trust an
application to the New York Stock Exchange or any other national stock exchange
or The Nasdaq National Market for listing upon notice of issuance of any
Preferred Securities;

     (iv) preparing for filing with the Commission and executing on behalf of
the Trust a registration statement on Form 8-A relating to the registration of
the Preferred Securities under Section 12(b) or 12(g) of the Securities Exchange
Act of 1934, as amended, including any amendments thereto;

     (v) negotiating the terms of, and executing and delivering, the
Underwriting Agreement providing for the sale of the Preferred Securities; and

     (vi) taking any other actions necessary or desirable to carry out any of
the foregoing activities.

     (d) Notwithstanding anything herein to the contrary, the Administrative
Trustee is authorized and directed to conduct the affairs of the Trust and to
operate the Trust so that (i) the Trust will not be deemed to be an "investment
company" required to be registered under the 1940 Act, or taxed as a corporation
or a partnership for United States Federal income tax purposes (ii) the Trust
will qualify as a grantor trust for United States Federal income tax purposes
and (iii) the Debentures will be treated as indebtedness of the Depositor for
United States Federal income tax purposes. In this connection, the Depositor and
the Administrative Trustee are authorized to take any action, not inconsistent
with applicable law, the Certificate of Trust, as amended from time to time, or
this Trust Agreement, that each of the Depositor and the Administrative Trustee
determines in their discretion to be necessary or desirable for such purposes.

     Section 2.08. Assets of Trust. The assets of the Trust shall consist of the
Trust Property.

     Section 2.09. Title to Trust Property. Legal title to all Trust Property
shall be vested at all times in the Property Trustee (in its capacity as such)
and shall be held and administered by the Property Trustee for the benefit of
the Securityholders in accordance with this Trust Agreement.

                                   ARTICLE III

                                 Payment Account

     Section 3.01. Payment Account.

     (a) On or prior to the Closing Date, the Property Trustee shall establish
the Payment Account. All monies and other property deposited or held from time
to time in the Payment Account shall be held by the Property Trustee for the
exclusive benefit of the Securityholders. The Property Trustee shall have
exclusive control of the Payment Account for the purpose of making deposits


                                       14


in and withdrawals from the Payment Account in accordance with this Trust
Agreement; provided that any Paying Agent shall have the right of withdrawal
with respect to the Payment Account solely for the purpose of making the
payments contemplated under Article 4.

     (b) The Property Trustee shall deposit in the Payment Account, promptly
upon receipt, all payments of principal of or interest on the Debentures and any
amounts paid to the Property Trustee pursuant to the Guarantee. Amounts held in
the Payment Account shall not be invested pending distribution thereof.

                                   ARTICLE IV

                            Distributions; Redemption

     Section 4.01. Distributions.

     (a) Distributions on the Trust Securities shall be cumulative, and will
accumulate whether or not there are funds of the Trust available for the payment
of Distributions. Distributions shall accumulate from July 6, 1998 and, except
during an Extension Period for the Debentures pursuant to the Indenture, shall
be payable quarterly in arrears on March 31, June 30, September 30 and December
31 of each year, commencing on September 30, 1998. If any date on which
Distributions are otherwise payable on the Trust Securities is not a Business
Day, then the payment of such Distributions shall be made on the next succeeding
day which is a Business Day (and without any interest or other payment in
respect of any such delay), except that, if such Business Day is in the next
succeeding calendar year, payment of such Distributions shall be made on the
immediately preceding Business Day, in each case with the same force and effect
as if made on such date (each date on which Distributions are payable in
accordance with this Section 4.01(a) is referred to as a "Distribution Date").
Except as otherwise permitted by Section 4.02(b)(v) hereof, Distributions in
arrears after the quarterly payment date therefor shall accumulate additional
Distributions (to the extent permitted by law) compounded quarterly at the
Distribution Rate (as defined herein). The term "Distributions," as used herein,
shall include any such additional Distributions.

     Within two Business Days after receipt by the Property Trustee of notice of
an Extension Period pursuant to Section 4.01 of the Indenture, the Property
Trustee shall give notice thereof to the Securityholders by first class mail,
postage prepaid.

     (b) The Trust Securities represent undivided beneficial interests in the
Trust Property, and, subject to Sections 4.03 and 4.06 hereof, all Distributions
will be made pro rata on each of the Trust Securities. Distributions on the
Trust Securities shall be payable at a rate of 7-1/4% per annum of the
Liquidation Amount of the Trust Securities. The amount of Distributions payable
for any full quarterly period shall be computed on the basis of a 360-day year
of twelve 30-day months. During an Extension Period for the Debentures, the rate
per annum at which Distributions on the Trust Securities accumulate shall be
increased by an amount such that the aggregate amount of Distributions that
accumulate on all Trust Securities during any such Extension Period is equal to
the aggregate amount of interest (including interest payable on unpaid interest
at the rate per annum


                                       15


set forth above, compounded quarterly) that accrues during any such Extension
Period on the Debentures.

     (c) Distributions on the Trust Securities shall be made from the Payment
Account by the Property Trustee or any Paying Agent and shall be payable on each
Distribution Date only to the extent that the Trust has funds then available in
the Payment Account for the payment of such Distributions.

     (d) Distributions on the Trust Securities on each Distribution Date shall
be payable to the Holders thereof as they appear on the Securities Register for
the Trust Securities on the relevant record date, which shall be one Business
Day prior to such Distribution Date; provided, however, that in the event that
the Preferred Securities are not in book-entry-only form, the relevant record
date shall be the 15th day of the last month of each calendar quarter, whether
or not a Business Day.

     Section 4.02. Redemption.

     (a) Upon receipt by the Trust of a notice of redemption of Debentures, the
Trust will call for redemption a Like Amount of Trust Securities at the
Redemption Price on the Debenture Redemption Date and will call for redemption
all Outstanding Trust Securities on the stated maturity date of the Debentures.

     (b) Notice of redemption shall be given by the Property Trustee by
first-class mail, postage prepaid, mailed not less than 30 nor more than 60 days
prior to the Redemption Date to each Holder of Trust Securities to be redeemed,
at such Holder's address appearing in the Securities Register. All notices of
redemption shall state:

     (i) the Redemption Date;

     (ii) the Redemption Price;

     (iii) the CUSIP number;

     (iv) the place or places where Trust Securities Certificates are to be
surrendered for payment of the Redemption Price;

     (v) that on the Redemption Date the Redemption Price will become payable
upon each such Trust Security to be redeemed and that Distributions thereon will
cease to accumulate on and after such date; and

     (vi) if less than all of the Outstanding Trust Securities are to be
redeemed, the identification and total


                                       16


Liquidation Amount of the particular Trust Securities to be redeemed.

     (c) The Trust Securities redeemed on each Redemption Date shall be redeemed
at the Redemption Price with the proceeds from the contemporaneous redemption or
payment at maturity of Debentures. Redemptions of the Trust Securities shall be
made and the Redemption Price shall be payable on each Redemption Date only to
the extent that the Trust has funds then available in the Payment Account for
the payment of such Redemption Price.

     (d) If the Trust, by action of the Property Trustee, gives a notice of
redemption in respect of any Preferred Securities, then, on the Redemption Date,
subject to Section 4.02(c), the Property Trustee will irrevocably deposit with
the Paying Agent funds sufficient to pay the Redemption Price for the Preferred
Securities being redeemed on such date and will give the Paying Agent
irrevocable instructions and authority to pay the Redemption Price to the
Holders of such Preferred Securities upon surrender of their Preferred
Securities Certificates. Notwithstanding the foregoing, Distributions payable on
or prior to the Redemption Date for any Trust Securities called for redemption
shall be payable to the Holders of such Trust Securities as they appear on the
Securities Register for the Trust Securities on the record dates for the related
Distribution Dates. If notice of redemption shall have been given and funds
irrevocably deposited as required, then upon the date of such deposit, all
rights of Securityholders holding Trust Securities so called for redemption will
cease, except the right of such Securityholders to receive the Redemption Price,
but without interest, and such Trust Securities will cease to be Outstanding. In
the event that any date on which any Redemption Price is payable is not a
Business Day, then payment of the Redemption Price payable on such date will be
made on the next succeeding day which is a Business Day (and without any
interest or other payment in respect of any such delay), except that, if such
Business Day is in the next succeeding calendar year, such payment will be made
on the immediately preceding Business Day, in each case, with the same force and
effect as if made on such date. In the event that payment of the Redemption
Price in respect of any Trust Securities called for redemption is improperly
withheld or refused, and not paid either by the Trust or by the Depositor
pursuant to the Guarantee, Distributions on such Trust Securities will continue
to accumulate, at the then applicable rate, from the Redemption Date originally
established by the Trust for such Trust Securities to the date such Redemption
Price is actually paid, in which case the actual payment date will be the date
fixed for redemption for purposes of calculating the Redemption Price.

     (e) If less than all the Outstanding Trust Securities are to be redeemed on
a Redemption Date, then the aggregate Liquidation Amount of Trust Securities to
be redeemed shall be allocated 3% to the Common Securities and 97% to the
Preferred Securities. The particular Preferred Securities to be redeemed shall
be selected by the Property Trustee from the


                                       17


Outstanding Preferred Securities not previously called for redemption, by such
method as the Property Trustee shall deem fair and appropriate. The Property
Trustee shall promptly notify the Securities Registrar in writing of the
Preferred Securities selected for redemption. If fewer than all of the Trust
Securities represented by a Trust Securities Certificate are redeemed, the
Administrative Trustee shall execute for the Holder a new Trust Securities
Certificate representing the unredeemed Trust Securities. For all purposes of
this Trust Agreement, unless the context otherwise requires, all provisions
relating to the redemption of Preferred Securities shall relate, in the case of
any Preferred Securities redeemed or to be redeemed only in part, to the portion
of the Liquidation Amount of Preferred Securities which has been or is to be
redeemed.

     Section 4.03. Subordination of Common Securities.

     (a) Payment of Distributions on, and the Redemption Price of, the Trust
Securities, as applicable, shall be made pro rata based on the Liquidation
Amount of the Trust Securities; provided, however, that if on any Distribution
Date or Redemption Date, a Debenture Event of Default shall have occurred and be
continuing, no payment of any Distribution on, or Redemption Price of, any
Common Security, and no other payment on account of the liquidation of Common
Securities, shall be made unless payment in full in cash of all accumulated and
unpaid Distributions on all Outstanding Preferred Securities for all
Distribution Periods terminating on or prior thereto, or in the case of payment
of the Redemption Price, the full amount of such Redemption Price on all
Outstanding Preferred Securities then being redeemed, shall have been made or
provided for, and all funds immediately available to the Property Trustee shall
first be applied to the payment in full in cash of all Distributions on, or the
Redemption Price of, Preferred Securities then due and payable.

     (b) In the case of the occurrence of any Debenture Event of Default, the
Holder of Common Securities will be deemed to have waived any right to act with
respect to any related Event of Default under this Trust Agreement and such
Debenture Event of Default until the effect of such related Event of Default and
such Debenture Event of Default has been cured, waived or otherwise eliminated.
Until any such Event of Default under this Trust Agreement and such Debenture
Event of Default has been so cured, waived or otherwise eliminated, the Property
Trustee shall act solely on behalf of the Holders of the Preferred Securities
and not the Holder of the Common Securities, and only the Holders of the
Preferred Securities will have the right to direct the Property Trustee to act
on their behalf.

     Section 4.04. Payment Procedures. Payments of Distributions, if the Trust
Securities are held by a Clearing Agency, shall be made to the Clearing Agency
by wire transfer in immediately available funds. Payments of Distributions
pursuant to Section 4.01 in respect of the Common Securities shall be made in
such manner as shall be mutually agreed between the Property


                                       18


Trustee and the Holder of the Common Securities. Payment of the Redemption Price
or Liquidation Distribution of the Trust Securities and payments of
Distributions pursuant to Section 4.01 in respect of Trust Securities held in
certificated form shall be made in immediately available funds upon surrender of
the Trust Securities Certificate representing such Trust Securities at the
Corporate Trust Office of the Property Trustee.

     Section 4.05. Tax Returns and Reports. The Administrative Trustee shall
prepare (or cause to be prepared), at the Depositor's expense, and file all
Federal, State and local tax and information returns and reports required to be
filed by or in respect of the Trust. In this regard, the Administrative Trustee
shall (a) prepare and file (or cause to be prepared or filed) the appropriate
Internal Revenue Service Form required to be filed in respect of the Trust in
each taxable year of the Trust and (b) prepare and furnish (or cause to be
prepared and furnished) to each Securityholder the related Internal Revenue
Service Form 1099 OID, or any successor form or the information required to be
provided on such form. The Administrative Trustee shall provide the Depositor
and the Property Trustee with a copy of all such returns, reports and schedules
promptly after such filing or furnishing. The Trustees shall comply with United
States Federal withholding and backup withholding tax laws and information
reporting requirements with respect to any payments to Securityholders under the
Trust Securities.

     Section 4.06. Payments under Indenture. Any amount payable hereunder to any
Holder of Preferred Securities shall be reduced by the amount of any
corresponding payment such Holder has directly received pursuant to Section 6.07
of the Indenture or pursuant to the Guarantee. Notwithstanding the provisions
hereunder to the contrary, Securityholders acknowledge that any Holder of
Preferred Securities that receives payment under Section 6.07 of the Indenture
may receive amounts greater than the amount such Holder may be entitled to
receive pursuant to the other provisions of this Trust Agreement.

                                    ARTICLE V

                          Trust Securities Certificates

     Section 5.01. Initial Ownership. Upon the creation of the Trust and the
contribution by the Depositor pursuant to Section 2.03 and until the issuance of
the Trust Securities, and at any time during which no Trust Securities are
Outstanding, the Depositor shall be the sole beneficial owner of the Trust.

     Section 5.02. The Trust Securities Certificates. The Trust Securities
Certificates shall be issued representing one or more Trust Securities. Trust
Securities Certificates representing fractional interests shall not be issued.
The Trust Securities Certificates shall be executed on behalf of the Trust by
manual signature of the Administrative Trustee or by a facsimile signature of
the Administrative Trustee countersigned by the Securities


                                       19


Registrar. Trust Securities Certificates bearing the signatures of individuals
who were, at the time when such signatures shall have been affixed, authorized
to sign on behalf of the Trust, shall be validly issued and entitled to the
benefits of this Trust Agreement, notwithstanding that such individuals or any
of them shall have ceased to be so authorized prior to the delivery of such
Trust Securities Certificates or did not hold such offices at the date of
delivery of such Trust Securities Certificates. A transferee of a Trust
Securities Certificate shall become a Securityholder, and shall be entitled to
the rights and subject to the obligations of a Securityholder hereunder, upon
due registration of such Trust Securities Certificate in such transferee's name
pursuant to Section 5.04.

     Section 5.03. Delivery of Trust Securities Certificates. On the Closing
Date, the Administrative Trustee shall cause Trust Securities Certificates, in
an aggregate Liquidation Amount as provided in Sections 2.04 and 2.05, to be
executed on behalf of the Trust as provided in Section 5.02 and delivered to or
upon a written order of the Depositor signed by its Chairman of the Board, its
President, any Vice President or the Treasurer, without further corporate action
by the Depositor, in authorized denominations. The written order of the
Depositor shall be accompanied by an Officer's Certificate and an Opinion of
Counsel.

     Section 5.04. Registration of Transfer and Exchange of Preferred Securities
Certificates. A registrar appointed by the Depositor (the "Securities
Registrar") shall keep or cause to be kept, at the office or agency maintained
pursuant to Section 5.08, a register (the "Securities Register") in which,
subject to such reasonable regulations as it may prescribe, the Securities
Registrar shall provide for the registration of Trust Securities Certificates
(subject to Section 5.10 in the case of the Common Securities Certificates) and
registration of transfers and exchanges of Preferred Securities Certificates as
herein provided. The Property Trustee shall be the initial Securities Registrar;
any successor Securities Registrar shall be appointed by the Administrative
Trustee.

     Upon surrender for registration of transfer of any Preferred Securities
Certificate at the office or agency maintained pursuant to Section 5.08, the
Administrative Trustee shall execute and deliver, in the name of the designated
transferee or transferees, one or more new Preferred Securities Certificates
representing the same number of Preferred Securities dated the date of execution
by the Administrative Trustee. At the option of a Holder, Preferred Securities
Certificates may be exchanged for other Preferred Securities Certificates upon
surrender of the Preferred Securities Certificates to be exchanged at the office
or agency maintained pursuant to Section 5.08. The Securities Registrar shall
not be required to register the transfer of any Preferred Securities that have
been called for redemption or after the Liquidation Date.


                                       20


     Preferred Securities presented or surrendered for registration of transfer
or exchange shall be accompanied by a written instrument of transfer in form
satisfactory to the Administrative Trustee and the Securities Registrar duly
executed by the Holder or such Holder's attorney duly authorized in writing.
Each Preferred Securities Certificate surrendered for registration of transfer
or exchange shall be cancelled and subsequently disposed of by the Securities
Registrar in accordance with its customary practice.

     No service charge shall be made for any registration of transfer or
exchange of Preferred Securities, but the Securities Registrar may require
payment of a sum sufficient to cover any tax or governmental charge that may be
imposed in connection with any transfer or exchange of Preferred Securities.

     Section 5.05. Mutilated, Destroyed, Lost or Stolen Trust Securities
Certificates. If (a) any mutilated Trust Securities Certificate shall be
surrendered to the Securities Registrar, or if the Securities Registrar shall
receive evidence to its satisfaction of the destruction, loss or theft of any
Trust Securities Certificate, and (b) there shall be delivered to the Securities
Registrar and the Administrative Trustee such security or indemnity as may be
required by them to hold the Securities Registrar and the Trust harmless, then
in the absence of notice that such Trust Securities Certificate shall have been
acquired by a bona fide purchaser, the Administrative Trustee, on behalf of the
Trust shall execute and make available for delivery, in exchange for or in lieu
of any such mutilated, destroyed, lost or stolen Trust Securities Certificate, a
new Trust Securities Certificate of like tenor. In connection with the issuance
of any new Trust Securities Certificate under this Section, the Administrative
Trustee or the Securities Registrar may require the payment of a sum sufficient
to cover any tax or other governmental charge that may be imposed in connection
therewith. Any duplicate Trust Securities Certificate issued pursuant to this
Section shall constitute conclusive evidence of an undivided beneficial interest
in the assets of the Trust, as if originally issued, whether or not the lost,
stolen or destroyed Trust Securities Certificate shall be found at any time.

     Section 5.06. Persons Deemed Securityholders. Prior to due presentation of
a Trust Security Certificate for registration of transfer, the Administrative
Trustee, the Paying Agent or the Securities Registrar shall treat the Person in
whose name any Trust Securities Certificate shall be registered in the
Securities Register as the owner and Holder of such Trust Securities Certificate
for the purpose of receiving Distributions and for all other purposes
whatsoever, and neither the Trustees, the Paying Agent nor the Securities
Registrar shall be bound by any notice to the contrary.

     Section 5.07. Access to List of Securityholders' Names and Addresses. In
the event that the Property Trustee is no longer the Securities Registrar, the
Administrative Trustee or the


                                       21


Depositor shall furnish or cause to be furnished a list, in such form as the
Property Trustee may reasonably require, of the names and addresses of the
Securityholders as of the most recent record date and (a) to the Property
Trustee, quarterly not later than 10 days prior to a Distribution Date and (b)
to the Property Trustee, promptly after receipt by the Administrative Trustee or
the Depositor of a request therefor from the Property Trustee in order to enable
the Paying Agent to pay Distributions in accordance with Section 4.01 hereof) in
each case to the extent such information is in the possession or control of the
Administrative Trustee or the Depositor and is not identical to a previously
supplied list or has not otherwise been received by the Property Trustee. The
rights of Securityholders to communicate with other Securityholders with respect
to their rights under this Trust Agreement or under the Trust Securities, and
the corresponding rights of the Property Trustee shall be as provided in the
Trust Indenture Act. Each Holder, by receiving and holding a Trust Securities
Certificate, shall be deemed to have agreed not to hold the Depositor, the
Property Trustee, the Administrative Trustee or the Delaware Trustee accountable
by reason of the disclosure of its name and address, regardless of the source
from which such information was derived.

     Section 5.08. Maintenance of Office or Agency. The Property Trustee shall
maintain in Newark, New Jersey, an office or offices or agency or agencies where
Preferred Securities may be surrendered for registration of transfer or exchange
and where notices and demands to or upon the Trustees in respect of the Trust
Securities Certificates may be served. The Property Trustee shall give prompt
written notice to the Depositor and to the Securityholders of any change in the
location of the Securities Register or any such office or agency, which shall
initially be at the Corporate Trust Office of the Property Trustee.

     Section 5.09. Appointment of Paying Agent. The Paying Agent shall make
Distributions to Securityholders from the Payment Account and shall report the
amounts of such Distributions to the Property Trustee and the Administrative
Trustee. Any Paying Agent shall have the revocable power to withdraw funds from
the Payment Account for the purpose of making Distributions. The Administrative
Trustee may revoke such power and remove the Paying Agent, provided that such
revocation and removal with respect to the sole Paying Agent shall not become
effective until the appointment of a successor. The Paying Agent shall initially
be the Property Trustee, and any co-paying agent chosen by the Property Trustee
and acceptable to the Administrative Trustee and the Depositor. Any Person
acting as Paying Agent shall be permitted to resign as Paying Agent upon 30
days' written notice to the Administrative Trustee and the Depositor, and, if
applicable, the Property Trustee, provided that such resignation with respect to
the sole Paying Agent shall not become effective until the appointment of a
successor. In the event that the Property Trustee shall no longer be the Paying
Agent or a successor Paying Agent shall resign or its authority to act be
revoked, the Administrative Trustee shall appoint a successor that is acceptable
to the


                                       22


Property Trustee (in the case of any other Paying Agent) and the Depositor to
act as Paying Agent (which shall be a bank or trust company and have a combined
capital and surplus of at least $50,000,000). The Administrative Trustee shall
cause such successor Paying Agent or any additional Paying Agent appointed by
the Administrative Trustee to execute and deliver to the Trustees an instrument
in which such successor Paying Agent or additional Paying Agent shall agree with
the Trustees that as Paying Agent, such successor Paying Agent or additional
Paying Agent will hold all sums, if any, held by it for payment to the
Securityholders in trust for the benefit of the Securityholders entitled thereto
until such sums shall be paid to such Securityholders. The Paying Agent shall
return all of such sums remaining unclaimed to the Property Trustee and upon
removal of a Paying Agent such Paying Agent shall also return such sums in its
possession to the Property Trustee. The provisions of Sections 7.01, 7.03 and
7.06 shall apply to the Property Trustee also in its role as Paying Agent, for
so long as the Property Trustee shall act as Paying Agent and, to the extent
applicable, to any other Paying Agent appointed hereunder. Any reference in this
Trust Agreement to the Paying Agent shall include any co-paying agent unless the
context requires otherwise.

     Section 5.10. No Transfer of Common Securities by Depositor. To the fullest
extent permitted by law, any attempted transfer of the Common Securities shall
be void. The Administrative Trustee shall cause each Common Securities
Certificate issued to the Depositor to contain a legend stating "THIS
CERTIFICATE IS NOT TRANSFERABLE". By execution of this Trust Agreement, the
Depositor agrees to the foregoing provisions.

     Section 5.11. Book-Entry Preferred Securities Certificates; Common
Securities Certificate.

     (a) The Preferred Securities, upon original issuance on the Closing Date,
will not be engraved but will be issued in the form of one or more printed or
typewritten Book-Entry Preferred Securities Certificates, to be delivered to The
Depository Trust Company, the initial Clearing Agency, by, or on behalf of, the
Trust. Such Book-Entry Preferred Securities Certificate or Certificates shall
initially be registered on the Securities Register in the name of Cede & Co.,
the nominee of the initial Clearing Agency.

     (b) A single Common Securities Certificate representing the Common
Securities shall be issued to the Depositor in the form of a definitive Common
Securities Certificate.

     Section 5.12. Definitive Preferred Securities Certificates. If (a) the
Depositor advises the Trustees in writing that the Clearing Agency is no longer
willing or able to properly discharge its responsibilities with respect to the
Preferred Securities Certificates or the Clearing Agency is no longer registered
or in good standing under the Securities Exchange Act of 1934, as amended, or
other applicable statute or regulation, and the Depositor is unable to locate a
qualified successor within 90


                                       23


days, (b) the Depositor at its option advises the Trustees in writing that it
elects to terminate the book-entry system through the Clearing Agency or (c) an
Event of Default occurs and is continuing, then the Administrative Trustee shall
issue Definitive Preferred Securities Certificates. Upon surrender to the
Administrative Trustee of the Book-Entry Preferred Securities Certificates by
the Clearing Agency, accompanied by registration instructions, the
Administrative Trustee shall execute and deliver the Definitive Preferred
Securities Certificates in accordance with the instructions of the Clearing
Agency. Neither the Securities Registrar nor the Trustees shall be liable for
any delay in delivery of such instructions and may conclusively rely on, and
shall be protected in relying on, such instructions. The Definitive Preferred
Securities Certificates shall be printed, lithographed or engraved or may be
produced in any other manner as is reasonably acceptable to the Administrative
Trustee, as evidenced by the execution thereof by the Administrative Trustee.

     Section 5.13. Rights of Securityholders. The Securityholders shall not have
any right or title to the Trust Property other than the undivided beneficial
interest in the assets of the Trust conferred by their Trust Securities and they
shall have no right to call for any partition or division of property, profits
or rights of the Trust except as described below. The Trust Securities shall be
personal property giving only the rights specifically set forth therein and in
this Trust Agreement. The Trust Securities shall have no preemptive or similar
rights and when issued and delivered to Securityholders against payment of the
purchase price therefor will be fully paid and nonassessable by the Trust. The
Holders of the Trust Securities, in their capacities as such, shall be entitled
to the same limitation of personal liability extended to stockholders of private
corporations for profit organized under the General Corporation Law of the State
of Delaware.

                                   ARTICLE VI

                    Acts of Securityholders; Meetings; Voting

     Section 6.01. Limitations on Voting Rights.

     (a) Except as provided herein and in the Indenture and as otherwise
required by law, no Holder of Trust Securities shall have any right to vote or
in any manner otherwise control the administration, operation and management of
the Trust or the obligations of the parties hereto, nor shall anything herein
set forth, or contained in the terms of the Trust Securities Certificates, be
construed so as to constitute the Securityholders from time to time as partners
or members of an association.

     (b) The Trustees shall not (i) direct the time, method and place of
conducting any proceeding for any remedy available to the Debenture Trustee or
executing any trust or power conferred on the Debenture Trustee with respect to
such Debentures, (ii) waive any past default which may be waived under Section
6.04


                                       24


of the Indenture, (iii) exercise any right to rescind or annul an acceleration
of the principal of all the Debentures or (iv) consent to any amendment or
modification of the Indenture, where such consent shall be required, without, in
each case, obtaining the prior consent of the Holders of at least a majority in
aggregate Liquidation Amount of all Outstanding Preferred Securities; provided,
however, that where such consent under the Indenture would require the consent
of each holder of Debentures affected thereby, no such consent shall be given by
the Property Trustee without the prior written consent of each Holder of
Outstanding Preferred Securities. The Trustees shall not revoke any action
previously authorized or approved by a vote of the Holders of Preferred
Securities, except by a subsequent vote of the Holders of Preferred Securities.
The Property Trustee shall notify all Holders of the Preferred Securities of any
notice received from the Debenture Trustee as a result of the Trust being the
holder of the Debentures. In addition to obtaining the consent of the Holders of
the Preferred Securities, prior to taking any of the foregoing actions, the
Trustees shall, at the expense of the Depositor, obtain an Opinion of Counsel
experienced in such matters to the effect that the Trust will not be classified
as an association taxable as a corporation or partnership for United States
Federal income tax purposes on account of such action and will continue to be
classified as a grantor trust for United States Federal income tax purposes.

     (c) Subject to Section 10.02(c) hereof, if any proposed amendment to the
Trust Agreement provides for, or the Trustees otherwise propose to effect, (i)
any action that would adversely affect in any material respect the powers,
preferences or special rights of the Preferred Securities, whether by way of
amendment to this Trust Agreement or otherwise, or (ii) the dissolution or
liquidation of the Trust, other than pursuant to the terms of this Trust
Agreement, then the Holders of Outstanding Preferred Securities will be entitled
to vote on such amendment or proposal and such amendment or proposal shall not
be effective except with the approval of the Holders of at least a majority in
aggregate Liquidation Amount of the Outstanding Preferred Securities.

     Section 6.02. Notice of Meetings. Notice of all meetings of the Preferred
Securityholders, stating the time, place and purpose of the meeting, shall be
given by the Property Trustee pursuant to Section 10.08 to each Preferred
Securityholder of record, at his/her registered address, at least 15 days and
not more than 90 days before the meeting. At any such meeting, any business
properly before the meeting may be so considered whether or not stated in the
notice of the meeting. Any adjourned meeting may be held as adjourned without
further notice.

     Section 6.03. Meetings of Preferred Securityholders. No annual meeting of
Securityholders is required to be held. The Administrative Trustee, however,
shall call a meeting of Securityholders to vote on any matter upon the written
request of the Holders of at least 25% of the aggregate Liquidation Amount of


                                       25


the Outstanding Preferred Securities and the Administrative Trustee or the
Property Trustee may, at any time in their discretion, call a meeting of
Preferred Securityholders to vote on any matters as to which the Preferred
Securityholders are entitled to vote.

     Holders of at least 50% of the aggregate Liquidation Amount of the
Outstanding Preferred Securities, present in person or by proxy, shall
constitute a quorum at any meeting of Preferred Securityholders.

     If a quorum is present at a meeting, an affirmative vote of the Holders of
at least a majority of the aggregate Liquidation Amount of the Outstanding
Preferred Securities present, either in person or by proxy, at such meeting
shall constitute the action of the Preferred Securityholders, unless this Trust
Agreement requires a greater number of affirmative votes.

     Section 6.04. Voting Rights. A Securityholder shall be entitled to one vote
for each Trust Security in respect of any matter as to which such Securityholder
is entitled to vote.

     Section 6.05. Proxies, etc. At any meeting of Securityholders, any
Securityholder entitled to vote thereat may vote by proxy, provided that no
proxy shall be voted at any meeting unless it shall have been placed on file
with the Administrative Trustee, or with such other officer or agent of the
Trust as the Administrative Trustee may direct, for verification prior to the
time at which such vote shall be taken. Pursuant to a resolution of the Property
Trustee, proxies may be solicited in the name of the Property Trustee or one or
more officers of the Property Trustee. Only Securityholders of record shall be
entitled to vote. When Trust Securities are held jointly by several Persons, any
one of them may vote at any meeting in person or by proxy in respect of such
Trust Securities, but if more than one of them shall be present at such meeting
in person or by proxy, and such joint owners or their proxies so present
disagree as to any vote to be cast, such vote shall not be received in respect
of such Trust Securities. A proxy purporting to be executed by or on behalf of a
Securityholder shall be deemed valid unless challenged at or prior to its
exercise, and the burden of proving invalidity shall rest on the challenger. No
proxy shall be valid more than three years after its date of execution.

     Section 6.06. Securityholder Action by Written Consent. Any action which
may be taken by Securityholders at a meeting may be taken without a meeting if
Holders of the proportion of the Outstanding Securities required to approve such
action shall consent to the action in writing.

     Section 6.07. Record Date for Voting and Other Purposes. For the purposes
of determining the Securityholders who are entitled to notice of and to vote at
any meeting or by written consent, or for the purpose of any other action, the
Administrative Trustee may from time to time fix a date, not more than 90 days
prior to the date of any meeting of Securityholders, as a record


                                       26


date for the determination of the identity of the Securityholders for such
purposes.

     Section 6.08. Acts of Securityholders. Any request, demand, authorization,
direction, notice, consent, waiver or other action provided or permitted by this
Trust Agreement to be given, made or taken by Securityholders may be embodied in
and evidenced by one or more instruments of substantially similar tenor signed
by such Securityholders in person or by an agent duly appointed in writing; and,
except as otherwise expressly provided herein, such action shall become
effective when such instrument or instruments are delivered to the
Administrative Trustee. Such instrument or instruments (and the action embodied
therein and evidenced thereby) are herein sometimes referred to as the "Act" of
the Securityholders signing such instrument or instruments. Proof of execution
of any such instrument or of a writing appointing any such agent shall be
sufficient for any purpose of this Trust Agreement and (subject to Section 7.02)
conclusive, if made in the manner provided in this Section.

     The fact and date of the execution by any Person of any such instrument or
writing may be proved by the affidavit of a witness of such execution or by a
certificate of a notary public or other officer authorized by law to take
acknowledgments of deeds, certifying that the individual signing such instrument
or writing acknowledged to him/her the execution thereof. Where such execution
is by a signer acting in a capacity other than his/her individual capacity, such
certificate or affidavit shall also constitute sufficient proof of his/her
authority. The fact and date of the execution of any such instrument or writing,
or the authority of the Person executing the same, may also be proved in any
other manner which any Trustee receiving the same deems sufficient.

     The ownership of Trust Securities shall be proved by the Securities
Register.

     Any request, demand, authorization, direction, notice, consent, waiver or
other act of the Securityholder of any Trust Security shall bind every future
Securityholder of the same Trust Security and the Securityholder of every Trust
Security issued upon the registration of transfer thereof or in exchange
therefor or in lieu thereof in respect of anything done, omitted or suffered to
be done by the Trustees or the Trust in reliance thereon, whether or not
notation of such action is made upon such Trust Security.

     Without limiting the foregoing, a Securityholder entitled hereunder to take
any action hereunder with regard to any particular Trust Security may do so with
regard to all or any part of the Liquidation Amount of such Trust Security or by
one or more duly appointed agents, each of which may do so pursuant to such
appointment with regard to all or any part of such Liquidation Amount.

     If any dispute shall arise between the Securityholders and the
Administrative Trustee or among such Securityholders or Trustees with respect to
the authenticity, validity or binding nature of any request, demand,
authorization, direction, consent, waiver or other Act of such Securityholder or
Trustee under this Article VI, then the determination of such matter by the
Property Trustee shall be conclusive with respect to such matter.


                                       27


     Section 6.09. Inspection of Records. Upon reasonable notice to the
Administrative Trustee and the Property Trustee, the records of the Trust shall
be open to inspection by Securityholders during normal business hours for any
purpose reasonably related to such Securityholder's interest as a
Securityholder.

                                   ARTICLE VII

                                  The Trustees

     Section 7.01. Certain Duties and Responsibilities.

     (a) The duties and responsibilities of the Trustees shall be as provided by
this Trust Agreement and, in the case of the Property Trustee, also by the Trust
Indenture Act. The Property Trustee, other than during the occurrence and
continuance of an Event of Default, undertakes to perform only such duties as
are specifically set forth in this Trust Agreement and, upon an Event of
Default, must exercise the same degree of care and skill as a prudent person
would exercise or use in the conduct of his/her own affairs. The Trustees shall
have all the privileges, rights and immunities provided by the Delaware Business
Trust Act. Notwithstanding the foregoing, no provision of this Trust Agreement
shall require the Trustees to expend or risk their own funds or otherwise incur
any financial liability in the performance of any of their duties hereunder, or
in the exercise of any of their rights or powers, if they shall have reasonable
grounds for believing that repayment of such funds or adequate indemnity against
such risk or liability is not reasonably assured to it. Whether or not therein
expressly so provided, every provision of this Trust Agreement relating to the
conduct or affecting the liability of or affording protection to the Trustees
shall be subject to the provisions of this Section. Nothing in this Trust
Agreement shall be construed to release the Property Trustee from liability for
its own negligent action, its own negligent failure to act, or its own willful
misconduct. To the extent that, at law or in equity, the Administrative Trustee
has duties (including fiduciary duties) and liabilities relating thereto to the
Trust or to the Securityholders, the Administrative Trustee shall not be liable
to the Trust or to any Securityholder for the Administrative Trustee's good
faith reliance on the provisions of this Trust Agreement. The provisions of this
Trust Agreement, to the extent that they restrict the duties and liabilities of
the Administrative Trustee otherwise existing at law or in equity, are agreed by
the


                                       28


Depositor and the Securityholders to replace such other duties and liabilities
of the Administrative Trustee.

     (b) All payments made by the Property Trustee or any other Paying Agent in
respect of the Trust Securities shall be made only from the income and proceeds
from the Trust Property. Each Securityholder, by its acceptance of a Trust
Security, agrees that (i) it will look solely to the income and proceeds from
the Trust Property to the extent available for distribution to it as herein
provided and (ii) the Trustees are not personally liable to it for any amount
distributable in respect of any Trust Security or for any other liability in
respect of any Trust Security. This Section 7.01(b) does not limit the liability
of the Trustees expressly set forth elsewhere in this Trust Agreement or, in the
case of the Property Trustee, in the Trust Indenture Act.

     Section 7.02. Notice of Defaults; Direct Action by Securityholders. Within
90 days after the occurrence of any Event of Default actually known to the
Property Trustee, the Property Trustee shall transmit, in the manner and to the
extent provided in Section 10.08, notice of such Event of Default to the
Securityholders, the Administrative Trustee and the Depositor, unless such Event
of Default shall have been cured or waived. If the Property Trustee has failed
to enforce its rights under this Trust Agreement or the Indenture to the fullest
extent permitted by law and subject to the terms of this Trust Agreement and the
Indenture, any Securityholder may institute a legal proceeding directly against
any Person to enforce the Property Trustee's rights under this Trust Agreement
or the Indenture with respect to Debentures having a principal amount equal to
the aggregate Liquidation Amount of the Preferred Securities of such
Securityholder without first instituting a legal proceeding against the Property
Trustee or any other Person. To the extent that any action under the Indenture
is entitled to be taken by the holders of at least a specified percentage of the
principal amount of the outstanding Debentures, Holders of at least the same
percentage of the Liquidation Amount of the Outstanding Preferred Securities may
also take such action in the name of the Trust if such action has not been taken
by the Property Trustee. Notwithstanding the foregoing, if a Debenture Event of
Default relating to the Depositor's failure to pay the principal of or interest
on the Debentures has occurred and is continuing thereby resulting in an Event
of Default hereunder, then each Holder of Preferred Securities may institute a
legal proceeding directly against the Depositor for enforcement of payment to
such Holder, as provided in Section 6.07 of the Indenture.

     Section 7.03. Certain Rights of Property Trustee. Subject to the provisions
of Section 7.01:

     (a) the Property Trustee may rely and shall be protected in acting or
refraining from acting in good faith upon any resolution, Opinion of Counsel,
certificate, written representation of a Holder or transferee, certificate of
auditors or any other certificate, statement, instrument, opinion, report,


                                       29


notice, request, consent, order, appraisal, bond, debenture, note, other
evidence of indebtedness or other paper or document believed by it to be genuine
and to have been signed or presented by the proper party or parties;

     (b) if, other than during the occurrence and continuance of an Event of
Default, (i) in performing its duties under this Trust Agreement, the Property
Trustee is required to decide between alternative courses of action or (ii) in
construing any of the provisions in this Trust Agreement, the Property Trustee
finds the same ambiguous or inconsistent with any other provisions contained
herein or (iii) the Property Trustee is unsure of the application of any
provision of this Trust Agreement, then, except as to any matter as to which the
Preferred Securityholders are entitled to vote under the terms of this Trust
Agreement, the Property Trustee shall deliver a notice to the Depositor
requesting written instructions of the Depositor as to the course of action to
be taken. The Property Trustee shall take such action, or refrain from taking
such action, as the Property Trustee shall be instructed in writing to take, or
to refrain from taking, by the Depositor; provided, however, that if the
Property Trustee does not receive such instructions of the Depositor within ten
Business Days after it has delivered such notice, or such reasonably shorter
period of time set forth in such notice (which to the extent practicable shall
not be less than two Business Days), it may, but shall be under no duty to, take
or refrain from taking such action not inconsistent with this Trust Agreement as
it shall deem advisable and in the best interests of the Securityholders, in
which event the Property Trustee shall have no liability except for its own
negligent action, its own negligent failure to act or its own willful
misconduct;

     (c) the Property Trustee may consult with counsel or other experts of its
selection and the advice or opinion of such counsel or other experts with
respect to legal matters or advice within the scope of such experts' area of
expertise shall be full and complete authorization and protection in respect of
any action taken, suffered or omitted by it hereunder in good faith and in
reliance thereon;

     (d) the Property Trustee shall be under no obligation to exercise any of
the rights or powers vested in it by this Trust Agreement at the request or
direction of any of the Securityholders pursuant to this Trust Agreement, unless
such Securityholders shall have offered to the Property Trustee reasonable
security or indemnity against the costs, expenses and liabilities which might be
incurred by it in compliance with such request or direction;

     (e) the Property Trustee shall not be bound to make any investigation into
the facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order,
approval, bond, debenture, note or other evidence of indebtedness or other paper
or document, but the Property Trustee, in its discretion, may make


                                       30


such further inquiry or investigation into such facts or matters as it may see
fit; and

     (f) the Property Trustee may execute any of the trusts or powers hereunder
or perform any duties hereunder either directly or by or through its agents or
attorneys and the Property Trustee shall not be responsible for any misconduct
or negligence on the part of any agent or attorney appointed with due care by it
hereunder.

     Section 7.04. Not Responsible for Recitals or Issuance of Securities. The
recitals contained herein and in the Trust Securities Certificates shall be
taken as the statements of the Trust, and the Trustees do not assume any
responsibility for their correctness. The Trustees shall not be accountable for
the use or application by the Depositor of the proceeds of the Debentures.

     Section 7.05. May Hold Securities. Any Trustee or any other agent of any
Trustee or the Trust, in its individual or any other capacity, may become the
owner or pledgee of Trust Securities and, subject to Sections 7.08 and 7.13 and,
except as provided in the definition of the term Outstanding in Article I, may
otherwise deal with the Trust with the same rights it would have if it were not
a Trustee or such other agent.

     Section 7.06. Compensation; Indemnity; Fees. The Depositor agrees:

     (a) to pay to the Trustees from time to time such compensation as shall
have been agreed in writing with the Depositor for all services rendered by them
hereunder (which compensation shall not be limited by any provision of law in
regard to the compensation of a trustee of an express trust);

     (b) except as otherwise expressly provided herein, to reimburse the
Trustees upon request for all reasonable expenses, disbursements and advances
incurred or made by the Trustees in accordance with any provision of this Trust
Agreement (including the reasonable compensation and the expenses and
disbursements of its agents and counsel), except any such expense, disbursement
or advance as may be attributable to its own negligent action, its own negligent
failure to act or its own wilful misconduct (or, in the case of the
Administrative Trustee, any such expense, disbursement or advance as may be
attributable to his/her gross negligence); and

     (c) to indemnify each of the Trustees or any predecessor Trustee for, and
to hold the Trustees harmless against, any and all loss, damage, claims,
liability, penalty or expense including taxes (other than taxes based on the
income of such Trustee) incurred without its own negligent action, its own
negligent failure to act or its wilful misconduct (or, in the case of the
Administrative Trustees, incurred without gross negligence or bad faith),
arising out of or in connection with the acceptance or administration of this
Trust Agreement, including the costs and expenses of defending itself against
any claim or liability in


                                       31


connection with the exercise or performance of any of its powers or duties
hereunder.

     No Trustee may claim any Lien or charge on any Trust Property as a result
of any amount due pursuant to this Section 7.06.

     The provisions of this Section 7.06 shall survive the termination of this
Trust Agreement.

     Section 7.07. Corporate Property Trustee Required; Eligibility of Trustees.

     (a) There shall at all times be a Property Trustee hereunder. The Property
Trustee shall be a Person that is eligible pursuant to the Trust Indenture Act
to act as such and has a combined capital and surplus of at least $50,000,000.
If any such Person publishes reports of condition at least annually, pursuant to
law or to the requirements of its supervising or examining authority, then for
the purposes of this Section, the combined capital and surplus of such Person
shall be deemed to be its combined capital and surplus as set forth in its most
recent report of condition so published. If at any time the Property Trustee
with respect to the Trust Securities shall cease to be eligible in accordance
with the provisions of this Section, it shall resign immediately in the manner
and with the effect hereinafter specified in this Article.

     (b) There shall at all times be one or more Administrative Trustees
hereunder. Each Administrative Trustee shall be either a natural person who is
at least 21 years of age or a legal entity that shall act through one or more
persons authorized to bind that entity.

     (c) There shall at all times be a Delaware Trustee. The Delaware Trustee
shall either be (i) a natural person who is at least 21 years of age and a
resident of the State of Delaware or (ii) a legal entity with its principal
place of business in the State of Delaware and that otherwise meets the
requirements of applicable Delaware law that shall act through one or more
persons authorized to bind such entity.

     Section 7.08. Conflicting Interests. If the Property Trustee has or shall
acquire a conflicting interest within the meaning of the Trust Indenture Act,
the Property Trustee shall either eliminate such interest or resign, to the
extent and in the manner provided by, and subject to the provisions of, the
Trust Indenture Act and this Trust Agreement.

     Section 7.09. Co-Trustees and Separate Trustee. Unless an Event of Default
shall have occurred and be continuing, at any time or times, for the purpose of
meeting the legal requirements of the Trust Indenture Act or of any jurisdiction
in which any part of the Trust Property may at the time be located, the
Depositor and the Administrative Trustee (and if more than one Administrative


                                       32


Trustee, by agreed action of the majority of such Trustees) shall have power (i)
to appoint, and upon the written request of the Administrative Trustee the
Depositor shall for such purpose join with the Administrative Trustee in the
execution, delivery and performance of all instruments and agreements necessary
or proper to appoint one or more Persons approved by the Property Trustee either
to act as co-trustee, jointly with the Property Trustee, of all or any part of
such Trust Property, or to the extent required by law to act as separate trustee
of any such property, in either case with such powers as may be provided in the
instrument of appointment, and (ii) to vest in such Person or Persons in the
capacity aforesaid, any property, title, right or power deemed necessary or
desirable, subject to the other provisions of this Section. If the Depositor
does not join in such appointment within 15 days after the receipt by it of a
request so to do, or in case a Debenture Event of Default has occurred and is
continuing, the Property Trustee alone shall have power to make such
appointment. Any co-trustee or separate trustee appointed pursuant to this
Section shall either be (i) a natural person who is at least 21 years of age and
a resident of the United States or (ii) a legal entity with its principal place
of business in the United States that shall act through one or more persons
authorized to bind such entity.

     Should any written instrument from the Depositor be required by any
co-trustee or separate trustee so appointed for more fully confirming to such
co-trustee or separate trustee such property, title, right or power, any and all
such instruments shall, on request, be executed, acknowledged, and delivered by
the Depositor.

     Every co-trustee or separate trustee shall, to the extent permitted by law,
but to such extent only, be appointed subject to the following terms, namely:

     (a) The Trust Securities shall be executed and delivered and all rights,
powers, duties and obligations hereunder in respect of the custody of
securities, cash and other personal property held by, or required to be
deposited or pledged with, the Trustees specified hereunder, shall be exercised,
solely by such Trustees and not by such co-trustee or separate trustee.

     (b) The rights, powers, duties and obligations hereby conferred or imposed
upon the Property Trustee in respect of any property covered by such appointment
shall be conferred or imposed upon and exercised or performed by the Property
Trustee or by the Property Trustee and such co-trustee or separate trustee
jointly, as shall be provided in the instrument appointing such co-trustee or
separate trustee, except to the extent that under any law of any jurisdiction in
which any particular act is to be performed, the Property Trustee shall be
incompetent or unqualified to perform such act, in which event such rights,
powers, duties and obligations shall be exercised and performed by such
co-trustee or separate trustee.


                                       33


     (c) The Property Trustee at any time, by an instrument in writing executed
by it, with the written concurrence of the Depositor, may accept the resignation
of or remove any co-trustee or separate trustee appointed under this Section,
and, in case a Debenture Event of Default has occurred and is continuing, the
Property Trustee shall have power to accept the resignation of, or remove, any
such co-trustee or separate trustee without the concurrence of the Depositor.
Upon the written request of the Property Trustee, the Depositor shall join with
the Property Trustee in the execution, delivery and performance of all
instruments and agreements necessary or proper to effectuate such resignation or
removal. A successor to any co-trustee or separate trustee so resigned or
removed may be appointed in the manner provided in this Section.

     (d) No co-trustee or separate trustee hereunder shall be personally liable
by reason of any act or omission of the Property Trustee, or any other trustee
hereunder.

     (e) The Property Trustee shall not be liable by reason of any act of a
co-trustee or separate trustee.

     (f) Any Act of Holders delivered to the Property Trustee shall be deemed to
have been delivered to each such co-trustee and separate trustee.

     Section 7.10. Resignation and Removal; Appointment of Successor. No
resignation or removal of any Trustee and no appointment of a successor Trustee
pursuant to this Article shall become effective until the acceptance of
appointment by the successor Trustee in accordance with the applicable
requirements of Section 7.11.

     Subject to the immediately preceding paragraph, any Trustee may resign at
any time with respect to the Trust Securities by giving written notice thereof
to the Securityholders.

     Unless an Event of Default shall have occurred and be continuing, any
Trustee may be removed at any time by Act of the Holder of the Common
Securities. If an Event of Default shall have occurred and be continuing, the
Property Trustee or the Delaware Trustee, or both of them, may be removed at
such time only by Act of the Holders of at least a majority in Liquidation
Amount of the Outstanding Preferred Securities, delivered to such Trustee (in
its individual capacity and on behalf of the Trust). The Administrative Trustee
may only be removed by the Holder of Common Securities at any time.

     If the instrument of acceptance by the successor Trustee required by
Section 7.11 shall not have been delivered to the Trustee within 30 days after
the giving of such notice of resignation or removal, the Trustee may petition,
at the expense of the Depositor, any court of competent jurisdiction for the
appointment of a successor Trustee.


                                       34


     If any Trustee shall resign, be removed or become incapable of acting as
Trustee, or if a vacancy shall occur in the office of any Trustee for any cause,
at a time when no Event of Default shall have occurred and be continuing, the
Holder of Common Securities, by Act of the Holder of Common Securities delivered
to the retiring Trustee, shall promptly appoint a successor Trustee or Trustees
and the Trust, and the retiring Trustee shall comply with the applicable
requirements of Section 7.11. If the Property Trustee or the Delaware Trustee
shall resign, be removed or become incapable of continuing to act as the
Property Trustee or the Delaware Trustee, as the case may be, at a time when an
Event of Default has occurred and is continuing, the Holders of Preferred
Securities, by Act of the Securityholders of at least a majority in Liquidation
Amount of the Outstanding Preferred Securities delivered to the retiring
Trustee, shall promptly appoint a successor Trustee or Trustees, and such
successor Trustee shall comply with the applicable requirements of Section 7.11.
If any Administrative Trustee shall resign, be removed or become incapable of
acting as Administrative Trustee at a time when an Event of Default shall have
occurred and be continuing, the Holder of Common Securities shall appoint a
successor Administrative Trustee. If no successor Trustee shall have been so
appointed by the Holder of Common Securities or the Holders of Preferred
Securities and accepted appointment in the manner required by Section 7.11, any
Securityholder who has been a Securityholder of Trust Securities for at least
six months may, on behalf of himself and all others similarly situated, petition
any court of competent jurisdiction for the appointment of a successor Trustee.

     The Property Trustee shall give notice of each resignation and each removal
of a Trustee and each appointment of a successor Trustee to all Securityholders
in the manner provided in Section 10.08 and shall give notice to the Depositor.
Each notice shall include the name of the successor Trustee and the address of
its Corporate Trust Office if it is the Property Trustee.

     Notwithstanding the foregoing or any other provision of this Trust
Agreement, in the event any Administrative Trustee or Delaware Trustee who is a
natural person dies or becomes, in the opinion of the Depositor, incompetent or
incapacitated, the vacancy created by such death, incompetence or incapacity may
be filled by (a) the unanimous act of the remaining Administrative Trustees if
there are at least two of them or (b) otherwise by the Depositor (with the
successor in each case being a Person who satisfies the eligibility requirements
for Administrative Trustee or for the Delaware Trustee, as the case may be, set
forth in Section 7.07).

     Section 7.11. Acceptance of Appointment by Successor. In case of the
appointment hereunder of a successor Trustee, the retiring Trustee and each
successor Trustee shall execute and deliver to the Trust and the retiring
Trustee an amendment hereto wherein each successor Trustee shall accept such
appointment and which (a) shall contain such provisions as shall be necessary or
desirable to transfer and confirm to, and to vest in, each successor Trustee all
the rights, powers, trusts and duties of the


                                       35


retiring Trustee and (b) shall add to or change any of the provisions of this
Trust Agreement as shall be necessary to provide for or facilitate the
administration of the trusts hereunder by more than one Trustee, it being
understood that nothing herein or in such amendment shall constitute such
Trustees co-trustees of the same trust and that each such Trustee shall be
trustee of a trust or trusts hereunder separate and apart from any trust or
trusts hereunder administered by any other such Trustee and upon the execution
and delivery of such amendment the resignation or removal of the retiring
Trustee shall become effective to the extent provided therein and each such
successor Trustee, without any further act, deed or conveyance, shall become
vested with all the rights, powers, trusts and duties of the retiring Trustee
and the Trust; but, on request of the Trust or any successor Trustee, such
retiring Trustee shall duly assign, transfer and deliver to such successor
Trustee all Trust Property, all proceeds thereof and money held by such retiring
Trustee hereunder.

     Upon request of any such successor Trustee, the Trust shall execute any and
all instruments for more fully and certainly vesting in and confirming to such
successor Trustee all such rights, powers and trusts referred to in the
preceding paragraphs.

     No successor Trustee shall accept its appointment unless at the time of
such acceptance such successor Trustee shall be qualified and eligible under
this Article.

     Section 7.12. Merger, Conversion, Consolidation or Succession to Business.
Any Person into which any of the Trustees may be merged or converted or with
which it may be consolidated, or any Person resulting from any merger,
conversion or consolidation to which such Trustee shall be a party, or any
Person succeeding to all or substantially all the corporate trust business of
such Trustee, shall be the successor of such Trustee hereunder, provided such
Person shall be otherwise qualified and eligible under this Article, without the
execution or filing of any paper or any further act on the part of any of the
parties hereto.

     Section 7.13. Preferential Collection of Claims Against Depositor or Trust.
If and when the Property Trustee or the Delaware Trustee shall be or become a
creditor (whether directly or indirectly, secured or unsecured) of the Depositor
or the Trust (or any other obligor upon the Debentures or the Trust Securities),
including under the terms of Section 7.05 hereof, the Property Trustee or the
Delaware Trustee, as the case may be, shall be subject to and shall take all
actions necessary in order to comply with the provisions of the Trust Indenture
Act regarding the collection of claims against the Depositor or Trust (or any
such other obligor).

     Section 7.14. Reports by Property Trustee. The Property Trustee shall
transmit to Holders such reports concerning the Property Trustee and its actions
under this Trust Agreement as may be required pursuant to the Trust Indenture
Act at the times and in the manner provided pursuant thereto. If required by


                                       36


Section 313(a) of the Trust Indenture Act, the Property Trustee shall, within 60
days after each May 31 following the date of this Trust Agreement deliver to
Holders a brief report, dated as of such May 31, which complies with the
provisions of such Section 313(a).

     A copy of each such report shall, at the time of such transmission to
Holders, be filed by the Property Trustee with each stock exchange upon which
any Preferred Securities are then listed, with the Commission and with the
Trust. The Trust will promptly notify the Property Trustee when any Preferred
Securities are listed on any stock exchange.

     Section 7.15. Reports to the Property Trustee and the Commission. The
Depositor and the Administrative Trustee on behalf of the Trust shall provide to
the Property Trustee and the Commission, as applicable, such documents, reports
and information as required by Section 314 of the Trust Indenture Act (if any)
and the compliance certificate required by Section 314(a) of the Trust Indenture
Act in the form, in the manner and at the times required by Section 314 of the
Trust Indenture Act.

     Section 7.16. Evidence of Compliance with Conditions Precedent. The
Depositor and the Administrative Trustee on behalf of the Trust shall provide to
the Property Trustee evidence of compliance with the conditions precedent, if
any, provided for in this Trust Agreement that relate to any of the matters set
forth in Section 314(c) of the Trust Indenture Act.

     Section 7.17. Statements Required in Officer's Certificate and Opinion of
Counsel.

     Each Officer's Certificate and Opinion of Counsel with respect to
compliance with a covenant or condition provided for in this Trust Agreement
shall include:

     (1) a statement that each Person making such Officer's Certificate or
Opinion of Counsel has read such covenant or condition;

     (2) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such Officer's
Certificate or Opinion of Counsel are based;

     (3) a statement that, in the opinion of each such Person, such Person has
made such examination or investigation as is necessary to enable such Person to
express an informed opinion as to whether or not such covenant or condition has
been complied with; and

     (4) a statement that, in the opinion of such Person, such covenant or
condition has been complied with; provided, however, that with respect to
matters of fact not involving any


                                       37


legal conclusion, an Opinion of Counsel may rely on an Officer's Certificate or
certificates of public officials.

     Section 7.18. Number of Trustees.

     (a) The number of Trustees shall be three, provided that the Holder of all
of the Common Securities by written instrument may increase and, if increased,
may decrease the number of Administrative Trustees.

     (b) If a Trustee ceases to hold office for any reason and the number of
Administrative Trustees is not reduced pursuant to Section 7.18(a), or if the
number of Trustees is increased pursuant to Section 7.18(a), a vacancy shall
occur. The vacancy shall be filled with a Trustee appointed in accordance with
Section 7.10.

     (c) The death, resignation, retirement, removal, bankruptcy, dissolution,
termination, incompetence or incapacity to perform the duties of a Trustee shall
not operate to dissolve, terminate or annul the Trust. Whenever a vacancy shall
occur, until such vacancy is filled by the appointment of an Administrative
Trustee in accordance with Section 7.10, the Administrative Trustees in office,
regardless of their number (and notwithstanding any other provision of this
Trust Agreement), shall have all the powers granted to the Administrative
Trustee and shall discharge all the duties imposed upon the Administrative
Trustees by this Trust Agreement.

     Section 7.19. Delegation of Power.

     (a) Any Administrative Trustee may, by power of attorney consistent with
applicable law, delegate to any natural person over the age of 21 his/her power
for the purpose of executing any documents contemplated in Section 2.07(a),
including any registration statement or amendment thereto filed with the
Commission, or making any other governmental filing; and

     (b) the Administrative Trustees shall have power to delegate from time to
time to such of their number, if there is more than one Administrative Trustee,
or to the Depositor the doing of such things and the execution of such
instruments either in the name of the Trust or the names of the Administrative
Trustees or otherwise as the Administrative Trustees may deem expedient, to the
extent such delegation is not prohibited by applicable law or contrary to the
provisions of the Trust, as set forth herein.

     Section 7.20. Voting. Except as otherwise provided in this Trust Agreement,
the consent or vote of the Trustees shall be approved by not less than a
majority of the Administrative Trustees.

                                  ARTICLE VIII


                                       38


                           Dissolution and Liquidation

     Section 8.01. Dissolution Upon Expiration Date. Unless earlier dissolved,
the Trust shall automatically dissolve on December 22, 2051 (the "Expiration
Date").

     Section 8.02. Early Dissolution. The earliest to occur of any of the
following events is an "Early Dissolution Event" upon the occurrence of which
the Trust shall be dissolved:

     (a) the occurrence of a Bankruptcy Event in respect of, or the dissolution
or liquidation of the Depositor or an acceleration of the maturity of the
Debentures pursuant to Section 6.02 of the Indenture;

     (b) upon the election of the Depositor to liquidate the Trust and cause the
distribution of a Like Amount of Debentures to the Holders of the Trust
Securities;

     (c) the redemption of all of the Trust Securities; and

     (d) an order for dissolution of the Trust shall have been entered by a
court of competent jurisdiction.

     The election of the Depositor pursuant to Section 8.02(b) shall be made by
the Depositor giving written notice to the Trustees not less than 30 days prior
to the date of distribution of the Debentures. Such notice shall specify the
date of distribution of the Debentures and shall be accompanied by an Opinion of
Counsel that such event will not be a taxable event to the Holders of the Trust
Securities for Federal income tax purposes.

     Section 8.03. Dissolution. The respective obligations and responsibilities
of the Trustees and the Trust continued hereby shall terminate upon the latest
to occur of the following: (a) the distribution by the Property Trustee to
Securityholders upon the liquidation of the Trust pursuant to Section 8.04, or
upon the redemption of all of the Trust Securities pursuant to Section 4.02, of
all amounts required to be distributed hereunder upon the final payment of the
Trust Securities; (b) the payment of any expenses owed by the Trust; and (c) the
discharge of all administrative duties of the Administrative Trustee, including
the performance of any tax reporting obligations with respect to the Trust or
the Securityholders.

     Section 8.04. Liquidation.

     (a) If an Early Dissolution Event specified in clause (a), (c) or (d) of
Section 8.02 occurs or upon the Expiration Date, the Trust shall be liquidated
by the Trustees as expeditiously as the Trustees determine to be possible by
distributing, after satisfaction of liabilities to creditors of the Trust as
provided by applicable law, to each Securityholder a Like Amount of Debentures,
subject to Section 8.04(d). If an Early


                                       39


Dissolution Event specified in clause (b) occurs, the Trust shall be liquidated
by the Trustee on the date of distribution of the Debentures specified by the
Depositor in its notice delivered pursuant to Section 8.02. Notice of
liquidation shall be given by the Property Trustee by first-class mail, postage
prepaid, mailed not later than 30 nor more than 60 days prior to the Liquidation
Date to each Holder of Trust Securities at such Holder's address appearing in
the Securities Register. All notices of liquidation shall:

     (i) state the Liquidation Date;

     (ii) state that from and after the Liquidation Date, the Trust Securities
will no longer be deemed to be Outstanding and any Trust Securities Certificates
not surrendered for exchange will be deemed to represent a Like Amount of
Debentures; and

     (iii) provide such information with respect to the mechanics by which
Holders may exchange Trust Securities Certificates for certificates evidencing
Debentures, or, if Section 8.04(d) applies, receive a Liquidation Distribution,
as the Administrative Trustee or the Property Trustee shall deem appropriate.

     (b) In order to effect the liquidation of the Trust and distribution of the
Debentures to Securityholders, the Property Trustee, either itself acting as
exchange agent or through the appointment of a separate exchange agent, shall
establish such procedures as it shall deem appropriate to effect the
distribution of Debentures in exchange for the Outstanding Trust Securities
Certificates.

     (c) Except where Section 8.02(c) or 8.04(d) applies, on or after the
Liquidation Date, (i) the Trust Securities will no longer be deemed to be
Outstanding, (ii) certificates representing a Like Amount of Debentures will be
issued to Holders of Trust Securities Certificates, upon surrender of such
certificates to the Administrative Trustee or its agent for exchange, (iii) the
Depositor shall use its best efforts to have the Debentures listed on the New
York Stock Exchange or such other exchange as the Preferred Securities are then
listed and shall take any reasonable action necessary to effect the distribution
of the Debentures, (iv) any Trust Securities Certificates not so surrendered for
exchange will be deemed to represent a Like Amount of Debentures, accruing
interest at the rate provided for in the Debentures from the last Distribution
Date on which a Distribution was made on such Trust Securities Certificates
until such certificates are so surrendered (and until such certificates are so
surrendered, no payments of interest or principal will be made to Holders of
Trust Securities Certificates with respect to such Debentures) and (v) all
rights of Securityholders holding Trust Securities will cease, except the right
of such Securityholders to receive Debentures upon surrender of Trust Securities
Certificates.


                                       40


     (d) In the event that, notwithstanding the other provisions of this Section
8.04, whether because of an order for dissolution entered by a court of
competent jurisdiction or otherwise, distribution of the Debentures in the
manner provided herein is determined by the Property Trustee not to be
practical, the Trust Property shall be liquidated, and the Trust shall be
dissolved, by the Property Trustee in such manner as the Property Trustee
determines. In such event, on the date of the dissolution of the Trust,
Securityholders will be entitled to receive out of the assets of the Trust
available for distribution to Securityholders, after satisfaction of liabilities
to creditors of the Trust as provided by applicable law, an amount equal to the
Liquidation Amount per Trust Security plus accumulated and unpaid Distributions
thereon to the date of payment (such amount being the "Liquidation
Distribution"). If, upon any such dissolution, the Liquidation Distribution can
be paid only in part because the Trust has insufficient assets available to pay
in full the aggregate Liquidation Distribution, then, subject to the next
succeeding sentence, the amounts payable by the Trust on the Trust Securities
shall be paid on a pro rata basis (based upon Liquidation Amounts). The Holder
of the Common Securities will be entitled to receive Liquidation Distributions
upon any such dissolution pro rata (determined as aforesaid) with Holders of
Preferred Securities, except that, if a Debenture Event of Default has occurred
and is continuing, the Preferred Securities shall have a priority over the
Common Securities, and no Liquidation Distribution will be paid to the Holders
of the Common Securities unless and until receipt by all Holders of the
Preferred Securities of the entire Liquidation Distribution payable in respect
thereof.

                                   ARTICLE IX

                                  Mergers, Etc.

     Section 9.01. Mergers, Consolidations, Amalgamations or Replacements of the
Trust. The Trust may not merge with or into, consolidate, amalgamate, or be
replaced by, or convey, transfer or lease its properties and assets as an
entirety or substantially as an entirety to any Person, except as described
below or under Article VIII. The Trust may, at the request of the Depositor,
with the consent of the Administrative Trustee and without the consent of the
Holders of the Preferred Securities, merge with or into, consolidate,
amalgamate, or be replaced by, a trust organized as such under the laws of any
State; provided, that (i) such successor entity either (a) expressly assumes all
of the obligations of the Trust with respect to the Preferred Securities or (b)
substitutes for the Preferred Securities other securities having substantially
the same terms as the Preferred Securities (the "Successor Securities") so long
as the Successor Securities rank the same as the Preferred Securities rank with
respect to the payment of Distributions and payments upon liquidation and
redemption, (ii) the Depositor expressly appoints a trustee of such successor
entity possessing the same powers and duties as the Property Trustee with
respect to the Debentures, (iii) the Successor Securities are listed, or any
Successor Securities will be listed


                                       41


upon notification of issuance, on any national securities exchange or other
organization on which the Preferred Securities are then listed, (iv) such
merger, consolidation, amalgamation or replacement does not cause the Preferred
Securities (including any Successor Securities) to be downgraded by any
nationally recognized statistical rating organization, (v) such merger,
consolidation, amalgamation or replacement does not adversely affect the rights,
preferences and privileges of the Holders of the Preferred Securities (including
any Successor Securities) in any material respect, (vi) such successor entity
has a purpose substantially similar to that of the Trust, (vii) prior to such
merger, consolidation, amalgamation or replacement, the Depositor has received
an Opinion of Counsel to the effect that (a) such merger, consolidation,
amalgamation or replacement does not adversely affect the rights, preferences
and privileges of the Holders of the Preferred Securities (including any
Successor Securities) in any material respect, and (b) following such merger,
consolidation, amalgamation or replacement, neither the Trust nor such successor
entity will be required to register as an investment company under the 1940 Act
and (viii) the Depositor or any permitted successor assignee owns all of the
common securities of such successor entity and guarantees the obligations of
such successor entity under the Successor Securities at least to the extent
provided by the Guarantee and this Trust Agreement. Notwithstanding the
foregoing, the Trust shall not, except with the consent of all Holders of the
Preferred Securities, merge with or into, consolidate, amalgamate, or be
replaced by, any other entity or permit any other entity to consolidate,
amalgamate, merge with or into, or replace it if such consolidation,
amalgamation, merger or replacement would cause the Trust or the successor
entity not to be classified as a grantor trust for United States Federal income
tax purposes.

                                    ARTICLE X

                            Miscellaneous Provisions

     Section 10.01. Limitation of Rights of Securityholders. The death,
incapacity, bankruptcy, dissolution and termination of any Person having an
interest, beneficial or otherwise, in Trust Securities shall not operate to
terminate this Trust Agreement or dissolve, terminate or annul the Trust, nor
entitle the legal representatives or heirs of such Person or any Securityholder
for such Person, to claim an accounting, take any action or bring any proceeding
in any court for a partition or winding-up of the arrangements contemplated
hereby, nor otherwise affect the rights, obligations and liabilities of the
parties hereto or any of them.

     Section 10.02. Amendment.

     (a) This Trust Agreement may be amended from time to time by the Trustees
and the Depositor, without the consent of any Securityholders, to cure any
ambiguity, defect or inconsistency or make any other change which does not
adversely affect in any material respect the interests of any Holder of
Preferred


                                       42


Securities. Any amendments of this Trust Agreement pursuant to Section 10.02(a)
shall become effective when notice thereof is given to the Securityholders.

     (b) Except as provided in Section 10.02(a) and 10.02(c) hereof, any
provision of this Trust Agreement may be amended by the Trustees and the
Depositor with the consent of Holders of at least a majority of the aggregate
Liquidation Amount of the Outstanding Preferred Securities.

     (c) In addition to and notwithstanding any other provision in this Trust
Agreement, without the consent of each affected Securityholder (such consent
being obtained in accordance with Section 6.03 or 6.06 hereof), this Trust
Agreement may not be amended to (i) change the method of calculation of, timing
or currency of any Distribution or Liquidation Distribution on the Trust
Securities or otherwise adversely affect the method of payment of any
Distribution or Liquidation Distribution required to be made in respect of the
Trust Securities as of a specified date; (ii) change the redemption provisions
of the Trust Securities; (iii) restrict the right of a Securityholder to
institute suit for the enforcement of any such payment contemplated in (i) or
(ii) above on or after the related date; (iv) modify the first sentence of
Section 2.06 hereof; (v) authorize or issue any beneficial interest in the Trust
other than as contemplated by this Trust Agreement as of the date hereof; (vi)
change the conditions precedent for the Depositor to elect to dissolve the Trust
and distribute the Debentures to Holders of Trust Securities as set forth in
Section 8.02; or (vii) affect the limited liability of any Holder of Preferred
Securities, and, notwithstanding any other provision herein, without the
unanimous consent of the Securityholders (such consent being obtained in
accordance with Section 6.03 or 6.06 hereof), paragraphs (b) and (c) of this
Section 10.02 may not be amended.

     (d) Notwithstanding any other provisions of this Trust Agreement, no
amendment to this Trust Agreement shall be made without receipt by the Trust of
an Opinion of Counsel experienced in such matters to the effect that such
amendment will not affect the Trust's status as a grantor trust for United
States Federal income tax purposes or its exemption from regulation as an
"investment company" under the 1940 Act.

     (e) Notwithstanding anything in this Trust Agreement to the contrary,
without the consent of the Depositor, this Trust Agreement may not be amended in
a manner which imposes any additional obligation on the Depositor.

     (f) In the event that any amendment to this Trust Agreement is made, the
Administrative Trustee shall promptly provide to the Depositor a copy of such
amendment.

     (g) In executing any amendment to this Trust Agreement, the Property
Trustee shall be entitled to receive, and (subject to Section 7.01) shall be
fully protected in relying upon,

                                       43


an Opinion of Counsel stating that the execution of such amendment is authorized
or permitted by this Trust Agreement. Except as contemplated by Section 7.11, a
Trustee may, but shall not be obligated to, enter into any amendment to this
Trust Agreement which affects such Trustee's own rights, duties or immunities
under this Trust Agreement or otherwise.

     Section 10.03. Severability. In case any provision in this Trust Agreement
or in the Trust Securities Certificates shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.

     Section 10.04. Governing Law. THIS TRUST AGREEMENT AND THE RIGHTS AND
OBLIGATIONS OF EACH OF THE SECURITYHOLDERS, THE TRUST AND THE TRUSTEES WITH
RESPECT TO THIS TRUST AGREEMENT AND THE TRUST SECURITIES SHALL BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF DELAWARE, WITHOUT
REGARD TO CONFLICT OF LAWS PRINCIPLES.

     Section 10.05. Payments Due on Non-Business Day. Except as provided in
Section 4.01(a) hereof, if the date fixed for any payment on any Trust Security
shall be a day which is not a Business Day, then such payment need not be made
on such date but may be made on the next succeeding day which is a Business Day
(except as otherwise provided therein, with the same force and effect as though
made on the date fixed for such payment), and no interest shall accumulate
thereon for the period after such date to the date of payment on such succeeding
day.

     Section 10.06. Successors and Assigns. This Trust Agreement shall be
binding upon and shall inure to the benefit of any successor to the Trust or
successor Trustee or both, including any successor by operation of law. Except
in connection with a consolidation, merger or sale involving the Depositor that
is permitted under Article V of the Indenture and pursuant to which the assignee
agrees in writing to perform the Depositor's obligations hereunder, the
Depositor shall not assign its obligations hereunder.

     Section 10.07. Headings. The Article and Section headings are for
convenience only and shall not affect the construction of this Trust Agreement.

     Section 10.08. Reports, Notices and Demands. Any report, notice, demand or
other communication which by any provision of this Trust Agreement is required
or permitted to be given or served to or upon any Securityholder or the
Depositor may be given or served in writing by deposit thereof, first-class
postage prepaid in the United States mail, hand delivery or facsimile
transmission, in each case, addressed, (a) in the case of a Holder of a
Preferred Security, to such Holder of a Preferred Security as such
Securityholder's name and address may appear on the Securities Register; and (b)
in the case of the Holder of a Common Security or the Depositor, to Public
Service Enterprise


                                       44


Group Incorporated, 80 Park Plaza, Newark, New Jersey 07101, Attention:
Treasurer, facsimile no.: (973) 596-6309. Such notice, demand or other
communication to or upon a Securityholder or the Depositor shall be deemed to
have been sufficiently given or made, for all purposes, upon hand delivery,
mailing or transmission.

     Any notice, demand or other communication which by any provision of this
Trust Agreement is required or permitted to be given or served to or upon the
Trust, the Property Trustee or the Administrative Trustee shall be given in
writing addressed (until another address is published by the Trust) as follows:
(a) with respect to the Property Trustee to First Union National Bank, 765 Broad
Street, Newark, New Jersey 07101, Attention: Corporate Trust Office; (b) with
respect to the Delaware Trustee, to One Rodney Square, 920 King Street,
Wilmington, Delaware 19801 Attention: Corporate Trust Department; and (c) with
respect to the Administrative Trustee, to the address above for notices to the
Depositor, marked "Attention: Administrative Trustee of Enterprise Capital Trust
III c/o Treasurer." Such notice, demand or other communication to or upon the
Trust, the Delaware Trustee or the Property Trustee shall be deemed to have been
sufficiently given or made only upon actual receipt of the writing by the Trust,
the Delaware Trustee or the Property Trustee.

     Section 10.09. Agreement Not to Petition. Each of the Trustees and the
Depositor agree for the benefit of the Securityholders that, until at least one
year and one day after the Trust has been terminated in accordance with Article
VIII, they shall not file, or join in the filing of, a petition against the
Trust under any Bankruptcy Laws or otherwise join in the commencement of any
proceeding against the Trust under any Bankruptcy Law. In the event the
Depositor or any of the Trustees takes action in violation of this Section
10.09, the Property Trustee agrees, for the benefit of Securityholders, that at
the expense of the Depositor, it shall file an answer with the bankruptcy court
or otherwise properly contest the filing of such petition by the Depositor or
any of the Trustees, as applicable, against the Trust or the commencement of
such action and raise the defense that the Depositor or Trustee, as applicable,
has agreed in writing not to take such action and should be stopped and
precluded therefrom and such other defenses, if any, as counsel for the Property
Trustee or the Trust may assert. The provisions of this Section 10.09 shall
survive the termination of this Trust Agreement.

     Section 10.10. Trust Indenture Act; Conflict with Trust Indenture Act.

     (a) This Trust Agreement is subject to the provisions of the Trust
Indenture Act that are required to be part of this Trust Agreement and shall, to
the extent applicable, be governed by such provisions.

     (b) The Property Trustee shall be the only Trustee which is a trustee for
the purposes of the Trust Indenture Act.


                                       45


     (c) If any provision hereof limits, qualifies or conflicts with another
provision hereof which is required to be included in this Trust Agreement by any
of the provisions of the Trust Indenture Act, such required provision shall
control. If any provision of this Trust Agreement modifies or excludes any
provision of the Trust Indenture Act which may be so modified or excluded, the
latter provision shall be deemed to apply to this Trust Agreement as so modified
or excluded, as the case may be.

     (d) The application of the Trust Indenture Act to this Trust Agreement
shall not affect the nature of the Trust Securities as equity securities
representing undivided beneficial interests in the assets of the Trust.

     Section 10.11. Acceptance of Terms of Trust Agreement, Guarantee and
Indenture. THE RECEIPT AND ACCEPTANCE OF A TRUST SECURITY OR ANY INTEREST
THEREIN BY OR ON BEHALF OF A SECURITYHOLDER OR ANY BENEFICIAL OWNER, WITHOUT ANY
SIGNATURE OR FURTHER MANIFESTATION OF ASSENT, SHALL CONSTITUTE THE UNCONDITIONAL
ACCEPTANCE BY THE SECURITYHOLDER AND ALL OTHERS HAVING A BENEFICIAL INTEREST IN
SUCH TRUST SECURITY OF ALL THE TERMS AND PROVISIONS OF THIS TRUST AGREEMENT AND
AGREEMENT TO THE SUBORDINATION PROVISIONS AND OTHER TERMS OF THE GUARANTEE AND
THE INDENTURE, AND SHALL CONSTITUTE THE AGREEMENT OF THE TRUST, SUCH
SECURITYHOLDER AND SUCH OTHERS THAT THE TERMS AND PROVISIONS OF THIS TRUST
AGREEMENT SHALL BE BINDING, OPERATIVE AND EFFECTIVE AS BETWEEN THE TRUST AND
SUCH SECURITYHOLDER AND SUCH OTHERS.


PUBLIC SERVICE ENTERPRISE                       FIRST UNION NATIONAL BANK, as
GROUP INCORPORATED, as Depositor                Property Trustee

By:                                             By:
   ------------------------------                 ------------------------------
Name:  Morton A. Plawner                        Name:  Frank Gallagher
Title: Treasurer                                Title: Vice President

Morton A. Plawner,                              FIRST UNION BANK OF DELAWARE,
as Administrative Trustee                       as Delaware Trustee

                                                By:
- -------------------------                          -----------------------------
                                                Name:  Frank Gallagher
                                                Title: Vice President


                                       46


                                                                       EXHIBIT A

                              CERTIFICATE OF TRUST
                                       OF
                          ENTERPRISE CAPITAL TRUST III

     Actual Certificate of Trust will be inserted here.


                                      A-1


                                                                       EXHIBIT B

     DTC FORM OF AGREEMENT TO BE INSERTED HERE


                                      C-1


EXHIBIT C

                      THIS CERTIFICATE IS NOT TRANSFERABLE

                               Certificate Number
                                       C-1

                                                     Number of Common Securities

                                                                         185,568

                    Certificate Evidencing Common Securities
                                       of
                          Enterprise Capital Trust III

                            7-1/4% Common Securities
                  (liquidation amount $25 per Common Security)

     Enterprise Capital Trust III , a statutory business trust created under the
laws of the State of Delaware (the "Trust"), hereby certifies that Public
Service Enterprise Group Incorporated (the "Holder") is the registered owner of
One Hundred Eighty-Five Thousand Five Hundred Sixty-Eight (185,568) common
securities of the Trust representing undivided beneficial interests in the
assets of the Trust and designated as the 7-1/4% Common Securities (liquidation
amount $25 per Common Security) (the "Common Securities"). In accordance with
Section 5.10 of the Trust Agreement (as defined below) the Common Securities are
not transferable and any attempted transfer hereof shall be void. The
designations, rights, privileges, restrictions, preferences and other terms and
provisions of the Common Securities are set forth in, and this certificate and
the Common Securities represented hereby are issued and shall in all respects be
subject to the terms and provisions of, the Amended and Restated Trust Agreement
of the Trust dated as of July 6, 1998 as the same may be amended from time to
time (the "Trust Agreement"). The Trust will furnish a copy of the Trust
Agreement to the Holder without charge upon written request to the Trust at its
principal place of business or registered office.

     Upon receipt of this certificate, the Holder is bound by the Trust
Agreement and is entitled to the benefits thereunder.

     IN WITNESS WHEREOF, the Trust has executed this certificate this 6th day of
July, 1998.

                                                   ENTERPRISE CAPITAL TRUST III


                                                   By:
                                                      --------------------------
                                                        Name:  Morton A. Plawner
                                                        Administrative Trustee


                                      C-2


                                                                       EXHIBIT D

                               Certificate Number

                                      -----

Number of Preferred Securities:
                                                             CUSIP NO. 29390B201

                   Certificate Evidencing Preferred Securities
                                       of
                          Enterprise Capital Trust III

             7-1/4% Trust Originated Preferred Securities, Series C
                  (liquidation amount $25 per Capital Security)

     Enterprise Capital Trust III , a statutory business trust created under the
laws of the State of Delaware (the "Trust"), hereby certifies that Cede & Co.
(the "Holder") is the registered owner of _________, _________________________
(_________) preferred securities of the Trust representing an undivided
beneficial interest in the assets of the Trust and designated the Enterprise
Capital Trust III 7-1/4% Trust Originated Preferred Securities, Series C
(liquidation amount $25 per Preferred Security) (the "Preferred Securities").
The Preferred Securities are transferable on the books and records of the Trust,
in person or by a duly authorized attorney, upon surrender of this certificate
duly endorsed and in proper form for transfer as provided in Section 5.04 of the
Trust Agreement (as defined below). The designations, rights, privileges,
restrictions, preferences and other terms and provisions of the Preferred
Securities are set forth in, and this certificate and the Preferred Securities
represented hereby are issued and shall in all respects be subject to the terms
and provisions of, the Amended and Restated Trust Agreement of the Trust dated
as of July 6, 1998 as the same may be amended from time to time (the "Trust
Agreement"). The Holder is entitled to the benefits of the Guarantee Agreement
entered into by Public Service Enterprise Group Incorporated, a New Jersey
corporation, and First Union National Bank as guarantee trustee, dated as of
July 6, 1998 (the "Guarantee") to the extent provided therein, together with the
obligations of Public Service Enterprise Group Incorporated under the Trust
Agreement, its 7-1/4% Deferrable Interest Subordinated Debentures, Series C, and
the Indenture related to such Deferrable Interest Subordinated Debentures. The
Trust will furnish a copy of the aforementioned agreements and instruments to
the Holder without charge upon written request to the Trust at its principal
place of business or registered office.


                                      D-1



     Upon receipt of this certificate, the Holder is bound by the Trust
Agreement and is entitled to the benefits thereunder.

     IN WITNESS WHEREOF, the Trust has executed this certificate this 6th day of
July, 1998.

                                                   ENTERPRISE CAPITAL TRUST III

                                                   By:
                                                      --------------------------
                                                        Name: Morton A. Plawner
                                                        Administrative Trustee

         [To be included in Book-Entry Preferred Securities Certificate]

This Preferred Security is a Book-Entry Preferred Securities Certificate within
the meaning of the Trust Agreement previously referred to and is registered in
the name of The Depository Trust Company (the "Depository") or a nominee of the
Depository. This Preferred Security is exchangeable for Preferred Securities
registered in the name of a person other than the Depository or its nominee only
in the limited circumstances described in the Trust Agreement and no transfer of
this Preferred Security (other than a transfer of this Preferred Security as a
whole by the Depository to a nominee of the Depository or by a nominee of the
Depository to the Depository or another nominee of the Depository) may be
registered except in limited circumstances.

Unless this Preferred Security is presented by an authorized representative of
The Depository Trust Company, a New York corporation, (55 Water Street, New
York) to Enterprise Capital Trust III or its agent for registration of transfer,
exchange or payment, and any Preferred Security issued is registered in the name
of Cede & Co. or such other name as requested by an authorized representative of
The Depository Trust Company and any payment hereon is made to Cede & Co. or to
such other entity as is requested by an authorized representative of The
Depository Trust Company, ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY A PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede
& Co., has an interest herein.


                                      D-2


                                   ASSIGNMENT


FOR VALUE RECEIVED, the undersigned assigns and transfers to: (Insert assignee's
social security or tax identification number) (Insert address and zip code of
assignee)

__________ Preferred Securities represented by this Preferred Securities
Certificate and irrevocably appoints

agent to transfer said Preferred Securities on the books of the Trust. The agent
may substitute another to act for him or her.

Date:

Signature:
(Sign exactly as your name appears on the other side of this Preferred Security
Certificate)

EX-3.(G)

                              Amended and Restated

                    Trust Agreement for PSEG Funding Trust I

                                      among

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED

                                 (as Depositor)

                       WACHOVIA BANK, NATIONAL ASSOCIATION

                              (as Property Trustee)

                  WACHOVIA TRUST COMPANY, NATIONAL ASSOCIATION

                              (as Delaware Trustee)

                                       and

                    THE ADMINISTRATIVE TRUSTEES NAMED HEREIN

                                   Dated as of

                               September 10, 2002





                              CROSS REFERENCE TABLE

Trust Indenture                                                      Section of
  Act Section                                                        Declaration

ss.310(a)(1)................................................................7.07
       (a)(2)...............................................................7.07
       (a)(3)...............................................................7.09
       (a)(4)........................................................2.07(a)(ii)
       (b)..................................................................7.08
ss.311(a)...................................................................7.13
       (b)..................................................................7.13
ss.312(a)...................................................................5.07
       (b)..................................................................5.07
       (c)..................................................................5.07
ss.313(a)...................................................................7.14
       (b)..................................................................7.14
       (c)..................................................................7.14
       (d)..................................................................7.14
ss.314(a)...................................................................7.15
       (b)........................................................Not Applicable
       (c)(1).........................................................7.16, 7.17
       (c)(2).........................................................7.16, 7.17
       (c)(3).....................................................Not Applicable
       (d)........................................................Not Applicable
       (e)................................................................. 7.17
ss.315(a).......................................................7.01(a), 7.03(a)
       (b)...........................................................7.02, 10.08
       (c)...............................................................7.01(a)
       (d)............................................................7.01, 7.03
       (e)........................................................Not Applicable
ss.316(a).........................................................Not Applicable
       (a)(1)(A)..................................................Not Applicable
       (a)(1)(B)..................................................Not Applicable
       (a)(2).....................................................Not Applicable
       (b)........................................................Not Applicable
       (c)........................................................Not Applicable
ss.317(a)(1)......................................................Not Applicable
       (a)(2).....................................................Not Applicable
       (b)..................................................................5.09
ss.318(a)..................................................................10.10

- ----------

      Note: This reconciliation and tie sheet shall not, for any purpose, be
deemed to be a part of the Declaration.


                                       i


                                                                                
                                    ARTICLE I
                                  Defined Terms


Section 1.01.   Definitions.........................................................1

                                   ARTICLE II
                            Continuation of the Trust

Section 2.01.   Name...............................................................14
Section 2.02.   Office of the Delaware Trustee; Principal Place of Business........14
Section 2.03.   Initial Contribution of Trust Property; Expenses of the Trust......15
Section 2.04.   Issuance of the Trust Securities...................................15
Section 2.05.   Purchase of Notes..................................................16
Section 2.06.   Declaration of Trust...............................................16
Section 2.07.   Authorization to Enter into Certain Transactions...................16
Section 2.08.   Assets of Trust....................................................20
Section 2.09.   Title to Trust Property............................................20

                                   ARTICLE III
                                 Payment Account

Section 3.01.   Payment Account....................................................20

                                   ARTICLE IV
                            Distributions; Redemption

Section 4.01.   Distributions......................................................21
Section 4.02.   Redemption.........................................................23
Section 4.03.   Subordination of Common Securities.................................25
Section 4.04.   Payment Procedures.................................................26
Section 4.05.   Tax Returns and Reports............................................26
Section 4.06.   Payments under Indenture...........................................26

                                    ARTICLE V
                          Trust Securities Certificates

Section 5.01.   Initial Ownership..................................................26
Section 5.02.   The Trust Securities Certificates..................................26
Section 5.03.   Delivery of Trust Securities Certificates..........................27
Section 5.04.   Registration of Transfer and Exchange of Preferred Securities
                Certificates; Common Securities Certificates.......................27
Section 5.05.   Mutilated, Destroyed, Lost or Stolen Trust Securities Certificates.28
Section 5.06.   Persons Deemed Securityholders.....................................28
Section 5.07.   Access to List of Securityholders' Names and Addresses.............29
Section 5.08.   Maintenance of Office or Agency....................................29
Section 5.09.   Appointment of Paying Agent........................................29
Section 5.10.   Preferred Securities Certificates; Common Securities Certificate...30
Section 5.11.   Definitive Preferred Securities Certificates.......................30
Section 5.12.   Rights of Securityholders..........................................31




                                       ii


                                                                                
Section 5.13.   Initial Remarketing................................................31
Section 5.14.   Secondary Remarketing..............................................33
Section 5.15.   Option to Put Preferred Securities upon Failed Secondary
                Remarketing........................................................36


                                   ARTICLE VI
                    Acts of Securityholders; Meetings; Voting

Section 6.01.   Limitations on Voting Rights.......................................36
Section 6.02.   Notice of Meetings.................................................37
Section 6.03.   Meetings of Holders of the Preferred Securities....................37
Section 6.04.   Voting Rights......................................................38
Section 6.05.   Proxies, etc.......................................................38
Section 6.06.   Securityholder Action by Written Consent...........................38
Section 6.07.   Record Date for Voting and Other Purposes..........................38
Section 6.08.   Acts of Securityholders............................................38
Section 6.09.   Inspection of Records..............................................39

                                   ARTICLE VII
                                  The Trustees

Section 7.01.   Certain Duties and Responsibilities................................39
Section 7.02.   Notice of Defaults; Direct Action by Securityholders...............40
Section 7.03.   Certain Rights of Property Trustee.................................41
Section 7.04.   Not Responsible for Recitals or Issuance of Securities.............42
Section 7.05.   May Hold Securities................................................42
Section 7.06.   Compensation; Indemnity; Fees......................................43
Section 7.07.   Corporate Property Trustee Required; Eligibility of Trustees.......43
Section 7.08.   Conflicting Interests..............................................44
Section 7.09.   Co-Trustees and Separate Trustee...................................44
Section 7.10.   Resignation and Removal; Appointment of Successor..................45
Section 7.11.   Acceptance of Appointment by Successor.............................46
Section 7.12.   Merger, Conversion, Consolidation or Succession to Business........47
Section 7.13.   Preferential Collection of Claims Against Depositor or Trust.......47
Section 7.14.   Reports by Property Trustee........................................47
Section 7.15.   Reports to the Property Trustee....................................48
Section 7.16.   Evidence of Compliance with Conditions Precedent...................48
Section 7.17.   Statements Required in Officers' Certificate and
                Opinion of Counsel.................................................48
Section 7.18.   Number of Trustees.................................................48
Section 7.19.   Delegation of Power................................................49
Section 7.20.   Voting.............................................................49

                                  ARTICLE VIII
                           Dissolution and Liquidation

Section 8.01.   Dissolution Upon Expiration Date...................................49
Section 8.02.   Early Termination..................................................49
Section 8.03.   Termination........................................................50
Section 8.04.   Winding Up.........................................................50




                                       iii


                                                                                
                                   ARTICLE IX
                                  Mergers, Etc.

Section 9.01.   Mergers, Consolidations, Amalgamations or Replacements
                of the Trust.......................................................51

                                    ARTICLE X
                            Miscellaneous Provisions

Section 10.01.  Limitation of Rights of Securityholders............................52
Section 10.02.  Amendment..........................................................52
Section 10.03.  Severability.......................................................53
Section 10.04.  Governing Law......................................................53
Section 10.05.  Payments Due on Non-Business Day...................................54
Section 10.06.  Successors and Assigns.............................................54
Section 10.07.  Headings...........................................................54
Section 10.08.  Reports, Notices and Demands.......................................54
Section 10.09.  Agreement Not to Petition..........................................55
Section 10.10.  Trust Indenture Act; Conflict with Trust Indenture Act.............55
Section 10.11.  Acceptance of Terms of Declaration, Guarantee and
                Indenture..........................................................55

EXHIBIT A Certificate of Trust.....................................................A-1

EXHIBIT B Certificate Evidencing Common Securities.................................B-1

EXHIBIT C Certificate Evidencing Preferred Securities..............................C-1




                                       iv


      AMENDED AND RESTATED TRUST AGREEMENT of PSEG Funding Trust I (the
"Trust"), dated as of September 10, 2002, among (i) Public Service Enterprise
Group Incorporated, a New Jersey corporation (the "Depositor"), (ii) Wachovia
Bank, National Association (formerly known as First Union National Bank), a
banking association organized under the laws of the United States, as trustee
(the "Property Trustee"), (iii) Wachovia Trust Company, National Association
(formerly known as First Union Trust Company, National Association), a banking
association organized under the laws of the United States (the "Delaware
Trustee"), (iv) Mark G. Kahrer, Morton A. Plawner and Fred F. Saunders (the
"Administrative Trustees") (the Property Trustee, the Delaware Trustee and the
Administrative Trustees are referred to collectively as the "Trustees"), and (v)
the several Holders, as hereinafter defined.

                                   WITNESSETH:

      WHEREAS, the Depositor, the Delaware Trustee and one of the Administrative
Trustees named in the Original Declaration have heretofore duly declared and
established a statutory trust pursuant to the Delaware Statutory Trust Act by
entering into a Trust Agreement, dated as of March 18, 2002 (the "Original
Declaration"), and by executing and filing with the Secretary of State of the
State of Delaware a Certificate of Trust on March 18, 2002, a form of which is
attached hereto as Exhibit A; and

      WHEREAS, the parties hereto desire to amend and restate the Original
Declaration in its entirety as set forth herein to provide for, among other
things, (i) the issuance of the Common Securities, as hereinafter defined, by
the Trust to the Depositor, (ii) the issuance and sale of the Preferred
Securities, as hereinafter defined, by the Trust pursuant to the Underwriting
Agreement, as hereinafter defined, and (iii) the acquisition by the Trust from
the Depositor of the Notes, as hereinafter defined.

      NOW, THEREFORE, in consideration of the agreements and obligations set
forth herein and for other good and valuable consideration, the sufficiency of
which is hereby acknowledged, each party, for the benefit of the other party and
for the benefit of the Securityholders, as hereinafter defined, hereby amends
and restates the Original Declaration in its entirety and agrees as follows:

                                    ARTICLE I
                                  Defined Terms

      Section 1.01. Definitions. For all purposes of this Declaration, except as
otherwise expressly provided or unless the context otherwise requires:

      (a) each term defined in this Article I has the meaning assigned to it in
this Article I and includes the plural as well as the singular;

      (b) each of the other terms used herein that is defined in the Trust
Indenture Act, either directly or by reference therein, has the meaning assigned
to it therein;

      (c) unless the context otherwise requires, any reference to an "Article"
or a "Section" refers to an Article or a Section, as the case may be, of this
Declaration; and



      (d) the words "herein", "hereof" and "hereunder" and other words of
similar import refer to this Declaration as a whole and not to any particular
Article, Section or other subdivision.

      "1940 Act" means the Investment Company Act of 1940, as amended.

      "Act" has the meaning specified in Section 6.08.

      "Administrative Trustee" means each individual identified as an
"Administrative Trustee" in the preamble to this Declaration, solely in his/her
capacity as Administrative Trustee of the Trust and not in his/her individual
capacity, or such Administrative Trustee's successor in interest in such
capacity, or any successor trustee appointed as herein provided.

      "Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.

      "Applicable Ownership Interest" means, with respect to a Corporate Unit
that includes the Treasury Portfolio, (A) a 5% undivided beneficial ownership
interest in a $1,000 face amount of a principal or interest strip in a U.S.
treasury security included in such Treasury Portfolio that matures on or prior
to November 15, 2005, and (B) for each scheduled Distribution Date on the
Preferred Securities that occurs after the Tax Event Redemption Date or, in the
event that the Preferred Securities are successfully remarketed on the Initial
Remarketing Date, after the Initial Reset Date and on or prior to November 16,
2005, an undivided beneficial ownership interest in a $1,000 face amount of a
principal or interest strip in a U.S. treasury security included in such
Treasury Portfolio that matures prior to such date in an aggregate amount equal
to the Distribution on a Preferred Security that would have been due on such
Distribution Date assuming (1) no reset of the Distribution rate on the
Preferred Securities on the Reset Effective Date, and (2) in the case of the
Treasury Portfolio to be purchased on the Initial Reset Date, that if a
Distribution is payable on the Preferred Securities on the Initial Reset Date,
that the Distribution payable on the next following Distribution Date on the
Preferred Securities includes only Distributions accumulated from and including
the Initial Reset Date to but excluding such Distribution Date.

      "Applicable Principal Amount" means either

      (A) in connection with a Tax Event Redemption Date that occurs prior to

            (1)   the Initial Reset Date, or

            (2)   in the event of a Failed Initial Remarketing, the Purchase
                  Contract Settlement Date,


                                       2


      the aggregate principal amount of the Notes corresponding to the aggregate
Liquidation Amount of the Preferred Securities that are components of the
Corporate Units on the Tax Event Redemption Date, or

      (B) in connection with a Tax Event Redemption Date that occurs on or after

            (1)   the Initial Reset Date or

            (2)   in the event of a Failed Initial Remarketing Date, the
                  Purchase Contract Settlement Date,

     the aggregate principal amount of the Notes corresponding to the aggregate
     Liquidation Amount of the Preferred Securities Outstanding on such Tax
     Event Redemption Date.

      "Appropriate Benchmark Treasury" means direct obligations of the United
States (which may be obligations traded on a when-issued basis only) having a
maturity comparable to the remaining term to mandatory redemption of the
Preferred Securities, as agreed upon by the Notes Issuer and the Reset Agent.
The rate for the Appropriate Benchmark Treasury will be the bid side rate
displayed at 10:00 A.M., New York City time, on the Initial Remarketing Date in
the Telerate system (or if the Telerate system is (a) no longer available on the
Initial Remarketing Date or (b) in the opinion of the Reset Agent (after
consultation with the Notes Issuer), no longer an appropriate system from which
to obtain such rate, such other nationally recognized quotation system as, in
the opinion of the Reset Agent (after consultation with the Notes Issuer) is
appropriate). If such rate is not so displayed, the rate for the Appropriate
Benchmark Treasury shall be, as calculated by the Reset Agent, the yield to
maturity for the Appropriate Benchmark Treasury, expressed as a bond equivalent
on the basis of a year of 365 or 366 days, as applicable, and applied on a daily
basis, and computed by taking the arithmetic mean of the secondary market bid
rates, as of 10:30 A.M., New York City time, on the Initial Remarketing Date of
three leading United States government securities dealers selected by the Reset
Agent (after consultation with the Notes Issuer) (which may include the Reset
Agent or an Affiliate thereof).

      "Bankruptcy Event" means, with respect to any Person, the occurrence of
any of the following events:

      (a)   Such Person, pursuant to or within the meaning of any Bankruptcy
            Law:

            (i)   commences a voluntary case or proceeding;

            (ii)  consents to the entry of an order for relief against it in an
                  involuntary case or proceeding;

            (iii) consents to the appointment of a Custodian, as hereinafter
                  defined, of it or for all or substantially all of its
                  property, and such Custodian is not discharged within 60 days;

            (iv)  makes a general assignment for the benefit of its creditors;
                  or


                                       3


            (v)   admits in writing its inability to pay its debts generally as
                  they become due; or

      (e) A court of competent jurisdiction enters an order or decree under any
Bankruptcy Law that:

            (i)   is for relief against such Person in an involuntary case or
                  proceeding;

            (ii)  appoints a Custodian of such Person for all or substantially
                  all of its properties;

            (iii) orders the liquidation of such Person;

            (iv)  and in each case the order or decree remains unstayed and in
                  effect for 60 days.

      "Bankruptcy Laws" means Title 11 of the United States Code, or similar
federal or state law for the relief of debtors.

      "Board Resolution" means (i) a copy of a resolution certified by the
Secretary or an Assistant Secretary of the Depositor to have been duly adopted
by the Depositor's Board of Directors or a committee established thereby and to
be in full force and effect on the date of such certification or (ii) a
certificate signed by the authorized officer or officers of the Depositor to
whom the Depositor's Board of Directors or a committee established thereby has
delegated its authority, and in each case, delivered to the Trustees.

      "Book-Entry Preferred Securities Certificates" means certificates
representing Preferred Securities issued in global, fully registered form with
the Clearing Agency as described in Section 5.10.

      "Business Day" means any day other than a Saturday or Sunday, or any other
day on which banking institutions in The City of New York are permitted or
required by any applicable law to close.

      "Cash Settlement" has the meaning specified in the Purchase Contract
Agreement.

      "Certificate Depository Agreement" means the agreement among the Trust,
the Property Trustee and The Depository Trust Company, as the initial Clearing
Agency, dated as of or prior to the Closing Date, relating to the Book-Entry
Preferred Securities Certificates, as the same may be amended and supplemented
from time to time.

      "Clearing Agency" means an organization registered as a "clearing agency"
pursuant to Section 17A of the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder. The Depository Trust Company
will be the initial Clearing Agency.

      "Clearing Agency Participant" means a member of, or participant in, the
Clearing Agency.


                                       4


      "Closing Date" means the Closing Time as defined in the Underwriting
Agreement, which date is also the date of execution and delivery of this
Declaration.

      "Code" means the Internal Revenue Code of 1986, as amended.

      "Collateral Agent" means The Bank of New York as Collateral Agent under
the Pledge Agreement until a successor Collateral Agent shall have become such
pursuant to the applicable provisions of the Pledge Agreement, and thereafter
"Collateral Agent" shall mean the Person who is then the Collateral Agent
thereunder.

      "Commission" means the Securities and Exchange Commission, as from time to
time constituted, created under the Securities Exchange Act of 1934, as amended,
or, if at any time after the execution of this Declaration such Commission is
not existing and performing the duties now assigned to it under the Trust
Indenture Act, then the body performing such duties at such time.

      "Common Security" means an undivided beneficial interest in the assets of
the Trust, having a Liquidation Amount of $50 and having the terms provided
therefor in this Declaration, any Annex hereto and the certificate representing
such interest, including the right to receive Distributions and a Liquidation
Distribution as provided herein.

      "Common Securities Certificate" means a certificate evidencing ownership
of Common Securities, substantially in the form attached hereto as Exhibit B.

      "Common Securities Purchase Agreement" means the Common Securities
Purchase Agreement, dated as of September 10, 2002, between the Depositor and
the Trust.

      "Corporate Trust Office" means the corporate trust office of the Property
Trustee located in the State of New Jersey which at the date hereof is 21 South
Street, Morristown, New Jersey 07960.

      "Corporate Unit" has the meaning specified in the Purchase Contract
Agreement.

      "Creditor" has the meaning specified in Section 2.03.

      "Custodial Agent" means The Bank of New York as Custodial Agent under the
Pledge Agreement until a successor Custodial Agent shall have become such
pursuant to the applicable provisions of the Pledge Agreement, and thereafter
"Custodial Agent" shall mean the Person who is then the Custodial Agent
thereunder.

      "Custodian" means any receiver, trustee, assignee, liquidator,
sequestrator, custodian or similar official under any Bankruptcy Law.

      "Declaration" means this Amended and Restated Trust Agreement, as the same
may be modified, amended or supplemented in accordance with the applicable
provisions hereof, including all exhibits hereto, including, for all purposes of
this Trust Agreement and any such modification, amendment or supplement, the
provisions of the Trust Indenture Act that are


                                       5


deemed to be a part of and govern this Trust Agreement and any such
modification, amendment or supplement, respectively.

      "Definitive Preferred Securities Certificates" means certificates
representing Preferred Securities issued in certificated, fully registered form
as described in Sections 5.10 and 5.11.

      "Delaware Statutory Trust Act" means Chapter 38 of Title 12 of the
Delaware Code, 12 Del. C.ss.3801, et seq., as it may be amended from time to
time.

      "Delaware Trustee" means the entity identified as the "Delaware Trustee"
in the preamble to this Declaration solely in its capacity as Delaware Trustee
of the Trust and not in its individual capacity, or its successor in interest in
such capacity, or any successor trustee appointed as herein provided.

      "Depositor" has the meaning specified in the preamble to this Declaration.

      "Distribution Date" has the meaning specified in Section 4.01(a).

      "Distributions" means amounts payable in respect of the Trust Securities
as provided in Section 4.01.

      "Event of Default" means the occurrence of a Note Event of Default
(whatever the reason for such Event of Default and whether it shall be voluntary
or involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body).

      "Expiration Date" has the meaning specified in Section 8.01.

      "Extension Period" means the period or periods in which pursuant to the
Indenture payments of interest on the Notes are deferred by extending the
interest payment periods thereof.

      "Failed Initial Remarketing" has the meaning specified in Section 5.13.

      "Failed Secondary Remarketing" has the meaning specified in Section 5.14.

      "Guarantee" means the Guarantee Agreement executed and delivered by the
Depositor to Wachovia Bank, National Association, a banking association
organized under the laws of the United States, as trustee thereunder,
contemporaneously with the execution and delivery of this Declaration, for the
benefit of the Holders of the Preferred Securities, as amended from time to
time.

      "Indenture" means the Indenture, dated as of November 1, 1998, between the
Depositor and the Indenture Trustee, as trustee thereunder, as amended by the
First Supplemental Indenture, dated as of September 10, 2002, and as further
amended or supplemented from time to time.

      "Indenture Trustee" means Wachovia Bank, National Association, a banking
association organized under the laws of the United States, in its capacity as
trustee under the


                                       6


Indenture, or any successor thereto, appointed in accordance with the terms and
provisions of the Indenture.

      "Initial Remarketing" means the Remarketing of the Preferred Securities on
the Initial Remarketing Date.

      "Initial Remarketing Date" means the third Business Day immediately
preceding the Initial Reset Date.

      "Initial Reset Date" means any Business Day selected by the Depositor in
its sole discretion during the period commencing May 16, 2005 through August 16,
2005 upon not less than eight (8) Business Days' prior written notice to the
Remarketing Agent; provided that, in the event that the Depositor does not
select an Initial Reset Date, the Initial Reset Date shall be August 16, 2005.

      "Lien" means any lien, pledge, charge, encumbrance, mortgage, deed of
trust, adverse ownership interest, hypothecation, assignment, security interest
or preference, priority or other security agreement or preferential arrangement
of any kind or nature whatsoever.

      "Like Amount" means (a) with respect to a redemption of Trust Securities,
Trust Securities having an aggregate Liquidation Amount equal to the aggregate
principal amount of Notes to be repaid in accordance with the Indenture and (b)
with respect to a distribution of Notes to Holders of Trust Securities in
connection with a dissolution of the Trust, Notes having an aggregate principal
amount equal to the aggregate Liquidation Amount of the Trust Securities in
exchange for which such Notes are distributed.

      "Liquidation Amount" means the liquidation amount of $50 per Trust
Security.

      "Liquidation Date" means the date on which Notes are to be distributed to
Holders of Trust Securities in connection with a dissolution of the Trust
pursuant to Section 8.04(a).

      "Liquidation Distribution" has the meaning specified in Section 8.04(d).

      "Notes" mean the series of senior deferrable notes to be issued by the
Notes Issuer under the Indenture and to be purchased by the Trust and held by
the Property Trustee.

      "Note Event of Default" means an "Event of Default" as defined in the
Indenture with respect to the Notes.

      "Notes Issuer" means Public Service Enterprise Group Incorporated or any
successor entity under the Indenture in a merger, consolidation, or conveyance,
transfer or lease of its properties and assets substantially as an entirety, in
its capacity as issuer of the Notes under the Indenture.

      "Notes Purchase Agreement" means the Notes Purchase Agreement, dated as of
September 10, 2002, between the Notes Issuer and the Trust.


                                       7


      "Note Redemption Date" means "Redemption Date" as defined in the Indenture
with respect to a Tax Event Redemption.

      "Officers' Certificate" means a certificate signed by two of the following
persons: the Chairman, the President, any Vice President, the Treasurer, any
Assistant Treasurer, the Secretary or any Assistant Secretary of the Depositor.

      "Opinion of Counsel" means a written opinion of counsel, who may be
counsel for the Trust, the Property Trustee or the Depositor or an Affiliate of
the Depositor and who shall be acceptable to the Property Trustee.

      "Original Declaration" has the meaning specified in the recitals to this
Declaration.

      "Outstanding", when used with respect to Trust Securities, means, as of
the date of determination, all Trust Securities represented by Trust Securities
Certificates theretofore authenticated, executed and delivered under this
Declaration, except:

      (a) Trust Securities evidenced by Trust Securities Certificates
theretofore cancelled by the Administrative Trustees or delivered to the
Administrative Trustees for cancellation or deemed cancelled pursuant to the
provisions of this Declaration;

      (b) Trust Securities for whose redemption money in the necessary amount
has been theretofore deposited with the Property Trustee or any Paying Agent for
the Holders of such Trust Securities; provided that, if such Trust Securities
are to be redeemed, notice of such redemption has been duly given pursuant to
this Declaration;

      (c) Trust Securities evidenced by Trust Securities Certificates in
exchange for or in lieu of which other Trust Securities Certificates have been
authenticated, executed and delivered pursuant to Section 5.05, other than any
such Trust Securities Certificates in respect of which there shall have been
presented to the Property Trustee proof satisfactory to it that such Trust
Securities Certificates are held by a protected purchaser in whose hands the
Trust Securities evidenced by such Trust Securities Certificates are valid
obligations of the Trust; and

      (d) as provided in Section 8.04(c);

provided, however, that in determining whether the Holders of the requisite
Liquidation Amount of the Outstanding Preferred Securities have given any
request, demand, authorization, direction, notice, consent or waiver hereunder,
Preferred Securities owned by the Depositor, any Trustee or any Affiliate of the
Depositor or any Trustee shall be disregarded and deemed not to be Outstanding,
except that in determining whether any Trustee shall be protected in relying
upon any such request, demand, authorization, direction, notice, consent or
waiver, only Preferred Securities which such Trustee actually knows to be so
owned shall be so disregarded. Preferred Securities so owned which have been
pledged in good faith may be regarded as Outstanding if the pledgee establishes
to the satisfaction of the Administrative Trustees the pledgee's right so to act
with respect to such Preferred Securities and that the pledgee is not the
Depositor or any Affiliate of the Depositor.


                                       8


      "Paying Agent" means the Property Trustee and any co-paying agent
appointed pursuant to Section 5.09.

      "Payment Account" means a segregated non-interest-bearing corporate trust
account maintained by the Property Trustee in its trust department for the
benefit of the Securityholders in which all amounts paid to the Property Trustee
in respect of the Notes or the Guarantee will be held and from which the
Property Trustee or such other Paying Agent shall make payments to the
Securityholders in accordance with Article 4.

      "Person" means a legal person, including any individual, corporation,
estate, partnership, joint venture, association, joint-stock company, limited
liability company, trust, unincorporated organization or government or any
agency or political subdivision thereof or any other entity of whatever nature.

      "Pledge Agreement" means the Pledge Agreement, dated as of September 10,
2002, among the Depositor, the Collateral Agent, the Securities Intermediary,
the Custodial Agent, and the Purchase Contract Agent.

      "Pledged Preferred Securities" has the meaning specified in the Pledge
Agreement.

      "Preferred Security" means a Preferred Security issued by the Trust, and
having an undivided beneficial interest in the assets of the Trust, having a
Liquidation Amount of $50 and having terms provided therefor in this
Declaration, any Annex hereto and the certificate representing such interest,
including the right to receive Distributions and a Liquidation Distribution as
provided herein.

      "Preferred Securities Certificate" means a certificate evidencing
ownership of one or more Preferred Securities, substantially in the form
attached hereto as Exhibit C.

      "Primary Treasury Dealer" means a primary U.S. government securities
dealer in New York City.

      "Property Trustee" means the commercial bank or trust company identified
as the "Property Trustee" in the preamble to this Declaration solely in its
capacity as Property Trustee of the Trust and not in its individual capacity, or
its successor in interest in such capacity, or any successor property trustee
appointed as herein provided.

      "Purchase Contract" shall have the meaning specified in the Purchase
Contract Agreement.

      "Purchase Contract Agent" means Wachovia Bank, National Association as
Purchase Contract Agent under the Purchase Contract Agreement until a successor
Purchase Contract Agent shall have become such pursuant to the applicable
provisions of the Purchase Contract Agreement, and thereafter "Purchase Contract
Agent" shall mean the Person who is then the Purchase Contract Agent thereunder.


                                       9


      "Purchase Contract Agreement" means the Purchase Contract Agreement, dated
as of September 10, 2002, between Public Service Enterprise Group Incorporated
and the Purchase Contract Agent.

      "Purchase Contract Settlement Date" means November 16, 2005.

      "Quotation Agent" means (A) Merrill Lynch, Pierce, Fenner & Smith
Incorporated and its successor, provided that if Merrill Lynch, Pierce, Fenner &
Smith Incorporated or its successor ceases to be a Primary Treasury Dealer, the
Depositor shall substitute another Primary Treasury Dealer therefor or (B) any
other Primary Treasury Dealer selected by the Depositor.

      "Redemption Amount" means, for each Note, the product of the principal
amount of such Note and a fraction, the numerator of which shall be the Treasury
Portfolio Purchase Price and the denominator of which shall be the Applicable
Principal Amount.

      "Redemption Date" means, with respect to any Trust Security to be
redeemed, the date fixed for such redemption by or pursuant to this Declaration;
it being understood that each Note Redemption Date and the stated maturity date
of the Notes shall be a Redemption Date for a Like Amount of Trust Securities.

      "Redemption Price" means the amount for which each Trust Security will be
redeemed, which amount will equal the redemption price paid by the Notes Issuer
to repay or redeem each Note held by the Trust.

      "Remarketed Securities" means (i) so long as the Trust has not been
dissolved in accordance with the terms hereof, the Preferred Securities or (ii)
if the Trust has been dissolved in accordance with the terms hereof, the Notes.

      "Remarketing" means the remarketing of the Remarketed Securities by the
Remarketing Agent pursuant to the Remarketing Agreement.

      "Remarketing Agent" means Merrill Lynch, Pierce, Fenner & Smith
Incorporated or, if the Remarketing Agent is removed or resigns, any successor
remarketing agent selected by the Depositor.

      "Remarketing Agreement" means the Remarketing Agreement, dated as of
September 10, 2002, among the Depositor, the Trust, the Remarketing Agent and
the Purchase Contract Agent.

      "Remarketing Per Preferred Security Price" means the Treasury Portfolio
Purchase Price divided by the number of Preferred Securities held as components
of Corporate Units and remarketed in the Initial Remarketing.

      "Reset Agent" has the meaning set forth in the Remarketing Agreement.

      "Reset Announcement Date" means, in the case of the Reset Rate to be
determined on the Initial Remarketing Date, the seventh (7th) Business Day
immediately preceding the Initial


                                       10


Reset Date and, in the case of the Reset Rate to be determined on the Secondary
Remarketing Date, if any, the seventh (7th) Business Day immediately preceding
November 16, 2005.

      "Reset Effective Date" means (i) the Initial Reset Date, in case the
Distribution rate is reset on the Initial Remarketing Date, or (ii) the Purchase
Contract Settlement Date, in case the Distribution rate is reset on the
Secondary Remarketing Date.

      "Reset Rate" means the rate per annum (to be determined by the Reset
Agent) equal to the sum of (X) the Reset Spread and (Y) the rate of interest on
(1) in the case of the Reset Rate to be determined on the Initial Remarketing
Date, the Appropriate Benchmark Treasury in effect on the Initial Remarketing
Date or (2) in the case of the Reset Rate to be determined on the Secondary
Remarketing Date, if any, the Two-Year Benchmark Treasury in effect on the
Secondary Remarketing Date.

      "Reset Spread" means (a) in the case of the Reset Rate to be determined on
the Initial Remarketing Date, a spread amount to be determined by the Reset
Agent on the applicable Reset Announcement Date as the appropriate spread so
that the Reset Rate will be the Distribution rate that the Preferred Securities
should bear in order for the Preferred Securities and Separate Preferred
Securities to be remarketed to have an approximate aggregate market value on the
Initial Remarketing Date of 100.25% of the sum of the Treasury Portfolio
Purchase Price and the Separate Preferred Securities Purchase Price plus
deferred and unpaid Distributions, if any, on such Preferred Securities and (b)
in the case of the Reset Rate to be determined on the Secondary Remarketing
Date, if any, a spread amount determined by the Reset Agent on the applicable
Reset Announcement Date as the appropriate spread so that the Reset Rate will be
the Distribution rate that the Preferred Securities should bear in order for the
Preferred Securities and Separate Preferred Securities to be remarketed to have
an approximate market value on the Secondary Remarketing Date of 100.25% of
their aggregate Liquidation Amount plus any deferred and unpaid Distributions,
if any, on such Preferred Securities.

      "Responsible Officer" means, when used with respect to the Property
Trustee, any vice president, assistant vice president, senior trust officer,
trust officer, assistant trust officer or other officer associated with the
corporate trust department of the Property Trustee customarily performing
functions similar to those performed by any of the above designated officers and
also means, with respect to a particular corporate trust matter, any other
officer to whom such matter is referred because of such person's knowledge of
and familiarity with the particular subject.

      "Secondary Remarketing" means the Remarketing of the Preferred Securities
on the Secondary Remarketing Date.

      "Secondary Remarketing Date" means the third Business Day immediately
preceding November 16, 2005.

      "Securities Register" and "Securities Registrar" have the respective
meanings specified in Section 5.04.

      "Securityholder" or "Holder" means a Person in whose name a Trust Security
or Securities is registered in the Securities Register; any such Person is a
beneficial owner within the meaning of the Delaware Statutory Trust Act.


                                       11


      "Separate Preferred Securities" means Preferred Securities that are no
longer a component of Corporate Units.

      "Separate Preferred Securities Purchase Price" means the amount in cash
equal to the product of the Remarketing Per Preferred Security Price multiplied
by the number of Separate Preferred Securities remarketed in the Initial
Remarketing.

      "Successor Securities" has the meaning specified in Section 9.01.

      "Tax Event" means the receipt by the Trust of an opinion of independent
counsel, rendered by a law firm having a recognized national tax practice, to
the effect that, as a result of any amendment to, or change, including any
announced prospective change in, the laws or any regulations of the United
States or any political subdivision or taxing authority, any amendment to or
change in an interpretation or application of these laws or regulations by any
legislative body, court, governmental agency or regulatory authority or any
interpretation or pronouncement that provides for a position with respect to
these laws or regulations that differs from the generally accepted position on
the Closing Date, which amendment or change is effective or which interpretation
or pronouncement is announced on or after the Closing Date, there is more than
an insubstantial increase in the risk that (i) the Trust is, or within 90 days
of the date of such opinion will be, subject to United States Federal income tax
with respect to income received or accrued on the Notes, (ii) interest payable
by the Notes Issuer on the Notes is not, or within 90 days of the date of such
opinion will not be, deductible by the Notes Issuer, in whole or in part, for
United States Federal income tax purposes, or (iii) the Trust is, or within 90
days of the date of such opinion will be, subject to more than a de minimis
amount of other taxes, duties or other governmental charges.

      "Tax Event Redemption" means that a Tax Event has occurred and is
continuing and the Notes have been called for redemption by the Notes Issuer
pursuant to the Indenture.

      "Tax Event Redemption Date" means the Redemption Date in respect of a Tax
Event Redemption.

      "Tax Event Redemption Liquidation Amount" means either (i) if the Tax
Event Redemption Date occurs prior to the Initial Reset Date or, in the event of
a Failed Initial Remarketing, prior to the Purchase Contract Settlement Date,
the aggregate Liquidation Amount of the Preferred Securities that are components
of Corporate Units on the Tax Event Redemption Date or (ii) if the Tax Event
Redemption Date occurs on or after the Initial Reset Date or, in the event of a
Failed Initial Remarketing, on or after the Purchase Contract Settlement Date,
the aggregate Liquidation Amount of the Preferred Securities Outstanding on such
Tax Event Redemption Date.

      "Treasury Unit" has the meaning specified in the Purchase Contract
Agreement.

      "Treasury Portfolio" means (1) in connection with the Initial Remarketing,
a portfolio of zero-coupon U.S. treasury securities consisting of (a) principal
or interest strips of U.S. treasury securities that mature on or prior to
November 15, 2005, in an aggregate amount equal to the aggregate Liquidation
Amount of the Preferred Securities comprising components of Corporate Units on
the Initial Remarketing Date and (b) with respect to each scheduled


                                       12


Distribution Date on the Preferred Securities that occurs after the Initial
Reset Date and on or before the Purchase Contract Settlement Date, principal or
interest strips of U.S. treasury securities that mature prior to such
Distribution Date in an aggregate amount equal to the aggregate Distribution
payment that would be due on such Distribution Date on the aggregate Liquidation
Amount of the Preferred Securities comprising components of Preferred Securities
on the Initial Reset Date, assuming (X) the rate on the Preferred Securities was
not reset to the Reset Rate as described in Section 5.13 and (Y) in the case of
the Treasury Portfolio to be purchased on the Initial Reset Date that is not
also a scheduled Distribution Date, that the Distribution payable on the next
following Distribution Date includes Distributions only accumulated from and
including the Initial Reset Date to but excluding such Distribution Date, and
(2) in connection with a Tax Event Redemption, (a) if the Tax Event Redemption
Date occurs prior to the Initial Reset Date or, in the event of a Failed Initial
Remarketing, prior to the Purchase Contract Settlement Date, a portfolio of
zero-coupon U.S. treasury securities consisting of (i) principal or interest
strips of U.S. treasury securities that mature on or prior to November 15, 2005
in an aggregate amount equal to the applicable Tax Event Redemption Liquidation
Amount and (ii) with respect to each scheduled Distribution Date on the
Preferred Securities that occurs after the Tax Event Redemption Date and on or
before the Purchase Contract Settlement Date, principal or interest strips of
U.S. treasury securities that mature on or prior to such Distribution Date in an
aggregate amount equal to the aggregate Distribution payment that would be due
on the applicable Tax Event Redemption Liquidation Amount of the Preferred
Securities on such Distribution Date, and (b) if the Tax Event Redemption Date
occurs on or after the Initial Reset Date or, in the event of a Failed Initial
Remarketing, on or after the Purchase Contract Settlement Date, a portfolio of
zero-coupon U.S. treasury securities consisting of (i) principal or interest
strips of U.S. treasury securities which mature on or prior to November 15, 2007
in an aggregate amount equal to the applicable Tax Event Redemption Liquidation
Amount and (ii) with respect to each scheduled Distribution Date on the
Preferred Securities that occurs after the Tax Event Redemption Date, principal
or interest strips of U.S. treasury securities that mature on or prior to such
Distribution Date in an aggregate amount equal to the aggregate Distribution
payment that would be due on such Distribution Date on the applicable Tax Event
Redemption Liquidation Amount of the Preferred Securities.

      "Treasury Portfolio Purchase Price" means the lowest aggregate price
quoted by the Primary Treasury Dealer to the Quotation Agent (a) in the case of
a Tax Event Redemption, on the third Business Day immediately preceding the Tax
Event Redemption Date for the purchase of the applicable Treasury Portfolio for
settlement on the Tax Event Redemption Date and (b) in the case of the Initial
Remarketing, on the Initial Remarketing Date for the purchase of the applicable
Treasury Portfolio for settlement on the Initial Reset Date.

      "Treasury Securities" mean zero-coupon U.S. treasury securities (CUSIP
Number 912820FX0 or 912820BQ9) with a principal amount at maturity equal to
$1,000 and maturing on November 15, 2005, the Business Day preceding the
Purchase Contract Settlement Date.

      "Trust" means the Delaware statutory trust continued hereby and identified
on the cover page to this Declaration.

      "Trust Indenture Act" means the Trust Indenture Act of 1939 as in force at
the date as of which this Declaration was executed; provided, however, that in
the event the Trust Indenture


                                       13


Act of 1939 is amended after such date, "Trust Indenture Act" means, to the
extent required by any such amendment, the Trust Indenture Act of 1939 as so
amended.

      "Trust Property" means (a) the Notes, (b) any cash on deposit in, or owing
to, the Payment Account and (c) all proceeds and rights in respect of the
foregoing and any other property and assets for the time being held or deemed to
be held by the Property Trustee pursuant to the trusts of this Declaration.

      "Trust Security" means any one of the Common Securities or the Preferred
Securities.

      "Trust Securities Certificate" means any one of the Common Securities
Certificates or the Preferred Securities Certificates.

      "Two-Year Benchmark Treasury" means direct obligations of the United
States (which may be obligations traded on a when-issued basis only) having a
maturity comparable to the remaining term to mandatory redemption of the
Preferred Securities, as agreed upon by the Notes Issuer and the Reset Agent.
The rate for the Two-Year Benchmark Treasury will be the bid side rate displayed
at 10:00 A.M., New York City time, on the third Business Day immediately
preceding the Purchase Contract Settlement Date in the Telerate system (or if
the Telerate system is (a) no longer available on the Secondary Remarketing Date
or (b) in the opinion of the Reset Agent (after consultation with the Notes
Issuer) no longer an appropriate system from which to obtain such rate, such
other nationally recognized quotation system as, in the opinion of the Reset
Agent (after consultation with the Notes Issuer), is appropriate). If such rate
is not so displayed, the rate for the Two-Year Benchmark Treasury shall be, as
calculated by the Reset Agent, the yield to maturity for the Two-Year Benchmark
Treasury, expressed as a bond equivalent on the basis of a year of 365 or 366
days, as applicable, and applied on a daily basis, and computed by taking the
arithmetic mean of the secondary market bid rates, as of 10:30 A.M., New York
City time, on the Secondary Remarketing Date of three leading United States
government securities dealers selected by the Reset Agent (after consultation
with the Notes Issuer) (which may include the Reset Agent or an affiliate
thereof).

      "Underwriting Agreement" means the Underwriting Agreement, dated September
5, 2002, among the Trust, the Depositor and the Underwriters named therein.

                                   ARTICLE II
                            Continuation of the Trust

      Section 2.01. Name. The Trust created and continued hereby shall be known
as "PSEG Funding Trust I" as such name may be modified from time to time by the
Administrative Trustees following written notice to the Holders of Trust
Securities and the other Trustees, in which name the Trustees may conduct the
business of the Trust, make and execute contracts and other instruments on
behalf of the Trust and sue and be sued.

      Section 2.02. Office of the Delaware Trustee; Principal Place of Business.
The address of the Delaware Trustee in the State of Delaware is One Rodney
Square, 920 King Street, Suite 102, Wilmington, Delaware 19801 or such other
address in the State of Delaware as the Delaware Trustee may designate by
written notice to the Securityholders and the Depositor. The principal place of
business of the Trust is 80 Park Plaza, Newark, New Jersey 07101.


                                       14


      Section 2.03. Initial Contribution of Trust Property; Expenses of the
Trust.

      (a) The Property Trustee acknowledges receipt in trust from the Depositor
in connection with the Original Declaration of the sum of $10, which constituted
the initial Trust Property.

      (b) The Depositor shall be responsible for and shall pay for all
obligations (other than with respect to the Trust Securities) and all costs and
expenses of the Trust (including, but not limited to, costs and expenses
relating to the organization of the Trust, the issuance and sale of the
Preferred Securities, the fees and expenses (including reasonable counsel fees
and expenses) of the Trustees as provided in Section 7.06, the costs and
expenses of accountants, attorneys, statistical or bookkeeping services,
expenses for printing and engraving and computing or accounting equipment,
Paying Agent(s), Securities Registrar, duplication, travel and telephone and
other telecommunications expenses and costs and expenses incurred in connection
with the disposition of Trust assets).

      (c) The Depositor will pay any and all taxes (other than United States
withholding taxes attributable to the Trust or its assets) and all liabilities,
costs and expenses with respect to such taxes of the Trust.

      (d) The Depositor's obligations under this Section 2.03 shall be for the
benefit of, and shall be enforceable by, the Property Trustee and any Person to
whom any such obligations, costs, expenses and taxes are owed (a "Creditor")
whether or not such Creditor has received notice hereof. The Property Trustee
and any such Creditor may enforce the Depositor's obligations under this Section
2.03 directly against the Depositor and the Depositor irrevocably waives any
right or remedy to require that the Property Trustee or any such Creditor take
any action against the Trust or any other Person before proceeding against the
Depositor. The Depositor agrees to execute such additional agreements as may be
necessary or desirable in order to give full effect to the provisions of this
Section 2.03.

      (e) The Depositor shall make no claim upon the Trust Property for the
payment of such expenses.

      Section 2.04. Issuance of the Trust Securities. The Depositor, on behalf
of the Trust, executed and delivered the Underwriting Agreement. One of the
Administrative Trustees, on behalf of the Trust, shall execute in accordance
with Section 5.02 and deliver to the Collateral Agent one or more Preferred
Securities Certificates registered in the name of the Purchase Contract Agent
having an aggregate Liquidation Amount of $460,000,000, against receipt by the
Property Trustee of the aggregate purchase price of such Preferred Securities of
$460,000,000, which amount the Administrative Trustees shall promptly deliver to
the Property Trustee. Contemporaneously with each issuance of Preferred
Securities, one Administrative Trustee, on behalf of the Trust, shall execute in
accordance with Section 5.02 and deliver to the Depositor a Common Securities
Certificate, registered in the name of the Depositor, representing 284,537
Common Securities having an aggregate Liquidation Amount of $14,226,850, and in
satisfaction of the purchase price of such Common Securities the Depositor shall
deliver to the Property Trustee the sum of $14,226,850. The Trust Securities may
have such additional or different terms specified in an Annex hereto.


                                       15


      Section 2.05. Purchase of Notes. The Administrative Trustees, on behalf of
the Trust, shall purchase $474,226,850 aggregate principal amount of Notes from
the Depositor, registered in the name of the Trust. In satisfaction of the
purchase price for such Notes, the Property Trustee, on behalf of the Trust,
shall deliver to the Depositor the sum of $474,226,850.

      Section 2.06. Declaration of Trust. The exclusive purposes and functions
of the Trust are (a) to issue and sell Trust Securities and use the proceeds
from such sale to acquire the Notes and to hold, transfer, sell and otherwise
dispose of the Notes in accordance with this Declaration, (b) to enter into the
Underwriting Agreement, the Remarketing Agreement, the Common Securities
Purchase Agreement, the Notes Purchase Agreement and the Certificate Depository
Agreement, (c) to maintain the status of the Trust as a grantor trust for United
States Federal income tax purposes, and (d) except as otherwise limited herein,
to engage in only those activities necessary, convenient or incidental thereto.
The Depositor hereby appoints the Trustees as trustees of the Trust, to have all
the rights, powers and duties to the extent set forth herein, and the Trustees
hereby accept such appointment. The Property Trustee hereby declares that it
will hold the Trust Property in trust upon and subject to the conditions set
forth herein for the benefit of the Securityholders. The Administrative Trustees
shall have all rights, powers and duties set forth herein. The Delaware Trustee
shall not be entitled to exercise any powers, nor shall the Delaware Trustee
have any of the duties and responsibilities of the Property Trustee or the
Administrative Trustees set forth herein. The Delaware Trustee shall be one of
the Trustees of the Trust for the sole and limited purpose of fulfilling the
requirements of Section 3807 of the Delaware Statutory Trust Act.

      Section 2.07. Authorization to Enter into Certain Transactions. The
Trustees shall conduct the affairs of the Trust in accordance with the terms of
this Declaration. Subject to the limitations set forth in paragraph (b) of this
Section, and in accordance with the following provisions (i) and (ii), the
Trustees shall have the authority to enter into all transactions and agreements
determined by the Trustees to be appropriate in exercising the authority,
express or implied, otherwise granted to the Trustees under this Declaration,
and to perform all acts in furtherance thereof, including without limitation,
the following:

            (i) As among the Trustees, the Administrative Trustees shall have
the power and authority to act on behalf of the Trust with respect to the
following matters:

                  (A) executing and delivering the Trust Securities on behalf of
the Trust;

                  (B) acquiring the Notes with the proceeds of the sale of the
Trust Securities; provided that the Administrative Trustees shall cause legal
title to the Notes to be held of record in the name of the Property Trustee for
the benefit of the Holders of the Securities;

                  (C) giving the Depositor and the Property Trustee prompt
written notice of the occurrence of a Tax Event; provided that the
Administrative Trustees shall consult with the Depositor and the Property
Trustee before taking or refraining from taking any action in relation to any
such Tax Event;


                                       16


                  (D) establishing a record date with respect to all actions to
be taken hereunder that require a record date to be established, including and
with respect to, for the purposes of Section 316(c) of the Trust Indenture Act;

                  (E) bringing or defending, paying, collecting, compromising,
arbitrating, resorting to legal action or otherwise adjust claims or demands of
or against the Trust, unless pursuant to Section 2.07(a)(ii)(I), the Property
Trustee has the power to bring any legal action;

                  (F) employing or otherwise engaging employees and agents (who
may be designated as officers with titles) and managers, contractors, advisors
and consultants to conduct only those services that the Administrative Trustees
have authority to conduct directly, and to pay reasonable compensation for such
services;

                  (G) causing the Trust to comply with the Trust's obligations
under the Trust Indenture Act;

                  (H) giving to the Property Trustee the certificate required by
Section 314(a)(4) of the Trust Indenture Act, which certificate may be executed
by any Administrative Trustee;

                  (I) incurring expenses that are necessary or incidental to
carry out any of the purposes of the Trust;

                  (J) taking all action that may be necessary or appropriate for
the preservation and continuation of the Trust's valid existence, rights,
franchise and privileges as a statutory trust under the laws of the State of
Delaware and of each other jurisdiction in which such existence is necessary to
protect the limited liability of the Holders of the Securities or to enable the
Trust to effect the purposes for which it was created;

                  (K) taking all action necessary to cause all applicable tax
returns and tax information reports that are required to be filed with respect
to the Trust to be duly prepared and filed;

                  (L) causing the Trust to enter into, and executing, delivering
and performing on behalf of the Trust, the Remarketing Agreement, the Common
Securities Purchase Agreement, the Notes Purchase Agreement and the Certificate
Depository Agreement and such other agreements as may be necessary or desirable
in connection with the purposes and function of the Trust, including the
appointment of a successor depositary;

                  (M) assisting in registering the Preferred Securities under
the Securities Act of 1933, as amended, and under state securities or blue sky
laws, and qualifying this Declaration as a trust indenture under the Trust
Indenture Act;

                  (N) assisting in the listing of the Preferred Securities upon
such securities exchange or exchanges as the Depositor shall determine and the
registration of the Preferred Securities under the Securities Exchange Act of
1934, as amended, and the preparation and filing of all periodic and other
reports and other documents pursuant to the foregoing;


                                       17


                  (O) to the extent provided in this Declaration, dissolving,
liquidating and terminating the Trust in accordance with the terms of this
Declaration, and preparing, executing and filing the certificate of cancellation
with the Secretary of State of the State of Delaware, if necessary;

                  (P) sending notices or assisting the Property Trustee in
sending notices and other information regarding the Trust Securities and the
Notes to Securityholders in accordance with this Declaration; and

                  (Q) taking any action incidental to the foregoing as the
Administrative Trustees may from time to time determine is necessary or
advisable to give effect to the terms of this Declaration for the benefit of the
Securityholders (without consideration of the effect of any such action on any
particular Securityholder).

            (ii) As among the Trustees, the Property Trustee shall have the
power, duty and authority to act on behalf of the Trust with respect to the
following matters:

                  (A) establishing and maintaining the Payment Account and
appointing Paying Agents (subject to Section 5.09);

                  (B) receiving payment of the purchase price of the Trust
Securities;

                  (C) receiving and holding the Notes;

                  (D) collecting interest, premium, if any, and principal
payments on the Notes and depositing them in the Payment Account;

                  (E) making Distributions and other payments to the
Securityholders in respect of the Trust Securities;

                  (F) exercising all of the rights, powers and privileges of a
holder of the Notes;

                  (G) sending notices of defaults, redemptions, Extension
Periods, liquidations and other information regarding the Trust Securities and
the Notes to the Securityholders in accordance with this Declaration;

                  (H) engaging in such ministerial activities as shall be
necessary or appropriate to effect the redemption of the Trust Securities to the
extent they are redeemed or mature;

                  (I) to the extent provided in this Declaration, dissolving,
liquidating and terminating the Trust, including distributing the Trust Property
in accordance with the terms of this Declaration, and preparing, executing and
filing the certificate of cancellation with the Secretary of State of the State
of Delaware, if necessary;

                  (J) after an Event of Default, taking any action incidental to
the foregoing as the Property Trustee may from time to time determine is
necessary or advisable to


                                       18


give effect to the terms of this Declaration and protect and conserve the Trust
Property for the benefit of the Securityholders (without consideration of the
effect of any such action on any particular Securityholder); and

                  (K) registering transfers and exchanges of the Preferred
Securities in accordance with this Declaration (but only if at such time the
Property Trustee shall be the Securities Registrar).

            (b) So long as this Declaration remains in effect, the Trust (or the
Trustees acting on behalf of the Trust) shall not undertake any business,
activities or transaction except as expressly provided herein or contemplated
hereby. In particular, the Trustees acting on behalf of the Trust shall not:

                  (i) acquire any assets or investments (other than the Notes),
reinvest the proceeds derived from investments, possess any power or otherwise
act in such a way as to vary the Trust Property or engage in any activities not
authorized by this Declaration;

                  (ii) sell, assign, transfer, exchange, mortgage, pledge,
set-off or otherwise dispose of any of the Trust Property or interests therein,
including to Securityholders, except as expressly provided herein;

                  (iii) take any action that would cause the Trust to fail or
cease to qualify as a grantor trust for United States Federal income tax
purposes;

                  (iv) incur any indebtedness for borrowed money or incur any
other obligations;

                  (v) issue any securities or other evidences of beneficial
ownership of, or beneficial interests in, the Trust other than the Trust
Securities; or

                  (vi) take or consent to any action that would result in the
placement of a Lien on any of the Trust Property. The Administrative Trustees
shall defend all claims and demands of all Persons at any time claiming any Lien
on any of the Trust Property adverse to the interest of the Trust or the
Securityholders in their capacity as Securityholders.

            (c) In connection with the issue and sale of the Preferred
Securities, the Depositor shall have the right and responsibility to assist the
Trust with respect to, or effect on behalf of the Trust, the following (and any
actions taken by the Depositor in furtherance of the following prior to the date
of this Declaration are hereby ratified and confirmed in all respects):

                  (i) preparing for filing with the Commission and executing on
behalf of the Trust a registration statement on Form S-3 in relation to the
Preferred Securities, including any amendments thereto;

                  (ii) determining the States in which to take appropriate
action to qualify or register for sale all or part of the Preferred Securities
and doing any and all such acts, other than actions which must be taken by or on
behalf of the Trust, and advising the Trustees of actions they must take on
behalf of the Trust, and preparing for execution and filing any documents to be
executed and filed by the Trust or on behalf of the Trust, as the Depositor
deems necessary or advisable in order to comply with the applicable laws of any
such States;


                                       19


                  (iii) if necessary, preparing for filing and executing on
behalf of the Trust an application to the New York Stock Exchange or any other
national stock exchange or The Nasdaq Stock Market for listing upon notice of
issuance of any Preferred Securities;

                  (iv) if necessary, preparing for filing with the Commission
and executing on behalf of the Trust a registration statement on Form 8-A
relating to the registration of the Preferred Securities under Section 12(b) or
12(g) of the Securities Exchange Act of 1934, as amended, including any
amendments thereto;

                  (v) negotiating the terms of, and executing and delivering,
the Underwriting Agreement providing for the sale of the Preferred Securities;
and

                  (vi) taking any other actions necessary or desirable to carry
out any of the foregoing activities.

            (d) Notwithstanding anything herein to the contrary, the
Administrative Trustees are authorized and directed to conduct the affairs of
the Trust and to operate the Trust so that (i) the Trust will not be deemed to
be an "investment company" required to be registered under the 1940 Act, or
taxed as a corporation or a partnership for United States Federal income tax
purposes, (ii) the Trust will qualify as a grantor trust for United States
Federal income tax purposes and (iii) the Notes will be treated as indebtedness
of the Depositor for United States Federal income tax purposes. In this
connection, the Depositor and the Administrative Trustees are authorized to take
any action, not inconsistent with applicable law, the Certificate of Trust, as
amended from time to time, the certificate of incorporation of the Depositor, as
amended from time to time, or this Declaration, that each of the Depositor and
the Administrative Trustees determines in their discretion to be necessary or
desirable for such purposes as long as that action does not adversely affect the
interests of the holders of the Preferred Securities or vary the terms of the
Preferred Securities in any material respect.

      Section 2.08. Assets of Trust. The assets of the Trust shall consist of
the Trust Property.

      Section 2.09. Title to Trust Property. Legal title to all Trust Property
shall be vested at all times in the Property Trustee (in its capacity as such)
and shall be held and administered by the Property Trustee for the benefit of
the Securityholders in accordance with this Declaration.

                                   ARTICLE III
                                 Payment Account

      Section 3.01. Payment Account.

      (a) On or prior to the Closing Date, the Property Trustee shall establish
the Payment Account. All monies and other property deposited or held from time
to time in the Payment Account shall be held by the Property Trustee for the
exclusive benefit of the Securityholders. The Property Trustee shall have
exclusive control of the Payment Account for the purpose of making deposits in
and withdrawals from the Payment Account in accordance with this


                                       20


Declaration; provided that any Paying Agent shall have the right of withdrawal
with respect to the Payment Account solely for the purpose of making the
payments contemplated under Article IV.

      (b) The Property Trustee shall deposit in the Payment Account, promptly
upon receipt, all payments of principal of or premium, if any, or interest on
the Notes and any amounts paid to the Property Trustee pursuant to the
Guarantee. Amounts held in the Payment Account shall not be invested pending
distribution thereof.

                                   ARTICLE IV
                            Distributions; Redemption

      Section 4.01. Distributions.

      (a) Distributions on the Trust Securities shall be cumulative, and will
accumulate whether or not there are funds of the Trust available for the payment
of Distributions. Distributions shall accumulate from September 10, 2002 at the
rate per annum of 6.25% of the Liquidation Amount per Trust Security to but
excluding the Reset Effective Date, if any, and at the Reset Rate thereafter.
Except during an Extension Period for the Notes pursuant to the Indenture,
Distributions on the Trust Securities shall be payable quarterly in arrears on
February 16, May 16, August 16 and November 16 of each year, commencing on
November 16, 2002; provided that, following the Reset Effective Date, if any,
Distributions shall be payable semi-annually in arrears on each May 16 and
November 16, commencing November 16, 2005, in the event that the Preferred
Securities are successfully remarketed on the Initial Remarketing Date, or May
16, 2006, in the event that the Preferred Securities are successfully remarketed
on the Secondary Remarketing Date. The amount of Distributions payable for any
period shall be computed on the basis of a 360-day year of twelve 30-day months.
If any date on which Distributions are otherwise payable on the Trust Securities
is not a Business Day, then the payment of such Distributions shall be made on
the next succeeding day which is a Business Day (and without any interest or
other payment in respect of any such delay), except that, if such Business Day
is in the next succeeding calendar year, payment of such Distributions shall be
made on the immediately preceding Business Day, in each case with the same force
and effect as if made on such date (each date on which Distributions are payable
in accordance with this Section 4.01(a) is referred to as a "Distribution
Date").

      If the Preferred Securities are successfully remarketed on the Initial
Remarketing Date and the Initial Reset Date is not otherwise a scheduled
Distribution Date, a Distribution shall be payable to Holders on the Initial
Reset Date equal to Distributions accumulated from, and including, the most
recent Distribution Date to, but excluding, the Initial Reset Date. In such
case, the Distribution payable on the Distribution Date next following the
Initial Reset Date shall equal the amount of Distributions accumulated from, and
including, the Initial Reset Date to, but excluding, such Distribution Date.

      Within two Business Days after receipt by the Property Trustee of notice
of an Extension Period pursuant to Section 208 of the First Supplemental
Indenture, the Property Trustee shall give notice thereof to the Securityholders
by first class mail, postage prepaid.


                                       21


      (b) The Distribution rate on the Trust Securities will be reset on the
Initial Remarketing Date to the applicable Reset Rate (which Reset Rate will be
effective on and after the Initial Reset Date), except in the event of a Failed
Initial Remarketing. In the event of a Failed Initial Remarketing, the
Distribution rate on the Trust Securities will be reset on the Secondary
Remarketing Date to the applicable Reset Rate (which Reset Rate will be
effective on and after the Purchase Contract Settlement Date), except that in
the event of a Failed Secondary Remarketing, the Distribution rate on the Trust
Securities will not be reset and the scheduled Distribution Dates shall remain
February 16, August 16, May 16 and November 16. On the applicable Reset
Announcement Date, the applicable Reset Spread and the Appropriate Benchmark
Treasury or Two-Year Benchmark Treasury, as applicable, will be announced by the
Depositor. On the Business Day immediately following such Reset Announcement
Date, the Holders of Preferred Securities will be notified of such Reset Spread
and Appropriate Benchmark Treasury or Two-Year Benchmark Treasury, as
applicable, by the Property Trustee. Such notice shall be sufficiently given to
such Holders of Notes if published in a newspaper which is published each
Business Day in the English language of general circulation in The City of New
York, which is expected to be The Wall Street Journal.

      (c) Not later than seven calendar days nor more than 15 calendar days
immediately preceding the Initial Remarketing Date or the Secondary Remarketing
Date, as the case may be, the Depositor shall, or shall request the Clearing
Agency or its nominee to, notify the Holders of Preferred Securities of such
Reset Announcement Date and, in the case of a Secondary Remarketing, the
procedures to be followed by such Holders of Preferred Securities wishing to
settle the related Purchase Contracts with separate cash on the Business Day
immediately preceding the Purchase Contract Settlement Date.

      (d) The Trust Securities represent undivided beneficial interests in the
Trust Property, and, subject to Sections 4.03 and 4.06 hereof, all Distributions
will be made pro rata on each of the Trust Securities. During an Extension
Period for the Notes, the rate per annum at which Distributions on the Trust
Securities are then accumulating shall accumulate at (1) the rate of 10.25% per
annum, compounded quarterly, to but excluding November 16, 2007, if the
Preferred Securities are not successfully remarketed, or (2) the rate of 10.25%
per annum, compounded quarterly, to but excluding the Reset Effective Date and
at the Reset Rate (which shall not be higher than the maximum rate permitted
under applicable law) thereafter, compounded semi-annually, to but excluding
November 16, 2007, if the Preferred Securities are successfully remarketed.
Notwithstanding clause (2) above, upon no less than 2 Business Days' notice to
the Remarketing Agent prior to the Initial Remarketing Date or the Secondary
Remarketing Date, as the case may be, the Notes Issuer may elect pursuant to the
Indenture that payments of interest on the Notes, and therefore Distributions on
the Trust Securities, may not be deferrable after the Reset Effective Date.

      (e) Distributions on the Trust Securities shall be made from the Payment
Account by the Property Trustee or any Paying Agent and shall be payable on each
Distribution Date only to the extent that the Trust has funds then available in
the Payment Account for the payment of such Distributions.

      (f) Distributions on the Trust Securities on each Distribution Date shall
be payable to the Holders thereof as they appear on the Securities Register for
the Trust Securities on the


                                       22


relevant record date, which shall be one Business Day prior to such Distribution
Date; provided, however, that in the event that the Preferred Securities are not
in book-entry-only form, the relevant record date shall be the day selected by
the Administrative Trustees which is at least one Business Day but not more than
60 Business Days preceding such Distribution Date, whether or not a Business
Day.

      (g) Upon the successful remarketing of the Preferred Securities on either
the Initial Remarketing Date or the Secondary Remarketing Date, any and all
deferred and unpaid Distributions on the Preferred Securities will be deemed to
have been paid in full by Trust on the Initial Reset Date or the Purchase
Contract Settlement Date, as the case may be. In addition, upon the occurrence
of a Failed Secondary Remarketing, an Extension Period, if any, in effect at
such time shall terminate and the Trust shall be obligated to pay all deferred
and unpaid Distributions on November 16, 2005.

      Section 4.02. Redemption.

      (a) The Trust will call for redemption all Outstanding Trust Securities
upon the earlier of a Tax Event Redemption Date or the stated maturity date of
the Notes, in each case, at the Redemption Price.

      (b) If the Notes Issuer redeems the Notes upon the occurrence and
continuance of a Tax Event, the proceeds from such redemption shall be applied
by the Property Trustee on a proportional basis to redeem the Outstanding Trust
Securities in whole (but not in part) at a Redemption Price per Trust Security
equal to the Redemption Amount attributable to a Note with a principal amount
equal to the Liquidation Amount of such Trust Security plus any accumulated and
unpaid Distributions thereon to the Tax Event Redemption Date. If, following the
occurrence of a Tax Event, the Notes Issuer exercises its option to redeem the
Notes, the Notes Issuer shall appoint the Quotation Agent to assemble the
Treasury Portfolio in consultation with the Note Issuer. Subject to the Trust's
fulfillment of the notice requirements set forth in Section 4.02(c), if a Tax
Event Redemption Date occurs (i) prior to the Initial Reset Date, or (ii) if the
Preferred Securities are not successfully remarketed on the Initial Remarketing
Date, prior to November 16, 2005, the Redemption Price payable upon redemption
of each Outstanding Preferred Security comprising a component of the Corporate
Units will be distributed to the Collateral Agent under the Pledge Agreement,
which in turn will apply that amount to purchase the Treasury Portfolio and
remit the remaining portion, if any, of such price to the Purchase Contract
Agent for payment to the Holders of the Preferred Securities in accordance with
the terms of the Pledge Agreement. If such excess amount referred to in the
immediately preceding sentence is to be paid to Holders of the Preferred
Securities, (i) with respect to the Preferred Securities represented by one or
more global Certificates (including Separate Preferred Securities), by 12:00
noon, New York City time, on the Tax Event Redemption Date under the Purchase
Contract Agreement, the Purchase Contract Agent will deposit irrevocably with
the Clearing Agency or its nominee funds sufficient to pay such amount, and the
Purchase Contract Agent shall give the Clearing Agency irrevocable instructions
and authority to pay such amount to the Beneficial Owners of the Preferred
Securities, and (ii) with respect to Preferred Securities not represented by one
or more global Certificates under the Purchase Contract Agreement, the Purchase
Contract Agent shall pay such amount to the Holders of such Trust Securities by
check mailed to the address of each Holder appearing on the


                                       23


Securities Register of the Trust on the Tax Event Redemption Date. If a Tax
Event Redemption occurs on or after the Initial Reset Date, in the case of
clause (i) of the second preceding sentence, or on or after November 16, 2005,
in the case of clause (ii) of the second preceding sentence, the Treasury
Portfolio shall not be purchased and the Property Trustee shall distribute to
the Holders of the Outstanding Trust Securities on the Tax Event Redemption
Date, the Redemption Price payable upon redemption of such Holders' interests in
the assets of the Trust in accordance with Section 4.02(e) below.

      (c) Notice of redemption shall be given by the Property Trustee by
first-class mail, postage prepaid, mailed not less than 30 nor more than 60 days
prior to the Redemption Date to each Holder of Trust Securities to be redeemed,
at such Holder's address appearing in the Securities Register. All notices of
redemption shall state:

            (i) the Redemption Date;

            (ii) the Redemption Price;

            (iii) the CUSIP number;

            (iv) the place or places where Trust Securities Certificates are to
be surrendered for payment of the Redemption Price;

            (v) that on the Redemption Date the Redemption Price will become
payable upon each such Trust Security to be redeemed and that Distributions
thereon will cease to accumulate on and after such date; and

            (vi) if less than all of the Outstanding Trust Securities are to be
redeemed, the identification and total Liquidation Amount of the particular
Trust Securities to be redeemed.

No defect in the notice of redemption or in the mailing thereof with respect to
any Holder shall affect the validity of the redemption proceedings with respect
to any other Holder.

      (d) The Trust Securities redeemed on each Redemption Date shall be
redeemed at the Redemption Price with the proceeds from the contemporaneous
redemption or payment at maturity of Notes. Redemptions of the Trust Securities
shall be made and the Redemption Price shall be payable on each Redemption Date
only to the extent that the Trust has funds then available in the Payment
Account for the payment of such Redemption Price.

      (e) If the Trust, by action of the Property Trustee, gives a notice of
redemption in respect of any Preferred Securities, then, on the Redemption Date,
subject to Section 4.02(b) and (d), (i) with respect to the Trust Securities
represented by one or more global Trust Securities Certificates, by 12:00 noon,
New York City time, on the Redemption Date, the Property Trustee will deposit
irrevocably with the Clearing Agency or its nominee funds sufficient to pay the
applicable Redemption Price, and the Property Trustee shall give the Clearing
Agency irrevocable instructions and authority to pay the Redemption Price to the
beneficial owners of the Trust Securities, and (ii) with respect to Trust
Securities not represented by one or more global Trust Securities Certificates,
the Property Trustee shall pay the applicable Redemption Price to the Holders of
such Trust Securities by check mailed to the address of each Holder appearing on


                                       24


the register of the Trust on the Redemption Date upon surrender of the Preferred
Securities Certificate representing such Preferred Securities at the Corporate
Trust Office of the Property Trustee. Notwithstanding the foregoing, so long as
the Holder of any Preferred Securities is the Purchase Contract Agent, the
payment of the Redemption Price in respect of the Preferred Securities held by
the Purchase Contract Agent shall be made no later than 12:00 noon, New York
City time, on the Redemption Date by check or wire transfer in immediately
available funds at such place and to such account as may be designated by the
Collateral Agent or the Purchase Contract Agent. If notice of redemption shall
have been given and funds irrevocably deposited as required, then upon the date
of such deposit, all rights of Securityholders holding Trust Securities so
called for redemption will cease, except the right of such Securityholders to
receive the Redemption Price, but without interest, and such Trust Securities
will cease to be Outstanding. In the event that any date on which any Redemption
Price is payable is not a Business Day, then payment of the Redemption Price
payable on such date will be made on the next succeeding day which is a Business
Day (and without any interest or other payment in respect of any such delay),
except that, if such Business Day is in the next succeeding calendar year, such
payment will be made on the immediately preceding Business Day, in each case,
with the same force and effect as if made on such date. In the event that
payment of the Redemption Price in respect of any Trust Securities called for
redemption is improperly withheld or refused, and not paid either by the Trust
or by the Depositor pursuant to the Guarantee, Distributions on such Trust
Securities will continue to accumulate, at the then applicable rate, from the
Redemption Date originally established by the Trust for such Trust Securities to
the date such Redemption Price is actually paid, in which case the actual
payment date will be the date fixed for redemption for purposes of calculating
the Redemption Price.

      Section 4.03. Subordination of Common Securities.

      (a) Payment of Distributions on, and the Liquidation, Distribution and
Redemption Price of, the Trust Securities, as applicable, shall be made pro rata
based on the Liquidation Amount of the Trust Securities; provided, however, that
if on any applicable date, a Note Event of Default shall have occurred and be
continuing, no payment of any Distribution on, or Liquidation, Distribution and
Redemption Price of, any Common Security, and no other payment on account of the
Common Securities, shall be made unless payment in full in cash of all
accumulated and unpaid Distributions on all Outstanding Preferred Securities for
all distribution periods terminating on or prior thereto, or in the case of
payment of the Liquidation, Distribution and Redemption Price, the full amount
of such Liquidation, Distribution and Redemption Price applicable to all
Outstanding Preferred Securities then Outstanding or then being redeemed, as the
case may be, shall have been made or provided for, and all funds immediately
available to the Property Trustee shall first be applied to the payment in full
in cash of all Distributions on, or the Liquidation, Distribution and Redemption
Price of, Preferred Securities then due and payable.

      (b) In the case of the occurrence of any Note Event of Default, the Holder
of Common Securities will be deemed to have waived any right to act with respect
to any related Event of Default under this Declaration and such Note Event of
Default until the effect of such related Event of Default and such Note Event of
Default has been cured, waived or otherwise eliminated. Until any such Event of
Default under this Declaration and such Note Event of Default has been so cured,
waived or otherwise eliminated, the Property Trustee shall act solely


                                       25


on behalf of the Holders of the Preferred Securities and not the Holder of the
Common Securities, and only the Holders of the Preferred Securities will have
the right to direct the Property Trustee to act on their behalf.

      Section 4.04. Payment Procedures. Payments of Distributions pursuant to
Section 4.01 in respect of the Preferred Securities shall be made by check
mailed to the address of the Holder thereof as such address shall appear on the
Securities Register or, if the Preferred Securities are held by a Clearing
Agency, such Distributions shall be made to the Clearing Agency by wire transfer
in immediately available funds. Payments of Distributions pursuant to Section
4.01 in respect of the Common Securities shall be made in such manner as shall
be mutually agreed between the Property Trustee and the Holder of the Common
Securities. Payment of the Redemption Price or Liquidation Distribution of the
Trust Securities shall be made in immediately available funds upon surrender of
the Preferred Securities Certificate representing such Preferred Securities at
the Corporate Trust Office of the Property Trustee.

      Section 4.05. Tax Returns and Reports. To the extent required by law, the
Administrative Trustees shall prepare (or cause to be prepared), at the
Depositor's expense, and file all Federal, State and local tax and information
returns and reports required to be filed by or in respect of the Trust. In this
regard, the Administrative Trustees shall (a) prepare and file (or cause to be
prepared or filed) the appropriate Internal Revenue Service Form required to be
filed in respect of the Trust in each taxable year of the Trust and (b) prepare
and furnish (or cause to be prepared and furnished) to each Securityholder the
related Internal Revenue Service Form 1099 OID, or any successor form or the
information required to be provided on such form. The Administrative Trustees
shall provide the Depositor and the Property Trustee with a copy of all such
returns, reports and schedules promptly after such filing or furnishing. The
Trustees shall comply with United States Federal withholding and backup
withholding tax laws and information reporting requirements with respect to any
payments to Securityholders under the Trust Securities.

      Section 4.06. Payments under Indenture. Any amount payable hereunder to
any Holder of Preferred Securities shall be reduced by the amount of any
corresponding payment such Holder has directly received pursuant to Section 508
of the Indenture or pursuant to the Guarantee. Notwithstanding the provisions
hereunder to the contrary, Securityholders acknowledge that any Holder of
Preferred Securities that receives payment under Section 508 of the Indenture
may receive amounts greater than the amount such Holder may be entitled to
receive pursuant to the other provisions of this Declaration.

                                   ARTICLE V
                          Trust Securities Certificates

      Section 5.01. Initial Ownership. Upon the creation of the Trust and the
contribution by the Depositor pursuant to Section 2.03 and until the issuance of
the Trust Securities, and at any time during which no Trust Securities are
Outstanding, the Depositor shall be the sole beneficial owner of the Trust.

      Section 5.02. The Trust Securities Certificates. The Trust Securities
Certificates shall be issued representing one or more Preferred Securities.
Preferred Securities Certificates


                                       26


representing fractional interests shall not be issued. The Trust Securities
Certificates shall be executed on behalf of the Trust by manual or facsimile
signature of one of the Administrative Trustees. Trust Securities Certificates
bearing the manual or facsimile signature of an individual who was, at the time
when such signature shall have been affixed, authorized to sign on behalf of the
Trust, shall be validly issued and entitled to the benefits of this Declaration,
notwithstanding that such individual shall have ceased to be so authorized prior
to the delivery of such Trust Securities Certificates or did not hold such
office at the date of delivery of such Trust Securities Certificates. A
transferee of a Trust Securities Certificate shall become a Securityholder, and
shall be entitled to the rights and subject to the obligations of a
Securityholder hereunder, upon due registration of such Trust Securities
Certificate in such transferee's name pursuant to Section 5.04.

      Section 5.03. Delivery of Trust Securities Certificates. One or more of
the Administrative Trustees shall cause Trust Securities Certificates, in an
aggregate Liquidation Amount as provided in Sections 2.04 and 2.05, to be
executed on behalf of the Trust as provided in Section 5.02 and delivered to or
upon a written order of the Depositor signed by its Chairman of the Board, its
President, any Vice President or the Treasurer, without further corporate action
by the Depositor, in authorized denominations.

      Section 5.04. Registration of Transfer and Exchange of Preferred
Securities Certificates; Common Securities Certificates. (a) The Preferred
Securities initially shall be pledged, pursuant to the terms of the Pledge
Agreement, as collateral to secure the obligations of the Holders of Corporate
Units to purchase common shares of the Depositor in accordance with the terms of
the Purchase Contract Agreement.

            (i) The Preferred Securities may be transferred, in whole or in
      part, only in accordance with the terms and conditions set forth in this
      Declaration and to the extent that they are Pledged Securities, pursuant
      to the Pledge Agreement. To the fullest extent permitted by law, any
      transfer or purported transfer of any Preferred Security not made in
      accordance with this Declaration shall be null and void.

            (ii) Subject to this Section 5.04 and any legend inscribed on a
      Book-Entry Preferred Securities Certificate, the Preferred Securities
      shall be freely transferable.

            (iii) A registrar appointed by the Depositor (the "Securities
      Registrar") shall keep or cause to be kept, at the office or agency
      maintained pursuant to Section 5.08, a register (the "Securities
      Register") in which, subject to such reasonable regulations as it may
      prescribe, the Securities Registrar shall provide for the registration of
      Trust Securities Certificates and registration of transfers and exchanges
      of Preferred Securities Certificates as herein provided. The Property
      Trustee shall be the initial Securities Registrar; any successor
      Securities Registrar shall be appointed by the Administrative Trustees.

            (iv) Upon surrender for registration of transfer of any Preferred
      Securities Certificate at the office or agency maintained pursuant to
      Section 5.08, one of the Administrative Trustees shall execute and
      deliver, in the name of the designated transferee or transferees, one or
      more new Preferred Securities Certificates representing


                                       27


      the same number of Preferred Securities dated the date of execution by the
      Administrative Trustees. At the option of a Holder, Preferred Securities
      Certificates may be exchanged for other Preferred Securities Certificates
      upon surrender of the Preferred Securities Certificates to be exchanged at
      the office or agency maintained pursuant to Section 5.08. The Securities
      Registrar shall not be required to register the transfer of any Preferred
      Securities that have been called for redemption or after the Liquidation
      Date.

            (v) Preferred Securities presented or surrendered for registration
      of transfer or exchange shall be accompanied by a written instrument of
      transfer in form satisfactory to the Administrative Trustees and the
      Securities Registrar duly executed by the Holder or such Holder's attorney
      duly authorized in writing. Each Preferred Securities Certificate
      surrendered for registration of transfer or exchange shall be cancelled
      and subsequently disposed of by the Property Trustee in accordance with
      its customary practice.

            (vi) No service charge shall be made for any registration of
      transfer or exchange of Preferred Securities, but the Securities Registrar
      may require payment of a sum sufficient to cover any tax or governmental
      charge that may be imposed in connection with any transfer or exchange of
      Preferred Securities other than an exchange not involving any transfer.

      (b) The Notes Issuer may not transfer the Common Securities. To the
fullest extent permitted by law, any attempted transfer of the Common Securities
shall be null and void.

      Section 5.05. Mutilated, Destroyed, Lost or Stolen Trust Securities
Certificates. If (a) any mutilated Trust Securities Certificate shall be
surrendered to the Securities Registrar, or if the Securities Registrar shall
receive evidence to its satisfaction of the destruction, loss or theft of any
Trust Securities Certificate, and (b) there shall be delivered to the Securities
Registrar and the Administrative Trustees such security or indemnity as may be
reasonably required by them to hold the Securities Registrar and the Trust
harmless, then in the absence of notice that such Trust Securities Certificate
shall have been acquired by a protected purchaser, the Administrative Trustees,
on behalf of the Trust shall execute and make available for delivery, in
exchange for or in lieu of any such mutilated, destroyed, lost or stolen Trust
Securities Certificate, a new Trust Securities Certificate of like tenor. In
connection with the issuance of any new Trust Securities Certificate under this
Section, the Administrative Trustees or the Securities Registrar may require the
payment of a sum sufficient to cover any tax or other governmental charge that
may be imposed in connection therewith. Any duplicate Trust Securities
Certificate issued pursuant to this Section shall constitute conclusive evidence
of an undivided beneficial interest in the assets of the Trust, as if originally
issued, whether or not the lost, stolen or destroyed Trust Securities
Certificate shall be found at any time.

      Section 5.06. Persons Deemed Securityholders. Prior to due presentation of
a Trust Security Certificate for registration of transfer, the Trustees or the
Securities Registrar shall treat the Person in whose name any Trust Securities
Certificate shall be registered in the Securities Register as the owner and
Holder of such Trust Securities Certificate for the purpose of receiving
Distributions and for all other purposes whatsoever, and neither the Trustees
nor the Securities Registrar shall be bound by any notice to the contrary.


                                       28


      Section 5.07. Access to List of Securityholders' Names and Addresses. In
the event that the Property Trustee is no longer the Securities Registrar, the
Administrative Trustees or the Depositor shall furnish or cause to be furnished
to the Property Trustee a list, in such form as the Property Trustee may
reasonably require, of the names and addresses of the Securityholders as of the
most recent record date (a) quarterly, not later than 10 days prior to a
Distribution Date, and (b) promptly after receipt by the Administrative Trustees
or the Depositor of a request therefor from the Property Trustee in order to
enable the Paying Agent to pay Distributions in accordance with Section 4.01
hereof, in each case to the extent such information is in the possession or
control of the Administrative Trustees or the Depositor and is not identical to
a previously supplied list or has not otherwise been received by the Property
Trustee. The rights of Securityholders to communicate with other Securityholders
with respect to their rights under this Declaration or under the Trust
Securities, and the corresponding rights of the Property Trustee shall be as
provided in the Trust Indenture Act. Each Holder, by receiving and holding a
Trust Securities Certificate, shall be deemed to have agreed not to hold the
Depositor, the Property Trustee, the Administrative Trustees or the Delaware
Trustee accountable by reason of the disclosure of its name and address,
regardless of the source from which such information was derived.

      Section 5.08. Maintenance of Office or Agency. The Property Trustee shall
maintain in the Borough of Manhattan, The City of New York, an office or offices
or agency or agencies where Preferred Securities may be surrendered for
registration of transfer or exchange and where notices and demands to or upon
the Trustees in respect of the Trust Securities Certificates may be served. The
Property Trustee shall give prompt written notice to the Depositor and to the
Securityholders of any change in the location of the Securities Register or any
such office or agency, which shall initially be at the Corporate Trust Office of
the Property Trustee.

      Section 5.09. Appointment of Paying Agent. The Paying Agent shall make
Distributions to Securityholders from the Payment Account and shall report the
amounts of such Distributions to the Property Trustee and the Administrative
Trustees. Any Paying Agent shall have the revocable power to withdraw funds from
the Payment Account for the purpose of making Distributions. The Administrative
Trustees may revoke such power and remove the Paying Agent, provided that such
revocation and removal with respect to the sole Paying Agent shall not become
effective until the appointment of a successor. The Paying Agent shall initially
be the Property Trustee, and any co-paying agent chosen by the Property Trustee
and acceptable to the Administrative Trustees and the Depositor. Any Person
acting as Paying Agent shall be permitted to resign as Paying Agent upon 30
days' written notice to the Administrative Trustees and the Depositor, and, if
applicable, the Property Trustee, provided that such resignation with respect to
the sole Paying Agent shall not become effective until the appointment of a
successor. In the event that the Property Trustee shall no longer be the Paying
Agent or a successor Paying Agent shall resign or its authority to act be
revoked, the Administrative Trustees shall appoint a successor that is
acceptable to the Property Trustee (in the case of any other Paying Agent) and
the Depositor to act as Paying Agent (which shall be a bank or trust company and
have a combined capital and surplus of at least $50,000,000). The Administrative
Trustees shall cause such successor Paying Agent or any additional Paying Agent
appointed by the Administrative Trustees to execute and deliver to the Trustees
an instrument in which such successor Paying Agent or additional Paying Agent
shall agree with the Trustees that as Paying Agent, such successor Paying Agent
or additional Paying Agent will hold all sums, if any, held by it for


                                       29


payment to the Securityholders in trust for the benefit of the Securityholders
entitled thereto until such sums shall be paid to such Securityholders. The
Paying Agent shall return all of such sums remaining unclaimed to the Property
Trustee and upon removal of a Paying Agent such Paying Agent shall also return
such sums in its possession to the Property Trustee. The provisions of Sections
7.01, 7.03 and 7.06 shall apply to the Property Trustee also in its role as
Paying Agent, for so long as the Property Trustee shall act as Paying Agent and,
to the extent applicable, to any other Paying Agent appointed hereunder. Any
reference in this Declaration to the Paying Agent shall include any co-paying
agent unless the context requires otherwise.

      Section 5.10. Preferred Securities Certificates; Common Securities
Certificate.

      (a) The Preferred Securities, upon original issuance, will be issued in
the form of a Definitive Preferred Securities Certificate registered in the name
of the Purchase Contract Agent. Separate Preferred Securities shall be issued in
the form of one or more printed or typewritten Book-Entry Preferred Securities
Certificates to be delivered to The Depository Trust Company, the initial
Clearing Agency, by, or on behalf of, the Trust. Such Book-Entry Preferred
Securities Certificate or Certificates shall initially be registered on the
Securities Register in the name of Cede & Co., the nominee of the initial
Clearing Agency. Each such Definitive Preferred Securities Certificate and
Book-Entry Preferred Securities Certificate shall represent such number of the
Outstanding Preferred Securities as shall be from time to time endorsed thereon,
which numbers may be increased or decreased, as applicable, to reflect, in
connection with the creation of Treasury Units and the recreation of Corporate
Units, transfers between Pledged Preferred Securities and Separate Preferred
Securities. Any such increase or decrease in the aggregate number of Preferred
Securities represented by (i) a Definitive Preferred Securities Certificate
shall be made by the Collateral Agent and (ii) a Book-Entry Preferred Securities
Certificate shall be made by the Property Trustee, as custodian of the
Book-Entry Preferred Securities Certificates, in each case upon the instructions
of the Collateral Agent given pursuant to Article IV of the Pledge Agreement.

      (b) A single Common Securities Certificate representing the Common
Securities shall be issued to the Depositor in the form of a definitive Common
Securities Certificate.

      Section 5.11. Definitive Preferred Securities Certificates. If, with
respect to Book-Entry Preferred Securities, (a) the Depositor advises the
Trustees in writing that the Clearing Agency is no longer willing or able to
properly discharge its responsibilities with respect to the Book-Entry Preferred
Securities Certificates or the Clearing Agency is no longer registered or in
good standing under the Securities Exchange Act of 1934, as amended, or other
applicable statute or regulation, and the Depositor is unable to locate a
qualified successor within 90 calendar days, (b) the Depositor at its option
advises the Trustees in writing that it elects to terminate the book-entry
system through the Clearing Agency or (c) an Event of Default occurs and is
continuing, then the Trust shall issue Definitive Preferred Securities
Certificates. Upon surrender to the Administrative Trustees of the Book-Entry
Preferred Securities Certificates by the Clearing Agency, accompanied by
registration instructions, one of the Administrative Trustees shall execute and
deliver the Definitive Preferred Securities Certificates in accordance with the
instructions of the Clearing Agency and the Depositor will appoint a Paying
Agent with respect to such Definitive Preferred Securities Certificates. Neither
the Securities Registrar nor the Trustees shall be liable for any delay in
delivery of such instructions and may conclusively


                                       30


rely on, and shall be protected in relying on, such instructions. The Definitive
Preferred Securities Certificates shall be printed, lithographed or engraved or
may be produced in any other manner as is reasonably acceptable to the
Administrative Trustees, as evidenced by the execution thereof by one of the
Administrative Trustees.

      Section 5.12. Rights of Securityholders. The Securityholders shall not
have any right or title to the Trust Property other than the undivided
beneficial interest in the assets of the Trust conferred by their Trust
Securities and they shall have no right to call for any partition or division of
property, profits or rights of the Trust except as described below. The Trust
Securities shall be personal property giving only the rights specifically set
forth therein and in this Declaration. The Trust Securities shall have no
preemptive or similar rights and when issued and delivered to Securityholders
against payment of the purchase price therefor will be fully paid and
nonassessable by the Trust. The Holders of the Trust Securities, in their
capacities as such, shall be entitled to the same limitation of personal
liability extended to stockholders of private corporations for profit organized
under the General Corporation Law of the State of Delaware.

      Section 5.13. Initial Remarketing.

      (a) The Depositor will request, not later than seven nor more than 15
calendar days prior to the Initial Remarketing Date, that the Clearing Agency
notify the Holders of the Preferred Securities and the Holders of Corporate
Units and Treasury Units of the Initial Remarketing.

      (b) Not later than 5:00 P.M., New York City time, on the fifth Business
Day immediately preceding the Initial Reset Date (but in no event earlier than
the Distribution Date next preceding the Initial Reset Date), each Holder of the
Separate Preferred Securities may elect to have Preferred Securities held by
such Holder remarketed. Holders of Separate Preferred Securities shall give
notice of their election to have such Separate Preferred Securities remarketed
to the Custodial Agent and deliver such Separate Preferred Securities to the
Custodial Agent pursuant to the Pledge Agreement. Any such notice and delivery
shall be irrevocable after 5:00 P.M., New York City time, on the fifth Business
Day immediately preceding the Initial Reset Date and may not be conditioned upon
the level at which the Reset Rate is established. Under Section 5.02 of the
Purchase Contract Agreement, Preferred Securities that constitute components of
Corporate Units will be remarketed as provided therein and in this Section 5.13.
The Preferred Securities constituting components of Corporate Units shall be
deemed tendered, notwithstanding any failure by the Holder of such Corporate
Units to deliver or properly deliver such Preferred Securities to the
Remarketing Agent for purchase.

      (c) The right of each Holder to have Preferred Securities (including any
Preferred Securities that constitute components of Corporate Units) tendered for
purchase shall be limited to the extent that (i) the Remarketing Agent conducts
a Remarketing pursuant to the terms of the Remarketing Agreement, (ii) Preferred
Securities tendered have not been called for redemption, (iii) the Remarketing
Agent is able to find a purchaser or purchasers for tendered Preferred
Securities at a price per Preferred Security such that the aggregate price for
the Preferred Securities is not less than 100% of the sum of the Treasury
Portfolio Purchase Price, the Separate Preferred Securities Purchase Price and
deferred and unpaid Distributions, if any, on the


                                       31


Preferred Securities, and (iv) such purchaser or purchasers deliver the purchase
price therefor to the Remarketing Agent as and when required.

      (d) On the Initial Remarketing Date, pursuant to the Remarketing Agreement
the Remarketing Agent shall use reasonable efforts to remarket, at a price per
Preferred Security such that the aggregate price for the Preferred Securities is
equal to approximately 100.25% of the sum of the Treasury Portfolio Purchase
Price, the Separate Preferred Securities Purchase Price and deferred and unpaid
Distributions on the Preferred Securities to be remarketed.

      (e) [reserved].

      (f) If the Remarketing Agent has determined that it will be able to
remarket all Preferred Securities tendered or deemed tendered prior to 4:00
P.M., New York City time, on the Initial Remarketing Date, the Reset Agent,
subject to the terms of the Remarketing Agreement, shall determine the Reset
Rate.

      (g) If, by 4:00 P.M., New York City time, on the Initial Remarketing Date,
the Remarketing Agent is unable to remarket all Preferred Securities tendered or
deemed tendered for purchase or if the Initial Remarketing shall not have
occurred because a condition precedent to the Remarketing shall not have been
fulfilled, a failed Remarketing ("Failed Initial Remarketing") shall be deemed
to have occurred and the Remarketing Agent shall so advise by telephone the
Collateral Agent, the Administrative Trustees, the Depositor, the Property
Trustee, the Indenture Trustee and the Clearing Agency.

      (h) By approximately 4:30 P.M., New York City time, on the Initial
Remarketing Date, provided that there has not been a Failed Initial Remarketing,
the Remarketing Agent shall advise, by telephone (i) the Collateral Agent, the
Administrative Trustees, the Depositor, the Property Trustee, the Indenture
Trustee and the Clearing Agency of the Reset Rate determined in the Initial
Remarketing and the aggregate Liquidation Amount of Preferred Securities sold in
the Initial Remarketing, (ii) each purchaser (or the Clearing Agency Participant
thereof) of the Reset Rate and the aggregate Liquidation Amount of Preferred
Securities such purchaser is to purchase and (iii) each purchaser to give
instructions to its Clearing Agency Participant to pay the purchase price on the
Initial Reset Date in same day funds against delivery of the Preferred
Securities purchased through the facilities of the Clearing Agency.

      (i) In accordance with the Clearing Agency's normal procedures, on the
Initial Reset Date, the transactions described above with respect to each
Preferred Security tendered for purchase and sold in the Initial Remarketing
shall be executed through the Clearing Agency, and the accounts of the
respective Clearing Agency Participants shall be debited and credited and such
Preferred Securities delivered by book entry as necessary to effect purchases
and sales of such Preferred Securities. The Clearing Agency shall make payment
in accordance with its normal procedures.

      (j) If any Holder selling Preferred Securities in the Initial Remarketing
fails to deliver such Preferred Securities, the Clearing Agency Participant of
such selling Holder and of any other Person that was to have purchased Preferred
Securities in the Initial Remarketing may deliver to any such other Person an
aggregate Liquidation Amount of Preferred Securities that is


                                       32


less than the aggregate Liquidation Amount of Preferred Securities that
otherwise was to be purchased by such Person. In such event, the aggregate
Liquidation Amount of Preferred Securities to be so delivered shall be
determined by such Clearing Agency Participant, and delivery of such lesser
aggregate Liquidation Amount of Preferred Securities shall constitute good
delivery.

      (k) The Remarketing Agent is not obligated to purchase any Preferred
Securities in the Initial Remarketing or otherwise. Neither the Trust, any
Trustee, the Depositor nor the Remarketing Agent shall be obligated in any case
to provide funds to make payment upon tender of Preferred Securities for
Remarketing.

      (l) The tender and settlement procedures set forth in this Section 5.13,
including provisions for payment by purchasers of Preferred Securities in the
Initial Remarketing, shall be subject to modification, notwithstanding any
provision to the contrary set forth herein, to the extent required by the
Clearing Agency or if the book-entry system is no longer available for the
Preferred Securities at the time of the Initial Remarketing, to facilitate the
tendering and Remarketing of Preferred Securities in certificated form. In
addition, the Remarketing Agent may, notwithstanding any provision to the
contrary set forth herein, modify the settlement procedures set forth herein in
order to facilitate the settlement process.

      (m) Anything herein to the contrary notwithstanding, the Reset Rate shall
in no event exceed the maximum rate permitted by applicable law and, as provided
in the Remarketing Agreement, neither the Remarketing Agent nor the Reset Agent
shall have any obligation to determine whether there is any limitation under
applicable law on the Reset Rate or, if there is any such limitation, the
maximum permissible Reset Rate on the Preferred Securities and they shall rely
solely upon written notice from the Depositor (which the Depositor agrees to
provide no later than the eighth Business Day before the Initial Reset Date) as
to whether or not there is any such limitation and, if so, the maximum
permissible Reset Rate.

      Section 5.14. Secondary Remarketing.

      (a) If a Failed Initial Remarketing has occurred, the Depositor will
request, not later than seven nor more than 15 calendar days prior to the
Secondary Remarketing that the Clearing Agency notify the Holders of the
Preferred Securities and the Holders of Corporate Units and Treasury Units of
the Secondary Remarketing and of the procedures that must be followed if a
Holder of Preferred Securities wishes to exercise such Holder's rights with
respect to the Put Option if there is a Failed Secondary Remarketing.

      (b) Not later than 5:00 P.M., New York City time, on the fifth Business
Day immediately preceding the Purchase Contract Settlement Date (but in no event
earlier than the Distribution Date next preceding the Purchase Contract
Settlement Date), each Holder of the Preferred Securities may elect to have
Preferred Securities held by such Holder remarketed. Under Section 5.02 of the
Purchase Contract Agreement, (i) holders or beneficial owners of Corporate Units
that do not give notice of intention to make a Cash Settlement of their related
Purchase Contracts shall be deemed to have consented to the disposition of the
Preferred Securities constituting a component of such Corporate Units in
accordance with Section 5.02(b)(iii) of the Purchase Contract Agreement, and
(ii) holders or beneficial owners of


                                       33


Corporate Units who give such notice but fail to pay the Purchase Price in cash
as required by Section 5.02(b)(ii) of the Purchase Contract Agreement shall be
deemed to have consented to the disposition of the Preferred Securities
constituting a component of such Corporate Units in accordance with Section
5.02(d) of the Purchase Contract Agreement. Holders of Separate Preferred
Securities shall give notice of their election to have such Preferred Securities
remarketed to the Custodial Agent and deliver such Separate Preferred Securities
to the Custodial Agent pursuant to the Pledge Agreement. Any such notice and
delivery shall be irrevocable after 5:00 A.M., New York City time, on the fifth
Business Day immediately preceding the Purchase Contract Settlement Date and may
not be conditioned upon the level at which the Reset Rate is established.

      (c) If any Holder of Corporate Units does not give a notice of its
intention to make a Cash Settlement, the Preferred Securities of such Holder
shall be deemed tendered, notwithstanding any failure by such Holder to deliver
or properly deliver such Preferred Securities to the Remarketing Agent for
purchase.

      (d) The right of each Holder to have Preferred Securities (including any
Preferred Securities that constitute components of Corporate Units) tendered for
purchase shall be limited to the extent that (i) the Remarketing Agent conducts
a Remarketing pursuant to the terms of the Remarketing Agreement, (ii) Preferred
Securities tendered have not been called for redemption, (iii) the Remarketing
Agent is able to find a purchaser or purchasers for tendered Preferred
Securities at a price of not less than 100% of the aggregate Liquidation Amount
thereof plus deferred and unpaid Distributions thereon, if any, and (iv) such
purchaser or purchasers deliver the purchase price therefor to the Remarketing
Agent as and when required.

      (e) If a Failed Initial Remarketing has occurred, on the Secondary
Remarketing Date, the Remarketing Agent shall use reasonable efforts to
remarket, at a price equal to approximately 100.25% of the aggregate Liquidation
Amount thereof plus deferred and unpaid Distributions, if any, thereon,
Preferred Securities tendered or deemed tendered for purchase.

      (f) If the Remarketing Agent has determined that it will be able to
remarket all Preferred Securities tendered or deemed tendered prior to 4:00
P.M., New York City time, on the Secondary Remarketing Date, the Reset Agent
shall, subject to the terms of the Remarketing Agreement, determine the Reset
Rate.

      (g) If, by 4:00 P.M., New York City time, on the Secondary Remarketing
Date, the Remarketing Agent is unable to remarket all Preferred Securities
tendered or deemed tendered for purchase or if the Secondary Remarketing shall
not have occurred because a condition precedent to the Secondary Remarketing
shall not have been fulfilled, a failed Remarketing ("Failed Secondary
Remarketing") shall be deemed to have occurred, the interest rate on the
Preferred Securities shall not be reset and the Remarketing Agent shall so
advise by telephone the Collateral Agent, the Administrative Trustees, the
Depositor, the Property Trustee, the Indenture Trustee and the Clearing Agency.

      (h) By approximately 4:30 P.M., New York City time, on the Secondary
Remarketing Date, provided that there has not been a Failed Secondary
Remarketing, the Remarketing Agent shall advise, by telephone (i) the Collateral
Agent, the Administrative Trustees, the Depositor,


                                       34


the Property Trustee, the Indenture Trustee and the Clearing Agency of the Reset
Rate determined in the Secondary Remarketing and the aggregate Liquidation
Amount of Preferred Securities sold in the Secondary Remarketing, (ii) each
purchaser (or the Clearing Agency Participant thereof) of the Reset Rate and the
aggregate Liquidation Amount of Preferred Securities such purchaser is to
purchase and (iii) each purchaser to give instructions to its Clearing Agency
Participant to pay the purchase price on the Purchase Contract Settlement Date
in same day funds against delivery of the Preferred Securities purchased through
the facilities of the Clearing Agency.

      (i) In accordance with the Clearing Agency's normal procedures, on the
Purchase Contract Settlement Date, the transactions described above with respect
to each Security tendered for purchase and sold in the Secondary Remarketing
shall be executed through the Clearing Agency, and the accounts of the
respective Clearing Agency Participants shall be debited and credited and such
Preferred Securities delivered by book entry as necessary to effect purchases
and sales of such Preferred Securities. The Clearing Agency shall make payment
in accordance with its normal procedures.

      (j) If any Holder selling Preferred Securities in the Secondary
Remarketing fails to deliver such Preferred Securities, the Clearing Agency
Participant of such selling Holder and of any other Person that was to have
purchased Preferred Securities in the Secondary Remarketing may deliver to any
such other Person an aggregate Liquidation Amount of Preferred Securities that
is less than the aggregate Liquidation Amount of Preferred Securities that
otherwise was to be purchased by such Person. In such event, the aggregate
Liquidation Amount of Preferred Securities to be so delivered shall be
determined by such Clearing Agency Participant, and delivery of such lesser
aggregate Liquidation Amount of Preferred Securities shall constitute good
delivery.

      (k) The Remarketing Agent is not obligated to purchase any Preferred
Securities in the Secondary Remarketing or otherwise. Neither the Trust, any
Trustee, the Depositor nor the Remarketing Agent shall be obligated in any case
to provide funds to make payment upon tender of Preferred Securities for
Remarketing.

      (l) The tender and settlement procedures set forth in this Section 5.14,
including provisions for payment by purchasers of Preferred Securities in the
Secondary Remarketing, shall be subject to modification, notwithstanding any
provision to the contrary set forth herein, to the extent required by the
Clearing Agency or if the book-entry system is no longer available for the
Preferred Securities at the time of the Secondary Remarketing, to facilitate the
tendering and Remarketing of Preferred Securities in certificated form. In
addition, the Remarketing Agent may, notwithstanding any provision to the
contrary set forth herein, modify the settlement procedures set forth herein in
order to facilitate the settlement process.

      (m) Anything herein to the contrary notwithstanding, the Reset Rate shall
in no event exceed the maximum rate permitted by applicable law and, as provided
in the Remarketing Agreement, neither the Remarketing Agent nor the Reset Agent
shall have any obligation to determine whether there is any limitation under
applicable law on the Reset Rate or, if there is any such limitation, the
maximum permissible Reset Rate on the Preferred Securities and they shall rely
solely upon written notice from the Depositor (which the Depositor agrees to
provide


                                       35


prior to the eighth Business Day before the Purchase Contract Settlement Date)
as to whether or not there is any such limitation and, if so, the maximum
permissible Reset Rate.

      Section 5.15. Option to Put Preferred Securities upon Failed Secondary
Remarketing.

      (a) If a Failed Secondary Remarketing has occurred, Holders of the
Separate Preferred Securities who hold such Separate Preferred Securities
following the Purchase Contract Settlement Date will have the right to deliver
the Preferred Securities to the Trust for repurchase on December 1, 2005 (the
"Repurchase Date"), upon at least three Business Days prior notice, at a price
per Preferred Security equal to the Liquidation Amount plus any accrued and
unpaid Distributions (the "Put Price").

      (b) In order for the Preferred Securities to be repurchased on the Put
Option Exercise Date, the Property Trustee must receive on or prior to 5:00 p.m.
New York City time on the third Business Day immediately preceding the
Repurchase Date, at its Corporate Trust Office or at an office or agency
maintained by the Property Trustee in the Borough of Manhattan, The City of New
York, the Preferred Securities to be repurchased with the form entitled "Option
to Elect Repurchase" on the reverse of or otherwise accompanying such Preferred
Securities duly completed. Any such notice received by the Trustee shall be
irrevocable. All questions as to the validity, eligibility (including time of
receipt) and acceptance of the Preferred Securities for repayment shall be
determined by the Notes Issuer, whose determination shall be final and binding.

      (c) Payment of the Put Price shall be made through the Property Trustee,
subject to the Property Trustee's receipt of payment from the Notes Issuer in
accordance with the terms of the Indenture, no later than 12:00 noon, New York
City time, on the Repurchase Date, and to such account as may be designated. If
the Trustee holds immediately available funds sufficient to pay the Put Price of
Preferred Securities presented for repayment, then, immediately prior to the
close of business on the Repurchase Date, such Preferred Securities will cease
to be Outstanding and Distributions thereon will cease to accumulate, whether or
not such Preferred Securities have been received by the Trust, and all other
rights of the Holder in respect of the Preferred Securities, including the
Holder's right to require the Trust to repay such Preferred Securities, shall
terminate and lapse (other than the right to receive the Put Price upon delivery
of such Preferred Securities but without interest on such Put Price). Neither
the Property Trustee nor the Trust will be required to register or cause to be
registered the transfer of any Preferred Securities which repayment has been
elected.

                                   ARTICLE VI
                    Acts of Securityholders; Meetings; Voting

      Section 6.01. Limitations on Voting Rights.

      (a) Except as provided herein and in the Indenture and as otherwise
required by law, no Holder of Trust Securities shall have any right to vote or
in any manner otherwise control the administration, operation and management of
the Trust or the obligations of the parties hereto, nor shall anything herein
set forth, or contained in the terms of the Trust Securities Certificates,


                                       36


be construed so as to constitute the Securityholders from time to time as
partners or members of an association.

      (b) The Trustees shall not (i) direct the time, method and place of
conducting any proceeding for any remedy available to the Indenture Trustee or
executing any trust or power conferred on the Indenture Trustee with respect to
such Notes, (ii) waive any past default which may be waived under Section 513 of
the Indenture, (iii) exercise any right to rescind or annul an acceleration of
the principal of all the Notes or (iv) consent to any amendment or modification
of the Indenture, where such consent shall be required, without, in each case,
obtaining the prior consent of the Holders of a majority in aggregate
Liquidation Amount of all Outstanding Preferred Securities; provided, however,
that where such consent under the Indenture would require the consent of each
holder of Notes affected thereby, no such consent shall be given by the Property
Trustee without the prior written consent of the Holder of each Outstanding
Preferred Security. The Trustees shall not revoke any action previously
authorized or approved by a vote of the Holders of Preferred Securities, except
by a subsequent vote of the Holders of Preferred Securities. The Property
Trustee shall notify all Holders of the Preferred Securities of any notice
received from the Indenture Trustee as a result of the Trust being the holder of
the Notes. In addition to obtaining the consent of the Holders of the Preferred
Securities, prior to taking any of the foregoing actions, the Trustees shall, at
the expense of the Depositor, obtain an Opinion of Counsel experienced in such
matters to the effect that the Trust will not be classified as an association
taxable as a corporation or partnership for United States Federal income tax
purposes on account of such action and will continue to be classified as a
grantor trust for United States Federal income tax purposes.

      (c) Subject to Section 10.02(c) hereof, if any proposed amendment to the
Declaration provides for, or the Trustees otherwise propose to effect, (i) any
action that would adversely affect in any material respect the powers,
preferences or special rights of the Preferred Securities, whether by way of
amendment to this Declaration or otherwise, or (ii) the dissolution or
liquidation of the Trust, other than pursuant to the terms of this Declaration,
then the Holders of Outstanding Preferred Securities will be entitled to vote on
such amendment or proposal and such amendment or proposal shall not be effective
except with the approval of the Holders of a majority in aggregate Liquidation
Amount of the Outstanding Preferred Securities.

      Section 6.02. Notice of Meetings. Notice of all meetings of the Holders of
the Preferred Securities, stating the time, place and purpose of the meeting,
shall be given by the Property Trustee pursuant to Section 10.08 to each
Preferred Securityholder of record, at his/her registered address, at least 15
days and not more than 90 days before the meeting. At any such meeting, any
business properly before the meeting may be so considered whether or not stated
in the notice of the meeting. Any adjourned meeting may be held as adjourned
without further notice.

      Section 6.03. Meetings of Holders of the Preferred Securities. No annual
meeting of Securityholders is required to be held. The Administrative Trustees,
however, shall call a meeting of Securityholders to vote on any matter upon the
written request of the Holders of at least 25% of the aggregate Liquidation
Amount of the Outstanding Preferred Securities and the Administrative Trustees
or the Property Trustee may, at any time in their discretion, call a meeting of
Holders of the Preferred Securities to vote on any matters as to which the
Holders of the Preferred Securities are entitled to vote.


                                       37


      Holders of a majority of the aggregate Liquidation Amount of the
Outstanding Preferred Securities, present in person or by proxy, shall
constitute a quorum at any meeting of Securityholders.

      If a quorum is present at a meeting, an affirmative vote of the Holders of
a majority of the aggregate Liquidation Amount of the Outstanding Preferred
Securities present, either in person or by proxy, at such meeting shall
constitute the action of the Securityholders, unless this Declaration requires a
greater number of affirmative votes.

      Section 6.04. Voting Rights. A Securityholder shall be entitled to one
vote for each Trust Security in respect of any matter as to which such
Securityholder is entitled to vote.

      Section 6.05. Proxies, etc. At any meeting of Securityholders, any
Securityholder entitled to vote thereat may vote by proxy, provided that no
proxy shall be voted at any meeting unless it shall have been placed on file
with the Administrative Trustees, or with such other officer or agent of the
Trust as the Administrative Trustees may direct, for verification prior to the
time at which such vote shall be taken. Pursuant to a resolution of the Property
Trustee, proxies may be solicited in the name of the Property Trustee or one or
more officers of the Property Trustee. Only Securityholders of record shall be
entitled to vote. When Trust Securities are held jointly by several Persons, any
one of them may vote at any meeting in person or by proxy in respect of such
Trust Securities, but if more than one of them shall be present at such meeting
in person or by proxy, and such joint owners or their proxies so present
disagree as to any vote to be cast, such vote shall not be received in respect
of such Trust Securities. A proxy purporting to be executed by or on behalf of a
Securityholder shall be deemed valid unless challenged at or prior to its
exercise, and the burden of proving invalidity shall rest on the challenger. No
proxy shall be valid more than three years after its date of execution.

      Section 6.06. Securityholder Action by Written Consent. Any action which
may be taken by Securityholders at a meeting may be taken without a meeting and
without prior notice if Holders of the proportion of the Outstanding Preferred
Securities required to approve such action shall consent to the action in
writing.

      Section 6.07. Record Date for Voting and Other Purposes. For the purposes
of determining the Securityholders who are entitled to notice of and to vote at
any meeting or by written consent, or for the purpose of any other action, the
Administrative Trustees may from time to time fix a date, not more than 90 days
prior to the date of any meeting of Securityholders, as a record date for the
determination of the identity of the Securityholders for such purposes.

      Section 6.08. Acts of Securityholders. Any request, demand, authorization,
direction, notice, consent, waiver or other action provided or permitted by this
Declaration to be given, made or taken by Securityholders may be embodied in and
evidenced by one or more instruments of substantially similar tenor signed by
such Securityholders in person or by an agent duly appointed in writing; and,
except as otherwise expressly provided herein, such action shall become
effective when such instrument or instruments are delivered to the
Administrative Trustees. Such instrument or instruments (and the action embodied
therein and evidenced thereby) are herein sometimes referred to as the "Act" of
the Securityholders signing such instrument or instruments. Proof of execution
of any such instrument or of a writing appointing


                                       38


any such agent shall be sufficient for any purpose of this Declaration and
(subject to Section 7.02) conclusive, if made in the manner provided in this
Section.

      The fact and date of the execution by any Person of any such instrument or
writing may be proved by the affidavit of a witness of such execution or by a
certificate of a notary public or other officer authorized by law to take
acknowledgments of deeds, certifying that the individual signing such instrument
or writing acknowledged to him/her the execution thereof. Where such execution
is by a signer acting in a capacity other than his/her individual capacity, such
certificate or affidavit shall also constitute sufficient proof of his/her
authority. The fact and date of the execution of any such instrument or writing,
or the authority of the Person executing the same, may also be proved in any
other manner which any Trustee receiving the same deems sufficient.

      The ownership of Preferred Securities shall be proved by the Securities
Register.

      Any request, demand, authorization, direction, notice, consent, waiver or
other act of the Securityholder of any Trust Security shall bind every future
Securityholder of the same Trust Security and the Securityholder of every Trust
Security issued upon the registration of transfer thereof or in exchange
therefor or in lieu thereof in respect of anything done, omitted or suffered to
be done by the Trustees or the Trust in reliance thereon, whether or not
notation of such action is made upon such Trust Security.

      Without limiting the foregoing, a Securityholder entitled hereunder to
take any action hereunder with regard to any particular Trust Security may do so
with regard to all or any part of the Liquidation Amount of such Trust Security
or by one or more duly appointed agents, each of which may do so pursuant to
such appointment with regard to all or any part of such Liquidation Amount.

      If any dispute shall arise between the Securityholders and the
Administrative Trustees or among such Securityholders or Administrative Trustees
with respect to the authenticity, validity or binding nature of any request,
demand, authorization, direction, consent, waiver or other Act of such
Securityholder or Trustee under this Article VI, then the determination of such
matter by the Property Trustee shall be conclusive with respect to such matter.

      Section 6.09. Inspection of Records. Upon reasonable notice to the
Administrative Trustees and the Property Trustee, the records of the Trust shall
be open to inspection by Securityholders during normal business hours for any
purpose reasonably related to such Securityholder's interest as a
Securityholder.

                                   ARTICLE VII
                                  The Trustees

      Section 7.01. Certain Duties and Responsibilities. (a) The duties and
responsibilities of the Trustees shall be as provided by this Declaration and,
in the case of the Property Trustee, also by the Trust Indenture Act. The
Property Trustee, other than during the occurrence and continuance of an Event
of Default, undertakes to perform only such duties as are specifically set forth
in this Declaration and, upon an Event of Default, must exercise the same degree
of care and skill as a prudent person would exercise or use in the conduct of
his/her own affairs. The


                                       39


Trustees shall have all the privileges, rights and immunities provided by the
Delaware Statutory Trust Act. Notwithstanding the foregoing, no provision of
this Declaration shall require the Trustees to expend or risk their own funds or
otherwise incur any financial liability in the performance of any of their
duties hereunder, or in the exercise of any of their rights or powers, if they
shall have reasonable grounds for believing that repayment of such funds or
adequate indemnity against such risk or liability is not reasonably assured to
it. Whether or not therein expressly so provided, every provision of this
Declaration relating to the conduct or affecting the liability of or affording
protection to the Trustees shall be subject to the provisions of this Section.
Nothing in this Declaration shall be construed to release the Property Trustee
from liability for its own negligent action, its own negligent failure to act,
or its own willful misconduct. To the extent that, at law or in equity, the
Trustees have duties (including fiduciary duties) and liabilities relating
thereto to the Trust or to the Securityholders, the Trustees shall not be liable
to the Trust or to any Securityholder for the Trustees' good faith reliance on
the provisions of this Declaration. The provisions of this Declaration, to the
extent that they restrict the duties and liabilities of the Trustees otherwise
existing at law or in equity, are agreed by the Depositor and the
Securityholders to replace such other duties and liabilities of the Trustees.

      (b) All payments made by the Property Trustee or any other Paying Agent in
respect of the Trust Securities shall be made only from the income and proceeds
from the Trust Property. Each Securityholder, by its acceptance of a Trust
Security, agrees that (i) it will look solely to the income and proceeds from
the Trust Property to the extent available for distribution to it as herein
provided and (ii) the Trustees are not personally liable to it for any amount
distributable in respect of any Trust Security or for any other liability in
respect of any Trust Security. This Section 7.01(b) does not limit the liability
of the Trustees expressly set forth elsewhere in this Declaration or, in the
case of the Property Trustee, in the Trust Indenture Act.

      Section 7.02. Notice of Defaults; Direct Action by Securityholders. Within
90 days after the occurrence of any Event of Default actually known to a
Responsible Officer of the Property Trustee, the Property Trustee shall
transmit, in the manner and to the extent provided in Section 10.08, notice of
such Event of Default to the Securityholders, the Administrative Trustees and
the Depositor, unless such Event of Default shall have been cured or waived. If
the Property Trustee has failed to enforce its rights under this Declaration or
the Indenture to the fullest extent permitted by law and subject to the terms of
this Declaration and the Indenture after a Securityholder has made a written
request therefor, any Securityholder may institute a legal proceeding directly
to enforce the Property Trustee's rights under this Declaration or the Indenture
with respect to Notes having an aggregate principal amount equal to the
aggregate Liquidation Amount of the Preferred Securities of such Securityholder
without first instituting a legal proceeding against the Property Trustee or any
other Person. To the extent that any action under the Indenture is entitled to
be taken by the holders of at least a specified percentage of the principal
amount of the outstanding Notes, Holders of at least the same percentage of the
Liquidation Amount of the Outstanding Preferred Securities may also take such
action in the name of the Trust if such action has not been taken by the
Property Trustee. To the fullest extent permitted by law, the foregoing shall be
in addition to and not in limitation of any direct rights provided to the
Holders of the Preferred Securities against the Note Issuer under the terms of
the Indenture, including the right, without any notice or other demand on the
Property Trustee, to institute suit for the enforcement of any payment of the
principal of and any premium and interest on Notes as provided in Section 508 of
the Indenture.


                                       40


      Section 7.03. Certain Rights of Property Trustee. Subject to the
provisions of Section 7.01: (a) the Property Trustee may conclusively rely and
shall be protected in acting or refraining from acting in good faith upon any
resolution, Opinion of Counsel, certificate, written representation of a Holder
or transferee, certificate of auditors or any other certificate, statement,
instrument, opinion, report, notice, request, consent, order, appraisal, bond,
Note, note, other evidence of indebtedness or other paper or document believed
by it to be genuine and to have been signed or presented by the proper party or
parties;

      (b) if, other than during the occurrence and continuance of an Event of
Default, (i) in performing its duties under this Declaration, the Property
Trustee is required to decide between alternative courses of action or (ii) in
construing any of the provisions in this Declaration, the Property Trustee finds
the same ambiguous or inconsistent with any other provisions contained herein or
(iii) the Property Trustee is unsure of the application of any provision of this
Declaration, then, except as to any matter as to which the Holders of the
Preferred Securities are entitled to vote under the terms of this Declaration,
the Property Trustee shall deliver a notice to the Depositor requesting written
instructions of the Depositor as to the course of action to be taken. The
Property Trustee shall take such action, or refrain from taking such action, as
the Property Trustee shall be instructed in writing to take, or to refrain from
taking, by the Depositor; provided, however, that if the Property Trustee does
not receive such instructions of the Depositor within ten Business Days after it
has delivered such notice, or such reasonably shorter period of time set forth
in such notice (which to the extent practicable shall not be less than two
Business Days), it may, but shall be under no duty to, take or refrain from
taking such action not inconsistent with this Declaration as it shall deem
advisable and in the best interests of the Securityholders, in which event the
Property Trustee shall have no liability except for its own negligent action,
its own negligent failure to act or its own willful misconduct;

      (c) the Property Trustee may consult with counsel or other experts of its
selection and the advice or opinion of such counsel or other experts with
respect to legal matters or advice within the scope of such experts' area of
expertise shall be full and complete authorization and protection in respect of
any action taken, suffered or omitted by it hereunder in good faith and in
reliance thereon;

      (d) the Property Trustee shall be under no obligation to exercise any of
the rights or powers vested in it by this Declaration at the request or
direction of any of the Securityholders pursuant to this Declaration, unless
such Securityholders shall have offered to the Property Trustee security or
indemnity against the costs, expenses and liabilities reasonably satisfactory to
the Property Trustee which might be incurred by it in compliance with such
request or direction;

      (e) the Property Trustee shall not be bound to make any investigation into
the facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order,
approval, bond, Note, note or other evidence of indebtedness or other paper or
document, but the Property Trustee, in its discretion, may make such further
inquiry or investigation into such facts or matters as it may see fit;


                                       41


      (f) the Property Trustee may execute any of the trusts or powers hereunder
or perform any duties hereunder either directly or by or through its agents or
attorneys and the Property Trustee shall not be responsible for any misconduct
or negligence on the part of any agent or attorney appointed with due care by it
hereunder;

      (g) whenever in the administration of this Declaration, the Property
Trustee shall deem it desirable that a matter be proved or established prior to
taking, suffering or omitting any action hereunder, the Property Trustee (unless
other evidence be herein specifically prescribed) may, in the absence of bad
faith on its part, conclusively rely upon an Officers' Certificate;

      (h) the Property Trustee shall not be liable for any action taken,
suffered, or omitted to be taken by it in good faith and reasonably believed by
it to be authorized or within the discretion or rights or powers conferred upon
it by this Declaration;

      (i) the Property Trustee shall not be deemed to have notice of any default
or Event of Default unless a Responsible Officer of the Property Trustee has
actual knowledge thereof or unless written notice of any event which is in fact
such a default is received by the Property Trustee at the Corporate Trust Office
and such notice references the Trust Securities and this Declaration;

      (j) the rights, privileges, protections, immunities and benefits given to
the Property Trustee, including, without limitation, its right to be
indemnified, are extended to, and shall be enforceable by, the Property Trustee
in each of its capacities hereunder, and each agent, custodian and other Person
employed to act hereunder; and

      (k) the Property Trustee may request that the Depositor deliver an
Officers' Certificate setting forth the names of individuals and/or titles of
officers authorized at such time to take specified actions pursuant to this
Declaration, which Officers' Certificate may be signed by any person authorized
to sign an Officers' Certificate, including any person specified as so
authorized in any such certificate previously delivered and not superseded.

      Section 7.04. Not Responsible for Recitals or Issuance of Securities. The
recitals contained herein and in the Trust Securities Certificates shall be
taken as the statements of the Trust, and the Trustees do not assume any
responsibility for their correctness. The Trustees shall not be accountable for
the use or application by the Depositor of the proceeds of the Notes.

      The Property Trustee makes no representations as to the value or condition
of the property of the Trust or any part thereof. The Property Trustee makes no
representations as to the validity or sufficiency of this Declaration or the
Trust Securities.

      Section 7.05. May Hold Securities. Any Trustee or any other agent of any
Trustee or the Trust, in its individual or any other capacity, may become the
owner or pledgee of Trust Securities and, subject to Sections 7.08 and 7.13 and,
except as provided in the definition of the term Outstanding in Article I, may
otherwise deal with the Trust with the same rights it would have if it were not
a Trustee or such other agent.


                                       42


      Section 7.06. Compensation; Indemnity; Fees. The Depositor agrees:

      (a) to pay to the Trustees from time to time such compensation as shall
have been agreed in writing with the Depositor for all services rendered by them
hereunder (which compensation shall not be limited by any provision of law in
regard to the compensation of a trustee of an express trust);

      (b) except as otherwise expressly provided herein, to reimburse the
Trustees upon request for all reasonable expenses, disbursements and advances
incurred or made by the Trustees in accordance with any provision of this
Declaration (including the reasonable compensation and the expenses and
disbursements of its agents and counsel), except any such expense, disbursement
or advance as may be attributable to its own negligent action, its own negligent
failure to act or its own willful misconduct (or, in the case of the
Administrative Trustees or the Delaware Trustee, any such expense, disbursement
or advance as may be attributable to his/her gross negligence); and

      (c) to indemnify each of the Trustees or any predecessor Trustee for, and
to hold the Trustees harmless against, any and all loss, damage, claims,
liability, penalty or expense including taxes (other than taxes based on the
income of such Trustee) incurred without its own negligent action, its own
negligent failure to act or its willful misconduct (or, in the case of the
Administrative Trustees or the Delaware Trustee, incurred without gross
negligence or bad faith), arising out of or in connection with the acceptance or
administration of this Declaration, including the costs and expenses of
defending itself against any claim (whether by the Depositor, any Holder or any
other person) or liability in connection with the exercise or performance of any
of its powers or duties hereunder.

      No Trustee may claim any Lien or charge on any Trust Property as a result
of any amount due pursuant to this Section 7.06.

      The provisions of this Section 7.06 shall survive the termination of this
Declaration and the resignation or removal of the Trustees.

      Section 7.07. Corporate Property Trustee Required; Eligibility of
Trustees.

      (a) There shall at all times be a Property Trustee hereunder. The Property
Trustee shall be a Person that is eligible pursuant to the Trust Indenture Act
to act as such and has a combined capital and surplus of at least $50,000,000.
If any such Person publishes reports of condition at least annually, pursuant to
law or to the requirements of its supervising or examining authority, then for
the purposes of this Section, the combined capital and surplus of such Person
shall be deemed to be its combined capital and surplus as set forth in its most
recent report of condition so published. If at any time the Property Trustee
with respect to the Trust Securities shall cease to be eligible in accordance
with the provisions of this Section, it shall resign immediately in the manner
and with the effect hereinafter specified in this Article.

      (b) There shall at all times be one or more Administrative Trustees
hereunder. Each Administrative Trustees shall be either a natural person who is
at least 21 years of age or a legal entity that shall act through one or more
persons authorized to bind that entity.


                                       43


      (c) There shall at all times be a Delaware Trustee. The Delaware Trustee
shall either be (i) a natural person who is at least 21 years of age and a
resident of the State of Delaware or (ii) a legal entity with its principal
place of business in the State of Delaware and that otherwise meets the
requirements of applicable Delaware law that shall act through one or more
persons authorized to bind such entity. Notwithstanding any other provision of
this Declaration, the Delaware Trustee shall not be entitled to exercise any
powers, nor shall the Delaware Trustee have any of the duties and
responsibilities of the other Trustees described in this Declaration. The
Delaware Trustee shall be a trustee of the Trust for the sole and limited
purpose of fulfilling the requirements of Section 3807(a) of the Delaware
Statutory Trust Act.

      Section 7.08. Conflicting Interests. If the Property Trustee has or shall
acquire a conflicting interest within the meaning of the Trust Indenture Act,
the Property Trustee shall either eliminate such interest or resign, to the
extent and in the manner provided by, and subject to the provisions of, the
Trust Indenture Act and this Declaration.

      Section 7.09. Co-Trustees and Separate Trustee. Unless an Event of Default
shall have occurred and be continuing, at any time or times, for the purpose of
meeting the legal requirements of the Trust Indenture Act or of any jurisdiction
in which any part of the Trust Property may at the time be located, the
Depositor and the Administrative Trustees (and if more than one Administrative
Trustees, by agreed action of the majority of such Trustees) shall have power
(i) to appoint, and upon the written request of the Administrative Trustees the
Depositor shall for such purpose join with the Administrative Trustees in the
execution, delivery, and performance of all instruments and agreements necessary
or proper to appoint one or more Persons approved by the Property Trustee either
to act as co-trustee, jointly with the Property Trustee, of all or any part of
such Trust Property, or to the extent required by law to act as separate trustee
of any such property, in either case with such powers as may be provided in the
instrument of appointment, and (ii) to vest in such Person or Persons in the
capacity aforesaid, any property, title, right or power deemed necessary or
desirable, subject to the other provisions of this Section. If the Depositor
does not join in such appointment within 15 days after the receipt by it of a
request so to do, or in case a Note Event of Default has occurred and is
continuing, the Property Trustee alone shall have power to make such
appointment. Any co-trustee or separate trustee appointed pursuant to this
Section shall either be (i) a natural person who is at least 21 years of age and
a resident of the United States or (ii) a legal entity with its principal place
of business in the United States that shall act through one or more persons
authorized to bind such entity.

      Should any written instrument from the Depositor be required by any
co-trustee or separate trustee so appointed for more fully confirming to such
co-trustee or separate trustee such property, title, right, or power, any and
all such instruments shall, on request, be executed, acknowledged, and delivered
by the Depositor.

      Every co-trustee or separate trustee shall, to the extent permitted by
law, but to such extent only, be appointed subject to the following terms,
namely:

      (a) The Trust Securities shall be executed and delivered and all rights,
powers, duties, and obligations hereunder in respect of the custody of
securities, cash and other personal


                                       44


property held by, or required to be deposited or pledged with, the Trustees
specified hereunder, shall be exercised, solely by such Trustees and not by such
co-trustee or separate trustee.

      (b) The rights, powers, duties, and obligations hereby conferred or
imposed upon the Property Trustee in respect of any property covered by such
appointment shall be conferred or imposed upon and exercised or performed by the
Property Trustee or by the Property Trustee and such co-trustee or separate
trustee jointly, as shall be provided in the instrument appointing such
co-trustee or separate trustee, except to the extent that under any law of any
jurisdiction in which any particular act is to be performed, the Property
Trustee shall be incompetent or unqualified to perform such act, in which event
such rights, powers, duties and obligations shall be exercised and performed by
such co-trustee or separate trustee.

      (c) The Property Trustee at any time, by an instrument in writing executed
by it, with the written concurrence of the Depositor, may accept the resignation
of or remove any co-trustee or separate trustee appointed under this Section,
and, in case an Event of Default under the Indenture has occurred and is
continuing, the Property Trustee shall have power to accept the resignation of,
or remove, any such co-trustee or separate trustee without the concurrence of
the Depositor. Upon the written request of the Property Trustee, the Depositor
shall join with the Property Trustee in the execution, delivery, and performance
of all instruments and agreements necessary or proper to effectuate such
resignation or removal. A successor to any co-trustee or separate trustee so
resigned or removed may be appointed in the manner provided in this Section.

      (d) No co-trustee or separate trustee hereunder shall be personally liable
by reason of any act or omission of the Property Trustee, or any other trustee
hereunder.

      (e) The Property Trustee shall not be liable by reason of any act of a
co-trustee or separate trustee.

      (f) Any Act of Holders delivered to the Property Trustee shall be deemed
to have been delivered to each such co-trustee and separate trustee.

      Section 7.10. Resignation and Removal; Appointment of Successor. No
resignation or removal of any Trustee and no appointment of a successor Trustee
pursuant to this Article shall become effective until the acceptance of
appointment by the successor Trustee in accordance with the applicable
requirements of Section 7.11.

      Subject to the immediately preceding paragraph, any Trustee may resign at
any time with respect to the Trust Securities by giving written notice thereof
to the Securityholders.

      Unless an Event of Default shall have occurred and be continuing, any
Trustee may be removed at any time by Act of the Holder of the Common
Securities. If an Event of Default shall have occurred and be continuing, the
Property Trustee or the Delaware Trustee, or both of them, may be removed at
such time only by Act of the Holders of a majority in Liquidation Amount of the
Outstanding Preferred Securities, delivered to such Trustee (in its individual
capacity and on behalf of the Trust). The Administrative Trustees may be removed
at any time by the Holder of Common Securities only.


                                       45


      If the instrument of acceptance by the successor Trustee required by
Section 7.11 shall not have been delivered to the Trustee within 30 days after
the giving of such notice of resignation or removal, the Trustee may petition,
at the expense of the Depositor, any court of competent jurisdiction for the
appointment of a successor Trustee.

      If any Trustee shall resign, be removed or become incapable of acting as
Trustee, or if a vacancy shall occur in the office of any Trustee for any cause,
at a time when no Event of Default shall have occurred and be continuing, the
Holder of Common Securities, by Act of the Holder of Common Securities delivered
to the retiring Trustee, shall promptly appoint a successor Trustee or Trustees
and the Trust and the retiring Trustee shall comply with the applicable
requirements of Section 7.11. If the Property Trustee or the Delaware Trustee
shall resign, be removed or become incapable of continuing to act as the
Property Trustee or the Delaware Trustee, as the case may be, at a time when an
Event of Default has occurred and is continuing, the Holders of Preferred
Securities, by Act of the Securityholders of a majority in Liquidation Amount of
the Outstanding Preferred Securities delivered to the retiring Trustee, shall
promptly appoint a successor Trustee or Trustees, and such successor Trustee
shall comply with the applicable requirements of Section 7.11. If any
Administrative Trustee shall resign, be removed or become incapable of acting as
an Administrative Trustee at a time when an Event of Default shall have occurred
and be continuing, the Holder of Common Securities shall appoint a successor
Administrative Trustee. If no successor Trustee shall have been so appointed by
the Holder of Common Securities or the Holders of Preferred Securities and
accepted appointment in the manner required by Section 7.11, any Securityholder
who has been a Securityholder of Trust Securities for at least six months may,
on behalf of himself and all others similarly situated, petition any court of
competent jurisdiction for the appointment of a successor Trustee.

      The Property Trustee shall give notice of each removal of a Trustee and
each appointment of a successor Trustee to all Securityholders in the manner
provided in Section 10.08 and shall give notice to the Depositor. Each notice
shall include the name of the successor Trustee and the address of its Corporate
Trust Office if it is the Property Trustee.

      Notwithstanding the foregoing or any other provision of this Declaration,
in the event any Administrative Trustee or the Delaware Trustee who is a natural
person dies or becomes, in the opinion of the Depositor, incompetent or
incapacitated, the vacancy created by such death, incompetence or incapacity may
be filled by (a) the unanimous act of the remaining Administrative Trustees if
there are at least two of them or (b) otherwise by the Depositor (with the
successor in each case being a Person who satisfies the eligibility requirements
for Administrative Trustees or for the Delaware Trustee, as the case may be, set
forth in Section 7.07).

      Section 7.11. Acceptance of Appointment by Successor. In case of the
appointment hereunder of a successor Trustee, the retiring Trustee (if requested
by the Depositor) and each successor Trustee shall execute and deliver to the
Trust and the retiring Trustee an amendment hereto wherein each successor
Trustee shall accept such appointment and which (a) shall contain such
provisions as shall be necessary or desirable to transfer and confirm to, and to
vest in, each successor Trustee all the rights, powers, trusts and duties of the
retiring Trustee and (b) shall add to or change any of the provisions of this
Declaration as shall be necessary to provide for or facilitate the
administration of the trusts hereunder by more than one Trustee, it being
understood


                                       46


that nothing herein or in such amendment shall constitute such Trustees
co-trustees of the same trust and that each such Trustee shall be trustee of a
trust or trusts hereunder separate and apart from any trust or trusts hereunder
administered by any other such Trustee and upon the execution and delivery of
such amendment the resignation or removal of the retiring Trustee shall become
effective to the extent provided therein and each such successor Trustee,
without any further act, deed or conveyance, shall become vested with all the
rights, powers, trusts and duties of the retiring Trustee and the Trust; but, on
request of the Trust or any successor Trustee, such retiring Trustee shall duly
assign, transfer and deliver to such successor Trustee all Trust Property, all
proceeds thereof and money held by such retiring Trustee hereunder.

      Upon request of any such successor Trustee, the Trust shall execute any
and all instruments for more fully and certainly vesting in and confirming to
such successor Trustee all such rights, powers and trusts referred to in the
preceding paragraph.

      No successor Trustee shall accept its appointment unless at the time of
such acceptance such successor Trustee shall be qualified and eligible under
this Article.

      Section 7.12. Merger, Conversion, Consolidation or Succession to Business.
Any Person into which any of the Trustees may be merged or converted or with
which it may be consolidated, or any Person resulting from any merger,
conversion or consolidation to which such Trustee shall be a party, or any
Person succeeding to all or substantially all the corporate trust business of
such Trustee, shall be the successor of such Trustee hereunder, provided such
Person shall be otherwise qualified and eligible under this Article, without the
execution or filing of any paper or any further act on the part of any of the
parties hereto.

      Section 7.13. Preferential Collection of Claims Against Depositor or
Trust. If and when the Property Trustee or the Delaware Trustee shall be or
become a creditor (whether directly or indirectly, secured or unsecured) of the
Depositor or the Trust (or any other obligor upon the Notes or the Trust
Securities), including under the terms of Section 7.05 hereof, the Property
Trustee or the Delaware Trustee, as the case may be, shall be subject to and
shall take all actions necessary in order to comply with the provisions of the
Trust Indenture Act regarding the collection of claims against the Depositor or
Trust (or any such other obligor).

      Section 7.14. Reports by Property Trustee. The Property Trustee shall
transmit to Holders such reports concerning the Property Trustee and its actions
under this Declaration as may be required pursuant to the Trust Indenture Act at
the times and in the manner provided pursuant thereto. If required by Section
313(a) of the Trust Indenture Act, the Property Trustee shall, within 60 days
after each May 31 following the date of this Declaration deliver to Holders a
brief report, dated as of such May 31, which complies with the provisions of
such Section 313(a).

      A copy of each such report shall, at the time of such transmission to
Holders, be filed by the Property Trustee with each stock exchange upon which
any Preferred Securities are then listed, with the Commission and with the
Trust. The Trust will promptly notify the Property Trustee when any Preferred
Securities are listed on any stock exchange.


                                       47


      Section 7.15. Reports to the Property Trustee. The Depositor and the
Administrative Trustees on behalf of the Trust shall provide to the Property
Trustee such documents, reports and information as required by Section 314 of
the Trust Indenture Act (if any) and the compliance certificate required by
Section 314(a) of the Trust Indenture Act in the form, in the manner and at the
times required by Section 314 of the Trust Indenture Act.

      Delivery of such reports, information and documents to the Property
Trustee is for informational purposes only and the Property Trustee's receipt of
such shall not constitute constructive notice of any information contained
therein or determinable from information contained therein, including the
Trust's compliance with any of its covenants hereunder (as to which the Property
Trustee is entitled to conclusively rely exclusively on Officers' Certificates).

      Section 7.16. Evidence of Compliance with Conditions Precedent. The
Depositor and any Administrative Trustee on behalf of the Trust shall provide to
the Property Trustee evidence of compliance with the conditions precedent, if
any, provided for in this Declaration that relate to any of the matters set
forth in Section 314(c) of the Trust Indenture Act.

      Section 7.17. Statements Required in Officers' Certificate and Opinion of
Counsel.

      Each Officers' Certificate and Opinion of Counsel with respect to
compliance with a covenant or condition provided for in this Declaration shall
include:

                  (1) a statement that each Person making such Officers'
Certificate or Opinion of Counsel has read such covenant or condition;

                  (2) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions contained in
such Officers' Certificate or Opinion of Counsel are based;

                  (3) a statement that, in the opinion of each such Person, such
Person has made such examination or investigation as is necessary to enable such
Person to express an informed opinion as to whether or not such covenant or
condition has been complied with; and

                  (4) a statement that, in the opinion of such Person, such
covenant or condition has been complied with; provided, however, that with
respect to matters of fact not involving any legal conclusion, an Opinion of
Counsel may rely on an Officers' Certificate or certificates of public
officials.

      Section 7.18. Number of Trustees.

      (a) The number of Trustees shall initially be five, provided that the
Holder of all of the Common Securities by written instrument may increase or
decrease the number of Administrative Trustees provided that there be at least
one Administrative Trustee. During any period in which the number of
Administrative Trustees is more than one, any Administrative Trustees may act on
behalf of the Trust.

      (b) If a Trustee ceases to hold office for any reason and a vacancy shall
occur, the vacancy shall be filled with a Trustee appointed in accordance with
Section 7.10.


                                       48


      (c) The death, dissolution, termination, resignation, retirement, removal,
bankruptcy, incompetence or incapacity to perform the duties of a Trustee shall
not operate to annul, dissolve or terminate the Trust. Whenever a vacancy shall
occur, until such vacancy is filled by the appointment of an Administrative
Trustee in accordance with Section 7.10, the Administrative Trustees in office,
regardless of their number (and notwithstanding any other provision of this
Declaration), shall have all the powers granted to the Administrative Trustees
and shall discharge all the duties imposed upon the Administrative Trustees by
this Declaration.

      Section 7.19. Delegation of Power.

      (a) Any Administrative Trustee may, by power of attorney consistent with
applicable law, delegate to any natural person over the age of 21 his/her power
for the purpose of executing any documents contemplated in Section 2.07(a),
including any registration statement or amendment thereto filed with the
Commission, or making any other governmental filing; and

      (b) the Administrative Trustees shall have power to delegate from time to
time to such of their number, if there is more than one Administrative Trustee,
or to the Depositor the doing of such things and the execution of such
instruments either in the name of the Trust or the names of the Administrative
Trustees or otherwise as the Administrative Trustees may deem expedient, to the
extent such delegation is not prohibited by applicable law or contrary to the
provisions of the Trust, as set forth herein.

      Section 7.20. Voting. Except as otherwise provided in this Declaration,
the consent or vote of the Trustees shall be approved by the Administrative
Trustees or, if more than one, by a majority of the Administrative Trustees.

                                  ARTICLE VIII
                           Dissolution and Liquidation

      Section 8.01. Dissolution Upon Expiration Date. Unless earlier dissolved,
the Trust shall automatically dissolve on November 16, 2009 (the "Expiration
Date").

      Section 8.02. Early Termination. The earliest to occur of any of the
following events is an "Early Termination Event," upon the occurrence of which
the Trust shall dissolve:

      (a) the occurrence of a Bankruptcy Event in respect of, or the dissolution
or liquidation of, the Depositor or an acceleration of the maturity of the Notes
pursuant to Section 502 of the Indenture;

      (b) the election of the Depositor to dissolve the Trust and, after
satisfaction of creditors as required by applicable law, cause the distribution
of a Like Amount of Notes to the Holders of the Trust Securities;

      (c) the redemption, at mandatory redemption or upon the occurrence of a
Tax Event, of all of the Trust Securities; and

      (d) an order for dissolution of the Trust shall have been entered by a
court of competent jurisdiction.


                                       49


      The election of the Depositor pursuant to Section 8.02(b) shall be made by
the Depositor giving written notice to the Trustees not less than 30 days prior
to the date of distribution of the Notes. Such notice shall specify the date of
distribution of the Notes and shall be accompanied by an Opinion of Counsel that
such event will not be a taxable event to the Holders of the Trust Securities
for United States Federal income tax purposes.

      Section 8.03. Termination. The respective obligations and responsibilities
of the Trustees and the Trust shall terminate upon the latest to occur of the
following: (a) the distribution by the Property Trustee to Securityholders upon
the winding up of the Trust pursuant to Section 8.04 of all amounts required to
be distributed hereunder upon the final payment of the Trust Securities; (b) the
payment of any expenses owed by the Trust; and (c) the discharge of all
administrative duties of the Administrative Trustees, including the performance
of any tax reporting obligations with respect to the Trust or the
Securityholders and the filing of the Certificate of Cancellation with the
Secretary of State of the State of Delaware.

      Section 8.04. Winding Up.

      (a) If an Early Termination Event specified in clause (a) or (d) of
Section 8.02 occurs or upon the Expiration Date, the Trust shall be wound up by
the Trustees as expeditiously as the Trustees determine to be possible by
distributing, after satisfaction of liabilities to creditors of the Trust as
provided by applicable law, to each Securityholder a Like Amount of Notes,
subject to Section 8.04(d). If an Early Termination Event specified in clause
(b) occurs, the Trust shall be liquidated by the Trustee on the date of
distribution of the Notes specified by the Depositor in its notice delivered
pursuant to Section 8.02. Notice of liquidation shall be given by the Property
Trustee by first-class mail, postage prepaid, mailed not later than 30 nor more
than 60 days prior to the Liquidation Date to each Holder of Trust Securities at
such Holder's address appearing in the Securities Register. All notices of
liquidation shall:

            (i) state the Liquidation Date;

            (ii) state that from and after the Liquidation Date, the Trust
Securities will no longer be deemed to be Outstanding and any Trust Securities
Certificates not surrendered for exchange will be deemed to represent a Like
Amount of Notes; and

            (iii) provide such information with respect to the mechanics by
which Holders may exchange Trust Securities Certificates for certificates
evidencing Notes, or, if Section 8.04(d) applies, receive a Liquidation
Distribution, as the Administrative Trustees or the Property Trustee shall deem
appropriate.

      (b) In order to effect the winding up of the Trust and distribution of the
Notes to Securityholders, the Property Trustee, either itself acting as exchange
agent or through the appointment of a separate exchange agent, shall establish
such procedures as it shall deem appropriate to effect the distribution of Notes
in exchange for the Outstanding Trust Securities Certificates.

      (c) Except where Section 8.02(c) applies, on or after the Liquidation
Date, (i) the Trust Securities will no longer be deemed to be Outstanding, (ii)
certificates representing a Like Amount of Notes will be issued to Holders of
Trust Securities Certificates, upon surrender of


                                       50


such certificates to the Administrative Trustees or its agent for exchange,
(iii) the Depositor shall use its best efforts to have the Notes listed on the
New York Stock Exchange or such other exchange as the Preferred Securities are
then listed and shall take any reasonable action necessary to effect the
distribution of the Notes, (iv) any Trust Securities Certificates not so
surrendered for exchange will be deemed to represent a Like Amount of Notes,
accruing interest at the rate then borne by the Notes from the last Distribution
Date on which a Distribution was made on such Trust Certificates until such
certificates are so surrendered (and until such certificates are so surrendered,
no payments or interest or principal will be made to Holders of Trust Securities
Certificates with respect to such Notes) and (v) all rights of Securityholders
holding Trust Securities will cease, except the right of such Securityholders to
receive Notes upon surrender of Trust Securities Certificates.

      (d) In the event that, notwithstanding the other provisions of this
Section 8.04, whether because of an order for dissolution entered by a court of
competent jurisdiction or otherwise, distribution of the Notes in the manner
provided herein is determined by the Property Trustee not to be practical, the
Trust Property shall be liquidated, and the Trust shall be terminated, by the
Property Trustee in such manner as the Property Trustee determines. In such
event, Securityholders will be entitled to receive out of the assets of the
Trust available for distribution to Securityholders, after satisfaction of
liabilities to creditors of the Trust as provided by applicable law, an amount
equal to the Liquidation Amount per Trust Security plus accumulated and unpaid
Distributions thereon to the date of payment (such amount being the "Liquidation
Distribution"). If, upon any such dissolution, the Liquidation Distribution can
be paid only in part because the Trust has insufficient assets available to pay
in full the aggregate Liquidation Distribution, then, subject to the next
succeeding sentence, the amounts payable by the Trust on the Trust Securities
shall be paid on a pro rata basis (based upon Liquidation Amounts). The Holder
of the Common Securities will be entitled to receive Liquidation Distributions
upon any such dissolution pro rata (determined as aforesaid) with Holders of
Preferred Securities, except that, if a Note Event of Default has occurred and
is continuing, the Preferred Securities shall have a priority over the Common
Securities, and no Liquidation Distribution will be paid to the Holders of the
Common Securities unless and until receipt by all Holders of the Preferred
Securities of the entire Liquidation Distribution payable in respect thereof.

                                   ARTICLE IX
                                  Mergers, Etc.

      Section 9.01. Mergers, Consolidations, Amalgamations or Replacements of
the Trust. The Trust may not merge with or into, consolidate, amalgamate, or be
replaced by, or convey, transfer or lease its properties and assets as an
entirety or substantially as an entirety to any Person, except as described
below. The Trust may, at the request of the Depositor, with the consent of the
Administrative Trustees and without the consent of the Holders of the Trust
Securities, merge with or into, consolidate, amalgamate, or be replaced by, a
trust organized as such under the laws of any State; provided, that (i) such
successor entity either (a) expressly assumes all of the obligations of the
Trust with respect to the Trust Securities or (b) substitutes for the Trust
Securities other securities having substantially the same terms as the Trust
Securities (the "Successor Securities") so long as the Successor Securities rank
the same as the Trust Securities rank with respect to the payment of
Distributions and payments upon liquidation, redemption and otherwise, (ii) the
Depositor expressly appoints a trustee of such


                                       51


successor entity possessing the same powers and duties as the Property Trustee
as the holder of the Notes, (iii) the Successor Securities are listed, or any
Successor Securities will be listed upon notification of issuance, on any
national securities exchange or other organization on which the Trust Securities
are then listed or quoted, (iv) such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease does not cause the Preferred
Securities (including any Successor Securities) to be downgraded, placed under
surveillance or review or withdrawn by any nationally recognized statistical
rating organization, (v) such merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease does not adversely affect the rights, preferences
and privileges of the Holders of the Trust Securities (including any Successor
Securities) in any material respect, (vi) such successor entity has a purpose
substantially similar to that of the Trust, (vii) prior to such merger,
consolidation, amalgamation, replacement, transfer or lease, the Depositor and
the Property Trustee have received an Opinion of Counsel to the effect that (a)
such merger, consolidation, amalgamation, replacement, conveyance, transfer or
lease does not adversely affect the rights, preferences and privileges of the
Holders of the Trust Securities (including any Successor Securities) in any
material respect, and (b) following such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease, neither the Trust nor such successor
entity will be required to register as an investment company under the 1940 Act
and the Trust (or the successor entity) will continue to be classified as a
grantor trust for United States Federal income tax purposes and (viii) the
Depositor or any permitted successor assignee owns all of the common securities
of such successor entity and guarantees the obligations of such successor entity
under the Successor Securities at least to the extent provided by the Guarantee
and this Declaration. Notwithstanding the foregoing, the Trust shall not, except
with the consent of all Holders of the Trust Securities, merge with or into,
consolidate, amalgamate, or be replaced by or convey, transfer or lease its
properties and assets substantially as an entirety to, any other entity or
permit any other entity to consolidate, amalgamate, merge with or into, or
replace it if such consolidation, conversion, amalgamation, merger, replacement,
conveyance, transfer or lease would cause the Trust or the successor entity not
to be classified as a grantor trust for United States Federal income tax
purposes or would cause each Holder of Trust Securities not to be treated as
owning an undivided beneficial ownership interest in the Notes.

                                    ARTICLE X
                            Miscellaneous Provisions

      Section 10.01. Limitation of Rights of Securityholders. The death,
dissolution or incapacity of any Person having an interest, beneficial or
otherwise, in Trust Securities shall not operate to terminate this Declaration,
nor dissolve, annul or terminate the Trust, nor entitle the legal
representatives or heirs of such Person or any Securityholder for such Person,
to claim an accounting, take any action or bring any proceeding in any court for
a partition or winding-up of the arrangements contemplated hereby, nor otherwise
affect the rights, obligations and liabilities of the parties hereto or any of
them.

      Section 10.02. Amendment.

      (a) This Declaration may be amended from time to time by the Trustees and
the Depositor, without the consent of any Securityholders, to cure any
ambiguity, defect or inconsistency or make any other change which does not
adversely affect in any material respect


                                       52


the interests of any Holder of Preferred Securities. Notice of any amendments of
this Declaration pursuant to Section 10.02(a) shall be given to the
Securityholders.

      (b) Except as provided in Section 10.02(a) and 10.02(c) hereof, any
provision of this Declaration may be amended by the Trustees and the Depositor
with the consent of Holders of a majority of the aggregate Liquidation Amount of
the Outstanding Preferred Securities.

      (c) In addition to and notwithstanding any other provision in this
Declaration, without the consent of each affected Securityholder, this
Declaration may not be amended to (i) change the amount, timing or currency of
any Distribution or Liquidation Distribution on the Trust Securities or
otherwise adversely affect the method of payment of any Distribution or
Liquidation Distribution required to be made in respect of the Trust Securities
as of a specified date; (ii) change the redemption provisions of the Trust
Securities; (iii) restrict the right of a Securityholder to institute suit for
the enforcement of any such payment contemplated in (i) or (ii) above on or
after the related date; (iv) modify the first sentence of Section 2.06 hereof;
(v) authorize or issue any beneficial interest in the Trust other than as
contemplated by this Declaration; (vi) change the conditions precedent for the
Depositor to elect to dissolve the Trust and distribute the Notes to Holders of
Preferred Securities as set forth in Section 8.02; or (vii) affect the limited
liability of any Holder of Preferred Securities, and, notwithstanding any other
provision herein, without the unanimous consent of the Securityholders,
paragraphs (b) and (c) of this Section 10.02 may not be amended.

      (d) Notwithstanding any other provisions of this Declaration, no amendment
to this Declaration shall be made without receipt by the Trust of an Opinion of
Counsel experienced in such matters to the effect that such amendment will not
affect the Trust's status as a grantor trust for United States Federal income
tax purposes or its exemption from regulation as an "investment company" under
the 1940 Act.

      (e) Notwithstanding anything in this Declaration to the contrary, without
the consent of the Depositor, this Declaration may not be amended in a manner
which imposes any additional obligation on the Depositor.

      (f) In the event that any amendment to this Declaration is made, the
Administrative Trustees shall promptly provide to the Depositor a copy of such
amendment.

      (g) In executing any amendment to the Declaration, the Property Trustee
shall be entitled to receive, and (subject to Section 8.01) shall be fully
protected in relying upon, an Opinion of Counsel stating that the execution of
such amendment is authorized or permitted by this Declaration. Except as
contemplated by Section 7.11, a Trustee may, but shall not be obligated to,
enter into any amendment to this Declaration which affects the Trustee's own
rights, duties or immunities under this Declaration or otherwise.

      Section 10.03. Severability. In case any provision in this Declaration or
in the Trust Securities Certificates shall be invalid, illegal or unenforceable,
the validity, legality and enforceability of the remaining provisions shall not
in any way be affected or impaired thereby.

      Section 10.04. Governing Law. THIS DECLARATION AND THE RIGHTS AND
OBLIGATIONS OF EACH OF THE SECURITYHOLDERS, THE TRUST, THE DEPOSITOR


                                       53


AND THE TRUSTEES WITH RESPECT TO THIS DECLARATION AND THE TRUST SECURITIES SHALL
BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF
DELAWARE, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES.

      Section 10.05. Payments Due on Non-Business Day. If the date fixed for any
payment on any Trust Security shall be a day which is not a Business Day, then
such payment may be made on the next succeeding day which is a Business Day (and
without any interest or other payment in respect of any such delay), except
that, if such Business Day is in the next succeeding calendar year, such
payments shall be made on the immediately preceding Business Day, in each case
with the same force and effect as though made on the date fixed for such
payment.

      Section 10.06. Successors and Assigns. This Declaration shall be binding
upon and shall inure to the benefit of any successor to the Trust or successor
Trustee or both, including any successor by operation of law. Except in
connection with a consolidation, merger or sale involving the Depositor that is
permitted under Article V of the Indenture and pursuant to which the assignee
agrees in writing to perform the Depositor's obligations hereunder, the
Depositor shall not assign its obligations hereunder.

      Section 10.07. Headings. The Article and Section headings are for
convenience only and shall not affect the construction of this Declaration.

      Section 10.08. Reports, Notices and Demands. Any report, notice, demand or
other communication which by any provision of this Declaration is required or
permitted to be given or served to or upon any Securityholder or the Depositor
may be given or served in writing by deposit thereof, first-class postage
prepaid in the United States mail, hand delivery or facsimile transmission, in
each case, addressed, (a) in the case of a Holder of a Preferred Security, to
such Holder of a Preferred Security as such Securityholder's name and address
may appear on the Securities Register; and (b) in the case of the Holder of a
Common Security or the Depositor, to Public Service Enterprise Group
Incorporated, 80 Park Plaza, Newark, New Jersey 07101, Attention: Treasurer,
facsimile no.: 973-242-1651. Such notice, demand or other communication to or
upon a Securityholder shall be deemed to have been sufficiently given or made,
for all purposes, upon hand delivery, mailing or transmission.

      Any notice, demand or other communication which by any provision of this
Declaration is required or permitted to be given or served to or upon the
Property Trustee, the Delaware Trustee or the Administrative Trustees shall be
given in writing addressed (until another address is published by the Trust) as
follows: (a) with respect to the Property Trustee to Wachovia Bank, National
Association, 21 South Street, Morristown, New Jersey 07960, Attention: Corporate
Trust Administration; (b) with respect to the Delaware Trustee, to Wachovia
Trust Company, National Association, One Rodney Square, 920 King Street, Suite
102, Wilmington, Delaware 19801; and (c) with respect to the Administrative
Trustees, to the address above for notices to the Depositor, marked "Attention:
Administrative Trustee of PSEG Funding Trust I c/o Treasurer." Such notice,
demand or other communication to or upon the Property Trustee or the Delaware
Trustee shall be deemed to have been sufficiently given or made only upon actual
receipt of the writing by the Property Trustee or the Delaware Trustee.


                                       54


      Section 10.09. Agreement Not to Petition. Each of the Trustees and the
Depositor agree for the benefit of the Securityholders that, until at least one
year and one day after the Trust has been terminated in accordance with Article
VIII, they shall not file, or join in the filing of, a petition against the
Trust under any Bankruptcy Laws or otherwise join in the commencement of any
proceeding against the Trust under any Bankruptcy Law. In the event the
Depositor or any of the Trustees takes action in violation of this Section
10.09, the Property Trustee agrees, for the benefit of Securityholders, that at
the expense of the Depositor, it shall file an answer with the bankruptcy court
or otherwise properly contest the filing of such petition by the Depositor or
any of the Trustees, as applicable, against the Trust or the commencement of
such action and raise the defense that the Depositor and each of the Trustees
has agreed in writing not to take such action and should be stopped and
precluded therefrom and such other defenses, if any, as counsel for the Property
Trustee or the Trust may assert. The provisions of this Section 10.09 shall
survive the termination of this Declaration.

      Section 10.10. Trust Indenture Act; Conflict with Trust Indenture Act.

      (a) This Declaration is subject to the provisions of the Trust Indenture
Act that are required to be part of this Declaration and shall, to the extent
applicable, be governed by such provisions.

      (b) The Property Trustee shall be the only Trustee which is a trustee for
the purposes of the Trust Indenture Act.

      (c) If any provision hereof limits, qualifies or conflicts with another
provision hereof which is required to be included in this Declaration by any of
the provisions of the Trust Indenture Act, such required provision shall
control. If any provision of this Declaration modifies or excludes any provision
of the Trust Indenture Act which may be so modified or excluded, the latter
provision shall be deemed to apply to this Declaration as so modified or
excluded, as the case may be.

      (d) The application of the Trust Indenture Act to this Declaration shall
not affect the nature of the Trust Securities as equity securities representing
undivided beneficial interests in the assets of the Trust.

      Section 10.11. Acceptance of Terms of Declaration, Guarantee and
Indenture. THE RECEIPT AND ACCEPTANCE OF A TRUST SECURITY OR ANY INTEREST
THEREIN BY OR ON BEHALF OF A SECURITYHOLDER OR ANY BENEFICIAL OWNER, WITHOUT ANY
SIGNATURE OR FURTHER MANIFESTATION OF ASSENT, SHALL CONSTITUTE THE UNCONDITIONAL
ACCEPTANCE BY THE SECURITYHOLDER AND ALL OTHERS HAVING A BENEFICIAL INTEREST IN
SUCH TRUST SECURITY OF ALL THE TERMS AND PROVISIONS OF THIS DECLARATION AND
AGREEMENT TO THE SUBORDINATION PROVISIONS AND OTHER TERMS OF THE GUARANTEE AND
THE INDENTURE, AND SHALL CONSTITUTE THE AGREEMENT OF THE TRUST, SUCH
SECURITYHOLDER AND SUCH OTHERS THAT THE TERMS AND PROVISIONS OF THIS DECLARATION
SHALL BE BINDING, OPERATIVE AND EFFECTIVE AS BETWEEN THE TRUST AND SUCH
SECURITYHOLDER AND SUCH OTHERS.


                                       55


      WITNESS WHEREOF, the undersigned have caused this agreement to be executed
as of the day and year first above written.

                                        PUBLIC SERVICE ENTERPRISE GROUP
                                        INCORPORATED, as Depositor

                                        By:_____________________________________
                                           Name:
                                           Title:


                                        WACHOVIA BANK, NATIONAL
                                        ASSOCIATION, as Property Trustee

                                        By:_____________________________________
                                           Name:
                                           Title:


                                        WACHOVIA TRUST COMPANY, NATIONAL
                                        ASSOCIATION, as Delaware Trustee

                                        By:_____________________________________
                                           Name:
                                           Title:


                                        _______________________________________,
                                        as Administrative Trustee
                                        Name:


                                        _______________________________________,
                                        as Administrative Trustee
                                        Name:


                                        _______________________________________,
                                        as Administrative Trustee
                                        Name:


                                       56


EXHIBIT A

                              CERTIFICATE OF TRUST

                                       OF

                              PSEG FUNDING TRUST I

      THIS CERTIFICATE OF TRUST of PSEG Funding Trust I (the "Trust"), dated
March 18, 2002, is being duly executed and filed by the undersigned, as
trustees, to form a statutory trust under the Delaware Statutory Trust Act (12
Del. C.ss.3801 et seq.) (the "Act").

            (i) Name. The name of the statutory trust being formed hereby is
PSEG Funding Trust I.

            (ii) Delaware Trustee. The name and business address of the trustee
of the Trust in the State of Delaware are First Union Trust Company, National
Association, One Rodney Square, 920 King Street, Suite 102, Wilmington, Delaware
19801.

            (iii) Counterparts. This Certificate of Trust may be executed in one
or more counterparts, all of which together shall constitute one and the same
instrument.

            (iv) Effective Date. This Certificate of Trust shall be effective as
of its filing with the Secretary of State of Delaware.

      IN WITNESS WHEREOF, the undersigned, being the trustees of the Trust, have
executed this Certificate of Trust as of the date first above written in
accordance with Section 3811(a) of the Act.

                                        FIRST UNION TRUST COMPANY, NATIONAL
                                        ASSOCIATION, as Trustee


                                        By: ------------------------------------
                                            Name:  Sterling C. Correia
                                            Title: Vice President


                                            Mark G. Kahrer, as Trustee


                                        ----------------------------------------


                                      A-1


EXHIBIT B

                      THIS CERTIFICATE IS NOT TRANSFERABLE

THE RECEIPT AND ACCEPTANCE OF A COMMON SECURITY OR ANY INTEREST HEREIN BY OR ON
BEHALF OF A SECURITYHOLDER OR ANY BENEFICIAL OWNER, WITHOUT ANY SIGNATURE OR
FURTHER MANIFESTATION OF ASSENT, SHALL CONSTITUTE THE UNCONDITIONAL ACCEPTANCE
BY THE SECURITYHOLDER AND ALL OTHERS HAVING A BENEFICIAL INTEREST IN SUCH COMMON
SECURITY OF ALL THE TERMS AND PROVISIONS OF THE DECLARATION AND AGREEMENT TO THE
SUBORDINATION PROVISIONS AND OTHER TERMS OF THE GUARANTEE AND THE INDENTURE, AND
SHALL CONSTITUTE THE AGREEMENT OF THE TRUST, SUCH SECURITYHOLDER AND SUCH OTHERS
THAT THE TERMS AND PROVISIONS OF THE DECLARATION SHALL BE BINDING, OPERATIVE AND
EFFECTIVE AS BETWEEN THE TRUST AND SUCH SECURITYHOLDER AND SUCH OTHERS.

Certificate Number
__-1

Number of Common Securities:
Aggregate Liquidation Amount:

                    Certificate Evidencing Common Securities

                                       of

                              PSEG Funding Trust I

                                Common Securities

                  (liquidation amount $50 per Common Security)

      PSEG Funding Trust I, a statutory trust created under the laws of the
State of Delaware (the "Trust"), hereby certifies that Public Service Enterprise
Group Incorporated (the "Holder") is the registered holder of 284,537 common
securities of the Trust representing undivided beneficial interests in the
assets of the Trust and designated as the Common Securities (liquidation amount
$50 per Common Security) (the "Common Securities"). This certificate is, and the
Common Securities are, not transferable and any attempted transfer hereof shall
be void. The designations, rights, privileges, restrictions, preferences and
other terms and provisions of the Common Securities are set forth in, and this
certificate and the Common Securities represented hereby are issued and shall in
all respects be subject to the terms and provisions of, the Amended and Restated
Trust Agreement of the Trust dated as of September 10, 2002, as the same may be
amended from time to time (the "Declaration"). The Trust will furnish a copy of
the Declaration and the Indenture to the Holder without charge upon written
request to the Trust at its principal place of business or registered office.


                                      B-1


      Upon receipt of this certificate, the Holder is bound by the Declaration
and is entitled to the benefits thereunder.

      By acceptance, the Holder agrees to treat, for United States Federal
income tax purposes, the Notes as indebtedness of the Depositor and the Common
Securities as evidence of an undivided beneficial interest in the Notes.

      This Certificate shall be governed by and construed in accordance with the
laws of the State of Delaware without regard to the conflict of laws principles
thereof.


                                      B-2


      IN WITNESS WHEREOF, the Trust has executed this certificate this 10th day
of September, 2002.

                                        PSEG FUNDING TRUST I


                                        By:_____________________________________
                                           Name:
                                           Title: Administrative Trustee


                                      B-3


EXHIBIT C

      THE RECEIPT AND ACCEPTANCE OF A PREFERRED SECURITY OR ANY INTEREST HEREIN
BY OR ON BEHALF OF A SECURITYHOLDER OR ANY BENEFICIAL OWNER, WITHOUT ANY
SIGNATURE OR FURTHER MANIFESTATION OF ASSENT, SHALL CONSTITUTE THE UNCONDITIONAL
ACCEPTANCE BY THE SECURITYHOLDER AND ALL OTHERS HAVING A BENEFICIAL INTEREST IN
SUCH PREFERRED SECURITY OF ALL THE TERMS AND PROVISIONS OF THE DECLARATION AND
AGREEMENT TO THE SUBORDINATION PROVISIONS AND OTHER TERMS OF THE GUARANTEE AND
THE INDENTURE, AND SHALL CONSTITUTE THE AGREEMENT OF THE TRUST, SUCH
SECURITYHOLDER AND SUCH OTHERS THAT THE TERMS AND PROVISIONS OF THE DECLARATION
SHALL BE BINDING, OPERATIVE AND EFFECTIVE AS BETWEEN THE TRUST AND SUCH
SECURITYHOLDER AND SUCH OTHERS.

      [To be included in Book-Entry Preferred Securities Certificate- This
Preferred Security is a Book-Entry Preferred Securities Certificate within the
meaning of the Declaration previously referred to and is registered in the name
of The Depository Trust Company (the "Depository") or a nominee of the
Depository. This Preferred Security is exchangeable for Preferred Securities
registered in the name of a person or entity other than the Depository or its
nominee only in the limited circumstances described in the Declaration and no
transfer of this Preferred Security (other than a transfer of this Preferred
Security as a whole by the Depository to a nominee of the Depository or by a
nominee of the Depository to the Depository or another nominee of the
Depository) may be registered except in limited circumstances.

Unless this Preferred Security is presented by an authorized representative of
The Depository Trust Company, a New York corporation, (55 Water Street, New
York) to PSEG Funding Trust I or its agent for registration of transfer,
exchange or payment, and any Preferred Security issued is registered in the name
of Cede & Co. or such other name as requested by an authorized representative of
The Depository Trust Company and any payment hereon is made to Cede & Co. or to
such other entity as is requested by an authorized representative of The
Depository Trust Company, ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY A PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede
& Co., has an interest herein.]


                                      C-1


Certificate Number:_____

Number of Preferred Securities:
Aggregate Liquidation Amount:
CUSIP NO.

                   Certificate Evidencing Preferred Securities

                                       of

                              PSEG Funding Trust I


                              Preferred Securities,

                 (liquidation amount $50 per Preferred Security)

      PSEG Funding Trust I, a statutory trust created under the laws of the
State of Delaware (the "Trust"), hereby certifies that [For inclusion in
Book-Entry Preferred Securities Certificate only - Cede & Co.] [For inclusion in
Pledged Preferred Securities - Wachovia Bank, National Association, as Purchase
Contract Agent pursuant to the Purchase Contract Agreement] (the "Holder") is
the registered holder of 9,200,000 preferred securities of the Trust
representing undivided beneficial interests in the assets of the Trust and
designated the PSEG Funding Trust I 6.25% Preferred Securities (liquidation
amount $50 per Preferred Security) (the "Preferred Securities") or such other
number of Preferred Securities as is reflected in the Schedule of Increases or
Decreases attached hereto. Subject to the terms of the Declaration (as defined
below), the Preferred Securities are transferable on the books and records of
the Trust, in person or by a duly authorized attorney, upon surrender of this
certificate duly endorsed and in proper form for transfer as provided in Section
5.04 of the Declaration. The designations, rights, privileges, restrictions,
preferences and other terms and provisions of the Preferred Securities are set
forth in, and this certificate and the Preferred Securities represented hereby
are issued and shall in all respects be subject to the terms and provisions of,
the Amended and Restated Trust Agreement of the Trust dated as of September 10,
2002, as the same may be amended from time to time (the "Declaration"). The
Holder is entitled to the benefits of the Guarantee Agreement entered into by
Public Service Enterprise Group Incorporated, a New Jersey corporation, and
Wachovia Bank, National Association as guarantee trustee, dated as of September
10, 2002 (as the same may be amended from time to time, the "Guarantee") to the
extent provided therein, together with the obligations of Public Service
Enterprise Group Incorporated under the Declaration, its Notes and the Indenture
related to such Notes. The Trust will furnish a copy of the Declaration, the
Guarantee and the Indenture to the Holder without charge upon written request to
the Trust at its principal place of business or registered office.

      Upon receipt of this certificate, the Holder is bound by the Declaration
and is entitled to the benefits thereunder.


                                      C-2


      By acceptance, the Holder agrees to treat, for United States Federal
income tax purposes, the Notes as indebtedness of the Depositor and the
Preferred Securities as evidence of undivided beneficial interests in the Notes.

      This Certificate shall be governed by and construed in accordance with the
laws of the State of Delaware without regard to the conflict of laws principles
thereof.

      Capitalized terms used herein but not otherwise defined shall have the
respective meanings assigned thereto in the Declaration.

      IN WITNESS WHEREOF, the Trust has executed this certificate this 10th day
of September, 2002.

                                        PSEG FUNDING TRUST I


                                        By:_____________________________________
                                           Name:
                                           Title:  Administrative Trustee


                                      C-3


                                   ASSIGNMENT

FOR VALUE RECEIVED, the undersigned assigns and transfers to:

(Insert assignee's social security or tax identification number)

(Insert address and zip code of assignee)

__________ Preferred Securities represented by this Preferred Securities
Certificate and irrevocably appoints

agent to transfer said Preferred Securities on the books of the Trust. The agent
may substitute another to act for him or her.

Date:

Signature:

(Sign exactly as your name appears on the other side of this Preferred Security
Certificate)


                                      C-4


               [TO BE ATTACHED TO BOOK-ENTRY PREFERRED SECURITIES
                  CERTIFICATE AND PLEDGED PREFERRED SECURITIES]
                       SCHEDULE OF INCREASES OR DECREASES

The following increases or decreases in this [Book-Entry Preferred Securities
Certificate] [Pledged Preferred Security] have been made:




                                                                          
                Amount of increase      Amount of decrease     Aggregate number of
                in aggregate number    in aggregate number    Preferred Securities
                   of Preferred            of Preferred           evidenced by
                    Securities              Securities          this [Book-Entry
                 evidenced by this      evidenced by this     Preferred Securities
                    [Book-Entry       [Book-Entry Preferred       Certificate]           Signature of
               Preferred Securities         Securities         [Pledged Preferred     authorized officer
                   Certificate]            Certificate]             Security]         of Property Trustee
                [Pledged Preferred      [Pledged Preferred       following such          or Securities
Date                 Security]              Security]]        decrease or increase         Custodian
- ---------------------------------------------------------------------------------------------------------




                                      C-5

EX-3

                              Amended and Restated
                    Trust Agreement for PSEG Funding Trust II

                                      among

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                                 (as Depositor)

                       WACHOVIA BANK, NATIONAL ASSOCIATION
                              (as Property Trustee)

                  WACHOVIA TRUST COMPANY, NATIONAL ASSOCIATION
                              (as Delaware Trustee)

                                       and

                     THE ADMINISTRATIVE TRUSTEE NAMED HEREIN

                                   Dated as of
                                December 17, 2002




                              PSEG Funding Trust II
              Certain Sections of this Trust Agreement relating to
                         Sections 310 through 318 of the
                           Trust Indenture Act of 1939

Trust Indenture                                                  Trust Agreement
  Act Section                                                        Section
- --------------                                                   ---------------

   ss.310(a)(1)............................................................7.07
         (a)(2)............................................................7.07
         (a)(3)............................................................7.09
         (a)(4).....................................................2.07(a)(ii)
         (b)...............................................................7.08
   ss.311(a)...............................................................7.13
         (b)...............................................................7.13
   ss.312(a)...............................................................5.07
         (b)...............................................................5.07
         (c)...............................................................5.07
   ss.313(a)...............................................................7.14
         (b)...............................................................7.14
         (c)...............................................................7.14
         (d)...............................................................7.14
   ss.314(a)...............................................................7.15
         (b).....................................................Not Applicable
         (c)(1)......................................................7.16, 7.17
         (c)(2)......................................................7.16, 7.17
         (c)(3)..................................................Not Applicable
         (d).....................................................Not Applicable
         (e).............................................................. 7.17
   ss.315(a)....................................................7.01(a), 7.03(a)
         (b)........................................................7.02, 10.08
         (c)............................................................7.01(a)
         (d).........................................................7.01, 7.03
         (e).....................................................Not Applicable
   ss.316(a).....................................................Not Applicable
         (a)(1)(A)...............................................Not Applicable
         (a)(1)(B)...............................................Not Applicable
         (a)(2)..................................................Not Applicable
         (b).....................................................Not Applicable
         (c).....................................................Not Applicable
   ss.317(a)(1)..................................................Not Applicable
         (a)(2)..................................................Not Applicable
         (b)...............................................................5.09
   ss.318(a)..............................................................10.10

- ----------
      Note: This reconciliation and tie sheet shall not, for any purpose, be
deemed to be a part of the Trust Agreement.


                                       i


                                TABLE OF CONTENTS



                                                                                Page
                                                                                ----
                                                                             
                                      ARTICLE I
                                    DEFINED TERMS

Section 1.01   Definitions........................................................1

                                     ARTICLE II
                              CONTINUATION OF THE TRUST

Section 2.01   Name...............................................................8
Section 2.02   Office of the Delaware Trustee; Principal Place of Business........8
Section 2.03   Initial Contribution of Trust Property; Expenses of the Trust......8
Section 2.04   Issuance of the Trust Securities...................................9
Section 2.05   Purchase of Debentures.............................................9
Section 2.06   Declaration of Trust..............................................10
Section 2.07   Authorization to Enter into Certain Transactions..................10
Section 2.08   Assets of Trust...................................................13
Section 2.09   Title to Trust Property...........................................13

                                     ARTICLE III
                                   PAYMENT ACCOUNT

Section 3.01   Payment Account...................................................13

                                     ARTICLE IV
                              DISTRIBUTIONS; REDEMPTION

Section 4.01   Distributions.....................................................14
Section 4.02   Redemption........................................................15
Section 4.03   Subordination of Common Securities................................16
Section 4.04   Payment Procedures................................................17
Section 4.05   Tax Returns and Reports...........................................17
Section 4.06   Payments under Indenture..........................................17

                                      ARTICLE V
                            TRUST SECURITIES CERTIFICATES

Section 5.01   Initial Ownership.................................................17
Section 5.02   The Trust Securities Certificates.................................18
Section 5.03   Delivery of Trust Securities Certificates.........................18
Section 5.04   Registration of Transfer and Exchange of Preferred Securities
               Certificates......................................................18
Section 5.05   Mutilated, Destroyed, Lost or Stolen Trust Securities
               Certificates......................................................19
Section 5.06   Persons Deemed Securityholders....................................19



                                       ii


                                                                             
Section 5.07   Access to List of Securityholders' Names and Addresses............19
Section 5.08   Maintenance of Office or Agency...................................20
Section 5.09   Appointment of Paying Agent.......................................20
Section 5.10   No Transfer of Common Securities by Depositor.....................20
Section 5.11   Book-Entry Preferred Securities Certificates; Common Securities
               Certificate.......................................................21
Section 5.12   Definitive Preferred Securities Certificates......................21
Section 5.13   Rights of Securityholders.........................................21

                                     ARTICLE VI
                      ACTS OF SECURITYHOLDERS; MEETINGS; VOTING

Section 6.01   Limitations on Voting Rights......................................22
Section 6.02   Notice of Meetings................................................22
Section 6.03   Meetings of Holders of the Preferred Securities...................23
Section 6.04   Voting Rights.....................................................23
Section 6.05   Proxies, etc......................................................23
Section 6.06   Securityholder Action by Written Consent..........................23
Section 6.07   Record Date for Voting and Other Purposes.........................23
Section 6.08   Acts of Securityholders...........................................24
Section 6.09   Inspection of Records.............................................25

                                     ARTICLE VII
                                    THE TRUSTEES

Section 7.01   Certain Duties and Responsibilities...............................25
Section 7.02   Notice of Defaults; Direct Action by Securityholders..............25
Section 7.03   Certain Rights of Property Trustee................................26
Section 7.04   Not Responsible for Recitals or Issuance of Securities............28
Section 7.05   May Hold Securities...............................................28
Section 7.06   Compensation; Indemnity; Fees.....................................28
Section 7.07   Corporate Property Trustee Required; Eligibility of Trustees......29
Section 7.08   Conflicting Interests.............................................29
Section 7.09   Co-Trustees and Separate Trustee..................................29
Section 7.10   Resignation and Removal; Appointment of Successor.................31
Section 7.11   Acceptance of Appointment by Successor............................32
Section 7.12   Merger, Conversion, Consolidation or Succession to Business.......32
Section 7.13   Preferential Collection of Claims Against Depositor or Trust......32
Section 7.14   Reports by Property Trustee.......................................33
Section 7.15   Reports to the Property Trustee...................................33
Section 7.16   Evidence of Compliance with Conditions Precedent..................33
Section 7.17   Statements Required in Officers' Certificate and Opinion of
               Counsel...........................................................33
Section 7.18   Number of Trustees................................................34
Section 7.19   Delegation of Power...............................................34
Section 7.20   Voting............................................................35




                                        iii


                                                                             
                                    ARTICLE VIII
                             DISSOLUTION AND LIQUIDATION

Section 8.01   Dissolution Upon Expiration Date..................................35
Section 8.02   Early Termination.................................................35
Section 8.03   Termination.......................................................35
Section 8.04   Winding Up........................................................35

                                     ARTICLE IX
                                    MERGERS, ETC.

Section 9.01   Mergers, Consolidations, Amalgamations or Replacements of the
               Trust.............................................................37

                                      ARTICLE X
                              MISCELLANEOUS PROVISIONS

Section 10.01  Limitation of Rights of Securityholders...........................38
Section 10.02  Amendment.........................................................38
Section 10.03  Severability......................................................39
Section 10.04  Governing Law.....................................................39
Section 10.05  Payments Due on Non-Business Day..................................39
Section 10.06  Successors and Assigns............................................40
Section 10.07  Headings..........................................................40
Section 10.08  Reports, Notices and Demands......................................40
Section 10.09  Agreement Not to Petition.........................................40
Section 10.10  Trust Indenture Act; Conflict with Trust Indenture Act............41
Section 10.11  Characterization..................................................41
Section 10.12  Acceptance of Terms of Trust Agreement, Guarantee and Indenture...41

EXHIBIT A      Certificate of Trust.............................................A-1
EXHIBIT B      Certificate Evidencing Common Securities.........................B-1
EXHIBIT C      Certificate Evidencing Preferred Securities......................C-1




                                         iv


            AMENDED AND RESTATED TRUST AGREEMENT of PSEG Funding Trust II (the
"Trust"), dated as of December 17, 2002, among (i) Public Service Enterprise
Group Incorporated, a New Jersey corporation (the "Depositor"), (ii) Wachovia
Bank, National Association (formerly known as First Union National Bank), a
banking association organized under the laws of the United States, as trustee
(the "Property Trustee"), (iii) Wachovia Trust Company, National Association
(formerly known as First Union Trust Company, National Association), a banking
association organized under the laws of the United States, whose address in
Delaware is One Rodney Square, 920 King Street, Suite 102, Wilmington, Delaware
19801, as Delaware trustee (the "Delaware Trustee"), (iv) Mark G. Kahrer, an
individual whose address is c/o Public Service Enterprise Group Incorporated, 80
Park Plaza, P.O. Box 1171, Newark, New Jersey 07101 (the "Administrative
Trustee") (the Property Trustee, the Delaware Trustee and the Administrative
Trustee are referred to collectively as the "Trustees"), and (v) the several
Holders, as hereinafter defined.

                                     WITNESSETH:

            WHEREAS, the Depositor, the Delaware Trustee and the Administrative
Trustee have heretofore duly declared and established a statutory trust pursuant
to the Delaware Statutory Trust Act by entering into a Trust Agreement, dated as
of July 31, 2002 (the "Original Trust Agreement"), and by executing and filing
with the Secretary of State of the State of Delaware a Certificate of Trust on
August 1, 2002, a form of which is attached hereto as Exhibit A; and

            WHEREAS, the Depositor, the Property Trustee, the Delaware Trustee
and the Administrative Trustee desire to amend and restate the Original Trust
Agreement in its entirety as set forth herein to provide for, among other
things, (i) the issuance of the Common Securities, as hereinafter defined, by
the Trust to the Depositor, (ii) the issuance and sale of the Preferred
Securities, as hereinafter defined, by the Trust pursuant to the Underwriting
Agreement, as hereinafter defined, and (iii) the acquisition by the Trust from
the Depositor of the Debentures, as hereinafter defined.

            NOW, THEREFORE, in consideration of the agreements and obligations
set forth herein and for other good and valuable consideration, the sufficiency
of which is hereby acknowledged, each party, for the benefit of the other party
and for the benefit of the Securityholders, as hereinafter defined, hereby
amends and restates the Original Trust Agreement in its entirety and agrees as
follows:

                                    ARTICLE I
                                  Defined Terms

      Section 1.01 Definitions. For all purposes of this Trust Agreement, except
as otherwise expressly provided or unless the context otherwise requires:

            (a) each term defined in this Article I has the meaning assigned to
it in this Article I and includes the plural as well as the singular;

            (b) each of the other terms used herein that is defined in the Trust
Indenture Act, either directly or by reference therein, has the meaning assigned
to it therein;


                                       1


            (c) unless the context otherwise requires, any reference to an
"Article" or a "Section" refers to an Article or a Section, as the case may be,
of this Trust Agreement; and

            (d) the words "herein", "hereof" and "hereunder" and other words of
similar import refer to this Trust Agreement as a whole and not to any
particular Article, Section or other subdivision.

      "Act" has the meaning specified in Section 6.08.

      "Administrative Trustee" means the individual identified as the
"Administrative Trustee" in the preamble to this Trust Agreement, solely in
his/her capacity as Administrative Trustee of the Trust and not in his/her
individual capacity, or such Administrative Trustee's successor in interest in
such capacity, or any successor trustee appointed as herein provided.

      "Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.

      "Bankruptcy Event" means, with respect to any Person, the occurrence of
any of the following events:

            (a) Such Person, pursuant to or within the meaning of any Bankruptcy
Law:

                  (i) commences a voluntary case or proceeding;

                  (ii) consents to the entry of an order for relief against it
in an involuntary case or proceeding;

                  (iii) consents to the appointment of a Custodian, as
hereinafter defined, of it or for all or substantially all of its property, and
such Custodian is not discharged within 60 days;

                  (iv) makes a general assignment for the benefit of its
creditors; or

                  (v) admits in writing its inability to pay its debts generally
as they become due; or

            (b) A court of competent jurisdiction enters an order or decree
under any Bankruptcy Law that:

                  (i) is for relief against such Person in an involuntary case
or proceeding;


                                       2


                  (ii) appoints a Custodian of such Person for all or
substantially all of its properties;

                  (iii) orders the liquidation of such Person;

                  (iv) and in each case the order or decree remains unstayed and
in effect for 60 days.

      "Bankruptcy Laws" means Title 11 of the United States Code, or similar
federal or state law for the relief of debtors. "Custodian" means any receiver,
trustee, assignee, liquidator, sequestrator, custodian or similar official under
any Bankruptcy Law.

      "Board Resolution" means (i) a copy of a resolution certified by the
Secretary or an Assistant Secretary of the Depositor to have been duly adopted
by the Depositor's Board of Directors or a committee established thereby and to
be in full force and effect on the date of such certification or (ii) a
certificate signed by the authorized officer or officers of the Depositor to
whom the Depositor's Board of Directors or a committee established thereby has
delegated its authority, and in each case, delivered to the Trustees.

      "Book-Entry Preferred Securities Certificates" means certificates
representing Preferred Securities issued in global, fully registered form with
the Clearing Agency as described in Section 5.11.

      "Business Day" means a day other than (a) a Saturday or Sunday, or (b) a
day on which banking institutions in The City of New York or the State of New
Jersey are required by law or executive order to remain closed.

      "Certificate Depository Agreement" means the agreement among the Trust,
the Property Trustee and The Depository Trust Company, as the initial Clearing
Agency, dated as of the Closing Date, relating to the Book-Entry Preferred
Securities Certificates, as the same may be amended and supplemented from time
to time.

      "Clearing Agency" means an organization registered as a "clearing agency"
pursuant to Section 17A of the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder. The Depository Trust Company
will be the initial Clearing Agency.

      "Closing Date" means the Time of Delivery as defined in the Underwriting
Agreement, which date is also the date of execution and delivery of this Trust
Agreement.

      "Code" means the Internal Revenue Code of 1986, as amended.

      "Commission" means the Securities and Exchange Commission, as from time to
time constituted, created under the Securities Exchange Act of 1934, as amended,
or, if at any time after the execution of this Trust Agreement such Commission
is not existing and performing the duties now assigned to it under the Trust
Indenture Act, then the body performing such duties at such time.


                                       3


      "Common Security" means an undivided beneficial interest in the assets of
the Trust, having a Liquidation Amount of $25 and having the terms provided
therefor in this Trust Agreement, any Annex hereto and the certificate
representing such interest, including the right to receive Distributions and a
Liquidation Distribution as provided herein.

      "Common Securities Certificate" means a certificate evidencing ownership
of Common Securities, substantially in the form attached hereto as Exhibit B.

      "Corporate Trust Office" means the principal corporate trust office of the
Property Trustee located in the State of New Jersey which at the date hereof is
21 South Street, Morristown, New Jersey 07960.

      "Creditor" has the meaning specified in Section 2.03.

      "Debenture Event of Default" means an "Event of Default" as defined in the
Indenture with respect to the Debentures.

      "Debenture Redemption Date" means "Redemption Date" as defined in the
Indenture with respect to the Debentures.

      "Debenture Trustee" means Wachovia Bank, National Association, a banking
association organized under the laws of the United States, in its capacity as
trustee under the Indenture, or any successor thereto, appointed in accordance
with the terms and provisions of the Indenture.

      "Debentures" means the Depositor's 8.75% Deferrable Interest Junior
Subordinated Debentures, Series D, issued pursuant to the Indenture.

      "Definitive Preferred Securities Certificates" means certificates
representing Preferred Securities issued in certificated, fully registered form
as described in Section 5.12.

      "Delaware Statutory Trust Act" means Chapter 38 of Title 12 of the
Delaware Code, 12 Del. C.ss.3801, et seq., as it may be amended from time to
time.

      "Delaware Trustee" means the entity identified as the "Delaware Trustee"
in the preamble to this Trust Agreement solely in its capacity as Delaware
Trustee of the Trust and not in its individual capacity, or its successor in
interest in such capacity, or any successor trustee appointed as herein
provided.

      "Depositor" has the meaning specified in the preamble to this Trust
Agreement.

      "Distribution Date" has the meaning specified in Section 4.01(a).

      "Distributions" means amounts payable in respect of the Trust Securities
as provided in Section 4.01.

      "Event of Default" means the occurrence of a Debenture Event of Default
(whatever the reason for such Event of Default and whether it shall be voluntary
or involuntary


                                       4


or be effected by operation of law or pursuant to any judgment, decree or order
of any court or any order, rule or regulation of any administrative or
governmental body).

      "Expiration Date" has the meaning specified in Section 8.01.

      "Extension Period" means the period or periods in which pursuant to the
Indenture payments of interest on the Debentures are deferred by extending the
interest payment periods thereof.

      "Guarantee" means the Guarantee Agreement executed and delivered by the
Depositor to Wachovia Bank, National Association, a banking association
organized under the laws of the United States, as trustee thereunder,
contemporaneously with the execution and delivery of this Trust Agreement, for
the benefit of the Holders of the Preferred Securities, as amended from time to
time.

      "Indenture" means the Indenture, dated as of December 17, 2002, between
the Depositor and the Debenture Trustee, as trustee thereunder, as amended or
supplemented from time to time.

      "Lien" means any lien, pledge, charge, encumbrance, mortgage, deed of
trust, adverse ownership interest, hypothecation, assignment, security interest
or preference, priority or other security agreement or preferential arrangement
of any kind or nature whatsoever.

      "Like Amount" means (a) with respect to a redemption of Trust Securities,
Trust Securities having an aggregate Liquidation Amount equal to the aggregate
principal amount of Debentures to be repaid in accordance with the Indenture and
(b) with respect to a distribution of Debentures to Holders of Trust Securities
in connection with a dissolution of the Trust, Debentures having an aggregate
principal amount equal to the aggregate Liquidation Amount of the Trust
Securities in exchange for which such Debentures are distributed.

      "Liquidation Amount" means the liquidation amount of $25 per Trust
Security.

      "Liquidation Date" means the date on which Debentures are to be
distributed to Holders of Trust Securities in connection with a dissolution of
the Trust pursuant to Section 8.04(a).

      "Liquidation Distribution" has the meaning specified in Section 8.04(d).

      "1940 Act" means the Investment Company Act of 1940, as amended.

      "Officers' Certificate" means a certificate signed by two of the following
persons: the Chairman, the President, any Vice President, the Treasurer, any
Assistant Treasurer, the Secretary or any Assistant Secretary of the Depositor.

      "Opinion of Counsel" means a written opinion of counsel, who may be
counsel for the Trust, the Property Trustee or the Depositor or an Affiliate of
the Depositor, but not an employee of any thereof, and who shall be acceptable
to the Property Trustee.


                                       5


      "Original Trust Agreement" has the meaning specified in the recitals to
this Trust Agreement.

      "Outstanding", when used with respect to Trust Securities, means, as of
the date of determination, all Trust Securities represented by Trust Securities
Certificates theretofore executed and delivered under this Trust Agreement,
except:

            (a) Trust Securities represented by Trust Securities Certificates
theretofore cancelled by the Administrative Trustee or delivered to the
Administrative Trustee for cancellation;

            (b) Trust Securities for whose redemption money in the necessary
amount has been theretofore deposited with the Property Trustee or any Paying
Agent for the Holders of such Trust Securities; provided that, if such Trust
Securities are to be redeemed, notice of such redemption has been duly given
pursuant to this Trust Agreement;

            (c) Trust Securities which have been paid or Trust Securities
represented by Trust Securities Certificates in exchange for or in lieu of which
other Trust Securities Certificates have been executed and delivered pursuant to
Section 5.05, other than any such Trust Securities Certificates in respect of
which there shall have been presented to the Property Trustee proof satisfactory
to it that such Trust Securities Certificates are held by a protected purchaser;
and

            (d) as provided in Section 8.04(c);

provided, however, that in determining whether the Holders of the requisite
Liquidation Amount of the Outstanding Preferred Securities have given any
request, demand, authorization, direction, notice, consent or waiver hereunder,
Preferred Securities owned by the Depositor, any Trustee or any Affiliate of the
Depositor or any Trustee shall be disregarded and deemed not to be Outstanding,
except that (a) in determining whether any Trustee shall be protected in relying
upon any such request, demand, authorization, direction, notice, consent or
waiver, only Preferred Securities which such Trustee actually knows to be so
owned shall be so disregarded and (b) the foregoing shall not apply at any time
when all of the Outstanding Preferred Securities are owned by the Depositor, one
or more of the Trustees and/or any such Affiliate. Preferred Securities so owned
which have been pledged in good faith may be regarded as Outstanding if the
pledgee establishes to the satisfaction of the Administrative Trustee the
pledgee's right so to act with respect to such Preferred Securities and that the
pledgee is not the Depositor or any Affiliate of the Depositor.

      "Paying Agent" means the Property Trustee and any co-paying agent
appointed pursuant to Section 5.09.

      "Payment Account" means a segregated non-interest-bearing corporate trust
account maintained by the Property Trustee in its trust department for the
benefit of the Securityholders in which all amounts paid to the Property Trustee
in respect of the Debentures or the Guarantee will be held and from which the
Property Trustee or such other Paying Agent shall make payments to the
Securityholders in accordance with Article 4.


                                       6


      "Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.

      "Preferred Security" means a Preferred Security issued by the Trust, and
having an undivided beneficial interest in the assets of the Trust, having a
Liquidation Amount of $25 and having terms provided therefor in this Trust
Agreement, any Annex hereto and the certificate representing such interest,
including the right to receive Distributions and a Liquidation Distribution as
provided herein.

      "Preferred Securities Certificate" means a certificate evidencing
ownership of one or more Preferred Securities, substantially in the form
attached hereto as Exhibit C.

      "Property Trustee" means the commercial bank or trust company identified
as the "Property Trustee" in the preamble to this Trust Agreement solely in its
capacity as Property Trustee of the Trust and not in its individual capacity, or
its successor in interest in such capacity, or any successor property trustee
appointed as herein provided.

      "Redemption Date" means, with respect to any Trust Security to be
redeemed, the date fixed for such redemption by or pursuant to this Trust
Agreement; it being understood that each Debenture Redemption Date and the
stated maturity date of the Debentures shall be a Redemption Date for a Like
Amount of Trust Securities.

      "Redemption Price" means, with respect to any Trust Security, 100% of the
Liquidation Amount of such Trust Security, upon maturity of the Debentures or
earlier redemption, in each case, plus accumulated and unpaid Distributions
thereon to the Redemption Date.

      "Responsible Officer" means, when used with respect to the Property
Trustee, any vice president, assistant vice president, senior trust officer,
trust officer, assistant trust officer or other officer associated with the
corporate trust department of the Property Trustee customarily performing
functions similar to those performed by any of the above designated officers and
also means, with respect to a particular corporate trust matter, any other
officer to whom such matter is referred because of such person's knowledge of
and familiarity with the particular subject.

      "Securities Register" and "Securities Registrar" have the respective
meanings specified in Section 5.04.

      "Securityholder" or "Holder" means a Person in whose name a Trust Security
or Securities is registered in the Securities Register; any such Person is a
beneficial owner within the meaning of the Delaware Statutory Trust Act.

      "Successor Securities" has the meaning specified in Section 9.01.

      "Trust" means the Delaware statutory trust continued hereby and identified
on the cover page to this Trust Agreement.


                                       7


      "Trust Agreement" means this Amended and Restated Trust Agreement, as the
same may be modified, amended or supplemented in accordance with the applicable
provisions hereof, including all exhibits hereto, including, for all purposes of
this Trust Agreement and any such modification, amendment or supplement, the
provisions of the Trust Indenture Act that are deemed to be a part of and govern
this Trust Agreement and any such modification, amendment or supplement,
respectively.

      "Trust Indenture Act" means the Trust Indenture Act of 1939 as in force at
the date as of which this Trust Agreement was executed; provided, however, that
in the event the Trust Indenture Act of 1939 is amended after such date, "Trust
Indenture Act" means, to the extent required by any such amendment, the Trust
Indenture Act of 1939 as so amended.

      "Trust Property" means (a) the Debentures, (b) any cash on deposit in, or
owing to, the Payment Account and (c) all proceeds and rights in respect of the
foregoing and any other property and assets for the time being held or deemed to
be held by the Property Trustee pursuant to the trusts of this Trust Agreement.

      "Trust Security" means any one of the Common Securities or the Preferred
Securities.

      "Trust Securities Certificate" means any one of the Common Securities
Certificates or the Preferred Securities Certificates.

      "Underwriting Agreement" means the Underwriting Agreement, dated December
11, 2002, among the Trust, the Depositor and the Underwriters named therein.

                                   ARTICLE II
                            Continuation of the Trust

      Section 2.01 Name. The Trust created and continued hereby shall be known
as "PSEG Funding Trust II" as such name may be modified from time to time by the
Administrative Trustee following written notice to the Holders of Trust
Securities and the other Trustees, in which name the Trustees may conduct the
business of the Trust, make and execute contracts and other instruments on
behalf of the Trust and sue and be sued.

      Section 2.02 Office of the Delaware Trustee; Principal Place of Business.
The address of the Delaware Trustee in the State of Delaware is One Rodney
Square, 920 King Street, Suite 102, Wilmington, Delaware 19801 or such other
address in the State of Delaware as the Delaware Trustee may designate by
written notice to the Securityholders and the Depositor. The principal place of
business of the Trust is 80 Park Plaza, Newark, New Jersey 07101.

      Section 2.03 Initial Contribution of Trust Property; Expenses of the
Trust.

            (a) The Property Trustee acknowledges receipt in trust from the
Depositor in connection with the Original Trust Agreement of the sum of $10,
which constituted the initial Trust Property.


                                       8


            (b) The Depositor shall be responsible for and shall pay for all
obligations (other than with respect to the Trust Securities) and all costs and
expenses of the Trust (including, but not limited to, costs and expenses
relating to the organization of the Trust, the issuance and sale of the
Preferred Securities, the fees and expenses (including reasonable counsel fees
and expenses) of the Trustees as provided in Section 7.06, the costs and
expenses of accountants, attorneys, statistical or bookkeeping services,
expenses for printing and engraving and computing or accounting equipment,
Paying Agent(s), Securities Registrar, duplication, travel and telephone and
other telecommunications expenses and costs and expenses incurred in connection
with the disposition of Trust assets).

            (c) The Depositor will pay any and all taxes (other than United
States withholding taxes attributable to the Trust or its assets) and all
liabilities, costs and expenses with respect to such taxes of the Trust.

            (d) The Depositor's obligations under this Section 2.03 shall be for
the benefit of, and shall be enforceable by, the Property Trustee and any Person
to whom any such obligations, costs, expenses and taxes are owed (a "Creditor")
whether or not such Creditor has received notice hereof. The Property Trustee
and any such Creditor may enforce the Depositor's obligations under this Section
2.03 directly against the Depositor and the Depositor irrevocably waives any
right or remedy to require that the Property Trustee or any such Creditor take
any action against the Trust or any other Person before proceeding against the
Depositor. The Depositor agrees to execute such additional agreements as may be
necessary or desirable in order to give full effect to the provisions of this
Section 2.03.

            (e) The Depositor shall make no claim upon the Trust Property for
the payment of such expenses.

      Section 2.04 Issuance of the Trust Securities. The Depositor, on behalf of
the Trust and pursuant to the Original Trust Agreement, executed and delivered
the Underwriting Agreement. Contemporaneously with the execution and delivery of
this Trust Agreement, the Administrative Trustee, on behalf of the Trust, shall
execute in accordance with Section 5.02 and deliver to the Underwriters named in
the Underwriting Agreement one or more Book-Entry Preferred Securities
Certificates, registered in the name of the nominee of the initial Clearing
Agency, representing 7,200,000 Preferred Securities having an aggregate
Liquidation Amount of $180,000,000, against receipt by the Property Trustee of
the aggregate purchase price of such Preferred Securities of $180,000,000, which
amount the Administrative Trustee shall promptly deliver to the Property
Trustee. Contemporaneously therewith, the Administrative Trustee, on behalf of
the Trust, shall execute in accordance with Section 5.02 and deliver to the
Depositor a Common Securities Certificate, registered in the name of the
Depositor, representing 222,681 Common Securities having an aggregate
Liquidation Amount of $5,567,025, and in satisfaction of the purchase price of
such Common Securities the Depositor shall deliver to the Property Trustee the
sum of $5,567,025. The Trust Securities may have such additional or different
terms specified in an Annex hereto.

      Section 2.05 Purchase of Debentures. Contemporaneously with the execution
and delivery of this Trust Agreement (i) the Administrative Trustee, on behalf
of the Trust, shall purchase $185,567,025 aggregate principal amount of
Debentures from the Depositor, registered


                                       9


in the name of the Trust and (ii) in satisfaction of the purchase price for such
Debentures, the Property Trustee, on behalf of the Trust, shall deliver to the
Depositor the sum of $185,567,025.

      Section 2.06 Declaration of Trust. The exclusive purposes and functions of
the Trust are (a) to issue and sell Trust Securities and use the proceeds from
such sale to acquire the Debentures and to hold, transfer, sell and otherwise
dispose of the Debentures in accordance with this Trust Agreement, (b) to
maintain the status of the Trust as a grantor trust for United States Federal
income tax purposes, and (c) except as otherwise limited herein, to engage in
only those activities necessary, convenient or incidental thereto. The Depositor
hereby appoints the Trustees as trustees of the Trust, to have all the rights,
powers and duties to the extent set forth herein, and the Trustees hereby accept
such appointment. The Property Trustee hereby declares that it will hold the
Trust Property in trust upon and subject to the conditions set forth herein for
the benefit of the Securityholders. The Administrative Trustee shall have all
rights, powers and duties set forth herein. The Delaware Trustee shall not be
entitled to exercise any powers, nor shall the Delaware Trustee have any of the
duties and responsibilities of the Property Trustee or the Administrative
Trustee set forth herein. The Delaware Trustee shall be one of the Trustees of
the Trust for the sole and limited purpose of fulfilling the requirements of
Section 3807 of the Delaware Statutory Trust Act.

      Section 2.07 Authorization to Enter into Certain Transactions.

      (a) The Trustees shall conduct the affairs of the Trust in accordance with
the terms of this Trust Agreement. Subject to the limitations set forth in
paragraph (b) of this Section, and in accordance with the following provisions
(i) and (ii), the Trustees shall have the authority to enter into all
transactions and agreements determined by the Trustees to be appropriate in
exercising the authority, express or implied, otherwise granted to the Trustees
under this Trust Agreement, and to perform all acts in furtherance thereof,
including without limitation, the following:

            (i) As among the Trustees, the Administrative Trustee shall have the
power and authority to act on behalf of the Trust with respect to the following
matters:

                  (A) executing and delivering the Trust Securities on behalf of
the Trust;

                  (B) causing the Trust to enter into, and executing, delivering
and performing on behalf of the Trust, the Certificate Depository Agreement and
such other agreements as may be necessary or desirable in connection with the
purposes and function of the Trust, including the appointment of a successor
depositary;

                  (C) assisting in registering the Preferred Securities under
the Securities Act of 1933, as amended, and under state securities or blue sky
laws, and qualifying this Trust Agreement as a trust indenture under the Trust
Indenture Act;

                  (D) assisting in the listing of the Preferred Securities upon
such securities exchange or exchanges as the Depositor shall determine and the
registration of the Preferred Securities under the Securities Exchange Act of
1934, as amended, and the


                                       10


preparation and filing of all periodic and other reports and other documents
pursuant to the foregoing;

                  (E) to the extent provided in this Trust Agreement,
dissolving, liquidating and terminating the Trust in accordance with the terms
of this Trust Agreement, and preparing, executing and filing the certificate of
cancellation with the Secretary of State of the State of Delaware, if necessary;

                  (F) sending notices or assisting the Property Trustee in
sending notices and other information regarding the Trust Securities and the
Debentures to Securityholders in accordance with this Trust Agreement; and

                  (G) taking any action incidental to the foregoing as the
Administrative Trustee may from time to time determine is necessary or advisable
to give effect to the terms of this Trust Agreement for the benefit of the
Securityholders (without consideration of the effect of any such action on any
particular Securityholder).

            (ii) As among the Trustees, the Property Trustee shall have the
power, duty and authority to act on behalf of the Trust with respect to the
following matters:

                  (A) establishing and maintaining the Payment Account and
appointing Paying Agents (subject to Section 5.09);

                  (B) receiving payment of the purchase price of the Trust
Securities;

                  (C) receiving and holding the Debentures;

                  (D) collecting interest, premium, if any, and principal
payments on the Debentures and depositing them in the Payment Account;

                  (E) making Distributions and other payments to the
Securityholders in respect of the Trust Securities;

                  (F) exercising all of the rights, powers and privileges of a
holder of the Debentures;

                  (G) sending notices of defaults, redemptions, Extension
Periods, liquidations and other information regarding the Trust Securities and
the Debentures to the Securityholders in accordance with this Trust Agreement;

                  (H) to the extent provided in this Trust Agreement,
dissolving, liquidating and terminating the Trust, including distributing the
Trust Property in accordance with the terms of this Trust Agreement, and
preparing, executing and filing the certificate of cancellation with the
Secretary of State of the State of Delaware, if necessary;

                  (I) after an Event of Default, taking any action incidental to
the foregoing as the Property Trustee may from time to time determine is
necessary


                                       11


or advisable to give effect to the terms of this Trust Agreement and protect and
conserve the Trust Property for the benefit of the Securityholders (without
consideration of the effect of any such action on any particular
Securityholder); and

                  (J) registering transfers and exchanges of the Preferred
Securities in accordance with this Trust Agreement (but only if at such time the
Property Trustee shall be the Securities Registrar).

            (b) So long as this Trust Agreement remains in effect, the Trust (or
the Trustees acting on behalf of the Trust) shall not undertake any business,
activities or transaction except as expressly provided herein or contemplated
hereby. In particular, the Trustees acting on behalf of the Trust shall not (i)
acquire any assets or investments (other than the Debentures), reinvest the
proceeds derived from investments, possess any power or otherwise act in such a
way as to vary the Trust Property or engage in any activities not authorized by
this Trust Agreement, (ii) sell, assign, transfer, exchange, mortgage, pledge,
set-off or otherwise dispose of any of the Trust Property or interests therein,
including to Securityholders, except as expressly provided herein, (iii) take
any action that would cause the Trust to fail or cease to qualify as a grantor
trust for United States Federal income tax purposes, (iv) incur any indebtedness
for borrowed money or incur any other obligations, (v) issue any securities or
other evidences of beneficial ownership of, or beneficial interests in, the
Trust other than the Trust Securities, or (vi) take or consent to any action
that would result in the placement of a Lien on any of the Trust Property. The
Administrative Trustee shall defend all claims and demands of all Persons at any
time claiming any Lien on any of the Trust Property adverse to the interest of
the Trust or the Securityholders in their capacity as Securityholders.

            (c) In connection with the issue and sale of the Preferred
Securities, the Depositor shall have the right and responsibility to assist the
Trust with respect to, or effect on behalf of the Trust, the following (and any
actions taken by the Depositor in furtherance of the following prior to the date
of this Trust Agreement are hereby ratified and confirmed in all respects):

                  (i) preparing for filing with the Commission and executing on
behalf of the Trust a registration statement on Form S-3 in relation to the
Preferred Securities, including any amendments thereto;

                  (ii) determining the States in which to take appropriate
action to qualify or register for sale all or part of the Preferred Securities
and doing any and all such acts, other than actions which must be taken by or on
behalf of the Trust, and advising the Trustees of actions they must take on
behalf of the Trust, and preparing for execution and filing any documents to be
executed and filed by the Trust or on behalf of the Trust, as the Depositor
deems necessary or advisable in order to comply with the applicable laws of any
such States;

                  (iii) preparing for filing and executing on behalf of the
Trust an application to the New York Stock Exchange or any other national stock
exchange or The Nasdaq Stock Market for listing upon notice of issuance of any
Preferred Securities;


                                       12


                  (iv) preparing for filing with the Commission and executing on
behalf of the Trust a registration statement on Form 8-A relating to the
registration of the Preferred Securities under Section 12(b) or 12(g) of the
Securities Exchange Act of 1934, as amended, including any amendments thereto;

                  (v) negotiating the terms of, and executing and delivering,
the Underwriting Agreement providing for the sale of the Preferred Securities;
and

                  (vi) taking any other actions necessary or desirable to carry
out any of the foregoing activities.

            (d) Notwithstanding anything herein to the contrary, the
Administrative Trustee is authorized and directed to conduct the affairs of the
Trust and to operate the Trust so that (i) the Trust will not be deemed to be an
"investment company" required to be registered under the 1940 Act, or taxed as a
corporation or a partnership for United States Federal income tax purposes (ii)
the Trust will qualify as a grantor trust for United States Federal income tax
purposes and (iii) the Debentures will be treated as indebtedness of the
Depositor for United States Federal income tax purposes. In this connection, the
Depositor and the Administrative Trustee are authorized to take any action, not
inconsistent with applicable law, the Certificate of Trust, as amended from time
to time, or this Trust Agreement, that each of the Depositor and the
Administrative Trustee determines in their discretion to be necessary or
desirable for such purposes.

      Section 2.08 Assets of Trust. The assets of the Trust shall consist of the
Trust Property.

      Section 2.09 Title to Trust Property. Legal title to all Trust Property
shall be vested at all times in the Property Trustee (in its capacity as such)
and shall be held and administered by the Property Trustee for the benefit of
the Securityholders in accordance with this Trust Agreement.

                                  ARTICLE III
                                 Payment Account

      Section 3.01 Payment Account.

            (a) On or prior to the Closing Date, the Property Trustee shall
establish the Payment Account. All monies and other property deposited or held
from time to time in the Payment Account shall be held by the Property Trustee
for the exclusive benefit of the Securityholders. The Property Trustee shall
have exclusive control of the Payment Account for the purpose of making deposits
in and withdrawals from the Payment Account in accordance with this Trust
Agreement; provided that any Paying Agent shall have the right of withdrawal
with respect to the Payment Account solely for the purpose of making the
payments contemplated under Article IV.

            (b) The Property Trustee shall deposit in the Payment Account,
promptly upon receipt, all payments of principal of or premium, if any, or
interest on


                                       13


the Debentures and any amounts paid to the Property Trustee pursuant to the
Guarantee. Amounts held in the Payment Account shall not be invested pending
distribution thereof.

                                   ARTICLE IV
                            Distributions; Redemption

      Section 4.01 Distributions.

                  (a) Distributions on the Trust Securities shall be cumulative,
and will accumulate whether or not there are funds of the Trust available for
the payment of Distributions. Distributions shall accumulate from December 17,
2002 and, except during an Extension Period for the Debentures pursuant to the
Indenture, shall be payable quarterly in arrears on March 31, June 30, September
30 and December 31 of each year, commencing on March 31, 2003. If any date on
which Distributions are otherwise payable on the Trust Securities is not a
Business Day, then the payment of such Distributions shall be made on the next
succeeding day which is a Business Day (and without any interest or other
payment in respect of any such delay), except that, if such Business Day is in
the next succeeding calendar year, payment of such Distributions shall be made
on the immediately preceding Business Day, in each case with the same force and
effect as if made on such date (each date on which Distributions are payable in
accordance with this Section 4.01(a) is referred to as a "Distribution Date").

            Within two Business Days after receipt by the Property Trustee of
notice of an Extension Period pursuant to Section 4.01 of the Indenture, the
Property Trustee shall give notice thereof to the Securityholders by first class
mail, postage prepaid.

                  (b) The Trust Securities represent undivided beneficial
interests in the Trust Property, and, subject to Sections 4.03 and 4.06 hereof,
all Distributions will be made pro rata on each of the Trust Securities.
Distributions on the Trust Securities shall be payable at a rate of 8.75% per
annum of the Liquidation Amount of the Trust Securities. During an Extension
Period for the Debentures, the rate per annum at which Distributions on the
Trust Securities are then accumulating shall be increased by an amount such that
the aggregate amount of Distributions that accumulate on all Trust Securities
during any such Extension Period is equal to the aggregate amount of interest
(including interest payable on unpaid interest at the rate per annum referred to
above, compounded quarterly) that accrues during any such Extension Period on
the Debentures.

                  (c) Distributions on the Trust Securities shall be made from
the Payment Account by the Property Trustee or any Paying Agent and shall be
payable on each Distribution Date only to the extent that the Trust has funds
then available in the Payment Account for the payment of such Distributions.

                  (d) Distributions on the Trust Securities on each Distribution
Date shall be payable to the Holders thereof as they appear on the Securities
Register for the Trust Securities on the relevant record date, which shall be
one Business Day prior to such Distribution Date; provided, however, that in the
event that the Preferred Securities are not in book-entry-only form, the
relevant record date shall be the 15th calendar day preceding such Distribution
Date, whether or not a Business Day.


                                       14


      Section 4.02 Redemption.

            (a) Upon receipt by the Trust of a notice of redemption of
Debentures, the Trust will call for redemption a Like Amount of Outstanding
Trust Securities on the Debenture Redemption Date and will call for redemption
all Outstanding Trust Securities on the stated maturity date of the Debentures,
in each case, at the Redemption Price.

            (b) Notice of redemption shall be given by the Property Trustee by
first-class mail, postage prepaid, mailed not less than 30 nor more than 60 days
prior to the Redemption Date to each Holder of Trust Securities to be redeemed,
at such Holder's address appearing in the Securities Register. All notices of
redemption shall state:

                  (i) the Redemption Date;

                  (ii) the Redemption Price;

                  (iii) the CUSIP number;

                  (iv) the place or places where Trust Securities Certificates
are to be surrendered for payment of the Redemption Price;

                  (v) that on the Redemption Date the Redemption Price will
become payable upon each such Trust Security to be redeemed and that
Distributions thereon will cease to accumulate on and after such date; and

                  (vi) if less than all of the Outstanding Trust Securities are
to be redeemed, the identification and total Liquidation Amount of the
particular Trust Securities to be redeemed.

            (c) The Trust Securities redeemed on each Redemption Date shall be
redeemed at the Redemption Price with the proceeds from the contemporaneous
redemption or payment at maturity of Debentures. Redemptions of the Trust
Securities shall be made and the Redemption Price shall be payable on each
Redemption Date only to the extent that the Trust has funds then available in
the Payment Account for the payment of such Redemption Price.

            (d) If the Trust, by action of the Property Trustee, gives a notice
of redemption in respect of any Preferred Securities, then, on the Redemption
Date, subject to Section 4.02(c), the Property Trustee will irrevocably deposit
with the Paying Agent funds sufficient to pay the Redemption Price for the
Preferred Securities being redeemed on such date and will give the Paying Agent
irrevocable instructions and authority to pay the Redemption Price to the
Holders of such Preferred Securities upon surrender of their Preferred
Securities Certificates. Notwithstanding the foregoing, Distributions payable on
or prior to the Redemption Date for any Trust Securities called for redemption
shall be payable to the Holders of such Trust Securities as they appear on the
Securities Register for the Trust Securities on the record dates for the related
Distribution Dates. If notice of redemption shall have been given and funds
irrevocably deposited as required, then upon the date of such deposit, all
rights of Securityholders holding Trust Securities so called for redemption will
cease, except the right of such Securityholders to receive the Redemption Price,
but without interest, and such Trust


                                       15


Securities will cease to be Outstanding. In the event that any date on which any
Redemption Price is payable is not a Business Day, then payment of the
Redemption Price payable on such date will be made on the next succeeding day
which is a Business Day (and without any interest or other payment in respect of
any such delay), except that, if such Business Day is in the next succeeding
calendar year, such payment will be made on the immediately preceding Business
Day, in each case, with the same force and effect as if made on such date. In
the event that payment of the Redemption Price in respect of any Trust
Securities called for redemption is improperly withheld or refused, and not paid
either by the Trust or by the Depositor pursuant to the Guarantee, Distributions
on such Trust Securities will continue to accumulate, at the then applicable
rate, from the Redemption Date originally established by the Trust for such
Trust Securities to the date such Redemption Price is actually paid, in which
case the actual payment date will be the date fixed for redemption for purposes
of calculating the Redemption Price.

            (e) If less than all the Outstanding Trust Securities are to be
redeemed on a Redemption Date, then the aggregate Liquidation Amount of Trust
Securities to be redeemed shall be allocated 3% to the Common Securities and 97%
to the Preferred Securities. The particular Preferred Securities to be redeemed
shall be selected by the Property Trustee from the Outstanding Preferred
Securities not previously called for redemption, by such method as the Property
Trustee shall deem fair and appropriate. The Property Trustee shall promptly
notify the Securities Registrar in writing of the Preferred Securities selected
for redemption. If fewer than all of the Trust Securities represented by a Trust
Securities Certificate are redeemed, the Administrative Trustee shall execute
for the Holder a new Trust Securities Certificate representing the unredeemed
Trust Securities. For all purposes of this Trust Agreement, unless the context
otherwise requires, all provisions relating to the redemption of Preferred
Securities shall relate, in the case of any Preferred Securities redeemed or to
be redeemed only in part, to the portion of the Liquidation Amount of Preferred
Securities which has been or is to be redeemed.

      Section 4.03 Subordination of Common Securities.

            (a) Payment of Distributions on, and the Liquidation, Distribution
and Redemption Price of, the Trust Securities, as applicable, shall be made pro
rata based on the Liquidation Amount of the Trust Securities; provided, however,
that if on any applicable date, a Debenture Event of Default shall have occurred
and be continuing, no payment of any Distribution on, or Liquidation,
Distribution and Redemption Price of, any Common Security, and no other payment
on account of the Common Securities, shall be made unless payment in full in
cash of all accumulated and unpaid Distributions on all Outstanding Preferred
Securities for all distribution periods terminating on or prior thereto, or in
the case of payment of the Liquidation, Distribution and Redemption Price, the
full amount of such Liquidation, Distribution and Redemption Price applicable to
all Outstanding Preferred Securities then outstanding or then being redeemed, as
the case may be, shall have been made or provided for, and all funds immediately
available to the Property Trustee shall first be applied to the payment in full
in cash of all Distributions on, or the Liquidation, Distribution and Redemption
Price of, Preferred Securities then due and payable.

            (b) In the case of the occurrence of any Debenture Event of Default,
the Holder of Common Securities will be deemed to have waived any right to act
with respect to


                                       16


any related Event of Default under this Trust Agreement and such Debenture Event
of Default until the effect of such related Event of Default and such Debenture
Event of Default has been cured, waived or otherwise eliminated. Until any such
Event of Default under this Trust Agreement and such Debenture Event of Default
has been so cured, waived or otherwise eliminated, the Property Trustee shall
act solely on behalf of the Holders of the Preferred Securities and not the
Holder of the Common Securities, and only the Holders of the Preferred
Securities will have the right to direct the Property Trustee to act on their
behalf.

      Section 4.04 Payment Procedures. Payments of Distributions pursuant to
Section 4.01 in respect of the Preferred Securities shall be made by check
mailed to the address of the Holder thereof as such address shall appear on the
Securities Register or, if the Preferred Securities are held by a Clearing
Agency, such Distributions shall be made to the Clearing Agency by wire transfer
in immediately available funds. Payments of Distributions pursuant to Section
4.01 in respect of the Common Securities shall be made in such manner as shall
be mutually agreed between the Property Trustee and the Holder of the Common
Securities. Payment of the Redemption Price or Liquidation Distribution of the
Trust Securities shall be made in immediately available funds upon surrender of
the Preferred Securities Certificate representing such Preferred Securities at
the Corporate Trust Office of the Property Trustee.

      Section 4.05 Tax Returns and Reports. The Administrative Trustee shall
prepare (or cause to be prepared), at the Depositor's expense, and file all
Federal, State and local tax and information returns and reports required to be
filed by or in respect of the Trust. In this regard, the Administrative Trustee
shall (a) prepare and file (or cause to be prepared or filed) the appropriate
Internal Revenue Service Form required to be filed in respect of the Trust in
each taxable year of the Trust and (b) prepare and furnish (or cause to be
prepared and furnished) to each Securityholder the related Internal Revenue
Service Form 1099, or any successor form or the information required to be
provided on such form. The Administrative Trustee shall provide the Depositor
and the Property Trustee with a copy of all such returns, reports and schedules
promptly after such filing or furnishing. The Trustees shall comply with United
States Federal withholding and backup withholding tax laws and information
reporting requirements with respect to any payments to Securityholders under the
Trust Securities.

      Section 4.06 Payments under Indenture. Any amount payable hereunder to any
Holder of Preferred Securities shall be reduced by the amount of any
corresponding payment such Holder has directly received pursuant to Section 6.07
of the Indenture or pursuant to the Guarantee. Notwithstanding the provisions
hereunder to the contrary, Securityholders acknowledge that any Holder of
Preferred Securities that receives payment under Section 6.07 of the Indenture
may receive amounts greater than the amount such Holder may be entitled to
receive pursuant to the other provisions of this Trust Agreement.

                                   ARTICLE V
                          Trust Securities Certificates

      Section 5.01 Initial Ownership. Upon the creation of the Trust and the
contribution by the Depositor pursuant to Section 2.03 and until the issuance of
the Trust Securities, and at any time during which no Trust Securities are
outstanding, the Depositor shall be the sole beneficial owner of the Trust.


                                       17


      Section 5.02 The Trust Securities Certificates. The Trust Securities
Certificates shall be issued representing one or more Preferred Securities.
Preferred Securities Certificates representing fractional interests shall not be
issued. The Trust Securities Certificates shall be executed on behalf of the
Trust by manual or facsimile signature of the Administrative Trustee. Trust
Securities Certificates bearing the manual signature of an individual who was,
at the time when such signature shall have been affixed, authorized to sign on
behalf of the Trust, shall be validly issued and entitled to the benefits of
this Trust Agreement, notwithstanding that such individual shall have ceased to
be so authorized prior to the delivery of such Trust Securities Certificates or
did not hold such office at the date of delivery of such Trust Securities
Certificates. A transferee of a Trust Securities Certificate shall become a
Securityholder, and shall be entitled to the rights and subject to the
obligations of a Securityholder hereunder, upon due registration of such Trust
Securities Certificate in such transferee's name pursuant to Section 5.04.

      Section 5.03 Delivery of Trust Securities Certificates. On the Closing
Date, the Administrative Trustee shall cause Trust Securities Certificates, in
an aggregate Liquidation Amount as provided in Sections 2.04 and 2.05, to be
executed on behalf of the Trust as provided in Section 5.02.

      Section 5.04 Registration of Transfer and Exchange of Preferred Securities
Certificates. A registrar appointed by the Depositor (the "Securities
Registrar") shall keep or cause to be kept, at the office or agency maintained
pursuant to Section 5.08, a register (the "Securities Register") in which,
subject to such reasonable regulations as it may prescribe, the Securities
Registrar shall provide for the registration of Trust Securities Certificates
(subject to Section 5.10 in the case of the Common Securities Certificates) and
registration of transfers and exchanges of Preferred Securities Certificates as
herein provided. The Property Trustee shall be the initial Securities Registrar;
any successor Securities Registrar shall be appointed by the Administrative
Trustee.

            Upon surrender for registration of transfer of any Preferred
Securities Certificate at the office or agency maintained pursuant to Section
5.08, the Administrative Trustee shall execute and deliver, in the name of the
designated transferee or transferees, one or more new Preferred Securities
Certificates representing the same number of Preferred Securities dated the date
of execution by the Administrative Trustee. At the option of a Holder, Preferred
Securities Certificates may be exchanged for other Preferred Securities
Certificates upon surrender of the Preferred Securities Certificates to be
exchanged at the office or agency maintained pursuant to Section 5.08. The
Securities Registrar shall not be required to register the transfer of any
Preferred Securities that have been called for redemption or after the
Liquidation Date.

            Preferred Securities presented or surrendered for registration of
transfer or exchange shall be accompanied by a written instrument of transfer in
form satisfactory to the Administrative Trustee and the Securities Registrar
duly executed by the Holder or such Holder's attorney duly authorized in
writing. Each Preferred Securities Certificate surrendered for registration of
transfer or exchange shall be cancelled and subsequently disposed of by the
Property Trustee in accordance with its customary practice.


                                       18


            No service charge shall be made for any registration of transfer or
exchange of Preferred Securities, but the Securities Registrar may require
payment of a sum sufficient to cover any tax or governmental charge that may be
imposed in connection with any transfer or exchange of Preferred Securities
other than an exchange not involving any transfer.

      Section 5.05 Mutilated, Destroyed, Lost or Stolen Trust Securities
Certificates. If (a) any mutilated Trust Securities Certificate shall be
surrendered to the Securities Registrar, or if the Securities Registrar shall
receive evidence to its satisfaction of the destruction, loss or theft of any
Trust Securities Certificate, and (b) there shall be delivered to the Securities
Registrar and the Administrative Trustee such security or indemnity as may be
reasonably required by them to hold the Securities Registrar and the Trust
harmless, then in the absence of notice that such Trust Securities Certificate
shall have been acquired by a protected purchaser, the Administrative Trustee,
on behalf of the Trust shall execute and make available for delivery, in
exchange for or in lieu of any such mutilated, destroyed, lost or stolen Trust
Securities Certificate, a new Trust Securities Certificate of like tenor. In
connection with the issuance of any new Trust Securities Certificate under this
Section, the Administrative Trustee or the Securities Registrar may require the
payment of a sum sufficient to cover any tax or other governmental charge that
may be imposed in connection therewith. Any duplicate Trust Securities
Certificate issued pursuant to this Section shall constitute conclusive evidence
of an undivided beneficial interest in the assets of the Trust, as if originally
issued, whether or not the lost, stolen or destroyed Trust Securities
Certificate shall be found at any time.

      Section 5.06 Persons Deemed Securityholders. Prior to due presentation of
a Trust Security Certificate for registration of transfer, the Administrative
Trustee or the Securities Registrar shall treat the Person in whose name any
Trust Securities Certificate shall be registered in the Securities Register as
the owner and Holder of such Trust Securities Certificate for the purpose of
receiving Distributions and for all other purposes whatsoever, and neither the
Trustees nor the Securities Registrar shall be bound by any notice to the
contrary.

      Section 5.07 Access to List of Securityholders' Names and Addresses. In
the event that the Property Trustee is no longer the Securities Registrar, the
Administrative Trustee or the Depositor shall furnish or cause to be furnished
(a) to the Property Trustee, quarterly not later than 10 days prior to a
Distribution Date, a list, in such form as the Property Trustee may reasonably
require, of the names and addresses of the Securityholders as of the most recent
record date and (b) to the Property Trustee, promptly after receipt by the
Administrative Trustee or the Depositor of a request therefor from the Property
Trustee in order to enable the Paying Agent to pay Distributions in accordance
with Section 4.01 hereof), in each case to the extent such information is in the
possession or control of the Administrative Trustee or the Depositor and is not
identical to a previously supplied list or has not otherwise been received by
the Property Trustee. The rights of Securityholders to communicate with other
Securityholders with respect to their rights under this Trust Agreement or under
the Trust Securities, and the corresponding rights of the Property Trustee shall
be as provided in the Trust Indenture Act. Each Holder, by receiving and holding
a Trust Securities Certificate, shall be deemed to have agreed not to hold the
Depositor, the Property Trustee, the Administrative Trustee or the Delaware
Trustee accountable by reason of the disclosure of its name and address,
regardless of the source from which such information was derived.


                                       19


      Section 5.08 Maintenance of Office or Agency. The Property Trustee shall
maintain in the Borough of Manhattan, The City of New York, an office or offices
or agency or agencies where Preferred Securities may be surrendered for
registration of transfer or exchange and where notices and demands to or upon
the Trustees in respect of the Trust Securities Certificates may be served. The
Property Trustee shall give prompt written notice to the Depositor and to the
Securityholders of any change in the location of the Securities Register or any
such office or agency, which shall initially be at the Corporate Trust Office of
the Property Trustee.

      Section 5.09 Appointment of Paying Agent. The Paying Agent shall make
Distributions to Securityholders from the Payment Account and shall report the
amounts of such Distributions to the Property Trustee and the Administrative
Trustee. Any Paying Agent shall have the revocable power to withdraw funds from
the Payment Account for the purpose of making Distributions. The Administrative
Trustee may revoke such power and remove the Paying Agent, provided that such
revocation and removal with respect to the sole Paying Agent shall not become
effective until the appointment of a successor. The Paying Agent shall initially
be the Property Trustee, and any co-paying agent chosen by the Property Trustee
and acceptable to the Administrative Trustee and the Depositor. Any Person
acting as Paying Agent shall be permitted to resign as Paying Agent upon 30
days' written notice to the Administrative Trustee and the Depositor, and, if
applicable, the Property Trustee, provided that such resignation with respect to
the sole Paying Agent shall not become effective until the appointment of a
successor. In the event that the Property Trustee shall no longer be the Paying
Agent or a successor Paying Agent shall resign or its authority to act be
revoked, the Administrative Trustee shall appoint a successor that is acceptable
to the Property Trustee (in the case of any other Paying Agent) and the
Depositor to act as Paying Agent (which shall be a bank or trust company and
have a combined capital and surplus of at least $50,000,000). The Administrative
Trustee shall cause such successor Paying Agent or any additional Paying Agent
appointed by the Administrative Trustee to execute and deliver to the Trustees
an instrument in which such successor Paying Agent or additional Paying Agent
shall agree with the Trustees that as Paying Agent, such successor Paying Agent
or additional Paying Agent will hold all sums, if any, held by it for payment to
the Securityholders in trust for the benefit of the Securityholders entitled
thereto until such sums shall be paid to such Securityholders. The Paying Agent
shall return all of such sums remaining unclaimed to the Property Trustee and
upon removal of a Paying Agent such Paying Agent shall also return such sums in
its possession to the Property Trustee. The provisions of Sections 7.01, 7.03
and 7.06 shall apply to the Property Trustee also in its role as Paying Agent,
for so long as the Property Trustee shall act as Paying Agent and, to the extent
applicable, to any other Paying Agent appointed hereunder. Any reference in this
Trust Agreement to the Paying Agent shall include any co-paying agent unless the
context requires otherwise.

      Section 5.10 No Transfer of Common Securities by Depositor. To the fullest
extent permitted by law, any attempted transfer of the Common Securities shall
be void. The Administrative Trustee shall cause each Common Securities
Certificate issued to the Depositor to contain a legend stating "THIS
CERTIFICATE, AND THE COMMON SECURITIES REPRESENTED HEREBY, ARE NOT
TRANSFERABLE". By execution of this Trust Agreement, the Depositor agrees to the
foregoing provisions.


                                       20


      Section 5.11 Book-Entry Preferred Securities Certificates; Common
Securities Certificate.

            (a) The Preferred Securities, upon original issuance on the Closing
Date, will not be engraved but will be issued in the form of one or more printed
or typewritten Book-Entry Preferred Securities Certificates, to be delivered to
The Depository Trust Company, the initial Clearing Agency, or a custodian
thereof, by, or on behalf of, the Trust. Such Book-Entry Preferred Securities
Certificate or Certificates shall initially be registered on the Securities
Register in the name of Cede & Co., the nominee of the initial Clearing Agency.

            (b) A single Common Securities Certificate representing the Common
Securities shall be issued to the Depositor in the form of a definitive Common
Securities Certificate.

      Section 5.12 Definitive Preferred Securities Certificates. If (a) the
Depositor advises the Trustees in writing that the Clearing Agency is no longer
willing or able to properly discharge its responsibilities with respect to the
Preferred Securities Certificates or the Clearing Agency is no longer registered
or in good standing under the Securities Exchange Act of 1934, as amended, or
other applicable statute or regulation, and the Depositor is unable to locate a
qualified successor within 60 calendar days, (b) the Depositor at its option
advises the Trustees in writing that it elects to terminate the book-entry
system through the Clearing Agency or (c) an Event of Default occurs and is
continuing, then the Administrative Trustee shall issue Definitive Preferred
Securities Certificates. Upon surrender to the Administrative Trustee of the
Book-Entry Preferred Securities Certificates by the Clearing Agency, accompanied
by registration instructions, the Administrative Trustee shall execute and
deliver the Definitive Preferred Securities Certificates in accordance with the
instructions of the Clearing Agency. Neither the Securities Registrar nor the
Trustees shall be liable for any delay in delivery of such instructions and may
conclusively rely on, and shall be protected in relying on, such instructions.
The Definitive Preferred Securities Certificates shall be printed, lithographed
or engraved or may be produced in any other manner as is reasonably acceptable
to the Administrative Trustee, as evidenced by the execution thereof by the
Administrative Trustee.

      Section 5.13 Rights of Securityholders. The Securityholders shall not have
any right or title to the Trust Property other than the undivided beneficial
interest in the assets of the Trust conferred by their Trust Securities and they
shall have no right to call for any partition or division of property, profits
or rights of the Trust except as described below. The Trust Securities shall be
personal property giving only the rights specifically set forth therein and in
this Trust Agreement. The Trust Securities shall have no preemptive or similar
rights and when issued and delivered to Securityholders against payment of the
purchase price therefor will be fully paid and nonassessable by the Trust. The
Holders of the Trust Securities, in their capacities as such, shall be entitled
to the same limitation of personal liability extended to stockholders of private
corporations for profit organized under the General Corporation Law of the State
of Delaware.


                                       21


                                   ARTICLE VI
                    Acts of Securityholders; Meetings; Voting

      Section 6.01 Limitations on Voting Rights.

            (a) Except as provided herein and in the Indenture and as otherwise
required by law, no Holder of Trust Securities shall have any right to vote or
in any manner otherwise control the administration, operation and management of
the Trust or the obligations of the parties hereto, nor shall anything herein
set forth, or contained in the terms of the Trust Securities Certificates, be
construed so as to constitute the Securityholders from time to time as partners
or members of an association.

            (b) The Trustees shall not (i) direct the time, method and place of
conducting any proceeding for any remedy available to the Debenture Trustee or
executing any trust or power conferred on the Debenture Trustee with respect to
such Debentures, (ii) waive any past default which may be waived under Section
6.04 of the Indenture, (iii) exercise any right to rescind or annul an
acceleration of the principal of all the Debentures or (iv) consent to any
amendment or modification of the Indenture, where such consent shall be
required, without, in each case, obtaining the prior consent of the Holders of a
majority in aggregate Liquidation Amount of all Outstanding Preferred
Securities; provided, however, that where such consent under the Indenture would
require the consent of each holder of Debentures affected thereby, no such
consent shall be given by the Property Trustee without the prior written consent
of the Holder of each Outstanding Preferred Security. The Trustees shall not
revoke any action previously authorized or approved by a vote of the Holders of
Preferred Securities, except by a subsequent vote of the Holders of Preferred
Securities. The Property Trustee shall notify all Holders of the Preferred
Securities of any notice received from the Debenture Trustee as a result of the
Trust being the holder of the Debentures. In addition to obtaining the consent
of the Holders of the Preferred Securities, prior to taking any of the foregoing
actions, the Trustees shall, at the expense of the Depositor, obtain an Opinion
of Counsel experienced in such matters to the effect that the Trust will not be
classified as an association taxable as a corporation or partnership for United
States Federal income tax purposes on account of such action and will continue
to be classified as a grantor trust for United States Federal income tax
purposes.

            (c) Subject to Section 10.02(c) hereof, if any proposed amendment to
the Trust Agreement provides for, or the Trustees otherwise propose to effect,
(i) any action that would adversely affect in any material respect the powers,
preferences or special rights of the Preferred Securities, whether by way of
amendment to this Trust Agreement or otherwise, or (ii) the dissolution or
liquidation of the Trust, other than pursuant to the terms of this Trust
Agreement, then the Holders of Outstanding Preferred Securities will be entitled
to vote on such amendment or proposal and such amendment or proposal shall not
be effective except with the approval of the Holders of a majority in aggregate
Liquidation Amount of the Outstanding Preferred Securities.

      Section 6.02 Notice of Meetings. Notice of all meetings of the Holders of
the Preferred Securities, stating the time, place and purpose of the meeting,
shall be given by the Property Trustee pursuant to Section 10.08 to each
Preferred Securityholder of record, at his/her registered address, at least 15
days and not more than 90 days before the meeting. At any such


                                       22


meeting, any business properly before the meeting may be so considered whether
or not stated in the notice of the meeting. Any adjourned meeting may be held as
adjourned without further notice.

      Section 6.03 Meetings of Holders of the Preferred Securities. No annual
meeting of Securityholders is required to be held. The Administrative Trustee,
however, shall call a meeting of Securityholders to vote on any matter upon the
written request of the Holders of at least 25% of the aggregate Liquidation
Amount of the Outstanding Preferred Securities and the Administrative Trustee or
the Property Trustee may, at any time in their discretion, call a meeting of
Holders of the Preferred Securities to vote on any matters as to which the
Holders of the Preferred Securities are entitled to vote.

            Holders of a majority of the aggregate Liquidation Amount of the
Outstanding Preferred Securities, present in person or by proxy, shall
constitute a quorum at any meeting of Securityholders.

            If a quorum is present at a meeting, an affirmative vote of the
Holders of a majority of the aggregate Liquidation Amount of the Outstanding
Preferred Securities present, either in person or by proxy, at such meeting
shall constitute the action of the Securityholders, unless this Trust Agreement
requires a greater number of affirmative votes.

      Section 6.04 Voting Rights. A Securityholder shall be entitled to one vote
for each Trust Security in respect of any matter as to which such Securityholder
is entitled to vote.

      Section 6.05 Proxies, etc. At any meeting of Securityholders, any
Securityholder entitled to vote thereat may vote by proxy, provided that no
proxy shall be voted at any meeting unless it shall have been placed on file
with the Administrative Trustee, or with such other officer or agent of the
Trust as the Administrative Trustee may direct, for verification prior to the
time at which such vote shall be taken. Pursuant to a resolution of the Property
Trustee, proxies may be solicited in the name of the Property Trustee or one or
more officers of the Property Trustee. Only Securityholders of record shall be
entitled to vote. When Trust Securities are held jointly by several Persons, any
one of them may vote at any meeting in person or by proxy in respect of such
Trust Securities, but if more than one of them shall be present at such meeting
in person or by proxy, and such joint owners or their proxies so present
disagree as to any vote to be cast, such vote shall not be received in respect
of such Trust Securities. A proxy purporting to be executed by or on behalf of a
Securityholder shall be deemed valid unless challenged at or prior to its
exercise, and the burden of proving invalidity shall rest on the challenger. No
proxy shall be valid more than three years after its date of execution.

      Section 6.06 Securityholder Action by Written Consent. Any action which
may be taken by Securityholders at a meeting may be taken without a meeting if
Holders of the proportion of the Outstanding Preferred Securities required to
approve such action shall consent to the action in writing.

      Section 6.07 Record Date for Voting and Other Purposes. For the purposes
of determining the Securityholders who are entitled to notice of and to vote at
any meeting or by written consent, or for the purpose of any other action, the
Administrative Trustee may from time


                                       23


to time fix a date, not more than 90 days prior to the date of any meeting of
Securityholders, as a record date for the determination of the identity of the
Securityholders for such purposes.

      Section 6.08 Acts of Securityholders. Any request, demand, authorization,
direction, notice, consent, waiver or other action provided or permitted by this
Trust Agreement to be given, made or taken by Securityholders may be embodied in
and evidenced by one or more instruments of substantially similar tenor signed
by such Securityholders in person or by an agent duly appointed in writing; and,
except as otherwise expressly provided herein, such action shall become
effective when such instrument or instruments are delivered to the
Administrative Trustee. Such instrument or instruments (and the action embodied
therein and evidenced thereby) are herein sometimes referred to as the "Act" of
the Securityholders signing such instrument or instruments. Proof of execution
of any such instrument or of a writing appointing any such agent shall be
sufficient for any purpose of this Trust Agreement and (subject to Section 7.02)
conclusive, if made in the manner provided in this Section.

            The fact and date of the execution by any Person of any such
instrument or writing may be proved by the affidavit of a witness of such
execution or by a certificate of a notary public or other officer authorized by
law to take acknowledgments of deeds, certifying that the individual signing
such instrument or writing acknowledged to him/her the execution thereof. Where
such execution is by a signer acting in a capacity other than his/her individual
capacity, such certificate or affidavit shall also constitute sufficient proof
of his/her authority. The fact and date of the execution of any such instrument
or writing, or the authority of the Person executing the same, may also be
proved in any other manner which any Trustee receiving the same deems
sufficient.

            The ownership of Preferred Securities shall be proved by the
Securities Register.

            Any request, demand, authorization, direction, notice, consent,
waiver or other act of the Securityholder of any Trust Security shall bind every
future Securityholder of the same Trust Security and the Securityholder of every
Trust Security issued upon the registration of transfer thereof or in exchange
therefor or in lieu thereof in respect of anything done, omitted or suffered to
be done by the Trustees or the Trust in reliance thereon, whether or not
notation of such action is made upon such Trust Security.

            Without limiting the foregoing, a Securityholder entitled hereunder
to take any action hereunder with regard to any particular Trust Security may do
so with regard to all or any part of the Liquidation Amount of such Trust
Security or by one or more duly appointed agents, each of which may do so
pursuant to such appointment with regard to all or any part of such Liquidation
Amount.

            If any dispute shall arise between the Securityholders and the
Administrative Trustee or among such Securityholders or Trustees with respect to
the authenticity, validity or binding nature of any request, demand,
authorization, direction, consent, waiver or other Act of such Securityholder or
Trustee under this Article VI, then the determination of such matter by the
Property Trustee shall be conclusive with respect to such matter.


                                       24


      Section 6.09 Inspection of Records. Upon reasonable notice to the
Administrative Trustee and the Property Trustee, the records of the Trust shall
be open to inspection by Securityholders during normal business hours for any
purpose reasonably related to such Securityholder's interest as a
Securityholder.

                                  ARTICLE VII
                                  The Trustees

      Section 7.01 Certain Duties and Responsibilities.

            (a) The duties and responsibilities of the Trustees shall be as
provided by this Trust Agreement and, in the case of the Property Trustee, also
by the Trust Indenture Act. The Property Trustee, other than during the
occurrence and continuance of an Event of Default, undertakes to perform only
such duties as are specifically set forth in this Trust Agreement and, upon an
Event of Default, must exercise the same degree of care and skill as a prudent
person would exercise or use in the conduct of his/her own affairs. The Trustees
shall have all the privileges, rights and immunities provided by the Delaware
Statutory Trust Act. Notwithstanding the foregoing, no provision of this Trust
Agreement shall require the Trustees to expend or risk their own funds or
otherwise incur any financial liability in the performance of any of their
duties hereunder, or in the exercise of any of their rights or powers, if they
shall have reasonable grounds for believing that repayment of such funds or
adequate indemnity against such risk or liability is not reasonably assured to
it. Whether or not therein expressly so provided, every provision of this Trust
Agreement relating to the conduct or affecting the liability of or affording
protection to the Trustees shall be subject to the provisions of this Section.
Nothing in this Trust Agreement shall be construed to release the Property
Trustee from liability for its own negligent action, its own negligent failure
to act, or its own willful misconduct. To the extent that, at law or in equity,
the Administrative Trustee has duties (including fiduciary duties) and
liabilities relating thereto to the Trust or to the Securityholders, the
Administrative Trustee shall not be liable to the Trust or to any Securityholder
for the Administrative Trustee's good faith reliance on the provisions of this
Trust Agreement. The provisions of this Trust Agreement, to the extent that they
restrict the duties and liabilities of the Administrative Trustee otherwise
existing at law or in equity, are agreed by the Depositor and the
Securityholders to replace such other duties and liabilities of the
Administrative Trustee.

            (b) All payments made by the Property Trustee or any other Paying
Agent in respect of the Trust Securities shall be made only from the income and
proceeds from the Trust Property. Each Securityholder, by its acceptance of a
Trust Security, agrees that (i) it will look solely to the income and proceeds
from the Trust Property to the extent available for distribution to it as herein
provided and (ii) the Trustees are not personally liable to it for any amount
distributable in respect of any Trust Security or for any other liability in
respect of any Trust Security. This Section 7.01(b) does not limit the liability
of the Trustees expressly set forth elsewhere in this Trust Agreement or, in the
case of the Property Trustee, in the Trust Indenture Act.

      Section 7.02 Notice of Defaults; Direct Action by Securityholders. Within
90 days after the occurrence of any Event of Default actually known to a
Responsible Officer of the Property Trustee, the Property Trustee shall
transmit, in the manner and to the extent provided in


                                       25


Section 10.08, notice of such Event of Default to the Securityholders, the
Administrative Trustee and the Depositor, unless such Event of Default shall
have been cured or waived. If the Property Trustee has failed to enforce its
rights under this Trust Agreement or the Indenture to the fullest extent
permitted by law and subject to the terms of this Trust Agreement and the
Indenture, any Securityholder may institute a legal proceeding directly to
enforce the Property Trustee's rights under this Trust Agreement or the
Indenture with respect to Debentures having an aggregate principal amount equal
to the aggregate Liquidation Amount of the Preferred Securities of such
Securityholder without first instituting a legal proceeding against the Property
Trustee or any other Person. To the extent that any action under the Indenture
is entitled to be taken by the holders of at least a specified percentage of the
principal amount of the outstanding Debentures, Holders of at least the same
percentage of the Liquidation Amount of the Outstanding Preferred Securities may
also take such action in the name of the Trust if such action has not been taken
by the Property Trustee. To the fullest extent permitted by law, the foregoing
shall be in addition to and not in limitation of any direct rights provided to
the Holders of the Preferred Securities against the Depositor, as issuer of the
Debentures, under the terms of the Indenture, including the right, without any
notice or other demand on the Property Trustee, to institute suit for the
enforcement of any payment of the principal of and any premium and interest on
Debentures as provided in Section 6.07 of the Indenture.

      Section 7.03 Certain Rights of Property Trustee. Subject to the provisions
of Section 7.01:

            (a) the Property Trustee may conclusively rely and shall be
protected in acting or refraining from acting in good faith upon any resolution,
Opinion of Counsel, certificate, written representation of a Holder or
transferee, certificate of auditors or any other certificate, statement,
instrument, opinion, report, notice, request, consent, order, appraisal, bond,
debenture, note, other evidence of indebtedness or other paper or document
believed by it to be genuine and to have been signed or presented by the proper
party or parties;

            (b) if, other than during the occurrence and continuance of an Event
of Default, (i) in performing its duties under this Trust Agreement, the
Property Trustee is required to decide between alternative courses of action or
(ii) in construing any of the provisions in this Trust Agreement, the Property
Trustee finds the same ambiguous or inconsistent with any other provisions
contained herein or (iii) the Property Trustee is unsure of the application of
any provision of this Trust Agreement, then, except as to any matter as to which
the Holders of the Preferred Securities are entitled to vote under the terms of
this Trust Agreement, the Property Trustee shall deliver a notice to the
Depositor requesting written instructions of the Depositor as to the course of
action to be taken. The Property Trustee shall take such action, or refrain from
taking such action, as the Property Trustee shall be instructed in writing to
take, or to refrain from taking, by the Depositor; provided, however, that if
the Property Trustee does not receive such instructions of the Depositor within
ten Business Days after it has delivered such notice, or such reasonably shorter
period of time set forth in such notice (which to the extent practicable shall
not be less than two Business Days), it may, but shall be under no duty to, take
or refrain from taking such action not inconsistent with this Trust Agreement as
it shall deem advisable and in the best interests of the Securityholders, in
which event the Property Trustee shall have no liability except for its own
negligent action, its own negligent failure to act or its own willful
misconduct;


                                       26


            (c) the Property Trustee may consult with counsel or other experts
of its selection and the advice or opinion of such counsel or other experts with
respect to legal matters or advice within the scope of such experts' area of
expertise shall be full and complete authorization and protection in respect of
any action taken, suffered or omitted by it hereunder in good faith and in
reliance thereon;

            (d) the Property Trustee shall be under no obligation to exercise
any of the rights or powers vested in it by this Trust Agreement at the request
or direction of any of the Securityholders pursuant to this Trust Agreement,
unless such Securityholders shall have offered to the Property Trustee security
or indemnity against the costs, expenses and liabilities reasonably satisfactory
to the Property Trustee which might be incurred by it in compliance with such
request or direction;

            (e) the Property Trustee shall not be bound to make any
investigation into the facts or matters stated in any resolution, certificate,
statement, instrument, opinion, report, notice, request, direction, consent,
order, approval, bond, debenture, note or other evidence of indebtedness or
other paper or document, but the Property Trustee, in its discretion, may make
such further inquiry or investigation into such facts or matters as it may see
fit;

            (f) the Property Trustee may execute any of the trusts or powers
hereunder or perform any duties hereunder either directly or by or through its
agents or attorneys and the Property Trustee shall not be responsible for any
misconduct or negligence on the part of any agent or attorney appointed with due
care by it hereunder;

            (g) whenever in the administration of this Trust Agreement, the
Property Trustee shall deem it desirable that a matter be proved or established
prior to taking, suffering or omitting any action hereunder, the Property
Trustee (unless other evidence be herein specifically prescribed) may, in the
absence of bad faith on its part, conclusively rely upon an Officers'
Certificate;

            (h) the Property Trustee shall not be liable for any action taken,
suffered, or omitted to be taken by it in good faith and reasonably believed by
it to be authorized or within the discretion or rights or powers conferred upon
it by this Trust Agreement;

            (i) the Property Trustee shall not be deemed to have notice of any
Default or Event of Default unless a Responsible Officer of the Property Trustee
has actual knowledge thereof or unless written notice of any event which is in
fact such a default is received by the Property Trustee at the Corporate Trust
Office and such notice references the Trust Securities and this Trust Agreement;

            (j) the rights, privileges, protections, immunities and benefits
given to the Property Trustee, including, without limitation, its right to be
indemnified, are extended to, and shall be enforceable by, the Property Trustee
in each of its capacities hereunder, and each agent, custodian and other Person
employed to act hereunder; and

            (k) the Property Trustee may request that the Depositor deliver an
Officers' Certificate setting forth the names of individuals and/or titles of
officers authorized at such time to take specified actions pursuant to this
Trust Agreement, which Officers' Certificate


                                       27


may be signed by any person authorized to sign an Officers' Certificate,
including any person specified as so authorized in any such certificate
previously delivered and not superseded.

      Section 7.04 Not Responsible for Recitals or Issuance of Securities. The
recitals contained herein and in the Trust Securities Certificates shall be
taken as the statements of the Trust, and the Trustees do not assume any
responsibility for their correctness. The Trustees shall not be accountable for
the use or application by the Depositor of the proceeds of the Debentures.

            The Property Trustee makes no representations as to the value or
condition of the property of the Trust or any part thereof. The Property Trustee
makes no representations as to the validity or sufficiency of this Trust
Agreement or the Trust Securities.

      Section 7.05 May Hold Securities. Any Trustee or any other agent of any
Trustee or the Trust, in its individual or any other capacity, may become the
owner or pledgee of Trust Securities and, subject to Sections 7.08 and 7.13 and,
except as provided in the definition of the term Outstanding in Article I, may
otherwise deal with the Trust with the same rights it would have if it were not
a Trustee or such other agent.

      Section 7.06 Compensation; Indemnity; Fees. The Depositor agrees:

            (a) to pay to the Trustees from time to time such compensation as
shall have been agreed in writing with the Depositor for all services rendered
by them hereunder (which compensation shall not be limited by any provision of
law in regard to the compensation of a trustee of an express trust);

            (b) except as otherwise expressly provided herein, to reimburse the
Trustees upon request for all reasonable expenses, disbursements and advances
incurred or made by the Trustees in accordance with any provision of this Trust
Agreement (including the reasonable compensation and the expenses and
disbursements of its agents and counsel), except any such expense, disbursement
or advance as may be attributable to its own negligent action, its own negligent
failure to act or its own wilful misconduct (or, in the case of the
Administrative Trustee, any such expense, disbursement or advance as may be
attributable to his/her gross negligence); and

            (c) to indemnify each of the Trustees or any predecessor Trustee
for, and to hold the Trustees harmless against, any and all loss, damage,
claims, liability, penalty or expense including taxes (other than taxes based on
the income of such Trustee) incurred without its own negligent action, its own
negligent failure to act or its wilful misconduct (or, in the case of the
Administrative Trustees, incurred without gross negligence or bad faith),
arising out of or in connection with the acceptance or administration of this
Trust Agreement, including the costs and expenses of defending itself against
any claim (whether by the Depositor, any Holder or any other person) or
liability in connection with the exercise or performance of any of its powers or
duties hereunder.

      No Trustee may claim any Lien or charge on any Trust Property as a result
of any amount due pursuant to this Section 7.06.


                                       28


            The provisions of this Section 7.06 shall survive the termination of
this Trust Agreement and the resignation or removal of the Trustees.

      Section 7.07 Corporate Property Trustee Required; Eligibility of Trustees.

            (a) There shall at all times be a Property Trustee hereunder. The
Property Trustee shall be a Person that is eligible pursuant to the Trust
Indenture Act to act as such and has a combined capital and surplus of at least
$50,000,000. If any such Person publishes reports of condition at least
annually, pursuant to law or to the requirements of its supervising or examining
authority, then for the purposes of this Section, the combined capital and
surplus of such Person shall be deemed to be its combined capital and surplus as
set forth in its most recent report of condition so published. If at any time
the Property Trustee with respect to the Trust Securities shall cease to be
eligible in accordance with the provisions of this Section, it shall resign
immediately in the manner and with the effect hereinafter specified in this
Article.

            (b) There shall at all times be one or more Administrative Trustees
hereunder. Each Administrative Trustee shall be either a natural person who is
at least 21 years of age or a legal entity that shall act through one or more
persons authorized to bind that entity.

            (c) There shall at all times be a Delaware Trustee. The Delaware
Trustee shall either be (i) a natural person who is at least 21 years of age and
a resident of the State of Delaware or (ii) a legal entity with its principal
place of business in the State of Delaware and that otherwise meets the
requirements of applicable Delaware law that shall act through one or more
persons authorized to bind such entity.

      Section 7.08 Conflicting Interests. If the Property Trustee has or shall
acquire a conflicting interest within the meaning of the Trust Indenture Act,
the Property Trustee shall either eliminate such interest or resign, to the
extent and in the manner provided by, and subject to the provisions of, the
Trust Indenture Act and this Trust Agreement.

      Section 7.09 Co-Trustees and Separate Trustee. Unless an Event of Default
shall have occurred and be continuing, at any time or times, for the purpose of
meeting the legal requirements of the Trust Indenture Act or of any jurisdiction
in which any part of the Trust Property may at the time be located, the
Depositor and the Administrative Trustee (and if more than one Administrative
Trustee, by agreed action of the majority of such Trustees) shall have power (i)
to appoint, and upon the written request of the Administrative Trustee the
Depositor shall for such purpose join with the Administrative Trustee in the
execution, delivery, and performance of all instruments and agreements necessary
or proper to appoint one or more Persons approved by the Property Trustee either
to act as co-trustee, jointly with the Property Trustee, of all or any part of
such Trust Property, or to the extent required by law to act as separate trustee
of any such property, in either case with such powers as may be provided in the
instrument of appointment, and (ii) to vest in such Person or Persons in the
capacity aforesaid, any property, title, right or power deemed necessary or
desirable, subject to the other provisions of this Section. If the Depositor
does not join in such appointment within 15 days after the receipt by it of a
request so to do, or in case a Debenture Event of Default has occurred and is
continuing, the Property Trustee alone shall have power to make such
appointment. Any co-trustee or separate trustee appointed pursuant to this
Section shall either be (i) a natural person


                                       29


who is at least 21 years of age and a resident of the United States or (ii) a
legal entity with its principal place of business in the United States that
shall act through one or more persons authorized to bind such entity.

            Should any written instrument from the Depositor be required by any
co-trustee or separate trustee so appointed for more fully confirming to such
co-trustee or separate trustee such property, title, right, or power, any and
all such instruments shall, on request, be executed, acknowledged, and delivered
by the Depositor.

            Every co-trustee or separate trustee shall, to the extent permitted
by law, but to such extent only, be appointed subject to the following terms,
namely:

                  (a) The Trust Securities shall be executed and delivered and
all rights, powers, duties, and obligations hereunder in respect of the custody
of securities, cash and other personal property held by, or required to be
deposited or pledged with, the Trustees specified hereunder, shall be exercised,
solely by such Trustees and not by such co-trustee or separate trustee.

                  (b) The rights, powers, duties, and obligations hereby
conferred or imposed upon the Property Trustee in respect of any property
covered by such appointment shall be conferred or imposed upon and exercised or
performed by the Property Trustee or by the Property Trustee and such co-trustee
or separate trustee jointly, as shall be provided in the instrument appointing
such co-trustee or separate trustee, except to the extent that under any law of
any jurisdiction in which any particular act is to be performed, the Property
Trustee shall be incompetent or unqualified to perform such act, in which event
such rights, powers, duties and obligations shall be exercised and performed by
such co-trustee or separate trustee.

                  (c) The Property Trustee at any time, by an instrument in
writing executed by it, with the written concurrence of the Depositor, may
accept the resignation of or remove any co-trustee or separate trustee appointed
under this Section, and, in case an Event of Default under the Indenture has
occurred and is continuing, the Property Trustee shall have power to accept the
resignation of, or remove, any such co-trustee or separate trustee without the
concurrence of the Depositor. Upon the written request of the Property Trustee,
the Depositor shall join with the Property Trustee in the execution, delivery,
and performance of all instruments and agreements necessary or proper to
effectuate such resignation or removal. A successor to any co-trustee or
separate trustee so resigned or removed may be appointed in the manner provided
in this Section.

                  (d) No co-trustee or separate trustee hereunder shall be
personally liable by reason of any act or omission of the Property Trustee, or
any other trustee hereunder.

                  (e) The Property Trustee shall not be liable by reason of any
act of a co-trustee or separate trustee.

                  (f) Any Act of Holders delivered to the Property Trustee shall
be deemed to have been delivered to each such co-trustee and separate trustee.


                                       30


      Section 7.10 Resignation and Removal; Appointment of Successor. No
resignation or removal of any Trustee and no appointment of a successor Trustee
pursuant to this Article shall become effective until the acceptance of
appointment by the successor Trustee in accordance with the applicable
requirements of Section 7.11.

            Subject to the immediately preceding paragraph, any Trustee may
resign at any time with respect to the Trust Securities by giving written notice
thereof to the Securityholders.

            Unless an Event of Default shall have occurred and be continuing,
any Trustee may be removed at any time by Act of the Holder of the Common
Securities. If an Event of Default shall have occurred and be continuing, the
Property Trustee or the Delaware Trustee, or both of them, may be removed at
such time only by Act of the Holders of a majority in Liquidation Amount of the
Outstanding Preferred Securities, delivered to such Trustee (in its individual
capacity and on behalf of the Trust). The Administrative Trustee may be removed
at any time by the Holder of Common Securities only.

            If the instrument of acceptance by the successor Trustee required by
Section 7.11 shall not have been delivered to the Trustee within 30 days after
the giving of such notice of resignation or removal, the Trustee may petition,
at the expense of the Depositor, any court of competent jurisdiction for the
appointment of a successor Trustee.

            If any Trustee shall resign, be removed or become incapable of
acting as Trustee, or if a vacancy shall occur in the office of any Trustee for
any cause, at a time when no Event of Default shall have occurred and be
continuing, the Holder of Common Securities, by Act of the Holder of Common
Securities delivered to the retiring Trustee, shall promptly appoint a successor
Trustee or Trustees and the Trust, and the retiring Trustee shall comply with
the applicable requirements of Section 7.11. If the Property Trustee or the
Delaware Trustee shall resign, be removed or become incapable of continuing to
act as the Property Trustee or the Delaware Trustee, as the case may be, at a
time when an Event of Default has occurred and is continuing, the Holders of
Preferred Securities, by Act of the Securityholders of a majority in Liquidation
Amount of the Outstanding Preferred Securities delivered to the retiring
Trustee, shall promptly appoint a successor Trustee or Trustees, and such
successor Trustee shall comply with the applicable requirements of Section 7.11.
If any Administrative Trustee shall resign, be removed or become incapable of
acting as Administrative Trustee at a time when an Event of Default shall have
occurred and be continuing, the Holder of Common Securities shall appoint a
successor Administrative Trustee. If no successor Trustee shall have been so
appointed by the Holder of Common Securities or the Holders of Preferred
Securities and accepted appointment in the manner required by Section 7.11, any
Securityholder who has been a Securityholder of Trust Securities for at least
six months may, on behalf of himself and all others similarly situated, petition
any court of competent jurisdiction for the appointment of a successor Trustee.

            The Property Trustee shall give notice of each resignation and each
removal of a Trustee and each appointment of a successor Trustee to all
Securityholders in the manner provided in Section 10.08 and shall give notice to
the Depositor. Each notice shall include the name of the successor Trustee and
the address of its Corporate Trust Office if it is the Property Trustee.


                                       31


            Notwithstanding the foregoing or any other provision of this Trust
Agreement, in the event any Administrative Trustee or Delaware Trustee who is a
natural person dies or becomes, in the opinion of the Depositor, incompetent or
incapacitated, the vacancy created by such death, incompetence or incapacity may
be filled by (a) the unanimous act of the remaining Administrative Trustees if
there are at least two of them or (b) otherwise by the Depositor (with the
successor in each case being a Person who satisfies the eligibility requirements
for Administrative Trustee or for the Delaware Trustee, as the case may be, set
forth in Section 7.07).

      Section 7.11 Acceptance of Appointment by Successor. In case of the
appointment hereunder of a successor Trustee, the retiring Trustee and each
successor Trustee shall execute and deliver to the Trust and the retiring
Trustee an amendment hereto wherein each successor Trustee shall accept such
appointment and which (a) shall contain such provisions as shall be necessary or
desirable to transfer and confirm to, and to vest in, each successor Trustee all
the rights, powers, trusts and duties of the retiring Trustee and (b) shall add
to or change any of the provisions of this Trust Agreement as shall be necessary
to provide for or facilitate the administration of the trusts hereunder by more
than one Trustee, it being understood that nothing herein or in such amendment
shall constitute such Trustees co-trustees of the same trust and that each such
Trustee shall be trustee of a trust or trusts hereunder separate and apart from
any trust or trusts hereunder administered by any other such Trustee and upon
the execution and delivery of such amendment the resignation or removal of the
retiring Trustee shall become effective to the extent provided therein and each
such successor Trustee, without any further act, deed or conveyance, shall
become vested with all the rights, powers, trusts and duties of the retiring
Trustee and the Trust; but, on request of the Trust or any successor Trustee,
such retiring Trustee shall duly assign, transfer and deliver to such successor
Trustee all Trust Property, all proceeds thereof and money held by such retiring
Trustee hereunder.

            Upon request of any such successor Trustee, the Trust shall execute
any and all instruments for more fully and certainly vesting in and confirming
to such successor Trustee all such rights, powers and trusts referred to in the
first or second preceding paragraph, as the case may be.

            No successor Trustee shall accept its appointment unless at the time
of such acceptance such successor Trustee shall be qualified and eligible under
this Article.

      Section 7.12 Merger, Conversion, Consolidation or Succession to Business.
Any Person into which any of the Trustees may be merged or converted or with
which it may be consolidated, or any Person resulting from any merger,
conversion or consolidation to which such Trustee shall be a party, or any
Person succeeding to all or substantially all the corporate trust business of
such Trustee, shall be the successor of such Trustee hereunder, provided such
Person shall be otherwise qualified and eligible under this Article, without the
execution or filing of any paper or any further act on the part of any of the
parties hereto.

      Section 7.13 Preferential Collection of Claims Against Depositor or Trust.
If and when the Property Trustee or the Delaware Trustee shall be or become a
creditor (whether directly or indirectly, secured or unsecured) of the Depositor
or the Trust (or any other obligor upon the Debentures or the Trust Securities),
including under the terms of Section 7.05 hereof,


                                       32


the Property Trustee or the Delaware Trustee, as the case may be, shall be
subject to and shall take all actions necessary in order to comply with the
provisions of the Trust Indenture Act regarding the collection of claims against
the Depositor or Trust (or any such other obligor).

      Section 7.14 Reports by Property Trustee. The Property Trustee shall
transmit to Holders such reports concerning the Property Trustee and its actions
under this Trust Agreement as may be required pursuant to the Trust Indenture
Act at the times and in the manner provided pursuant thereto. If required by
Section 313(a) of the Trust Indenture Act, the Property Trustee shall, within 60
days after each May 31 following the date of this Trust Agreement deliver to
Holders a brief report, dated as of such May 31, which complies with the
provisions of such Section 313(a).

      A copy of each such report shall, at the time of such transmission to
Holders, be filed by the Property Trustee with each stock exchange upon which
any Preferred Securities are then listed, with the Commission and with the
Trust. The Trust will promptly notify the Property Trustee when any Preferred
Securities are listed on any stock exchange.

      Section 7.15 Reports to the Property Trustee. The Depositor and the
Administrative Trustee on behalf of the Trust shall provide to the Property
Trustee such documents, reports and information as required by Section 314 of
the Trust Indenture Act (if any) and the compliance certificate required by
Section 314(a) of the Trust Indenture Act in the form, in the manner and at the
times required by Section 314 of the Trust Indenture Act.

            Delivery of such reports, information and documents to the Property
Trustee is for informational purposes only and the Property Trustee's receipt of
such shall not constitute constructive notice of any information contained
therein or determinable from information contained therein, including the
Company's compliance with any of its covenants hereunder (as to which the
Property Trustee is entitled to conclusively rely exclusively on Officers'
Certificates).

      Section 7.16 Evidence of Compliance with Conditions Precedent. The
Depositor and the Administrative Trustee on behalf of the Trust shall provide to
the Property Trustee evidence of compliance with the conditions precedent, if
any, provided for in this Trust Agreement that relate to any of the matters set
forth in Section 314(c) of the Trust Indenture Act.

      Section 7.17 Statements Required in Officers' Certificate and Opinion of
Counsel.

            Each Officers' Certificate and Opinion of Counsel with respect to
compliance with a covenant or condition provided for in this Trust Agreement
shall include:

            (1) a statement that each Person making such Officers' Certificate
or Opinion of Counsel has read such covenant or condition;

            (2) a brief statement as to the nature and scope of the examination
or investigation upon which the statements or opinions contained in such
Officers' Certificate or Opinion of Counsel are based;


                                       33


            (3) a statement that, in the opinion of each such Person, such
Person has made such examination or investigation as is necessary to enable such
Person to express an informed opinion as to whether or not such covenant or
condition has been complied with; and

            (4) a statement that, in the opinion of such Person, such covenant
or condition has been complied with; provided, however, that with respect to
matters of fact not involving any legal conclusion, an Opinion of Counsel may
rely on an Officers' Certificate or certificates of public officials.

      Section 7.18 Number of Trustees.

            (a) The number of Trustees shall be three, provided that the Holder
of all of the Common Securities by written instrument may increase the number of
Administrative Trustees to more than one and, if so increased, may decrease the
number of Administrative Trustees. During any period in which the number of
Administrative Trustees is more than one, the Administrative Trustees shall act
by majority vote.

            (b) If a Trustee ceases to hold office for any reason and, with
respect to the Administrative Trustee, the number of Administrative Trustees is
not reduced as permitted by Section 7.18(a), or if the number of Administrative
Trustees is increased pursuant to Section 7.18(a), a vacancy shall occur. The
vacancy shall be filled with a Trustee appointed in accordance with Section
7.10.

            (c) The death, dissolution, termination, resignation, retirement,
removal, bankruptcy, incompetence or incapacity to perform the duties of a
Trustee shall not operate to annul, dissolve or terminate the Trust. Whenever a
vacancy shall occur, until such vacancy is filled by the appointment of an
Administrative Trustee in accordance with Section 7.10, the Administrative
Trustees in office, regardless of their number (and notwithstanding any other
provision of this Trust Agreement), shall have all the powers granted to the
Administrative Trustee and shall discharge all the duties imposed upon the
Administrative Trustees by this Trust Agreement.

      Section 7.19 Delegation of Power.

            (a) Any Administrative Trustee may, by power of attorney consistent
with applicable law, delegate to any natural person over the age of 21 his/her
power for the purpose of executing any documents contemplated in Section
2.07(a), including any registration statement or amendment thereto filed with
the Commission, or making any other governmental filing; and

            (b) the Administrative Trustees shall have power to delegate from
time to time to such of their number, if there is more than one Administrative
Trustee, or to the Depositor the doing of such things and the execution of such
instruments either in the name of the Trust or the names of the Administrative
Trustees or otherwise as the Administrative Trustees may deem expedient, to the
extent such delegation is not prohibited by applicable law or contrary to the
provisions of the Trust, as set forth herein.


                                       34


      Section 7.20 Voting. Except as otherwise provided in this Trust Agreement,
the consent or vote of the Trustees shall be approved by the Administrative
Trustee or, if more than one, by a majority of the Administrative Trustees.

                                  ARTICLE VIII
                           Dissolution and Liquidation

      Section 8.01 Dissolution Upon Expiration Date. Unless earlier dissolved,
the Trust shall automatically dissolve on December 31, 2034 (the "Expiration
Date").

      Section 8.02 Early Termination. The earliest to occur of any of the
following events is an "Early Termination Event":

                  (a) the occurrence of a Bankruptcy Event in respect of, or the
dissolution or liquidation of, the Depositor or an acceleration of the maturity
of the Debentures pursuant to Section 6.02 of the Indenture;

                  (b) upon the election of the Depositor to dissolve the Trust
and cause the distribution of a Like Amount of Debentures to the Holders of the
Trust Securities in accordance with their terms;

                  (c) the redemption of all of the Trust Securities; and

                  (d) an order for dissolution of the Trust shall have been
entered by a court of competent jurisdiction.

      The election of the Depositor pursuant to Section 8.02(b) shall be made by
the Depositor giving written notice to the Trustees not less than 30 days prior
to the date of distribution of the Debentures. Such notice shall specify the
date of distribution of the Debentures and shall be accompanied by an Opinion of
Counsel that such event will not be a taxable event to the Holders of the Trust
Securities for Federal income tax purposes.

      Section 8.03 Termination. The respective obligations and responsibilities
of the Trustees and the Trust shall terminate upon the latest to occur of the
following: (a) the distribution by the Property Trustee to Securityholders upon
the winding up of the Trust pursuant to Section 8.04 of all amounts required to
be distributed hereunder upon the final payment of the Trust Securities; (b) the
payment of any expenses owed by the Trust; and (c) the discharge of all
administrative duties of the Administrative Trustee, including the performance
of any tax reporting obligations with respect to the Trust or the
Securityholders and the filing of the Certificate of Cancellation with the
Secretary of State of the State of Delaware.

      Section 8.04 Winding Up.

            (a) If an Early Termination Event specified in clause (a) or (d) of
Section 8.02 occurs or upon the Expiration Date, the Trust shall be wound up by
the Trustees as expeditiously as the Trustees determine to be possible by
distributing, after satisfaction of liabilities to creditors of the Trust as
provided by applicable law, to each Securityholder a Like Amount of Debentures,
subject to Section 8.04(d). If an Early Termination Event specified in


                                       35


clause (b) occurs, the Trust shall be liquidated by the Trustee on the date of
distribution of the Debentures specified by the Depositor in its notice
delivered pursuant to Section 8.02. Notice of liquidation shall be given by the
Property Trustee by first-class mail, postage prepaid, mailed not later than 30
nor more than 60 days prior to the Liquidation Date to each Holder of Trust
Securities at such Holder's address appearing in the Securities Register. All
notices of liquidation shall:

                  (i) state the Liquidation Date;

                  (ii) state that from and after the Liquidation Date, the Trust
Securities will no longer be deemed to be Outstanding and any Trust Securities
Certificates not surrendered for exchange will be deemed to represent a Like
Amount of Debentures; and

                  (iii) provide such information with respect to the mechanics
by which Holders may exchange Trust Securities Certificates for certificates
evidencing Debentures, or, if Section 8.04(d) applies, receive a Liquidation
Distribution, as the Administrative Trustee or the Property Trustee shall deem
appropriate.

            (b) In order to effect the winding up of the Trust and distribution
of the Debentures to Securityholders, the Property Trustee, either itself acting
as exchange agent or through the appointment of a separate exchange agent, shall
establish such procedures as it shall deem appropriate to effect the
distribution of Debentures in exchange for the Outstanding Trust Securities
Certificates.

            (c) Except where Section 8.02(c) applies, on or after the
Liquidation Date, (i) the Trust Securities will no longer be deemed to be
Outstanding, (ii) certificates representing a Like Amount of Debentures will be
issued to Holders of Trust Securities Certificates, upon surrender of such
certificates to the Administrative Trustee or its agent for exchange, (iii) the
Depositor shall use its best efforts to have the Debentures listed on the New
York Stock Exchange or such other exchange as the Preferred Securities are then
listed and shall take any reasonable action necessary to effect the distribution
of the Debentures, (iv) any Trust Securities Certificates not so surrendered for
exchange will be deemed to represent a Like Amount of Debentures, accruing
interest at the rate then borne by the Debentures from the last Distribution
Date on which a Distribution was made on such Trust Certificates until such
certificates are so surrendered (and until such certificates are so surrendered,
no payments or interest or principal will be made to Holders of Trust Securities
Certificates with respect to such Debentures) and (v) all rights of
Securityholders holding Trust Securities will cease, except the right of such
Securityholders to receive Debentures upon surrender of Trust Securities
Certificates.

            (d) In the event that, notwithstanding the other provisions of this
Section 8.04, whether because of an order for dissolution entered by a court of
competent jurisdiction or otherwise, distribution of the Debentures in the
manner provided herein is determined by the Property Trustee not to be
practical, the Trust Property shall be liquidated, and the Trust shall be
terminated, by the Property Trustee in such manner as the Property Trustee
determines. In such event, Securityholders will be entitled to receive out of
the assets of the Trust available for distribution to Securityholders, after
satisfaction of liabilities to creditors of


                                       36


the Trust as provided by applicable law, an amount equal to the Liquidation
Amount per Trust Security plus accumulated and unpaid Distributions thereon to
the date of payment (such amount being the "Liquidation Distribution"). If, upon
any such dissolution, the Liquidation Distribution can be paid only in part
because the Trust has insufficient assets available to pay in full the aggregate
Liquidation Distribution, then, subject to the next succeeding sentence, the
amounts payable by the Trust on the Trust Securities shall be paid on a pro rata
basis (based upon Liquidation Amounts). The Holder of the Common Securities will
be entitled to receive Liquidation Distributions upon any such dissolution pro
rata (determined as aforesaid) with Holders of Preferred Securities, except
that, if a Debenture Event of Default has occurred and is continuing, the
Preferred Securities shall have a priority over the Common Securities, and no
Liquidation Distribution will be paid to the Holders of the Common Securities
unless and until receipt by all Holders of the Preferred Securities of the
entire Liquidation Distribution payable in respect thereof.

                                   ARTICLE IX
                                  Mergers, Etc.

      Section 9.01 Mergers, Consolidations, Amalgamations or Replacements of the
Trust. The Trust may not merge with or into, consolidate, amalgamate, or be
replaced by, or convey, transfer or lease its properties and assets as an
entirety or substantially as an entirety to any corporation or other entity,
except as described below. The Trust may, at the request of the Depositor, with
the consent of the Administrative Trustee and without the consent of the Holders
of the Trust Securities, merge with or into, consolidate, amalgamate, or be
replaced by, a trust organized as such under the laws of any State; provided,
that (i) such successor entity either (a) expressly assumes all of the
obligations of the Trust with respect to the Trust Securities or (b) substitutes
for the Trust Securities other securities having substantially the same terms as
the Trust Securities (the "Successor Securities") so long as the Successor
Securities rank the same as the Trust Securities rank with respect to the
payment of Distributions and payments upon liquidation, redemption and
otherwise, (ii) the Depositor expressly appoints a trustee of such successor
entity possessing the same powers and duties as the Property Trustee as the
holder of the Debentures, (iii) the Successor Securities are listed, or any
Successor Securities will be listed upon notification of issuance, on any
national securities exchange or other organization on which the Trust Securities
are then listed or quoted, (iv) such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease does not cause the Preferred
Securities (including any Successor Securities) to be downgraded, placed under
surveillance or review or withdrawn by any nationally recognized statistical
rating organization, (v) such merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease does not adversely affect the rights, preferences
and privileges of the Holders of the Trust Securities (including any Successor
Securities) in any material respect, (vi) such successor entity has a purpose
substantially similar to that of the Trust, (vii) prior to such merger,
consolidation, amalgamation, replacement, transfer or lease, the Depositor and
the Property Trustee have received an Opinion of Counsel to the effect that (a)
such merger, consolidation, amalgamation, replacement, conveyance, transfer or
lease does not adversely affect the rights, preferences and privileges of the
Holders of the Trust Securities (including any Successor Securities) in any
material respect, and (b) following such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease, neither the Trust nor such successor
entity will be required to register as an investment company under the 1940 Act
and the Trust (or the successor entity) will continue to be classified as a
grantor


                                       37


trust for United States federal income tax purposes and (viii) the Depositor or
any permitted successor assignee owns all of the common securities of such
successor entity and guarantees the obligations of such successor entity under
the Successor Securities at least to the extent provided by the Guarantee and
this Trust Agreement. Notwithstanding the foregoing, the Trust shall not, except
with the consent of all Holders of the Trust Securities, merge with or into,
consolidate, amalgamate, or be replaced by or convey, transfer or lease its
properties and assets substantially as an entirety to, any other entity or
permit any other entity to consolidate, amalgamate, merge with or into, or
replace it if such consolidation, conversion, amalgamation, merger, replacement,
conveyance, transfer or lease would cause the Trust or the successor entity not
to be classified as a grantor trust for United States Federal income tax
purposes or would cause each Holder of Trust Securities not to be treated as
owning an undivided beneficial ownership interest in the Debentures.

                                   ARTICLE X
                            Miscellaneous Provisions

      Section 10.01 Limitation of Rights of Securityholders. The death,
dissolution or incapacity of any Person having an interest, beneficial or
otherwise, in Trust Securities shall not operate to terminate this Trust
Agreement, nor entitle the legal representatives or heirs of such Person or any
Securityholder for such Person, to claim an accounting, take any action or bring
any proceeding in any court for a partition or winding-up of the arrangements
contemplated hereby, nor otherwise affect the rights, obligations and
liabilities of the parties hereto or any of them.

      Section 10.02 Amendment.

            (a) This Trust Agreement may be amended from time to time by the
Trustees and the Depositor, without the consent of any Securityholders, to cure
any ambiguity, defect or inconsistency or make any other change which does not
adversely affect in any material respect the interests of any Holder of
Preferred Securities; provided that any amendment described in this Section
10.02(a) made solely to conform this Trust Agreement to the final prospectus
provided to investors in connection with the initial offering of the Preferred
Securities will not be deemed to adversely affect in any material respect the
interests of the Holders. Notice of any amendments of this Trust Agreement
pursuant to Section 10.02(a) shall be given to the Securityholders.

            (b) Except as provided in Section 10.02(a) and 10.02(c) hereof, any
provision of this Trust Agreement may be amended by the Trustees and the
Depositor with the consent of Holders of a majority of the aggregate Liquidation
Amount of the Outstanding Preferred Securities.

            (c) In addition to and notwithstanding any other provision in this
Trust Agreement other than the proviso of the first sentence of Section
10.02(a), without the consent of each affected Securityholder (such consent
being obtained in accordance with Section 6.03 or 6.06 hereof), this Trust
Agreement may not be amended to (i) change the amount, timing or currency of any
Distribution or Liquidation Distribution on the Trust Securities or otherwise
adversely affect the method of payment of any Distribution or Liquidation
Distribution required


                                       38


to be made in respect of the Trust Securities as of a specified date; (ii)
change the redemption provisions of the Trust Securities; (iii) restrict the
right of a Securityholder to institute suit for the enforcement of any such
payment contemplated in (i) or (ii) above on or after the related date; (iv)
modify the first sentence of Section 2.06 hereof; (v) authorize or issue any
beneficial interest in the Trust other than as contemplated by this Trust
Agreement as of the date hereof; (vi) change the conditions precedent for the
Depositor to elect to dissolve the Trust and distribute the Debentures to
Holders of Preferred Securities as set forth in Section 8.02; or (vii) affect
the limited liability of any Holder of Preferred Securities, and,
notwithstanding any other provision herein, without the unanimous consent of the
Securityholders (such consent being obtained in accordance with Section 6.03 or
6.06 hereof), paragraphs (b) and (c) of this Section 10.02 may not be amended.

            (d) Notwithstanding any other provisions of this Trust Agreement, no
amendment to this Trust Agreement shall be made without receipt by the Trust of
an Opinion of Counsel experienced in such matters to the effect that such
amendment will not affect the Trust's status as a grantor trust for United
States Federal income tax purposes or its exemption from regulation as an
"investment company" under the 1940 Act.

            (e) Notwithstanding anything in this Trust Agreement to the
contrary, without the consent of the Depositor, other than in accordance with
the proviso in the first sentence of Section 10.02(a), this Trust Agreement may
not be amended in a manner which imposes any additional obligation on the
Depositor.

            (f) In the event that any amendment to this Trust Agreement is made,
the Administrative Trustee shall promptly provide to the Depositor a copy of
such amendment.

            (g) In executing any amendment to the Trust Agreement, the Property
Trustee shall be entitled to receive, and (subject to Section 8.01) shall be
fully protected in relying upon, an Opinion of Counsel stating that the
execution of such amendment is authorized or permitted by this Trust Agreement.
Except as contemplated by Section 7.11, the Trustee may, but shall not be
obligated to, enter into any amendment to this Trust Agreement which affects the
Trustee's own rights, duties or immunities under this Trust Agreement or
otherwise.

      Section 10.03 Severability. In case any provision in this Trust
Agreement or in the Trust Securities Certificates shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.

      Section 10.04 Governing Law. THIS TRUST AGREEMENT AND THE RIGHTS AND
OBLIGATIONS OF EACH OF THE SECURITYHOLDERS, THE TRUST, THE DEPOSITOR AND THE
TRUSTEES WITH RESPECT TO THIS TRUST AGREEMENT AND THE TRUST SECURITIES SHALL BE
CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF DELAWARE,
WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES.

      Section 10.05 Payments Due on Non-Business Day. Except as otherwise
provided with respect to the Debentures of a particular series, if the date
fixed for any payment on any Trust Security shall be a day which is not a
Business Day, then such payment need not be made


                                       39


on such date but may be made on the next succeeding day which is a Business Day,
with the same force and effect as though made on the date fixed for such
payment, and no interest shall accumulate thereon for the period after such date
to the date of payment on such succeeding day, except that, if such Business Day
is in the next succeeding calendar year, such payment shall be made on the
immediately preceding Business Day.

      Section 10.06 Successors and Assigns. This Trust Agreement shall be
binding upon and shall inure to the benefit of any successor to the Trust or
successor Trustee or both, including any successor by operation of law. Except
in connection with a consolidation, merger or sale involving the Depositor that
is permitted under Article V of the Indenture and pursuant to which the assignee
agrees in writing to perform the Depositor's obligations hereunder, the
Depositor shall not assign its obligations hereunder.

      Section 10.07 Headings. The Article and Section headings are for
convenience only and shall not affect the construction of this Trust Agreement.

      Section 10.08 Reports, Notices and Demands. Any report, notice, demand or
other communication which by any provision of this Trust Agreement is required
or permitted to be given or served to or upon any Securityholder or the
Depositor may be given or served in writing by deposit thereof, first-class
postage prepaid in the United States mail, hand delivery or facsimile
transmission, in each case, addressed, (a) in the case of a Holder of a
Preferred Security, to such Holder of a Preferred Security as such
Securityholder's name and address may appear on the Securities Register; and (b)
in the case of the Holder of a Common Security or the Depositor, to Public
Service Enterprise Group Incorporated, 80 Park Plaza, Newark, New Jersey 07101,
Attention: Treasurer, facsimile no.: 973-242-1651. Such notice, demand or other
communication to or upon a Securityholder shall be deemed to have been
sufficiently given or made, for all purposes, upon hand delivery, mailing or
transmission.

            Any notice, demand or other communication which by any provision of
this Trust Agreement is required or permitted to be given or served to or upon
the Property Trustee, the Delaware Trustee or the Administrative Trustee shall
be given in writing addressed (until another address is published by the Trust)
as follows: (a) with respect to the Property Trustee, to Wachovia Bank, National
Association, 21 South Street, Morristown, New Jersey 07960, Attention: Corporate
Trust Administration; (b) with respect to the Delaware Trustee, to Wachovia
Trust Company, National Association, One Rodney Square, 920 King Street, Suite
102, Wilmington, Delaware 19801; and (c) with respect to the Administrative
Trustee, to the address above for notices to the Depositor, marked "Attention:
Administrative Trustee of PSEG Funding Trust II c/o Treasurer." Such notice,
demand or other communication to or upon the Property Trustee or the Delaware
Trustee shall be deemed to have been sufficiently given or made only upon actual
receipt of the writing by the Property Trustee or the Delaware Trustee.

      Section 10.09 Agreement Not to Petition. Each of the Trustees and the
Depositor agree for the benefit of the Securityholders that, until at least one
year and one day after the Trust has been terminated in accordance with Article
VIII, they shall not file, or join in the filing of, a petition against the
Trust under any Bankruptcy Laws or otherwise join in the commencement of any
proceeding against the Trust under any Bankruptcy Law. In the event the
Depositor or any of the Trustees takes action in violation of this Section
10.09, the Property Trustee agrees, for the


                                       40


benefit of Securityholders, that at the expense of the Depositor, it shall file
an answer with the bankruptcy court or otherwise properly contest the filing of
such petition by the Depositor or any of the Trustees, as applicable, against
the Trust or the commencement of such action and raise the defense that the
Depositor and each of the Trustees has agreed in writing not to take such action
and should be stopped and precluded therefrom and such other defenses, if any,
as counsel for the Property Trustee or the Trust may assert. The provisions of
this Section 10.09 shall survive the termination of this Trust Agreement.
Section 10.10 Trust Indenture Act; Conflict with Trust Indenture Act.

            (a) This Trust Agreement is subject to the provisions of the Trust
Indenture Act that are required to be part of this Trust Agreement and shall, to
the extent applicable, be governed by such provisions.

            (b) The Property Trustee shall be the only Trustee which is a
trustee for the purposes of the Trust Indenture Act.

            (c) If any provision hereof limits, qualifies or conflicts with
another provision hereof which is required to be included in this Trust
Agreement by any of the provisions of the Trust Indenture Act, such required
provision shall control. If any provision of this Trust Agreement modifies or
excludes any provision of the Trust Indenture Act which may be so modified or
excluded, the latter provision shall be deemed to apply to this Trust Agreement
as so modified or excluded, as the case may be.

            (d) The application of the Trust Indenture Act to this Trust
Agreement shall not affect the nature of the Trust Securities as equity
securities representing undivided beneficial interests in the assets of the
Trust.

      Section 10.11 Characterization. The Depositor, the Trust, and the Holders
of the Trust Securities agree, for United States federal income tax purposes, to
treat the Debentures as indebtedness of the Depositor and to treat the Trust
Securities as evidence of a beneficial ownership interest in the Debentures
through a grantor trust.

      Section 10.12 Acceptance of Terms of Trust Agreement, Guarantee and
Indenture. THE RECEIPT AND ACCEPTANCE OF A TRUST SECURITY OR ANY INTEREST
THEREIN BY OR ON BEHALF OF A SECURITYHOLDER OR ANY BENEFICIAL OWNER, WITHOUT ANY
SIGNATURE OR FURTHER MANIFESTATION OF ASSENT SHALL CONSTITUTE THE UNCONDITIONAL
ACCEPTANCE BY THE SECURITYHOLDER AND ALL OTHERS HAVING A BENEFICIAL INTEREST IN
SUCH TRUST SECURITY OF ALL THE TERMS AND PROVISIONS OF THIS TRUST AGREEMENT AND
AGREEMENT TO THE SUBORDINATION PROVISIONS AND OTHER TERMS OF THE GUARANTEE AND
THE INDENTURE, AND SHALL CONSTITUTE THE AGREEMENT OF THE TRUST, SUCH
SECURITYHOLDER AND SUCH OTHERS THAT THE TERMS AND PROVISIONS OF THIS TRUST
AGREEMENT SHALL BE BINDING, OPERATIVE AND EFFECTIVE AS BETWEEN THE TRUST AND
SUCH SECURITYHOLDER AND SUCH OTHERS.


                                       41


            IN WITNESS WHEREOF, the undersigned, being duly authorized, have
caused this agreement to be executed as of the day and year first above written.

                                         PUBLIC SERVICE ENTERPRISE GROUP
                                         INCORPORATED, as Depositor

                                         By:____________________________________
                                            Name:
                                            Title:


                                         WACHOVIA BANK, NATIONAL
                                         ASSOCIATION, as Property Trustee

                                         By:____________________________________
                                            Name:
                                            Title:


                                         WACHOVIA TRUST COMPANY, NATIONAL
                                         ASSOCIATION, as Delaware Trustee

                                         By:____________________________________
                                            Name:
                                            Title:


                                         By:___________________________________,
                                            as Administrative Trustee
                                            Name:  Mark G. Kahrer


                                       42


EXHIBIT A

                                 CERTIFICATE OF
                                    TRUST OF
                              PSEG FUNDING TRUST II

            THIS CERTIFICATE OF TRUST of PSEG Funding Trust II (the "Trust"),
dated July 31, 2002, is being duly executed and filed by the undersigned, as
trustees, to form a business trust under the Delaware Business Trust Act (12
Del. C. ss. 3801 et seq.) (the "Act").

                  Name. The name of the business trust being formed hereby is
PSEG Funding Trust II.

                  Delaware Trustee. The name and business address of the trustee
of the Trust in the State of Delaware are Wachovia Trust Company, National
Association, One Rodney Square, 920 King Street, Suite 102, Wilmington, Delaware
19801.

                  Counterparts. This Certificate of Trust may be executed in one
or more counterparts, all of which together shall constitute one and the same
instrument.

                  Effective Date. This Certificate of Trust shall be effective
as of its filing with the Secretary of State of Delaware.

            IN WITNESS WHEREOF, the undersigned, being the trustees of the
Trust, have executed this Certificate of Trust as of the date first above
written in accordance with Section 3811(a) of the Act.

                                        WACHOVIA TRUST COMPANY, NATIONAL
                                        ASSOCIATION, as Trustee


                                        By: /s/ Sterling C.Correia
                                           -------------------------------------
                                        Name:  STERLING C. CORREIA
                                        Title: Vice President


                                        MARK G. KAHRER, as Trustee


                                        /s/ Mark G. Kahrer
                                        ----------------------------------------


                                      A-1


EXHIBIT B

                                THIS CERTIFICATE,
                  AND THE COMMON SECURITIES REPRESENTED HEREBY,
                              ARE NOT TRANSFERABLE

Certificate Number:  R-1

Number of Common Securities: 222,681

                    Certificate Evidencing Common Securities
                                       of
                              PSEG Funding Trust II

                            222,681 Common Securities
                  (liquidation amount $25 per Common Security)

            PSEG Funding Trust II, a statutory trust created under the laws of
the State of Delaware (the "Trust"), hereby certifies that Public Service
Enterprise Group Incorporated (the "Holder") is the registered holder of TWO
HUNDRED TWENTY TWO THOUSAND SIX HUNDRED EIGHTY ONE (222,681) common securities
of the Trust representing undivided beneficial interests in the assets of the
Trust and designated as the PSEG Funding Trust II 8.75% Common Securities
(liquidation amount $25 per Common Security) (the "Common Securities"). In
accordance with Section 5.10 of the Trust Agreement (as defined below), this
certificate is, and the Common Securities are, not transferable and any
attempted transfer hereof shall be void. The designations, rights, privileges,
restrictions, preferences and other terms and provisions of the Common
Securities are set forth in, and this certificate and the Common Securities
represented hereby are issued and shall in all respects be subject to the terms
and provisions of, the Amended and Restated Trust Agreement of the Trust dated
as of December 17, 2002, as the same may be amended from time to time (the
"Trust Agreement"). The Holder is entitled to the benefits of the Common
Securities Guarantee Agreement dated as of December 17, 2002, as the same may be
amended from time to time (the "Guarantee"). The Trust will furnish a copy of
the Trust Agreement and the Guarantee to the Holder without charge upon written
request to the Trust at its principal place of business or registered office.

            The Trust and the Holder of the Common Securities agree, for United
States federal income tax purposes, to treat the Holder's 8.75% Deferrable
Interest Junior Subordinated Debentures, Series D (the "Debentures"), as
indebtedness of the Holder of the Common Securities and to treat the Common
Securities as evidence of a beneficial ownership interest in the Debentures
through a grantor trust.

            Upon receipt of this certificate, the Holder is bound by the Trust
Agreement and is entitled to the benefits thereunder.


                                      B-1


            This Certificate shall be governed by and construed in accordance
with the laws of the State of Delaware without regard to the conflict of laws
principles thereof.


                                      B-2


            IN WITNESS WHEREOF, the Administrative Trustee of the Trust has
executed this certificate this 17th day of December, 2002.

                                        PSEG FUNDING TRUST II


                                        By:_____________________________________
                                           Name:  Mark G. Kahrer
                                           Title: Administrative Trustee


                                      B-3


EXHIBIT C

[To be included in Book-Entry Preferred Securities Certificate -
This Preferred Security is a Book-Entry Preferred Securities Certificate within
the meaning of the Trust Agreement hereinafter referred to and is registered in
the name of The Depository Trust Company (the "Depository") or a nominee of the
Depository. This Preferred Security is exchangeable for Preferred Securities
registered in the name of a person or entity other than the Depository or its
nominee only in the limited circumstances described in the Trust Agreement and
no transfer of this Preferred Security (other than a transfer of this Preferred
Security as a whole by the Depository to a nominee of the Depository or by a
nominee of the Depository to the Depository or another nominee of the
Depository) may be registered except in limited circumstances.

Unless this Preferred Security is presented by an authorized representative of
The Depository Trust Company, a New York corporation (55 Water Street, New
York), to PSEG Funding Trust II or its agent for registration of transfer,
exchange or payment, and any Preferred Security issued is registered in the name
of Cede & Co. or such other name as requested by an authorized representative of
The Depository Trust Company and any payment hereon is made to Cede & Co. or to
such other entity as is requested by an authorized representative of The
Depository Trust Company, ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY A PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede
& Co., has an interest herein.]

Certificate Number:  R-1

Number of Preferred Securities: 7,200,000

Cusip No.: 69361X 20 4


                                      C-1


                   Certificate Evidencing Preferred Securities
                                       of
                              PSEG Funding Trust II

                         7,200,000 Preferred Securities
                 (liquidation amount $25 per Preferred Security)

            PSEG Funding Trust II, a statutory trust created under the laws of
the State of Delaware (the "Trust"), hereby certifies that Cede & Co. (the
"Holder") is the registered holder of SEVEN MILLION TWO HUNDRED THOUSAND
(7,200,000) preferred securities of the Trust representing undivided beneficial
interests in the assets of the Trust and designated the PSEG Funding Trust II
8.75% Preferred Securities (liquidation amount $25 per Preferred Security) (the
"Preferred Securities"). The Preferred Securities are transferable on the books
and records of the Trust, in person or by a duly authorized attorney, upon
surrender of this certificate duly endorsed and in proper form for transfer as
provided in Section 5.04 of the Trust Agreement (as defined below). The
designations, rights, privileges, restrictions, preferences and other terms and
provisions of the Preferred Securities are set forth in, and this certificate
and the Preferred Securities represented hereby are issued and shall in all
respects be subject to the terms and provisions of, the Amended and Restated
Trust Agreement of the Trust dated as of December 17, 2002, as the same may be
amended from time to time (the "Trust Agreement"). The Holder is entitled to the
benefits of the Guarantee Agreement entered into by Public Service Enterprise
Group Incorporated, a New Jersey corporation, and Wachovia Bank, National
Association as guarantee trustee, dated as of December 17, 2002 (the
"Guarantee") to the extent provided therein, together with the obligations of
Public Service Enterprise Group Incorporated under the Trust Agreement, its
Deferrable Interest Junior Subordinated Debentures, Series D and the Indenture
related to such Deferrable Interest Junior Subordinated Debentures, Series D.
The Trust will furnish a copy of the Trust Agreement and the Guarantee to the
Holder without charge upon written request to the Trust at its principal place
of business or registered office.

            The Trust agrees, and by acceptance of a beneficial ownership
interest in the Preferred Securities, each beneficial owner of the Preferred
Securities will be deemed to have agreed, to treat, for United States federal
income tax purposes, the 8.75% Deferrable Interest Junior Subordinated
Debentures, Series D of Public Service Enterprise Group Incorporated as
indebtedness of Public Service Enterprise Group Incorporated and to treat the
Preferred Securities as evidence of a beneficial ownership interest in such
8.75% Deferrable Interest Junior Subordinated Debentures, Series D through a
grantor trust.

            Upon receipt of this certificate, the Holder is bound by the Trust
Agreement and is entitled to the benefits thereunder.

            This Certificate shall be governed by and construed in accordance
with the laws of the State of Delaware without regard to the conflict of laws
principles thereof.


                                      C-2


            IN WITNESS WHEREOF, the Administrative Trustee of the Trust has
executed this certificate this 17th day of December, 2002.

                                        PSEG FUNDING TRUST II


                                        By:_____________________________________
                                           Name:  Mark G. Kahrer
                                           Title: Administrative Trustee


                                      C-3


                                   ASSIGNMENT

FOR VALUE RECEIVED, the undersigned assigns and transfers to: (Insert assignee's
social security or tax identification number) (Insert address and zip code of
assignee)

__________ Preferred Securities represented by this Preferred Securities
Certificate and irrevocably appoints

agent to transfer said Preferred Securities on the books of the Trust. The agent
may substitute another to act for him or her.

Date:

Signature:
(Sign exactly as your name appears on the other side of this Preferred Security
Certificate)


                                      C-4

EX-4.(A)(9)(7)

                              SUPPLEMENTAL MORTGAGE
- --------------------------------------------------------------------------------

                             Supplemental Indenture

                             Dated September 1, 2002

                              ---------------------

                                 SUPPLEMENTAL TO
                          FIRST AND REFUNDING MORTGAGE,
                              DATED AUGUST 1, 1924

                              ---------------------

                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
                                       TO
                      WACHOVIA BANK, NATIONAL ASSOCIATION,
                                     TRUSTEE
                                 21 South Street
                          Morristown, New Jersey 07960
- --------------------------------------------------------------------------------

                           PROVIDING FOR THE ISSUE OF
                $600,000,000 FIRST AND REFUNDING MORTGAGE BONDS,
                           MEDIUM-TERM NOTES SERIES B

                              ---------------------

                     RECORD IN MORTGAGE BOOK AND RETURN TO:
                              JAMES T. FORAN, ESQ.
                               80 PARK PLAZA, T5B
                                  P.O. Box 570
                               NEWARK, N.J. 07101

Prepared by

(JAMES T. FORAN, Esq.)




                                TABLE OF CONTENTS

                              ---------------------

                                                                            Page
                                                                            ----
RECITALS ..................................................................    1
FORM OF BOND ..............................................................    4
FORM OF CERTIFICATE OF AUTHENTICATION .....................................    8
GRANTING CLAUSES ..........................................................    9

                                   ARTICLE I.
                    BONDS OF THE MEDIUM-TERM NOTES SERIES B.

Description of Series                                                         10

                                  ARTICLE II.
                   REDEMPTION OF BONDS OF MEDIUM-TERM NOTES SERIES B.

SECTION 2.01.  Redemption--Redemption Price ...............................   11
SECTION 2.02.  Redemptions Pursuant to Section 4C of
               Article Eight of the Indenture .............................   12
SECTION 2.03.  Interest on Called Bonds to Cease ..........................   12
SECTION 2.04.  Bonds Called in Part .......................................   13
SECTION 2.05.  Provisions of Indenture Not Applicable......................   13

                                  ARTICLE III.
                      CREDITS WITH RESPECT TO BONDS OF THE
                           MEDIUM-TERM NOTES SERIES B.

SECTION 3.01.  Credits.....................................................   13
SECTION 3.02.  Certificate of the Company..................................   13

                                   ARTICLE IV.
                                 MISCELLANEOUS.

SECTION 4.01.  Authentication of Bonds of Medium-Term
               Notes Series B..............................................   14
SECTION 4.02.  Additional Restrictions on Authentication of
               Additional Bonds Under Indenture............................   14
SECTION 4.03.  Restriction on Dividends....................................   14
SECTION 4.04.  Use of Facsimile Seal and Signatures........................   15
SECTION 4.05.  Time for Making of Payment..................................   15
SECTION 4.06.  Effective Period of Supplemental Indenture..................   15
SECTION 4.07.  Effect of Approval of Board of Public Utilities
               of the State of New Jersey..................................   15
SECTION 4.08.  Execution in Counterparts...................................   15
Acknowledgements...........................................................   17
Certificate of Residence...................................................   18



      SUPPLEMENTAL INDENTURE, dated the 1st day of September 2002, for
convenience of reference and effective from the time of execution and delivery
hereof, between PUBLIC SERVICE ELECTRIC AND GAS COMPANY, a corporation organized
under the laws of the State of New Jersey, hereinafter called the "Company",
party of the first part, and WACHOVIA BANK, NATIONAL ASSOCIATION, a national
banking association organized under the laws of the United States of America, as
Trustee under the indenture dated August 1, 1924, below mentioned, hereinafter
called the "Trustee", party of the second part.

      WHEREAS, on July 25, 1924, the Company executed and delivered to FIDELITY
UNION TRUST COMPANY (now known as WACHOVIA BANK, NATIONAL ASSOCIATION), a
certain indenture dated August 1, 1924 (hereinafter called the "Indenture") to
secure and to provide for the issue of First and Refunding Mortgage Gold Bonds
of the Company; and

      WHEREAS, the Indenture has been recorded in the following counties of the
State of New Jersey, in the offices, and therein in the books and at the pages,
as follows:



                                                                           Page
County                   Office                Book Number                Number
- ------                   ------                -----------                ------
                                                               
Atlantic                 Clerk's        1955  of Mortgages                   160
Bergen                   Clerk's          94  of Chattel Mortgages        123 etc.
                                         693  of Mortgages                 88 etc.
Burlington               Clerk's          52  of Chattel Mortgages      Folio 8, etc
                                                                         Folio 354,
                                         177  of Mortgages                  etc.
Camden                   Register's       45  of Chattel Mortgages        184 etc.
                                         239  of Mortgages                 1 etc.
Cumberland               Clerk's         786  of Mortgages                638 & c.
Essex                    Register's      437  of Chattel Mortgages          1-48
                                        T-51  of Mortgages                 341-392
Gloucester               Clerk's          34  of Chattel Mortgages        123 etc.
                                         142  of Mortgages                 7, etc.
Hudson                   Register's      453  of Chattel Mortgages         9, etc.
                                        1245  of Mortgages                484, etc.
Hunterdon                Clerk's         151  of Mortgages                   344
Mercer                   Clerk's          67  of Chattel Mortgages         1 etc.
                                         384  of Mortgages                 1 etc.
Middlesex                Clerk's         113  of Chattel Mortgages         3 etc.
                                         437  of Mortgages                294, etc.
Monmouth                 Clerk's                  951                  of Mortgages    291 & c.






                                                                           Page
County                   Office                Book Number                Number
- ------                   ------                -----------                ------
                                                                 
Morris                   Clerk's          N-3 of Chattel Mortgages        446 etc.
                                         F-10 of Mortgages                269 etc.
Ocean                    Clerk's         1809 of Mortgages                   40
Passaic                  Register's      M-6  of Chattel Mortgages        178, etc.
                                         R-13 of Mortgages                268 etc.
Salem                    Clerk's          267 of Mortgages                249 & c.
Somerset                 Clerk's          46  of Chattel Mortgages        207 etc.
                                         N-10 of Mortgages                 1 etc.
Sussex                   Clerk's          123 of Mortgages                 10 & c.
Union                    Register's      128  of Chattel Mortgages         28 & c.
                                          664 of Mortgages                259 etc.
Warren                   Clerk's          124 of Mortgages                141 etc.


and

      WHEREAS, the Indenture has also been recorded in the following counties of
the Commonwealth of Pennsylvania, in the offices, and therein in the books and
at the pages, as follows:

                                                                           Page
County                   Office                   Book Number             Number
- ------                   ------                   -----------             ------
Adams                    Recorder's          22  of Mortgages                105
Bedford                  Recorder's          90  of Mortgages                917
Blair                    Recorder's         671  of Mortgages                430
Cambria                  Recorder's         407  of Mortgages                352
Cumberland               Recorder's         500  of Mortgages                136
Franklin                 Recorder's         285  of Mortgages                373
Huntingdon               Recorder's         128  of Mortgages                 47
Indiana                  Recorder's         197  of Mortgages                281
Montgomery               Recorder's        5033  of Mortgages              1,221
Westmoreland             Recorder's        1281  of Mortgages                198
York                     Recorder's        31-V  of Mortgages                446

and

      WHEREAS, the Indenture granted, bargained, sold, aliened, remised,
released, conveyed, confirmed, assigned, transferred and set over unto the
Trustee certain property of the Company, more fully set forth and described in
the Indenture, then owned or which might thereafter be acquired by the Company;
and

      WHEREAS, the Company, by various supplemental indentures, supplemental to
the Indenture, the last of which was dated May 1, 1998, has granted, bargained,
sold, aliened, remised, released, conveyed, confirmed, assigned, transferred and
set over unto the Trustee certain property of the Company acquired by it after
the execution and delivery of the Indenture; and

      WHEREAS, since the execution and delivery of said supplemental indenture
dated May 1, 1998, the Company has acquired property which, in accordance with
the provisions of the Indenture, is subject to the lien thereof and the Company
desires to confirm such lien; and

      WHEREAS, the Indenture has been amended or supplemented from time to time;
and

      WHEREAS, it is provided in the Indenture that no bonds other than those of
the 5 1/2% Series due 1959 therein authorized may be issued thereunder unless a
supplemental indenture providing for the issue of such additional bonds shall
have been executed and delivered by the Company to the Trustee; and

      WHEREAS, the Company is making provisions for the issuance and sale of its
Secured Medium-Term Notes, Series B (the "Series B Notes"), to be issued under
an Indenture of Trust (the "Note Indenture") to be dated as of July 1, 1993
between the Company and JPMorgan Chase Bank (formerly known as The Chase
Manhattan Bank (National Association)), as Trustee (the "Note Trustee"); and




      WHEREAS, such Note Indenture provides, among other things, for the pledge
and delivery by the Company of a series of First and Refunding Mortgage Bonds of
the Company to evidence the Company's obligation to pay the principal and
interest with respect to outstanding Series B Notes; and for such purpose and in
order to service and secure payment of the principal and interest in respect of
the Series B Notes, the Company desires to provide for the issue of $600,000,000
aggregate principal amount of bonds under the Indenture of a series to be
designated as "First and Refunding Mortgage Bonds, Medium-Term Notes Series B"
(hereinafter sometimes called "Bonds of the Medium-Term Notes Series B"); and

      WHEREAS, the text of the Bonds of the Medium-Term Notes Series B and of
the certificate of authentication to be borne by the Bonds of the Medium-Term
Notes Series B shall be substantially of the following tenor:

                                 (FORM OF BOND)

This Bond is not transferable except as provided in the Indenture and in the
Indenture of Trust dated as of July 1, 1993 between the Company and JPMorgan
Chase Bank (formerly known as The Chase Manhattan Bank (National Association)),
as Trustee.

REGISTERED                                                            REGISTERED
NUMBER                                                                    AMOUNT
R                                                                   $600,000,000

                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
                       FIRST AND REFUNDING MORTGAGE BOND,
                           MEDIUM-TERM NOTES SERIES B

      Public Service Electric and Gas Company (hereinafter called the
"Company"), a corporation of the State of New Jersey, for value received, hereby
promises to pay to JPMorgan Chase Bank (formerly known as The Chase Manhattan
Bank (National Association)), as trustee under the Indenture of Trust dated as
of July 1, 1993 between the Company and such trustee, or registered assigns, on
the surrender hereof, the principal sum of Six Hundred Million Dollars, on
September 1, 2037, and to pay interest thereon from the date hereof, at the rate
of 10% per annum, and until payment of said principal sum, such interest to be
payable March 1 and September 1 in each year; provided, however, that the
Company shall receive certain credits against such obligations as set forth in
the Supplemental Indenture dated September 1, 2002 referred to below.

      Both the principal hereof and interest hereon shall be paid at the
principal corporate trust office of Wachovia Bank, National Association, in the
City of Morristown, State of New Jersey, or (at the option of the registered
owner) at the corporate trust office of any paying agent appointed by the
Company, in such coin or currency of the United States of America as at the time
of payment shall constitute legal tender for the payment of public and private
debts; provided, however, that any such payments of principal and interest shall
be subject to receipt of certain credits against such payment obligations as set
forth in the Supplemental Indenture dated September 1, 2002 referred to below.

      This Bond is one of the First and Refunding Mortgage Bonds of the Company
issued and to be issued under and pursuant to, and all equally secured by, an
indenture of mortgage or deed of trust dated August 1, 1924, as supplemented and
amended by supplemental indentures thereto, including the Supplemental Indenture
dated September 1, 2002, each duly executed by the Company and Wachovia Bank,
National Association (formerly known as Fidelity Union Trust Company) as
Trustee. This Bond is one of the Bonds of the Medium-Term Notes Series B, which
series is limited to the aggregate principal amount of $600,000,000 and is
issued pursuant to said Supplemental Indenture dated September 1, 2002.
Reference is hereby made to said indenture and all supplements thereto for a
specification of the principal amount of Bonds from time to time issuable
thereunder, and for a description of the properties mortgaged and conveyed or
assigned to said Trustee or its successors, the nature and extent of the
security, and the rights of the holders of said Bonds and any coupons
appurtenant thereto, and of the Trustee in respect of such security.

      In and by said indenture, as amended and supplemented, it is provided that
with the written approval of the Company and the Trustee, any of the provisions
of said indenture may from time to time be eliminated or modified and other
provisions may be added thereto provided the change does nor alter the annual
interest rate, redemption price or date, date of maturity or amount payable on
maturity of any then outstanding Bond or conflict with the Trust Indenture Act
of 1939 as then in effect, and provided the holders of 85% in principal amount
of the Bonds secured by said indenture and then outstanding (including, if such
change affect the Bonds of one or more series but less than all series then
outstanding, a like percentage of the then outstanding Bonds of each series
affected by such change, and excluding Bonds owned or controlled by the Company
or by



the parties owning at least 10% of the outstanding voting stock of the Company,
as more fully specified in said indenture) consent in writing thereto, all as
more fully set forth in said indenture, as amended and supplemented.

      First and Refunding Mortgage Bonds issuable under said indenture are
issuable in series, and the Bonds of any series may be for varying principal
amounts and in the form of coupon bonds and of registered bonds without coupons,
and the Bonds of any one series may differ from the Bonds of any other series as
to date, maturity, interest rate and otherwise, all as in said indenture
provided and set forth. The Bonds of the Medium-Term Notes Series B, in which
this Bond is included, are designated "First and Refunding Mortgage Bonds,
Medium-Term Notes Series B".

      In case of the happening of an event of default as specified in said
indenture and said supplemental indenture dated March 1, 1942, the principal sum
of the Bonds of this series may be declared or may become due and payable
forthwith, in the manner and with the effect in said indenture provided.

      The Bonds of this series are subject to redemption as provided in the
Supplemental Indenture dated September 1, 2002.

      This Bond is transferable, but only as provided in said indenture and the
Indenture of Trust dated as of July 1, 1993 between the Company and JPMorgan
Chase Bank (formerly known as The Chase Manhattan Bank (National Association)),
as trustee, upon surrender hereof, by the registered owner in person or by
attorney duly authorized in writing, at either of said offices where the
principal hereof and interest hereon are payable; upon any such transfer a new
fully registered Bond similar hereto will be issued to the transferee. This Bond
may in like manner be exchanged for one or more new fully registered Bonds of
the same series of other authorized denominations but of the same aggregate
principal amount. No service charge shall he made for any such transfer or
exchange, but the Company may require payment of a sum sufficient to cover any
tax or other governmental charge that may be imposed in relation thereto. The
Company and the Trustee hereunder and any paying agent may deem and treat the
person in whose name this Bond is registered as the absolute owner hereof for
the purpose of receiving payment of or on account of the principal hereof and
the interest hereon and for all other purposes; and neither the Company nor the
Trustee hereunder nor any paying agent shall be affected by any notice to the
contrary.

      The Bonds of this series are issuable only in fully registered form, in
any denomination authorized by the Company.

      No recourse under or upon any obligation, covenant or agreement contained
in said indenture or in any indenture supplemental thereto, or in any Bond
issued thereunder, or because of any indebtedness arising thereunder, shall be
had against any incorporator, or against any past, present or future
stockholder, officer, or director, as such, of the Company or of any successor
corporation, either directly or through the Company or any successor
corporation, under any rule of law, statute or constitutional provision or by
the enforcement of any assessment or by any legal or equitable proceeding or
otherwise, it being expressly agreed and understood that said indenture, any
indenture supplemental thereto and the obligations issued thereunder, are solely
corporate obligations, and that no personal liability whatever shall attach to,
or be incurred by, such incorporators, stockholders, officers or directors, as
such, of the Company, or of any successor corporation, or any of them, because
of the incurring of the indebtedness thereby authorized, or under or by reason
of any of the obligations, covenants or agreements contained in the indenture or
in any indenture supplemental thereto or in any of the Bonds issued thereunder,
or implied therefrom.

      This Bond shall not be entitled to any security or benefit under said
indenture, as amended and supplemented, and shall not become valid or obligatory
for any purpose, until the certificate of authentication, hereon endorsed, shall
have been signed by Wachovia Bank, National Association as Trustee, or by its
successor in trust under said indenture.



      IN WITNESS WHEREOF, the Company has caused this Bond to be duly executed
by its proper officers under its corporate seal.

Dated
                                        PUBLIC SERVICE ELECTRIC AND
                                           GAS COMPANY



                                        By -------------------------------------
                                                   (Vice) President
(Seal)
Attest:

  --------------------------------------
           (Assistant) Secretary

                     (FORM OF CERTIFICATE OF AUTHENTICATION)
                          CERTIFICATE OF AUTHENTICATION

      This Bond is one of the Bonds of the series designated therein which is
described in the within-mentioned indenture and supplemental indenture dated
September 1, 2002, as secured thereby.

                                        WACHOVIA BANK, NATIONAL
                                          ASSOCIATION, TRUSTEE

                                        By -------------------------------------
                                                   Authorized Officer




      WHEREAS, the execution and delivery of this supplemental indenture have
been duly authorized by the Board of Directors of the Company; and

      WHEREAS, the Company represents that all things necessary to make the bond
of the series hereinafter described, when duly authenticated by the Trustee and
issued by the Company, a valid, binding and legal obligation of the Company, and
to make this supplemental indenture a valid and binding agreement supplemental
to the Indenture, have been done and performed:

      NOW, THEREFORE, THIS SUPPLEMENTAL INDENTURE WITNESSETH that the Company,
in consideration of the premises and the execution and delivery by the Trustee
of this supplemental indenture, and in pursuance of the covenants and agreements
contained in the Indenture and for other good and valuable consideration, the
receipt of which is hereby acknowledged, has granted, bargained, sold, aliened,
remised, released, conveyed, confirmed, assigned, transferred and set over, and
by these presents does grant, bargain, sell, alien, remise, release, convey,
confirm, assign, transfer and set over unto the Trustee, its successors and
assigns, forever, all the right, title and interest of the Company in and to all
property of every kind and description (except cash, accounts and bills
receivable and all merchandise bought, sold or manufactured for sale in the
ordinary course of the Company's business, stocks, bonds or other corporate
obligations or securities, other than such as are described in Part V of the
Granting Clauses of the Indenture, not acquired with the proceeds of bonds
secured by the Indenture, and except as in the Indenture and herein otherwise
expressly excluded) acquired by the Company since the execution and delivery of
the supplemental indenture dated May 1, 1998, subsequent to the Indenture
(except any such property duly released from, or disposed of, free from the lien
of the Indenture, in accordance with the provisions thereof) and all such
property which at any time hereafter may be acquired by the Company;

      All of which property it is intended shall be included in and granted by
this supplemental indenture and covered by the lien of the Indenture as
heretofore and hereby amended and supplemented;

      UNDER AND SUBJECT to any encumbrances or mortgages existing on property
acquired by the Company at the time of such acquisition and not heretofore
discharged of record; and

      SUBJECT also, to the exceptions, reservations and provisions in the
Indenture and in this supplemental indenture recited, and to the liens,
reservations, exceptions, limitations, conditions and restrictions imposed by or
contained in the several deeds, grants, franchises and contracts or other
instruments through which the Company acquired or claims title to the aforesaid
property; and Subject, also, to the existing leases, to liens on easements or
rights of way, to liens for taxes, assessments and governmental charges not in
default or the payment of which is deferred, pending appeal or other contest by
legal proceedings, pursuant to Section 4 of Article Five of the indenture, or
the payment of which is deferred pending billing, transfer of title or final
determination of amount, to easements for alleys, streets, highways, rights of
way and railroads that may run across or encroach upon the said property, to
joint pole and similar agreements, to undetermined liens and charges, if any,
incidental to construction, and other encumbrances permitted by the indenture as
heretofore and hereby amended and supplemented;

      TO HAVE AND TO HOLD the property hereby conveyed or assigned, or intended
to be conveyed or assigned, unto the Trustee, its successor or successors and
assigns, forever;

      IN TRUST, NEVERTHELESS, upon the terms, conditions and trusts set forth in
the Indenture as heretofore and hereby amended and supplemented, to the end that
the said property shall be subject to the lien of the Indenture as heretofore
and hereby amended and supplemented, with the same force and effect as though
said property had been included in the Granting Clauses of the Indenture at the
time of the execution and delivery thereof;

      AND THIS SUPPLEMENTAL INDENTURE FURTHER WITNESSETH that for the
considerations aforesaid, it is hereby covenanted between the Company and the
Trustee as follows:



                                   ARTICLE I.

                    BONDS OF THE MEDIUM-TERM NOTES SERIES B.

      The series of bonds authorized by this supplemental indenture to be issued
under and secured by the Indenture shall be designated "First and Refunding
Mortgage Bonds, Medium-Term Notes Series B"; shall be limited to the aggregate
principal amount of $600,000,000; shall be issued initially to the Note Trustee
and shall mature and bear interest as set forth in the form of bond set forth
herein; provided, however, that the Company shall receive certain credits
against principal and interest as set forth in Section 3.01 hereof. The date of
each Bond of the Medium-Term Notes Series B shall be the interest payment date
next preceding the date of authentication, unless such date of authentication be
an interest payment date, in which case the date shall be the date of
authentication, or unless such date of authentication be prior to the first
semi-annual interest payment date, in which case the date shall be September 1,
2002. Bonds of the Medium-Term Notes Series B shall be issuable only in the form
of fully registered bonds in any denomination authorized by the Company.
Interest on the Bonds of the Medium-Term Notes Series B shall be payable
semi-annually in arrears on March 1 and September 1 of each year, payable
initially on March 1, 2003, subject to receipt of certain credits against
principal and interest as set forth in Section 3.01 hereof and shall be payable
as to both principal and interest in such coin or currency of the United States
of America as at the time of payment shall constitute legal tender for the
payment of public and private debts, at the principal corporate trust office of
the Trustee, or at the corporate trust office of any paying agent appointed.
Bonds of the Medium-Term Notes Series B shall be transferable and exchangeable,
but only as provided in the Indenture and the Note Indenture, upon surrender
thereof for cancellation by the registered owner in person or by attorney duly
authorized in writing at either of said offices. The Company hereby waives any
right to make a charge for any transfer or exchange of Bonds of the Medium-Term
Notes Series B, but the Company may require payment of a sum sufficient to cover
any tax or any other governmental charge that may be imposed in relation
thereto.

                                   ARTICLE II.

               REDEMPTION OF BONDS OF MEDIUM-TERM NOTES SERIES B.

      SECTION 2.01. Redemption--Redemption Price. Bonds of the Medium-Term Notes
Series B shall be subject to redemption prior to maturity under the conditions,
and upon payment of the amounts as may be specified in the following conditions:

     (a) at any time in whole or in part at the option of the Company upon
     receipt by the Trustee of written certification of the Company and of the
     Note Trustee that the principal amount of the Series B Notes then
     outstanding under the Note Indenture is not in excess of such principal
     amount of the Bonds of the Medium-Term Notes Series B as shall remain
     pledged to the Note Trustee after giving effect to such redemption; or (b)
     at any time by the application of any proceeds of released property or
     other money held by the Trustee and which, pursuant to Section 4C of
     Article Eight of the Indenture, as amended and supplemented, are applied to
     the redemption of Bonds of the Medium-Term Notes Series B, upon payment of
     100% of the principal amount thereof, together with interest accrued to the
     redemption date, provided that any such payment shall be subject to receipt
     by the Company of certain credits against such obligations as set forth in
     Section 3.01 hereof.

      SECTION 2.02. Redemptions Pursuant to Section 4C of Article Eight of the
Indenture. If, pursuant to Section 4C of Article Eight of the Indenture, as
amended and supplemented, any proceeds of released property or other money then
held by the Trustee shall be applied to the redemption of the Bonds of the
Medium-Term Notes Series B, the Trustee shall give at least 45 days prior
written notice of such redemption to the Note Trustee whereupon on the date
fixed for redemption such principal amount thereof as is equal to such proceeds
shall be redeemed; provided that no such redemption shall be made unless the
Trustee shall be in receipt of a written certification of the Company and the
Note Trustee that a like principal amount of Series B Notes shall have been
theretofore redeemed in accordance with the provisions of the Note Indenture.
For purposes of determining which of the Company's First and Refunding Mortgage
Bonds are subject to such mandatory redemption, the Mortgage Trustee shall
consider the 10% stated annual interest rate of the Bonds of the Medium-Term
Notes Series B, not the weighted average interest rate of outstanding Series B
Notes. Bonds of said series so redeemed shall be cancelled.



      SECTION 2.03. Interest on Called Bonds to Cease. Each Bond of the
Medium-Term Notes Series B or portion thereof called for redemption under
Section 2.02 hereof shall be due and payable at the office of the Note Trustee,
as paying agent hereunder, at its redemption price and on the specified
redemption date, anything herein or in such Bond to the contrary
notwithstanding. From and after the date when each Bond of the Medium-Term Notes
Series B or portion thereof shall be due and payable as aforesaid (unless upon
said date the full amount due thereon shall not be held by the Note Trustee, as
paying agent hereunder, and be immediately available for payment), all further
interest shall cease to accrue on such bond or on such portion thereof, as the
case may be.

      SECTION 2.04. Bonds Called in Part. If only a portion of any Bond of the
Medium-Term Notes Series B shall be called for redemption pursuant to Section
2.02 hereof, upon payment of the portion so called for redemption, the Note
Trustee shall make an appropriate notation upon the Bond of the principal amount
so redeemed. SECTION 2.05. Provisions of Indenture Not Applicable. The
provisions of Article Four of the Indenture, as amended and supplemented, shall
not apply to the procedure for the exercise of any right of redemption reserved
by the Company, or to any mandatory redemption provided, in this Article in
respect of the Bonds of the Medium-Term Notes Series B. There shall be no
sinking fund for the Bonds of the Medium-Term Notes Series B.

                                  ARTICLE III.

        CREDITS WITH RESPECT TO BONDS OF THE MEDIUM-TERM NOTES SERIES B.

      SECTION 3.01. Credits. In addition to any other credit, payment or
satisfaction to which the Company is entitled with respect to the Bonds of the
Medium-Term Notes Series B, the Company shall be entitled to credits against
amounts otherwise payable in respect of the Bonds of the Medium-Term Notes
Series B in an amount corresponding to (i) the principal amount of any of the
Company's Series B Notes issued under the Note Indenture surrendered to the Note
Trustee by the Company, or purchased by the Note Trustee, for cancellation, (ii)
the amount of money held by the Note Trustee and available and designated for
the payment of principal or redemption price (exclusive of any premium) of,
and/or interest on, the Series B Notes, regardless of the source of payment to
the Note Trustee of such moneys and (iii) the amount by which principal of and
interest due on the Bonds of the Medium-Term Notes Series B exceeds principal of
and interest due on the Series B Notes. The Note Trustee shall make notation on
such Bonds authorized hereby of any such credit.

      SECTION 3.02. Certificate of the Company. A certificate of the Company
signed by the President or any Vice President, and attested to by the Secretary
or any Assistant Secretary, and consented to by the Note Trustee, stating that
the Company is entitled to a credit under Section 3.01 hereof or that Bonds of
the Medium-Term Notes Series B have been cancelled, and setting forth the basis
therefor in reasonable detail, shall be conclusive evidence of such entitlement,
and the Trustee shall accept such certificate as such evidence without further
investigation or verification of the matters stated therein.

                                   ARTICLE IV.

                                 MISCELLANEOUS.

      SECTION 4.01. Authentication of Bonds of Medium-Term Notes Series B. None
of the Bonds of the Medium-Term Notes Series B, the issue of which is provided
for by this supplemental indenture, shall be authenticated by or on behalf of
the Trustee except in accordance with the provisions of the Indenture, as
amended and supplemented, and this supplemental indenture, and upon compliance
with the conditions in that behalf therein contained.

      SECTION 4.02. Additional Restrictions on Authentication of Additional
Bonds Under Indenture. The Company covenants that from and after the date of
execution of this supplemental indenture no additional bonds (as defined in
Section 1 of Article Two of the Indenture) shall be authenticated and delivered
by the Trustee under Subdivision A of Section 4 of said Article Two on account
of additions or improvements to the mortgaged property;

          (1) unless the net earnings of the Company for the period required by
     Subdivision C of Section 6 of said Article Two shall have been at least
     twice the fixed charges (in lieu of 13/4 times such fixed charges, as
     required by said Subdivision C); and for the purpose of this condition (a)
     such fixed charges shall in each case include interest on the bonds applied
     for, notwithstanding the parenthetical provision contained in clause (4) of
     said Subdivision C, and (b) in computing such net earnings there shall be
     included in expenses of operation (under paragraph (c) of said Subdivision
     C) all charges against earnings for depreciation, renewals or replacements,
     and all certificates with respect to net earnings delivered to the Trustee
     in connection with any authentication of additional bonds under said
     Article Two shall so state; and (2) except to the extent of 60% (in lieu of
     75% as permitted by Subdivision A of Section 7 of said Article Two) of the
     cost or fair value to the Company of the additions or improvements forming
     the basis for such authentication of additional bonds.



      SECTION 4.03. Restriction on Dividends. The Company will not declare or
pay any dividend on any shares of its common stock (other than dividends payable
in shares of its common stock) or make any other distribution on any such
shares, or purchase or otherwise acquire any such shares (except shares acquired
without cost to the Company) whenever such action would reduce the earned
surplus of the Company to an amount less than $10,000,000 or such lesser amount
as may remain after deducting from said $10,000,000 all amounts appearing in the
books of account of the Company on December 31, 1948, which shall thereafter,
pursuant to any order or rule of any regulatory body entered after said date, be
required to be removed, in whole or in part, from the books of account of the
Company by charges to earned surplus.

      SECTION 4.04. Use of Facsimile Seal and Signatures. The seal of the
Company and any or all signatures of the officers of the Company upon any of the
Bonds of the Medium-Term Notes Series B may be facsimiles.

      SECTION 4.05. Time for Making of Payment. All payments of principal or
redemption price of, and interest on, the Bonds of the Medium-Term Notes Series
B shall be made either prior to the due date thereof or on the due date thereof
in immediately available funds. In any case where the date of any such payment
shall be a Saturday or Sunday or a legal holiday or a day on which banking
institutions in the city of payment are authorized by law to close, then such
payment need not be made on such date but may be made on the next succeeding
business day with the same force and effect as if made on the due date, and no
interest on such payment shall accrue for the period after such date.

      SECTION 4.06. Effective Period of Supplemental Indenture. The preceding
provisions of Articles I, II and III of this supplemental indenture shall remain
in effect only so long as any of the Bonds of the Medium-Term Notes Series B
shall remain outstanding.

      SECTION 4.07. Effect of Approval of Board of Regulatory Commissioners of
the State of New Jersey. The approval of the Board of Public Utilities of the
State of New Jersey of the execution and delivery of these presents and of the
issue of any Bond of the Medium-Term Notes Series B shall not be construed as
approval of said Board of any other act, matter or thing which requires approval
of said Board under the laws of the State of New Jersey.

      SECTION 4.08. Execution in Counterparts. For the purpose of facilitating
the recording hereof, this supplemental indenture has been executed in several
counterparts, each of which shall be and shall be taken to be an original, and
all collectively but one instrument.



      IN WITNESS WHEREOF, Public Service Electric and Gas Company, party hereto
of the first part, after due corporate and other proceedings, has caused this
supplemental indenture to be signed and acknowledged or proved by its President
or one of its Vice Presidents and its corporate seal hereunto to be affixed and
to be attested by the signature of its Secretary or an Assistant Secretary; and
Wachovia Bank, National Association, as Trustee, party hereto of the second
part, has caused this supplemental indenture to be signed and acknowledged or
proved by its President or one of its Vice Presidents, and its corporate seal to
be hereunto affixed and to be attested by the signature of its Secretary,
Assistant Secretary; Vice President, or an Assistant Vice President. Executed
and delivered this 6th day of September, 2002.

                                        PUBLIC SERVICE ELECTRIC
                                        AND GAS COMPANY,

                                        By -------------------------------------
                                                        M.A. Plawner
                                                       Vice President

Attest:

  --------------------------------------
             E.J. Biggins, Jr.
                 Secretary

                                        WACHOVIA BANK, NATIONAL
                                           ASSOCIATION

                                        By -------------------------------------
                                                       F. Gallagher
                                                      Vice President

Attest:
  --------------------------------------
                M. Matthews
              Vice President



STATE OF NEW JERSEY
COUNT OF ESSEX                            SS:

      BE IT REMEMBERED, that on this 6th day of September 2002, before me, the
subscriber, a Notary Public of the State of New Jersey, personally appeared M.A.
Plawner, who, I am satisfied, is a Vice President of PUBLIC SERVICE ELECTRIC AND
GAS COMPANY, one of the corporations named in and which executed the foregoing
instrument, and is the person who signed the said instrument as such officer,
for and on behalf of such corporation, and I having first made known to him the
contents thereof, he did acknowledge that he signed the said instrument as such
officer, that the said instrument was made by such corporation and sealed with
its corporate seal, that the said instrument is the voluntary act and deed of
such corporation, made by virtue of authority from its Board of Directors, and
that said corporation the mortgagor, has received a true copy of said
instrument.

STATE OF NEW JERSEY
COUNT OF ESSEX                            SS:

      BE IT REMEMBERED, that on this 6th day of September 2002, before me, the
subscriber, a Notary Public of the State of New Jersey, personally appeared F.
Gallagher, who, I am satisfied, is a Vice President of WACHOVIA BANK, NATIONAL
ASSOCIATION, one of the corporations named in and which executed the foregoing
instrument, and is the person who signed the said instrument as such officer,
for and on behalf of such corporation, and I having first made known to him the
contents thereof, he did acknowledge that he signed the said instrument as such
officer, that the said instrument was made by such corporation and sealed with
its corporate seal, and that the said instrument is the voluntary act and deed
of such corporation, made by virtue of authority from its Board of Directors.



                            CERTIFICATE OF RESIDENCE

      Wachovia Bank, National Association, Mortgagee and Trustee within named,
hereby certifies that its precise residence is 21 South Street, Morristown, New
Jersey 07960.

                                        WACHOVIA BANK, NATIONAL
                                          ASSOCIATION,

                                        By -------------------------------------
                                                        F. Gallagher
                                                       Vice President

EX-4.(C)

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED

                                       AND

                      WACHOVIA BANK, NATIONAL ASSOCIATION,

                                     Trustee

                                -----------------

                          First Supplemental Indenture

                         Dated as of September 10, 2002

                                       To

                                    Indenture

                          Dated as of November 1, 1998

                                -----------------

                        Senior Deferrable Notes due 2007



            FIRST SUPPLEMENTAL INDENTURE, dated as of September 10, 2002 (this
"First Supplemental Indenture"), between PUBLIC SERVICE ENTERPRISE GROUP
INCORPORATED, a New Jersey corporation (the "Company"), having its principal
office at 80 Park Plaza, P.O. Box 1171, Newark, New Jersey 07101, and WACHOVIA
BANK, NATIONAL ASSOCIATION (formerly known as First Union National Bank), a
banking association organized under the laws of the United States, as Trustee
(the "Trustee"), under the Indenture, dated as of November 1, 1998, between the
Company and the Trustee (the "Indenture").

      WHEREAS, the Company has executed and delivered the Indenture to the
Trustee to provide for the issuance from time to time of its senior debt
securities evidencing its unsecured unsubordinated indebtedness (the
"Securities"), to be issued in one or more series as provided in the Indenture.

      WHEREAS, pursuant to the terms of the Indenture, the Company desires to
provide for the establishment of a series of Securities, to be known as its
"Senior Deferrable Notes due 2007" (herein called the "Notes"), in this First
Supplemental Indenture.

      WHEREAS, all things necessary to make this First Supplemental Indenture a
valid, binding and enforceable agreement of the Company, and to make the Notes,
when executed, authenticated and delivered by the Company, the valid, binding
and enforceable obligations of the Company have been done and the execution and
delivery of the First Supplemental Indenture has been duly authorized in all
material respects.

      WHEREAS, PSEG Funding Trust I, a Delaware statutory trust (the "Trust"),
will issue $460,000,000 in aggregate liquidation amount of its preferred
securities (the "Preferred Securities") and, in connection therewith, the
Company has agreed to purchase $14,226,850 in aggregate liquidation amount of
the Trust's common securities (the "Common Securities"), each representing an
undivided beneficial interest in the assets of the Trust, and the Trust proposes
to invest the proceeds from such issuances in $474,226,850 aggregate principal
amount of the Notes.

      NOW, THEREFORE, for and in consideration of the purchase of the Notes by
the Trust, it is mutually agreed, for the equal and proportionate benefit of the
Trust and any other future holders of the Notes (the "Holders"), as follows:

                                   ARTICLE ONE
                                   DEFINITIONS

      Section 101. Definition of Terms. Unless the context otherwise requires:

      (a) any term defined anywhere in this First Supplemental Indenture has the
same meaning throughout;

      (b) any term not defined herein that is defined in the Indenture has the
same meaning when used in this First Supplemental Indenture;


                                       1


      (c) any term not defined herein or in the Indenture that is defined in
Amended and Restated Trust Agreement, dated as of September 10, 2002 (the
"Declaration"), of the Trust has the same meaning when used in this First
Supplemental Indenture;

      (d) the term "Business Day," as used in the Indenture and this First
Supplemental Indenture with respect to the Notes, means any day other than a
Saturday or Sunday, or any other day on which banking institutions in The City
of New York are permitted or required by any applicable law to close.

                                  ARTICLE TWO
                         TERMS AND ISSUANCE OF THE NOTES

      Section 201. Issue of Notes. A series of Securities which shall be
designated the "Senior Deferrable Notes due 2007" shall be executed,
authenticated and delivered in accordance with the provisions of, and shall in
all respects be subject to, the terms, conditions and covenants of the Indenture
and this First Supplemental Indenture (including the forms of Notes set forth as
Exhibits A, B and C hereto). The Notes will constitute unsecured and
unsubordinated indebtedness of the Company and will rank equally with all other
existing or future unsecured and unsubordinated indebtedness of the Company. The
aggregate principal amount of Notes of the series created hereby which may be
authenticated and delivered under the Indenture shall not, except as permitted
by the provisions of the Indenture, exceed $474,226,850. The Notes shall be
initially issued in certificated form to the Trust (the "Initial Notes") and
shall be substantially in the Form of Exhibit A hereto. The Notes will be issued
in denominations of $50 and integral multiples thereof. The terms of such Notes
are herein incorporated by reference and made part of this First Supplemental
Indenture.

      Section 202. Maturity. Unless a Tax Event Redemption occurs or the Notes
are repurchased by the Company at the Holders' option following a Failed
Secondary Remarketing as described in Section 205(b), the entire principal
amount of the Notes will mature and become due and payable, together with any
accrued and unpaid interest thereon, on November 16, 2007 (the "Maturity Date").

      Section 203. Liquidation or Dissolution of Trust. In the event of an
involuntary or voluntary liquidation and dissolution of the Trust (other than in
connection with a Tax Event Redemption):

            (a) With respect to Separate Preferred Securities held in book-entry
form, Initial Notes in an aggregate principal amount equal to the aggregate
liquidation amount of such Separate Preferred Securities may be presented to the
Trustee by the Property Trustee, along with written certification by the
Property Trustee that the Separate Preferred Securities are held in book-entry
form, in exchange for a global Security (a "Global Note") in the form of Exhibit
B in an aggregate principal amount equal to the aggregate amount of Initial
Notes so presented to the Trustee by the Property Trustee. The securities
depositary for the Global Note will be The Depository Trust Company (the
"Depositary"). The Global Note will be registered in the name of the Depositary
or its nominee, and delivered by the Trustee to the Depositary or a custodian
appointed by the Depositary for crediting to the accounts of its participants
pursuant to the instructions of the Property Trustee. The Company, upon any such
presentation, shall


                                       2


execute a Global Note in such aggregate principal amount and deliver the same to
the Trustee for authentication and delivery in accordance with the Indenture and
this First Supplemental Indenture. Payments on the Notes issued as a Global Note
will be made to the Depositary or its nominee.

            (b) With respect to Pledged Preferred Securities, Initial Notes may
be presented to the Trustee by the Property Trustee, along with written
identification by the Property Trustee of the certificate or certificates
representing such Pledged Preferred Securities and of the liquidation amount
thereof, in exchange for a certificated Security (a "Certificated Note") in the
form of Exhibit C representing a Pledged Note (as such term is defined in the
Pledge Agreement) in an aggregate principal amount equal to the aggregate amount
of Initial Notes so presented to the Trustee by the Property Trustee. The
Pledged Notes shall be registered in the name of the Purchase Contract Agent as
attorney in fact for the holders of the Corporate Units and delivered by the
Trustee to the Collateral Agent for credit to the Collateral Account (as such
term is defined in the Purchase Contract Agreement) pursuant to the instructions
of the Property Trustee. The Company, upon any such presentation, shall execute
a Certificated Note in such aggregate principal amount and deliver the same to
the Trustee for authentication and delivery in accordance with the Indenture and
this First Supplemental Indenture.

            (c) Each such Global Note and Pledged Note shall represent such
number of the Outstanding Notes as shall be from time to time endorsed thereon,
which numbers may be increased or decreased, as applicable, to reflect, in
connection with the creation of Treasury Units and the recreation of Corporate
Units, transfers between Pledged Notes and Separate Notes (as such term is
defined in the Pledge Agreement). Any such increase or decrease in the aggregate
number of Notes represented by (i) a Pledged Note shall be made by the
Collateral Agent and (ii) a Global Note shall be made by the Trustee, as
custodian of the Global Notes, in each case upon the instructions of the
Collateral Agent given pursuant to Article 4 of the Pledge Agreement.

      Section 204. Interest.

            (a) Subject to Section 204(c) below, each Note will bear interest at
the rate of 6.25% per annum from September 10, 2002, payable quarterly in
arrears on February 16, May 16, August 16 and November 16 of each year,
commencing November 16, 2002; provided that, following the Reset Effective Date,
interest shall be payable semi-annually in arrears on each May 16 and November
16, commencing November 16, 2005, in the event that the Notes are successfully
remarketed on the Initial Remarketing Date, or May 16, 2006, in the event that
the Notes are successfully remarketed on the Secondary Remarketing Date.

            If the Reset Effective Date is the Initial Reset Date and such date
is not otherwise a scheduled Interest Payment Date, an interest payment shall be
payable on the Initial Reset Date equal to the amount of interest accrued on the
Notes from the most recent Interest Payment Date to but excluding the Initial
Reset Date. In such case, interest payable on the Interest Payment Date next
following the Initial Reset Date shall equal the amount of interest accrued from
and including the Initial Reset Date to but excluding such Interest Payment
Date.


                                       3


            Each date on which interest is payable on the Notes in accordance
with this Section 204(a) is referred to as an "Interest Payment Date."

            (b) The Regular Record Dates for the payment of interest on the
Notes on any Interest Payment Date shall be (i) as long as the Notes are
represented by Initial Notes or Certificated Notes (whether issued pursuant to
Section 203(b) or otherwise in accordance with the terms of the Indenture), the
fifteenth Business Day prior to each Interest Payment Date or (ii) if the Notes
are issued pursuant to Section 203(a) above, the Business Day preceding each
Interest Payment Date.

            (c) The interest rate on the Notes outstanding on and after the
Initial Remarketing Date will be reset to the Reset Rate, and interest will
accrue at the Reset Rate from and including the Initial Reset Date except in the
event of a Failed Initial Remarketing. In the event of a Failed Initial
Remarketing, the interest rate on the Notes outstanding on and after the
Secondary Remarketing Date will be reset to the Reset Rate, and interest will
accrue at the Reset Rate from and including the Purchase Contract Settlement
Date, except that in the event of a Failed Secondary Remarketing, the interest
rate on the Notes will not be reset and the scheduled Interest Payment Dates
shall remain February 16, May 16, August 16 and November 16. On the applicable
Reset Announcement Date, the applicable Reset Spread and the Appropriate
Benchmark Treasury or Two-Year Benchmark Treasury, as applicable, will be
announced by the Company. On the Business Day immediately following such Reset
Announcement Date, the Holders of Notes will be notified of such Reset Spread
and Appropriate Benchmark Treasury or Two-Year Benchmark Treasury, as
applicable, by the Company. Such notice shall be sufficiently given to such
Holders of Notes if published in a newspaper that is published each business day
in the English language of general circulation in The City of New York, which is
expected to be The Wall Street Journal.

            (d) Not later than seven calendar days nor more than 15 calendar
days immediately preceding the Initial Remarketing Date or the Secondary
Remarketing Date, as the case may be, the Company will request that the
Depositary or its nominee (or any successor Depositary or its nominee) notify
the Holders of Notes of the Initial Remarketing or the Secondary Remarketing, as
the case may be, and, in the case of a Secondary Remarketing, the procedures to
be followed by such holders of Notes wishing to settle the related Purchase
Contracts with separate cash on the Business Day immediately preceding the
Purchase Contract Settlement Date.

            (e) The amount of interest payable on the Notes for any period will
be computed on the basis of a 360-day year of twelve 30-day months. In the event
that any date on which interest is payable on the Notes is not a Business Day,
then payment of the interest payable on such date will be made on the next day
that is a Business Day (and without interest or other payment in respect of any
such delay), except that, if such Business Day is in the next calendar year,
then such payment will be made on the preceding Business Day.

      Section 205. Redemption and Repurchase.

            (a) If a Tax Event occurs and is continuing, the Company may, at its
option and upon not less than 30 nor more than 60 days' notice to the Holders of
the Notes,


                                       4


redeem the Notes in whole (but not in part) at a price per Note equal to the
Redemption Amount, plus any accrued and unpaid interest (including compound
interest, if any) to the Tax Event Redemption Date (as defined below). If the
Company elects to redeem the Notes following the occurrence of a Tax Event, (i)
the Company shall certify in writing to the Trustee the occurrence of the Tax
Event and the applicable Redemption Amount; (ii) the aggregate Redemption
Amount, plus any accrued and unpaid interest (including compound interest, if
any) to the Tax Event Redemption Date, shall be paid prior to 12:00 noon, New
York City time, on the date of redemption (the "Tax Event Redemption Date") by
check or wire transfer in immediately available funds at such place and to such
account as may be designated by each such Holder; (iii) the Company shall
appoint a Quotation Agent to assemble (or, in the event of a Tax Event
Redemption Date following a successful Remarketing) to ascertain the purchase
price of the Treasury Portfolio in consultation with the Company; and (iv) such
redemption shall otherwise be in accordance with the provisions of Article 11 of
the Indenture.

            (b) If a Failed Secondary Remarketing has occurred, holders of Notes
who hold such Notes following the Purchase Contract Settlement Date will have
the right to deliver the Notes to the Company for repurchase on December 1, 2005
(the "Note Repurchase Date"), upon at least three Business Days prior notice, at
a price per Note equal to the principal amount of such Notes plus any accrued
and unpaid interest (the "Note Put Price").

            (c) In order for the Notes to be repurchased on the Note Repurchase
Date, the Trustee must receive on or prior to 5:00 p.m. New York City time on
the third Business Day immediately preceding the Note Repurchase Date, at its
Corporate Trust Office or at an office or agency maintained by the Company in
the Borough of Manhattan, The City of New York, the Notes to be repurchased with
the form entitled "Option to Elect Repurchase" on the reverse of or otherwise
accompanying such Notes duly completed. Any such notice received by the Trustee
shall be irrevocable. All questions as to the validity, eligibility (including
time of receipt) and acceptance of the Notes for repayment shall be determined
by the Company, whose determination shall be final and binding.

            (d) Payment of the Note Put Price shall be made through the Trustee,
subject to the Trustee's receipt of payment from the Company in accordance with
the terms of the Indenture, no later than 12:00 noon, New York City time, on the
Note Repurchase Date, and to such account as may be designated. Neither the
Trustee nor the Company will be required to register or cause to be registered
the transfer of any Note for which repayment has been elected.

            (e) Unless the Company defaults in its obligation to pay the
Redemption Amount, plus any accrued and unpaid interest including compound
interest or the Note Put Price, on and after the Tax Event Redemption Date or
the Note Repurchase Date, as the case may be, interest shall cease to accrue on
the Notes so redeemed.

            (f) Except as provided in Section 205(a), the Company will have no
right to redeem the Notes.

            (g) The Notes will not be subject to a sinking fund provision.


                                       5


            (h) The Company will have no right to satisfy and discharge any of
its obligations on the Notes by making, or causing to be made, any deposit of
money or Government Obligations provided for by Article Fourteen of the
Indenture.

      Section 206. Events of Default. So long as the Notes are held by the
Property Trustee, it shall be an Event of Default with respect to the Notes if
the Trust shall have voluntarily or involuntarily dissolved, wound up its
business or otherwise terminated its existence except in connection with (i) the
distribution of the Notes held by the Property Trustee to the holders of the
Preferred Securities and Common Securities in liquidation of their interests in
the Trust; (ii) the redemption of all of the outstanding Preferred Securities
and Common Securities; or (iii) a consolidation, conversion, amalgamation,
merger or other transaction involving the Trust that is permitted under Article
IX of the Declaration.

      Section 207. Extension of Interest Payment Period.

            (a) The Company shall have the right at any time and from time to
time, so long as no Event of Default with respect to the Notes has occurred and
is continuing, to defer payments of interest by extending the interest payment
period of such Notes for a period not extending beyond the Maturity Date (an
"Extension Period"), during which Extension Period no interest shall be due and
payable; provided however, upon no less than two Business Days' notice to the
Remarketing Agent prior to the Initial Remarketing Date or the Secondary
Remarketing Date, as the case may be, the Company may elect that payments of
interest will not be deferrable after the Reset Effective Date. To the extent
permitted by applicable law, interest, the payment of which has been deferred
because of the extension of the interest payment period pursuant to this Section
207, will accrue (i) in the event of an Extension Period prior to the Reset
Effective Date or in the event of a Failed Secondary Remarketing, at the rate of
10.25% per annum, and (ii) in the event of an Extension Period, if any,
following the Reset Effective Date, at the Reset Rate per annum, in either case
until such Deferred Interest is paid. Deferred Interest shall be compounded
("Compounded Interest") (x) quarterly for each quarter of such Extension Period
prior to the Reset Effective Date, (y) quarterly for each quarter of such
Extension Period prior to November 16, 2007 in the event of a Failed Secondary
Remarketing, or (z) semiannually for each semiannual period of such Extension
Period, if any, subsequent to the Reset Effective Date. At the end of such
Extension Period, the Company shall pay all interest accrued and unpaid on the
Notes and Compounded Interest (together, "Deferred Interest") that shall be
payable to the Holders of the Notes in whose names the Notes are registered in
the Security Register on the first Regular Record Date after the end of the
Extension Period. Prior to the expiration of any Extension Period, the Company
may further extend such period, provided that such period together with all such
previous and further extensions thereof shall not extend beyond the Maturity
Date. Upon termination of any Extension Period and the payment of all Deferred
Interest then due, the Company may commence a new Extension Period, provided
that such Extension Period, together with all extensions thereof, may not extend
beyond the Maturity Date. No interest shall be due and payable during an
Extension Period except at the end thereof, but the Company, at its option, may
prepay on any Interest Payment Date all or any portion of the interest accrued
during the then elapsed portion of an Extension Period.


                                       6


            (b) In the event of a Failed Secondary Remarketing, the Company
shall pay all Deferred Interest on the Purchase Contract Settlement Date to the
Holders of record as of the applicable Regular Record Date.

            (c) The Company's deferral of interest payments during an Extension
Period shall not constitute an Event of Default pursuant to Section 501(1) of
the Indenture.

            (d) All Deferred Interest shall be deemed paid by the Company upon
the occurrence of the Reset Effective Date.

      Section 208. Notice of Extension. The Company shall give written notice to
the Trustee (and the Trustee shall give notice thereof to Holders of Notes) of
its election of any Extension Period (or any further extension thereof) at least
ten Business Days before the earlier of (i) the date on which interest on the
Notes would have been payable except for the election to begin or extend the
Extension Period (whether or not an Interest Payment Date), (ii) the date the
Trustee is required to give notice to any securities exchange or to Holders of
Notes of such date on which interest on the Notes would have been payable, or
(iii) the Regular Record Date on which interest on the Notes would have been
payable.

      Section 209. Place of Payment. The Place of Payment will be initially the
principal corporate trust office of the Trustee which, at the date hereof, is
located at 21 South Street, Morristown, New Jersey 07960.

                                  ARTICLE THREE
                                    EXPENSES

      Section 301. Payment of Expenses. In connection with the offering, sale
and issuance of the Notes to the Trust in connection with the sale of the
Preferred Securities and Common Securities by the Trust, the Company will pay
for all costs and expenses relating to the offering, sale and issuance of the
Notes, including compensation of the Trustee under the Indenture in accordance
with the provisions of Section 606 of the Indenture.

                                  ARTICLE FOUR
                                    COVENANTS

      Section 401. Covenants during an Extension Period or in the Event of an
Event of Default. During an Extension Period or if an Event of Default with
respect to the Notes occurs and is continuing, the Company shall not, and shall
not permit any of its subsidiaries to:

            (a) redeem, purchase, acquire, or make a liquidation payment with
respect to, any of its capital stock;

            (b) declare or pay any dividends or distributions on its capital
stock;

            (c) make any distribution on any trust preferred security that ranks
pari passu with the Preferred Securities or pay interest on senior debt with
similar deferral provisions to the Notes; or


                                       7


            (d) make any payment of principal, interest or premium, if any, on
or repay, repurchase or redeem any debt securities issued by the Company that
rank subordinate in right of payment to, the Notes or make any guarantee
payments with respect to any guarantee by the Company of the debt of any
subsidiary of the Company if such guarantee ranks subordinate in right of
payment to, the Notes.

      Notwithstanding the foregoing, the Company and any of its subsidiaries may
(i) purchase or acquire capital stock of the Company or such subsidiary in
connection with the satisfaction by the Company or such subsidiary of its
obligations under any employee or director compensation or benefit plans, under
its direct stock purchase and dividend reinvestment plan or pursuant to any
contract or security outstanding on the first day of any such Extension Period
or Event of Default, as the case may be, requiring the Company or such
subsidiary to purchase capital stock of the Company or such subsidiary, (ii)
reclassify the Company's or such subsidiary's capital stock or exchange or
convert one class or series of the Company's or such subsidiary's capital stock
for another class or series of the Company's or such subsidiary's capital stock,
(iii) purchase fractional interests in shares of the Company's or such
subsidiary's capital stock pursuant to the conversion or exchange provisions of
such capital stock or the security being converted or exchanged, (iv) redeem or
repurchase any rights pursuant to a rights agreement or (vi) make payments under
the Guarantee.

      Section 402. Additional Covenants Relating to the Trust. As long as the
Preferred Securities remain outstanding, the Company

            (a) maintain, directly or indirectly, 100% ownership of the Common
Securities;

            (b) cause the Trust to remain a statutory trust and not to
voluntarily dissolve, wind up, liquidate or be terminated, except as permitted
by the Declaration;

            (c) use its commercially reasonable efforts to ensure that the Trust
will not be an "investment company" required to be registered under the 1940
Act;

            (d) not take any action that would be reasonably likely to cause the
Trust to be classified as an association, a partnership or a publicly traded
partnership taxable as a corporation for United States federal income tax
purposes; and

            (e) pay all of the debts and obligations of the Trust (other than
with respect to the securities issued by the Trust) and all costs and expenses
of the Trust (including, but not limited to, all costs and expenses relating to
the organization of the Trust, the fees and expenses of the Property Trustee,
the Delaware Trustee and the Administrative Trustees and all costs and expenses
relating to the operation of the Trust) and any and all taxes, duties,
assessments or governmental charges of whatever nature (other than withholding
taxes) imposed on the Trust by the United States, or any other taxing authority,
so that the net amounts received and retained by the Trust after paying such
expenses will be equal to the amounts the Trust would have received had no
debts, obligations, costs, expenses, taxes, duties, assessments or governmental
charges been incurred by or imposed on the Trust.


                                       8


                                  ARTICLE FIVE
                             ORIGINAL ISSUE OF NOTES

      Section 501. Original Issue of Notes. Notes in an aggregate principal
amount of up to $474,226,850 may, upon execution of this First Supplemental
Indenture, be executed by the Company and delivered to the Trustee for
authentication, and the Trustee shall thereupon authenticate and deliver said
Notes upon receipt of a Company Order for authentication and delivery, without
any further action by the Company.

                                  ARTICLE SIX
                    RIGHTS OF HOLDERS OF PREFERRED SECURITIES

      Section 601. Preferred Security Holders' Rights. If the Property Trustee
fails to enforce its rights under the Notes in accordance with Section 507 of
the Indenture after a holder of Preferred Securities has made a written request,
the holder of Preferred Securities may, to the fullest extent permitted by law,
institute a legal proceeding directly against the Company in accordance with
Section 507 of the Indenture to enforce the Property Trustee's rights under the
Indenture without first instituting any legal proceeding against the Property
Trustee or any other Person.

      Section 602. Direct Action. Notwithstanding any other provision of the
Indenture, for as long as any Preferred Securities remain outstanding, to the
fullest extent permitted by law, if an Event of Default has occurred and is
continuing and such event is attributable to the failure of the Company to pay
interest or principal on the Notes on the date such interest or principal is
otherwise payable (or in the case of a Tax Event Redemption or a repurchase of
the Notes pursuant to Section 205(b), the Tax Event Redemption Date or the
Repurchase Date), then a holder of Preferred Securities may institute a
proceeding directly against the Company (a "Direct Action") to enforce payment
to such holder of the principal or interest on Notes having an aggregate
principal amount equal to the aggregate liquidation amount of the Preferred
Securities of such holder.

      Section 603. Payments Pursuant to Direct Actions. The Company will have
the right to set off against its obligations to the Trust, as Holder of the
Notes, any payment made to a holder of Preferred Securities in connection with a
Direct Action.

      Section 604. Modifications. So long as any Preferred Securities remain
outstanding, (i) no amendment to this First Supplemental Indenture or the
Indenture shall be made that adversely affects the holders of the Preferred
Securities in any material respect, and no termination of this First
Supplemental Indenture or the Indenture shall occur, and no waiver of any Event
of Default or compliance with any covenant under this First Supplemental
Indenture or the Indenture shall be effective, without the prior consent of the
holders of at least a majority in aggregate Liquidation Amount of the
Outstanding Preferred Securities unless and until the principal of the Notes and
all accrued and unpaid interest thereon have been paid in full, and (ii) no
amendment shall be made to this Article Six of this First Supplemental Indenture
that would impair the rights of the holders of the Preferred Securities without
the prior consent of the holders of each Outstanding Preferred Security unless
and until the principal of the Notes and all accrued and unpaid interest thereon
have been paid in full.


                                       9


                                 ARTICLE SEVEN
                                   REMARKETING

      Section 701. Effectiveness of this Article. Upon a distribution of the
Notes upon the liquidation and dissolution of the Trust which occurs prior to
the Initial Remarketing Date or, in the event of a Failed Initial Remarketing,
the Secondary Remarketing Date, the Notes shall be remarketed in accordance with
the procedures (the "Remarketing Procedures") relating to Remarketing set forth
in the Declaration and the Remarketing Agreement. In such case, the Notes shall
be remarketed in accordance with the Remarketing Procedures as and to the extent
that they were Preferred Securities and all references in the Remarketing
Procedures to (i) the Preferred Securities shall be read as references to the
Notes and (ii) the Property Trustee shall be read as references to the Indenture
Trustee, unless the context requires otherwise. Until such a distribution, or if
such distribution occurs after the Remarketing of the Preferred Securities
pursuant to the Declaration or the Purchase Contract Settlement Date, this
Article Seven will have no effect.

                                 ARTICLE EIGHT
                            ACCELERATION OF MATURITY

      Section 801. Automatic Acceleration. If an Event of Default with respect
to the Notes specified in clause (5) or (6) of Section 501 of the Indenture
occurs and is continuing, the principal of the Notes shall become due and
payable immediately, without any declaration, notice or other act on the part of
the Trustee or any holder thereof.

                                  ARTICLE NINE
                                  MISCELLANEOUS

      Section 901. Execution of Supplemental Indenture. This First Supplemental
Indenture is executed and shall be construed as an indenture supplemental to the
Indenture, and, as provided in the Indenture, this First Supplemental Indenture
forms a part thereof.

      Section 902. Conflict with Trust Indenture Act. If any provision hereof
limits, qualifies or conflicts with another provision hereof or of the Indenture
which is required to be included in this First Supplemental Indenture by any of
the provisions of the Trust Indenture Act, such required provision shall
control.

      Section 903. Construction. The Article and Section headings herein are for
convenience only and shall not affect the construction hereof. Unless otherwise
indicated herein, a reference to a Section or Article is to a Section or Article
of this First Supplemental Indenture.

      Section 904. Successors and Assigns. All covenants and agreements in this
First Supplemental Indenture by the Company shall bind its successors and
assigns, whether so expressed or not.

      Section 905. Separability Clause. In case any provision in this First
Supplemental Indenture or in the Notes shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.


                                       10


      Section 906. Benefits of First Supplemental Indenture. Nothing in this
First Supplemental Indenture or in the Notes, express or implied, shall give to
any Person, other than the parties hereto and their successors hereunder and the
holders, any benefit or any legal or equitable right, remedy or claim under this
First Supplemental Indenture.

      Section 907. Recitals. The recitals contained in this First Supplemental
Indenture shall be taken as statements of the Company, and the Trustee assumes
no responsibility for their correctness.


                                       11


      IN WITNESS WHEREOF, the parties hereto have caused this First Supplemental
Indenture to be duly executed as of the day and year first above written.

                                        PUBLIC SERVICE ENTERPRISE GROUP
                                        INCORPORATED

                                        By:
                                           -------------------------------------
                                           Name:
                                           Title:

[SEAL]

Attest:

- ----------------------------------------
Assistant Secretary


                                        WACHOVIA BANK, NATIONAL
                                        ASSOCIATION, as Trustee

                                        By:
                                           -------------------------------------
                                        Name:
                                        Title:

Attest:

- ----------------------------------------
Assistant Secretary



                                                                       EXHIBIT A

                             [FORM OF FACE OF NOTE]

REGISTERED

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED

                         SENIOR DEFERRABLE NOTE DUE 2007

No. R-                                                                         $

      PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED, a corporation duly organized
and existing under the laws of the State of New Jersey (herein called the
"Company," which term includes any successor corporation under the Indenture
hereinafter referred to herein), for value received, hereby promises to pay
Wachovia Bank, National Association, as Property Trustee for PSEG Funding Trust
I, or registered assigns, the principal sum of $474,226,850 (Four Hundred
Seventy Four Million, Two Hundred Twenty Six Thousand, Eight Hundred and Fifty
Dollars) on November 16, 2007, and to pay interest on said principal sum from
September 10, 2002, or from the most recent Interest Payment Date to which
interest has been paid or duly provided for, at the rate of 6.25% per annum to
but excluding the Reset Effective Date, and at the Reset Rate thereafter (which
rate shall not be higher than the maximum rate permitted by law) or, in the
event of a Failed Secondary Remarketing, to but excluding November 16, 2007,
until the principal hereof shall have become due and payable. The Company shall
pay interest on any overdue principal and premium, if any, and (without
duplication and to the extent that payment of such interest is enforceable under
applicable law) on any overdue installment of interest at 10.25% per annum to
but excluding the Reset Effective Date, and at the Reset Rate thereafter,
compounded quarterly (prior to the Reset Effective Date) or semiannually (on and
after the Reset Effective Date). Interest shall be payable quarterly in arrears
on February 16, May 16, August 16 and November 16 of each year, commencing
November 16, 2002; provided that, following the Reset Effective Date, interest
shall be payable semi-annually in arrears on each May 16 and November 16,
commencing November 16, 2005 (in the event that the Reset Effective Date is also
the Initial Reset Date) or May 16, 2006 (in the event that the Reset Effective
Date is also the Purchase Contract Settlement Date). If the Reset Effective Date
is the Initial Reset Date and such date is not otherwise a scheduled Interest
Payment Date, an interest payment shall be payable on the Initial Reset Date
equal to the amount of interest accrued on the Notes from the most recent
Interest Payment Date to but excluding the Initial Reset Date. In such case,
interest payable on the Interest Payment Date next following the Initial Reset
Date shall equal the amount of interest accrued from and including the Initial
Reset


                                      A-1


Date to but excluding such Interest Payment Date. Each date on which interest is
payable hereon is referred to herein as an "Interest Payment Date." The amount
of interest payable for any period will be computed on the basis of a 360-day
year of twelve 30-day months. In the event that any date on which interest is
payable is not a Business Day, then payment of the interest payable on such date
will be made on the next day that is a Business Day (and without any interest or
other payment in respect of such delay), except that, if such Business Day is in
the next calendar year, then such payment will be made on the preceding Business
Day. The interest installment so payable, and punctually paid or duly provided
for, on any Interest Payment Date will, as provided in the Indenture referred to
herein, be paid to the Holder in whose name this Note (or one or more
Predecessor Notes, as defined in said Indenture) is registered at the close of
business on the Regular Record Date for such interest installment, which shall
be the close of business on the Business Day preceding such Interest Payment
Date. Any such interest installment not punctually paid or duly provided for
shall forthwith cease to be payable to the Holder on such Regular Record Date,
and may be paid to the Holder in whose name this Note (or one or more
Predecessor Notes) is registered at the close of business on a Special Record
Date to be fixed by the Trustee referred to on the reverse side hereof for the
payment of such defaulted interest, notice whereof shall be given to the Holders
of this Note not less than 10 days prior to such Special Record Date, or may be
paid at any time in any other lawful manner not inconsistent with the
requirements of any securities exchange on which this Note may be listed, and
upon such notice as may be required by such exchange, all as more fully provided
in the Indenture.

      Payment of the principal of and premium, if any, and interest on this Note
will be made at the office or agency of the Trustee maintained for that purpose
in such coin or currency of the United States of America that at the time of
payment is legal tender for payment of public and private debts. The Company may
pay principal and interest by check payable in such money mailed to the Holder's
registered address or by wire transfer to a dollar account designated by the
Holder.

      Interest on this Note is deferrable, at the election of the Company, in
accordance with the terms of the First Supplemental Indenture, dated as of
September 10, 2002 (the "First Supplemental Indenture"), between the Company and
Wachovia Bank, National Association, as Trustee. Any deferred interest shall
accrue interest at the rate set forth in the First Supplemental Indenture.

      This Note is, to the extent provided in the Indenture, unsecured and will
rank in right of payment equally with all other unsecured and unsubordinated
obligations of the Company.

      Additional provisions of this Note are set forth on the reverse side
hereof, and such provisions shall for all purposes have the same effect as
though fully set forth at this place.

      Unless the certificate of authentication hereon has been executed by or on
behalf of the Trustee referred to on the reverse hereof by manual signature,
this Note shall not be entitled to any benefit under the Indenture or be valid
or obligatory for any purpose.


                                      A-2


      IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed.

                                        PUBLIC SERVICE ENTERPRISE GROUP
                                        INCORPORATED

Dated: September 10, 2002               By:
                                           -------------------------------------
                                           Name:
                                           Title:

[SEAL]

Attest:
       ---------------------------------
       Assistant Secretary

                     (FORM OF CERTIFICATE OF AUTHENTICATION)

                     TRUSTEE'S CERTIFICATE OF AUTHENTICATION

      This is one of the Securities of the series designated therein referred to
in the within-mentioned Indenture.

Dated: September 10, 2002               WACHOVIA BANK, NATIONAL
                                        ASSOCIATION, as Trustee

                                        By:
                                           -------------------------------------
                                           Authorized Signatory


                                      A-3


                            (FORM OF REVERSE OF NOTE)

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED

                         SENIOR DEFERRABLE NOTE DUE 2007

      This Note is one of a duly authorized series of Securities of the Company
(herein called the "Notes") issued under an Indenture, dated as of November 1,
1998, as supplemented by the First Supplemental Indenture (together, as amended
or supplemented from time to time, the "Indenture"), between the Company and
Wachovia Bank, National Association (formerly known as First Union National
Bank), as Trustee (herein called the "Trustee," which term includes any
successor trustee under the Indenture), to which Indenture reference is hereby
made for a statement of the respective rights, limitations of rights, duties and
immunities thereunder of the Company, the Trustee and the Holders of the Notes
and the terms upon which the Notes are, and are to be, authenticated and
delivered. This Note is one of the series designated on the face hereof, limited
in aggregate principal amount to $474,226,850.

      All terms used in this Note that are defined in the Indenture shall have
the meanings assigned to them in the Indenture.

      This Note is not subject to any sinking fund, nor may this Note be
redeemed at the option of the Company prior to the Maturity Date except upon the
occurrence of a Tax Event. In addition, the Notes shall be subject to repurchase
by the Company following a Failed Secondary Remarketing as described below.

      The indebtedness of this Note will not be subject to defeasance pursuant
to the Indenture.

      If an Event of Default with respect to the Notes shall occur and be
continuing, the principal of the Notes may be declared due and payable in the
manner and with the effect provided in the Indenture.

      The Company, the Trust, the Holders of the Notes, and holders of Preferred
Securities and Common Securities agree to treat the Notes as indebtedness for
all United States federal income tax purposes.

      If a Tax Event occurs and is continuing, the Company may, at its option
and upon not less than 30 nor more than 60 days' notice to the Holders of the
Notes, redeem the Notes in whole (but not in part) at a price per Note equal to
the Redemption Amount plus any accrued and unpaid interest (including compound
interest, if any) to the Tax Event Redemption Date. The Redemption Amount, plus
any accrued and unpaid interest (including compound interest, if any) to the Tax
Event Redemption Date, shall be paid prior to 12:00 noon, New York City time, on
the Tax Event Redemption Date, by check or wire transfer in immediately
available funds at such place and to such account as may be designated by each
such Holder.


                                      A-4


      If a Failed Secondary Remarketing has occurred, each Holder of Securities
will have the right to deliver the Notes to the Company for repurchase at a
price per Note equal to the Note Put Price. The Holder shall give written notice
of such election not less than three Business Days prior to December 1, 2005 and
the aggregate Put Price shall be paid prior to 12:00 noon, New York City time,
on December 1, 2005 by check or wire transfer in immediately available funds at
such place and to such account as may be designated by each such Holder.

      The Indenture permits, with certain exceptions as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Company and the rights of the Holders of the Securities of each series to be
affected under the Indenture at any time by the Company and the Trustee with the
consent of the Holders of not less than a majority in aggregate principal amount
of the Outstanding Securities at the time of each series to be affected (voting
as a class). The Indenture also contains provisions permitting the Holders of a
majority in aggregate principal amount of the Outstanding Securities of each
series at the time, on behalf of the Holders of all Securities of such series,
to waive compliance by the Company with certain provisions of the Indenture and
certain past defaults under the Indenture and their consequences. Any such
consent or waiver by the Holder of this Note shall be conclusive and binding
upon such Holder and upon all future Holders of this Note and of any Note issued
upon the registration of transfer hereof or in exchange hereof or in lieu
hereof, whether or not notation of such consent or waiver is made upon this
Note.

      No reference herein to the Indenture and no provision of this Note or of
the Indenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of and premium, if any, and
interest, if any, on this Note at the times, place and rate, and in the coin or
currency, herein prescribed.

      As provided in the Indenture and subject to certain limitations therein
set forth, the transfer of a Note of the series of which this Note is a part is
registrable in the Security Register, upon surrender of this Note for
registration of transfer at the office or agency of the Company to be maintained
by the Trustee for that purpose in the Borough of Manhattan, The City of New
York, duly endorsed by, or accompanied by a written instrument of transfer in
the form attached hereto and by such other documents satisfactory to the Company
and the Security Registrar duly executed by, the Holder hereof or his attorney
duly authorized in writing, and thereupon one or more new Notes of this series,
of authorized denominations and for the same aggregate principal amount, will be
issued to the designated transferee or transferees. The Security Registrar
initially appointed under the Indenture for the Notes is Wachovia Bank, National
Association.

      The Notes of the series of which this Note is a part are issuable only in
registered form without coupons in denominations of $50 and in integral
multiples thereof. As provided in the Indenture and subject to certain
limitations therein set forth, Notes of this series are exchangeable for a like
aggregate principal amount of Notes of this series and of like tenor of a
different authorized denomination, as requested by the Holder surrendering the
same.

      No service charge shall be made for any such registration of transfer or
exchange, but the Company may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection therewith.


                                      A-5


      Prior to due presentment of this Note for registration of transfer, the
Company, the Trustee and any agent of the Company or the Trustee may treat the
Holder in whose name this Note is registered as the owner hereof for all
purposes, whether or not this Note be overdue, and neither the Company, the
Trustee nor any such agent shall be affected by notice to the contrary.

      No recourse under or upon any obligation, covenant or agreement of the
Company in the Indenture or in this Security, or because of the creation of any
indebtedness represented thereby, shall be had against any incorporator,
stockholder, officer or director, as such, past, present or future, of the
Company or of any successor corporation, either directly or indirectly through
the Company or any successor corporation, under any rule of law, statute or
constitutional provision or by the enforcement of any assessment or penalty or
by any legal or equitable proceeding or otherwise, all such liability being
expressly waived and released by the acceptance hereof and as a condition of and
as part of the consideration for the issue hereof.


                                      A-6


                           OPTION TO ELECT REPURCHASE

      The undersigned hereby irrevocably requests and instructs the Company to
repurchase $____ principal amount of this Note in accordance with Section 205 of
the First Supplemental Indenture, on the "Repurchase Date," at the principal
amount of the Note plus any interest thereon accrued but unpaid to the date of
repurchase, to the undersigned at:

(Please print or type name and address of the undersigned),

and to issue to the undersigned, pursuant to the terms of the Indenture, a new
Note or Notes representing the remaining aggregate principal amount of this
Security.

For this Option to Elect Repayment to be effective, this Note with the Option to
Elect Repayment duly completed must be received by the Trustee at c/o
________________________ _______________________, no later than 5:00 p.m. on the
third Business Day immediately preceding December 1, 2005.

Dated:_______________________________   Signature:______________________________

                                        Signature Guarantee:____________________

Note: The signature to this Option to Elect Repurchase must correspond with the
name as written upon the face of the within Note without alteration or
enlargement or change whatsoever.


                                      A-7


                                  ABBREVIATIONS

The following abbreviations, when used in the inscription of the face of this
instrument, shall be construed as though they were written out in full according
to applicable laws or regulations:

           TEN COM               - as tenants in common
           TEN ENT               - as tenants by the entireties
           JT TEN                - as joint tenants with right of
                                     survivorship and not
                                   as tenants in common
           UNIF GIFT MIN ACT -   _________________ Custodian ___________________
                                       (Cust)                    (Minor) Under
                                 Uniform Gifts to Minors Act

Additional abbreviations may also be used though not in the above list.

                           _____________________________

FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and transfer(s)
unto

PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER OF ASSIGNEE

______________________________________________________________

______________________________________________________________

________________________________________________________________________________
         (Please Print or Typewrite Name and Address of Assignee)

the within instrument of PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED and does
hereby irrevocably constitute and appoint
___________________________________________ Attorney to transfer said instrument
on the books of the within-named corporation, with full power of substitution in
the premises.

Dated: __________________________         ______________________________________
                                                 Signature

NOTICE: The signature to this assignment must correspond with the name as
written upon the face of the within instrument in every particular, without
alteration by enlargement or any change whatever.


                                      A-8


                                                                       EXHIBIT B

                             [FORM OF FACE OF NOTE]

THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE
HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A
NOMINEE OF A DEPOSITARY. THIS GLOBAL SECURITY IS EXCHANGEABLE FOR SECURITIES
REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITARY OR ITS NOMINEE ONLY
IN THE LIMITED CIRCUMSTANCES HEREINAFTER DESCRIBED AND MAY NOT BE TRANSFERRED
EXCEPT AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY A
NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY
OR BY THE DEPOSITARY OR ANY NOMINEE OF THE DEPOSITARY TO A SUCCESSOR OF THE
DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR.

REGISTERED

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED

                         SENIOR DEFERRABLE NOTE DUE 2007

No. R-___________                                                              $

CUSIP No.____________

      PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED, a corporation duly organized
and existing under the laws of the State of New Jersey (herein called the
"Company," which term includes any successor corporation under the Indenture
hereinafter referred to herein), for value received, hereby promises to pay Cede
& Co., or registered assigns, the principal sum of $[ ] ([ ]) or such other
principal sum as is reflected in the Schedule of Increases or Decreases attached
hereto on November 16, 2007, and to pay interest on said principal sum from
September 10, 2002, or from the most recent Interest Payment Date to which
interest has been paid or duly provided for, at the rate of 6.25% per annum to
but excluding the Reset Effective Date, and at the Reset Rate thereafter (which
rate shall not be higher than the maximum rate permitted by law) or, in the
event of a Failed Secondary Remarketing, to but excluding November 16, 2007,
until the principal hereof shall have become due and payable. The Company shall
pay interest on any overdue principal and premium, if any, and (without
duplication and to the extent that payment of such interest is


                                      B-1


enforceable under applicable law) on any overdue installment of interest at
10.25% per annum to but excluding the Reset Effective Date, and at the Reset
Rate thereafter, compounded quarterly (prior to the Reset Effective Date) or
semiannually (on and after the Reset Effective Date). Interest shall be payable
quarterly in arrears on February 16, May 16, August 16 and November 16 of each
year, commencing November 16, 2002; provided that, following the Reset Effective
Date, interest shall be payable semi-annually in arrears on each May 16 and
November 16, commencing November 16, 2005 (in the event that the Reset Effective
Date is also the Initial Reset Date) or May 16, 2006 (in the event that the
Reset Effective Date is also the Purchase Contract Settlement Date). If the
Reset Effective Date is the Initial Reset Date and such date is not otherwise a
scheduled Interest Payment Date, an interest payment shall be payable on the
Initial Reset Date equal to the amount of interest accrued on the Notes from the
most recent Interest Payment Date to but excluding the Initial Reset Date. In
such case, interest payable on the Interest Payment Date next following the
Initial Reset Date shall equal the amount of interest accrued from and including
the Initial Reset Date to but excluding such Interest Payment Date. Each date on
which interest is payable hereon is referred to herein as an "Interest Payment
Date." The amount of interest payable for any period will be computed on the
basis of a 360-day year of twelve 30-day months. In the event that any date on
which interest is payable is not a Business Day, then payment of the interest
payable on such date will be made on the next day that is a Business Day (and
without any interest or other payment in respect of such delay), except that, if
such Business Day is in the next calendar year, then such payment will be made
on the preceding Business Day. The interest installment so payable, and
punctually paid or duly provided for, on any Interest Payment Date will, as
provided in the Indenture referred to herein, be paid to the Holder in whose
name this Note (or one or more Predecessor Notes, as defined in said Indenture)
is registered at the close of business on the Regular Record Date for such
interest installment, which shall be the close of business on the Business Day
preceding such Interest Payment Date. Any such interest installment not
punctually paid or duly provided for shall forthwith cease to be payable to the
Holder on such Regular Record Date, and may be paid to the Holder in whose name
this Note (or one or more Predecessor Notes) is registered at the close of
business on a Special Record Date to be fixed by the Trustee referred to on the
reverse side hereof for the payment of such defaulted interest, notice whereof
shall be given to the Holders of this Note not less than 10 days prior to such
Special Record Date, or may be paid at any time in any other lawful manner not
inconsistent with the requirements of any securities exchange on which this Note
may be listed, and upon such notice as may be required by such exchange, all as
more fully provided in the Indenture.

      Payment of the principal of and premium, if any, and interest on this Note
will be made at the office or agency of the Trustee maintained for that purpose
in such coin or currency of the United States of America that at the time of
payment is legal tender for payment of public and private debts. The Company may
pay principal and interest by check payable in such money mailed to the Holder's
registered address or by wire transfer to a dollar account designated by the
Holder.

      Interest on this Note is deferrable, at the election of the Company, in
accordance with the terms of the First Supplemental Indenture, dated as of
September 10, 2002 (the "First Supplemental Indenture"), between the Company and
Wachovia Bank, National Association, as Trustee. Any deferred interest shall
accrue interest at the rate set forth in the First Supplemental Indenture.


                                      B-2


      This Note is, to the extent provided in the Indenture, unsecured and will
rank in right of payment equally with all other unsecured and unsubordinated
obligations of the Company.

      Additional provisions of this Note are set forth on the reverse side
hereof, and such provisions shall for all purposes have the same effect as
though fully set forth at this place.

      Unless the certificate of authentication hereon has been executed by or on
behalf of the Trustee referred to on the reverse hereof by manual signature,
this Note shall not be entitled to any benefit under the Indenture or be valid
or obligatory for any purpose.


                                      B-3


      IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed.

                                          PUBLIC SERVICE ENTERPRISE GROUP
                                          INCORPORATED

Dated: September 10, 2002                 By:
                                             -----------------------------------
                                             Name:
                                             Title:

[SEAL]

Attest:
       -----------------------------------
        Assistant Secretary

                     (FORM OF CERTIFICATE OF AUTHENTICATION)

                     TRUSTEE'S CERTIFICATE OF AUTHENTICATION

      This is one of the Notes of the series referred to in the within-mentioned
Indenture.

Dated:September 10, 2002                  WACHOVIA BANK, NATIONAL
                                          ASSOCIATION, as Trustee

                                          By:
                                             -----------------------------------
                                             Authorized Signatory


                                      B-4


                            (FORM OF REVERSE OF NOTE)

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED

                         SENIOR DEFERRABLE NOTE DUE 2007

      This Note is one of a duly authorized series of Securities of the Company
(herein called the "Notes") issued under an Indenture, dated as of November 1,
1998, as supplemented by the First Supplemental Indenture (together, as amended
or supplemented from time to time, the "Indenture"), between the Company and
Wachovia Bank, National Association (formerly known as First Union National
Bank), as Trustee (herein called the "Trustee," which term includes any
successor trustee under the Indenture), to which Indenture reference is hereby
made for a statement of the respective rights, limitations of rights, duties and
immunities thereunder of the Company, the Trustee and the Holders of the Notes
and the terms upon which the Notes are, and are to be, authenticated and
delivered. This Note is one of the series designated on the face hereof, limited
in aggregate principal amount to $474,226,850.

      All terms used in this Note that are defined in the Indenture shall have
the meanings assigned to them in the Indenture.

      This Note is not subject to any sinking fund, nor may this Note be
redeemed at the option of the Company prior to the Maturity Date except upon the
occurrence of a Tax Event. In addition, the Notes shall be subject to repurchase
by the Company following a Failed Secondary Remarketing as described below.

      The indebtedness of this Note will not be subject to defeasance pursuant
to the Indenture.

      If an Event of Default with respect to the Notes shall occur and be
continuing, the principal of the Notes may be declared due and payable in the
manner and with the effect provided in the Indenture.

      The Company, the Trust, the Holders of the Notes, and holders of Preferred
Securities and Common Securities agree to treat the Notes as indebtedness for
all United States federal income tax purposes.

      If a Tax Event occurs and is continuing, the Company may, at its option
and upon not less than 30 nor more than 60 days' notice to the Holders of the
Notes, redeem the Notes in whole (but not in part) at a price per Note equal to
the Redemption Amount plus any accrued and unpaid interest (including compound
interest, if any) to the Tax Event Redemption Date. The Redemption Amount, plus
any accrued and unpaid interest (including compound interest, if any) to the Tax
Event Redemption Date, shall be paid prior to 12:00 noon, New York City time, on
the Tax Event Redemption Date, by check or wire transfer in immediately
available funds at such place and to such account as may be designated by each
such Holder.

      If a Failed Secondary Remarketing has occurred, each Holder of Securities
will have the right to deliver the Notes to the Company for repurchase at a
price per Note equal to the Note Put Price. The Holder shall give written notice
of such election not less than three Business Days prior to December 1, 2005 and
the aggregate Put Price shall be paid prior to 12:00 noon, New York City time,
on December 1, 2005 by check or wire transfer in immediately available funds at
such place and to such account as may be designated by each such Holder.


                                      B-5


      The Indenture permits, with certain exceptions as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Company and the rights of the Holders of the Securities of each series to be
affected under the Indenture at any time by the Company and the Trustee with the
consent of the Holders of not less than a majority in aggregate principal amount
of the Outstanding Securities at the time of each series to be affected (voting
as a class). The Indenture also contains provisions permitting the Holders of a
majority in aggregate principal amount of the Outstanding Securities of each
series at the time, on behalf of the Holders of all Securities of such series,
to waive compliance by the Company with certain provisions of the Indenture and
certain past defaults under the Indenture and their consequences. Any such
consent or waiver by the Holder of this Note shall be conclusive and binding
upon such Holder and upon all future Holders of this Note and of any Note issued
upon the registration of transfer hereof or in exchange hereof or in lieu
hereof, whether or not notation of such consent or waiver is made upon this
Note.

      No reference herein to the Indenture and no provision of this Note or of
the Indenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of and premium, if any, and
interest, if any, on this Note at the times, place and rate, and in the coin or
currency, herein prescribed.

      This Note shall be exchangeable for Notes registered in the names of
Persons other than the Depositary with respect to such series or its nominee
only as provided in this paragraph. This Note shall be so exchangeable if (x)
the Depositary is at any time unwilling or unable to continue as Depositary for
such series or no longer eligible or in good standing under the Securities
Exchange Act of 1934, as amended, or other applicable statute or regulation, or
(y) the Company executes and delivers to the Trustee an Order providing that
this Note shall be so exchangeable. Notes so issued in exchange for this Note
shall be of the same series, having the same interest rate, if any, and maturity
and having the same terms as this Note, in authorized denominations and in the
aggregate having the same principal amount as this Note and registered in such
names as the Depositary for such Global Note shall direct.

      As provided in the Indenture and subject to certain limitations therein
set forth, the transfer of a Note of the series of which this Note is a part is
registrable in the Security Register, upon surrender of this Note for
registration of transfer at the office or agency of the Company to be maintained
by the Trustee for that purpose in the Borough of Manhattan, The City of New
York, duly endorsed by, or accompanied by a written instrument of transfer in
the form attached hereto and by such other documents satisfactory to the Company
and the Security Registrar duly executed by, the Holder hereof or his attorney
duly authorized in writing, and thereupon one or more new Notes of this series,
of authorized denominations and for the same aggregate principal amount, will be
issued to the designated transferee or transferees. The


                                      B-6


Security Registrar initially appointed under the Indenture for the Notes is
Wachovia Bank, National Association.

      The Notes of the series of which this Note is a part are issuable only in
registered form without coupons in denominations of $50 and in integral
multiples thereof. As provided in the Indenture and subject to certain
limitations therein set forth, Notes of this series are exchangeable for a like
aggregate principal amount of Notes of this series and of like tenor of a
different authorized denomination, as requested by the Holder surrendering the
same.

      No service charge shall be made for any such registration of transfer or
exchange, but the Company may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection therewith.

      Prior to due presentment of this Note for registration of transfer, the
Company, the Trustee and any agent of the Company or the Trustee may treat the
Holder in whose name this Note is registered as the owner hereof for all
purposes, whether or not this Note be overdue, and neither the Company, the
Trustee nor any such agent shall be affected by notice to the contrary.

      No recourse under or upon any obligation, covenant or agreement of the
Company in the Indenture or in this Security, or because of the creation of any
indebtedness represented thereby, shall be had against any incorporator,
stockholder, officer or director, as such, past, present or future, of the
Company or of any successor corporation, either directly or indirectly through
the Company or any successor corporation, under any rule of law, statute or
constitutional provision or by the enforcement of any assessment or penalty or
by any legal or equitable proceeding or otherwise, all such liability being
expressly waived and released by the acceptance hereof and as a condition of and
as part of the consideration for the issue hereof.


                                      B-7


                           OPTION TO ELECT REPURCHASE

The undersigned hereby irrevocably requests and instructs the Company to
repurchase $____ principal amount of this Note in accordance with Section 205 of
the First Supplemental Indenture, on the "Repurchase Date," at the principal
amount of the Note plus any interest thereon accrued but unpaid to the date of
repurchase, to the undersigned at:

(Please print or type name and address of the undersigned),

and to issue to the undersigned, pursuant to the terms of the Indenture, a new
Note or Notes representing the remaining aggregate principal amount of this
Security.

For this Option to Elect Repurchase to be effective, this Note with the Option
to Elect Repayment duly completed must be received by the Trustee at c/o
________________________ _______________________, no later than 5:00 p.m. on the
third Business Day immediately preceding December 1, 2005.

Dated: __________________________       Signature: _____________________________

                                        Signature Guarantee: ___________________

Note: The signature to this Option to Elect Repayment must correspond with the
name as written upon the face of the within Note without alteration or
enlargement or change whatsoever.


                                      B-8


                                  ABBREVIATIONS

The following abbreviations, when used in the inscription of the face of this
instrument, shall be construed as though they were written out in full according
to applicable laws or regulations:

         TEN COM                 - as tenants in common
         TEN ENT                 - as tenants by the entireties
         JT TEN                  - as joint tenants with right of survivorship
                                      and not
                                   as tenants in common
         UNIF GIFT MIN ACT -     _________________ Custodian ___________________
                                      (Cust)                     (Minor) Under
                                 Uniform Gifts to Minors Act

                      _________________________________

Additional abbreviations may also be used though not in the above list.

- ---------------------------------

FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and transfer(s)
unto

PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER OF ASSIGNEE

______________________________________________________________

______________________________________________________________

_________________________________________________________________________

            (Please Print or Typewrite Name and Address of Assignee)

the within instrument of PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED and does
hereby irrevocably constitute and appoint
________________________________________ Attorney to transfer said instrument on
the books of the within-named corporation, with full power of substitution in
the premises.

Dated: __________________________       ________________________________________
                                        Signature

NOTICE: The signature to this assignment must correspond with the name as
written upon the face of the within instrument in every particular, without
alteration by enlargement or any change whatever.


                                      B-9


                       SCHEDULE OF INCREASES OR DECREASES

The following increases or decreases in this Global Note have been made:



                                                                   

          Amount of increase   Amount of decrease    Principal amount of
             in principal         in principal        Note evidenced by        Signature of
            amount of Note       amount of Note        the Global Note      authorized officer
           evidenced by the     evidenced by the       following such          of Trustee or
              Global Note         Global Note       decrease or increase   Securities Custodian
Date
- -----------------------------------------------------------------------------------------------



                                      B-10


                                                                       EXHIBIT C

                             [FORM OF FACE OF NOTE]

REGISTERED

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED

                         SENIOR DEFERRABLE NOTE DUE 2007

No. R-                                                                         $

      PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED, a corporation duly organized
and existing under the laws of the State of New Jersey (herein called the
"Company," which term includes any successor corporation under the Indenture
hereinafter referred to herein), for value received, hereby promises to pay
Wachovia Bank, National Association, as Purchase Contract Agent pursuant to the
Purchase Contract Agreement (as defined in the Indenture), or registered
assigns, the principal sum of $[ ] ([ ]) or such other principal sum as is
reflected in the Schedule of Increases or Decreases attached hereto on November
16, 2007, and to pay interest on said principal sum from September 10, 2002, or
from the most recent Interest Payment Date to which interest has been paid or
duly provided for, at the rate of 6.25% per annum to but excluding the Reset
Effective Date, and at the Reset Rate thereafter (which rate shall not be higher
than the maximum rate permitted by law) or, in the event of a Failed Secondary
Remarketing, to but excluding November 16, 2007, until the principal hereof
shall have become due and payable. The Company shall pay interest on any overdue
principal and premium, if any, and (without duplication and to the extent that
payment of such interest is enforceable under applicable law) on any overdue
installment of interest at 10.25% per annum to but excluding the Reset Effective
Date, and at the Reset Rate thereafter, compounded quarterly (prior to the Reset
Effective Date) or semiannually (on and after the Reset Effective Date).
Interest shall be payable quarterly in arrears on February 16, May 16, August 16
and November 16 of each year, commencing November 16, 2002; provided that,
following the Reset Effective Date, interest shall be payable semiannually in
arrears on each May 16 and November 16, commencing November 16, 2005 (in the
event that the Reset Effective Date is also the Initial Reset Date) or May 16,
2006 (in the event that the Reset Effective Date is also the Purchase Contract
Settlement Date). If the Reset Effective Date is the Initial Reset Date and such
date is not otherwise a scheduled Interest Payment Date, an interest payment
shall be payable on the Initial Reset Date equal to the amount of interest
accrued on the Notes from the most recent Interest Payment Date to but excluding
the Initial Reset Date. In such case, interest payable on the Interest Payment
Date next following the Initial Reset Date shall equal the


                                      C-1


amount of interest accrued from and including the Initial Reset Date to but
excluding such Interest Payment Date. Each date on which interest is payable
hereon is referred to herein as an "Interest Payment Date." The amount of
interest payable for any period will be computed on the basis of a 360-day year
of twelve 30-day months. In the event that any date on which interest is payable
is not a Business Day, then payment of the interest payable on such date will be
made on the next day that is a Business Day (and without any interest or other
payment in respect of such delay), except that, if such Business Day is in the
next calendar year, then such payment will be made on the preceding Business
Day. The interest installment so payable, and punctually paid or duly provided
for, on any Interest Payment Date will, as provided in the Indenture referred to
herein, be paid to the Holder in whose name this Note (or one or more
Predecessor Notes, as defined in said Indenture) is registered at the close of
business on the Regular Record Date for such interest installment, which shall
be the close of business on the Business Day preceding such Interest Payment
Date. Any such interest installment not punctually paid or duly provided for
shall forthwith cease to be payable to the Holder on such Regular Record Date,
and may be paid to the Holder in whose name this Note (or one or more
Predecessor Notes) is registered at the close of business on a Special Record
Date to be fixed by the Trustee referred to on the reverse side hereof for the
payment of such defaulted interest, notice whereof shall be given to the Holders
of this Note not less than 10 days prior to such Special Record Date, or may be
paid at any time in any other lawful manner not inconsistent with the
requirements of any securities exchange on which this Note may be listed, and
upon such notice as may be required by such exchange, all as more fully provided
in the Indenture.

      Payment of the principal of and premium, if any, and interest on this Note
will be made at the office or agency of the Trustee maintained for that purpose
in such coin or currency of the United States of America that at the time of
payment is legal tender for payment of public and private debts. The Company may
pay principal and interest by check payable in such money mailed to the Holder's
registered address or by wire transfer to a dollar account designated by the
Holder.

      Interest on this Note is deferrable, at the election of the Company, in
accordance with the terms of the First Supplemental Indenture, dated as of
September 10, 2002 (the "First Supplemental Indenture"), between the Company and
Wachovia Bank, National Association, as Trustee. Any deferred interest shall
accrue interest at the rate set forth in the First Supplemental Indenture.

      This Note is, to the extent provided in the Indenture, unsecured and will
rank in right of payment equally with all other unsecured and unsubordinated
obligations of the Company.

      Additional provisions of this Note are set forth on the reverse side
hereof, and such provisions shall for all purposes have the same effect as
though fully set forth at this place.

      Unless the certificate of authentication hereon has been executed by or on
behalf of the Trustee referred to on the reverse hereof by manual signature,
this Note shall not be entitled to any benefit under the Indenture or be valid
or obligatory for any purpose.


                                      C-2


      IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed.

                                       PUBLIC SERVICE ENTERPRISE GROUP
                                       INCORPORATED

Dated: September 10, 2002              By:
                                         ---------------------------------------
                                         Name:
                                         Title:

[SEAL]

Attest: -------------------------------
        Assistant Secretary

                     (FORM OF CERTIFICATE OF AUTHENTICATION)

                     TRUSTEE'S CERTIFICATE OF AUTHENTICATION

      This is one of the Securities of the series designated therein referred to
in the within-mentioned Indenture.

Dated: September 10, 2002              WACHOVIA BANK, NATIONAL
                                       ASSOCIATION, as Trustee

                                       By:
                                         ---------------------------------------
                                         Authorized Signatory


                                      C-3


                            (FORM OF REVERSE OF NOTE)

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED

                         SENIOR DEFERRABLE NOTE DUE 2007

      This Note is one of a duly authorized series of Securities of the Company
(herein called the "Notes") issued under an Indenture, dated as of November 1,
1998, as supplemented by the First Supplemental Indenture (together, as amended
or supplemented from time to time, the "Indenture"), between the Company and
Wachovia Bank, National Association (formerly known as First Union National
Bank), as Trustee (herein called the "Trustee," which term includes any
successor trustee under the Indenture), to which Indenture reference is hereby
made for a statement of the respective rights, limitations of rights, duties and
immunities thereunder of the Company, the Trustee and the Holders of the Notes
and the terms upon which the Notes are, and are to be, authenticated and
delivered. This Note is one of the series designated on the face hereof, limited
in aggregate principal amount to $474,226,850.

      All terms used in this Note that are defined in the Indenture shall have
the meanings assigned to them in the Indenture.

      This Note is not subject to any sinking fund, nor may this Note be
redeemed at the option of the Company prior to the Maturity Date except upon the
occurrence of a Tax Event. In addition, the Notes shall be subject to repurchase
by the Company following a Failed Secondary Remarketing as described below.

      The indebtedness of this Note will not be subject to defeasance pursuant
to the Indenture.

      If an Event of Default with respect to the Notes shall occur and be
continuing, the principal of the Notes may be declared due and payable in the
manner and with the effect provided in the Indenture.

      The Company, the Trust, the Holders of the Notes, and holders of Preferred
Securities and Common Securities agree to treat the Notes as indebtedness for
all United States federal income tax purposes.

      If a Tax Event occurs and is continuing, the Company may, at its option
and upon not less than 30 nor more than 60 days' notice to the Holders of the
Notes, redeem the Notes in whole (but not in part) at a price per Note equal to
the Redemption Amount plus any accrued and unpaid interest (including compound
interest, if any) to the Tax Event Redemption Date. The Redemption Amount, plus
any accrued and unpaid interest (including compound interest, if any) to the Tax
Event Redemption Date, shall be paid prior to 12:00 noon, New York City time, on
the Tax Event Redemption Date, by check or wire transfer in immediately
available funds at such place and to such account as may be designated by each
such Holder.


                                      C-4


      If a Failed Secondary Remarketing has occurred, each Holder of Securities
will have the right to deliver the Notes to the Company for repurchase at a
price per Note equal to the Note Put Price. The Holder shall give written notice
of such election not less than three Business Days prior to December 1, 2005 and
the aggregate Put Price shall be paid prior to 12:00 noon, New York City time,
on December 1, 2005 by check or wire transfer in immediately available funds at
such place and to such account as may be designated by each such Holder.

      The Indenture permits, with certain exceptions as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Company and the rights of the Holders of the Securities of each series to be
affected under the Indenture at any time by the Company and the Trustee with the
consent of the Holders of not less than a majority in aggregate principal amount
of the Outstanding Securities at the time of each series to be affected (voting
as a class). The Indenture also contains provisions permitting the Holders of a
majority in aggregate principal amount of the Outstanding Securities of each
series at the time, on behalf of the Holders of all Securities of such series,
to waive compliance by the Company with certain provisions of the Indenture and
certain past defaults under the Indenture and their consequences. Any such
consent or waiver by the Holder of this Note shall be conclusive and binding
upon such Holder and upon all future Holders of this Note and of any Note issued
upon the registration of transfer hereof or in exchange hereof or in lieu
hereof, whether or not notation of such consent or waiver is made upon this
Note.

      No reference herein to the Indenture and no provision of this Note or of
the Indenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of and premium, if any, and
interest, if any, on this Note at the times, place and rate, and in the coin or
currency, herein prescribed.

      As provided in the Indenture and subject to certain limitations therein
set forth, the transfer of a Note of the series of which this Note is a part is
registrable in the Security Register, upon surrender of this Note for
registration of transfer at the office or agency of the Company to be maintained
by the Trustee for that purpose in the Borough of Manhattan, The City of New
York, duly endorsed by, or accompanied by a written instrument of transfer in
the form attached hereto and by such other documents satisfactory to the Company
and the Security Registrar duly executed by, the Holder hereof or his attorney
duly authorized in writing, and thereupon one or more new Notes of this series,
of authorized denominations and for the same aggregate principal amount, will be
issued to the designated transferee or transferees. The Security Registrar
initially appointed under the Indenture for the Notes is Wachovia Bank, National
Association.

      The Notes of the series of which this Note is a part are issuable only in
registered form without coupons in denominations of $50 and in integral
multiples thereof. As provided in the Indenture and subject to certain
limitations therein set forth, Notes of this series are exchangeable for a like
aggregate principal amount of Notes of this series and of like tenor of a
different authorized denomination, as requested by the Holder surrendering the
same.

      No service charge shall be made for any such registration of transfer or
exchange, but the Company may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection therewith.


                                      C-5


      Prior to due presentment of this Note for registration of transfer, the
Company, the Trustee and any agent of the Company or the Trustee may treat the
Holder in whose name this Note is registered as the owner hereof for all
purposes, whether or not this Note be overdue, and neither the Company, the
Trustee nor any such agent shall be affected by notice to the contrary.

      No recourse under or upon any obligation, covenant or agreement of the
Company in the Indenture or in this Security, or because of the creation of any
indebtedness represented thereby, shall be had against any incorporator,
stockholder, officer or director, as such, past, present or future, of the
Company or of any successor corporation, either directly or indirectly through
the Company or any successor corporation, under any rule of law, statute or
constitutional provision or by the enforcement of any assessment or penalty or
by any legal or equitable proceeding or otherwise, all such liability being
expressly waived and released by the acceptance hereof and as a condition of and
as part of the consideration for the issue hereof.


                                      C-6


                           OPTION TO ELECT REPURCHASE

      The undersigned hereby irrevocably requests and instructs the Company to
repurchase $____ principal amount of this Note in accordance with Section 205 of
the First Supplemental Indenture, on the "Repurchase Date," at the principal
amount of the Note plus any interest thereon accrued but unpaid to the date of
repurchase, to the undersigned at:

(Please print or type name and address of the undersigned),

and to issue to the undersigned, pursuant to the terms of the Indenture, a new
Note or Notes representing the remaining aggregate principal amount of this
Security.

For this Option to Elect Repurchase to be effective, this Note with the Option
to Elect Repayment duly completed must be received by the Trustee at c/o
________________________ _______________________, no later than 5:00 p.m. on the
third Business Day immediately preceding December 1, 2005.

Dated: ___________________________     Signature: ______________________________

                                       Signature Guarantee: ____________________

Note: The signature to this Option to Elect Repurchase must correspond with the
name as written upon the face of the within Note without alteration or
enlargement or change whatsoever.


                                      C-7


                                  ABBREVIATIONS

The following abbreviations, when used in the inscription of the face of this
instrument, shall be construed as though they were written out in full according
to applicable laws or regulations:

        TEN COM            - as tenants in common
        TEN ENT            - as tenants by the entireties
        JT TEN             - as joint tenants with right of survivorship and not
                             as tenants in common
        UNIF GIFT MIN ACT -  _________________ Custodian _______________________
                                   (Cust)                     (Minor) Under
                            Uniform Gifts to Minors Act

Additional abbreviations may also be used though not in the above list.

                          _______________________________

FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and transfer(s)
unto

PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER OF ASSIGNEE

______________________________________________________________

______________________________________________________________

- --------------------------------------------------------------------------------
         (Please Print or Typewrite Name and Address of Assignee)

the within instrument of PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED and does
hereby irrevocably constitute and appoint
___________________________________________ Attorney to transfer said instrument
on the books of the within-named corporation, with full power of substitution in
the premises.

Dated: _____________________            ________________________________________
                                              Signature

NOTICE: The signature to this assignment must correspond with the name as
written upon the face of the within instrument in every particular, without
alteration by enlargement or any change whatever.


                                      C-8




                       SCHEDULE OF INCREASES OR DECREASES

The following increases or decreases in this Pledged Note have been made:

                                                                
        Amount of increase    Amount of decrease     Principal amount of
           in principal          in principal         Note evidenced by        Signature of
          amount of Note        amount of Note        the Pledged Note      authorized officer
         evidenced by the      evidenced by the        following such          of Trustee or
           Pledged Note          Pledged Note       decrease or increase   Securities Custodian
Date
- -----------------------------------------------------------------------------------------------



                                      C-9

EX-4.(D)

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED

                                       and

                 WACHOVIA BANK, NATIONAL ASSOCIATION, as Trustee

                                    INDENTURE

                          Dated as of December 17, 2002

                          Providing for the Issuance of
                              Debentures in Series

                                    including

       8.75% Deferrable Interest Junior Subordinated Debentures, Series D





             Public Service Enterprise Group Incorporated Indenture
                 Certain Sections of this Indenture relating to
                         Sections 310 through 318 of the
                           Trust Indenture Act of 1939



   Trust Indenture Act Section
   ---------------------------
                                                                     Indenture Section
                                                                     -----------------
                                                                
ss.310(a)(1)             ...........................................  7.10
       (a)(2)            ...........................................  7.10
       (a)(3)            ........................................... Not Applicable
       (a)(4)            ........................................... Not Applicable
       (a)(5)            ........................................... Not Applicable
       (b)               ........................................... 7.08; 7.10; 11.01
       (c)               ........................................... Not Applicable
ss.311(a)                ...........................................  7.11
       (b)               ...........................................  7.11
       (c)               ........................................... Not Applicable
ss.312(a)                ...........................................  2.07
       (b)               ........................................... 11.03
       (c)               ........................................... 11.03
ss.313(a)                ...........................................  7.06
       (b)(1)            ........................................... Not Applicable
       (b)(2)            ...........................................  7.06
       (c)               ........................................... 7.06; 11.02
       (d)               ...........................................  7.06
ss.314(a)                ........................................... 4.03; 11.02
       (b)               ........................................... Not Applicable
       (c)(1)            ........................................... 2.02; 11.04; 11.05
       (c)(2)            ........................................... 2.02; 11.04; 11.05
       (c)(3)            ........................................... Not Applicable
       (d)               ........................................... Not Applicable
       (e)               ........................................... 11.05
       (f)               ........................................... Not Applicable
ss.315(a)                ...........................................  7.01(b)
       (b)               ........................................... 7.05, 11.02
       (c)               ...........................................  7.01(a)
       (d)               ...........................................  7.01(c)
       (e)               ...........................................  6.11
ss.316(a)(1)(A)          ...........................................  6.05
       (a)(1)(B)         ...........................................  6.04
       (a)(2)            ........................................... Not Applicable
       (a)(last sentence)...........................................  2.10
       (b)               ...........................................  6.07
       (c)               ...........................................  1.05
ss.317(a)(1)             ...........................................  6.08
       (a)(2)            ...........................................  6.09
       (b)               ...........................................  2.06
ss.318(a)                ........................................... 11.01
       (b)               ........................................... Not Applicable
       (c)               ........................................... 11.01

- ----------
      Note: This reconciliation and tie sheet shall not, for any purpose, be
            deemed to be a part of the Indenture.



                                       i





                                TABLE OF CONTENTS

                                                                                Page

                                    ARTICLE 1
                   DEFINITIONS AND INCORPORATION BY REFERENCE

                                                                           
1.01       Definitions............................................................1
1.02       Other Definitions......................................................6
1.03       Incorporation by Reference of Trust Indenture Act......................6
1.04       Rules of Construction..................................................6
1.05       Acts of Holders and Holders of Preferred Securities....................7

                                    ARTICLE 2
                     THE DEBENTURES; THE SERIES D DEBENTURES

2.01       Issue of Debentures Generally..........................................8
2.02       Terms and Form of the Series D Debentures..............................9
2.03       Payment of Principal and Interest.....................................10
2.04       Execution, Authentication and Delivery................................12
2.05       Registrar and Paying Agent............................................13
2.06       Paying Agent to Hold Money in Trust...................................14
2.07       Debentureholder Lists.................................................15
2.08       Transfer and Exchange.................................................15
2.09       Replacement Debentures................................................15
2.10       Outstanding Debentures; Determinations of Holders' Action.............16
2.11       Temporary Debentures..................................................17
2.12       Book-Entry System.....................................................17
2.13       Cancellation..........................................................18

                                    ARTICLE 3
                                   REDEMPTION

3.01       Redemption: Notice to Trustee.........................................19
3.02       Selection of Debentures to be Redeemed................................19
3.03       Notice of Redemption..................................................19
3.04       Effect of Notice of Redemption........................................20
3.05       Deposit of Redemption Price...........................................20
3.06       Debentures Redeemed in Part...........................................21

                                    ARTICLE 4
                                    COVENANTS

4.01       Payment of Debentures.................................................21
4.02       Prohibition Against Dividends. etc....................................22
4.03       SEC Reports...........................................................22
4.04       Compliance Certificates...............................................22



                                       ii





                                                                           
4.05       Further Instruments and Acts..........................................23
4.06       Payments for Consents.................................................23
4.07       Payment of Expenses of Trusts.........................................23

                                    ARTICLE 5

                              SUCCESSOR CORPORATION

5.01       When the Company May Merge, Etc.......................................23

                                    ARTICLE 6
                              DEFAULTS AND REMEDIES

6.01       Events of Default.....................................................24
6.02       Acceleration..........................................................25
6.03       Other Remedies........................................................26
6.04       Waiver of Past Defaults...............................................26
6.05       Control by Majority...................................................27
6.06       Limitation on Suits...................................................27
6.07       Rights of Holders to Receive Payment..................................28
6.08       Collection Suit by the Trustee........................................28
6.09       The Trustee May File Proofs of Claim..................................28
6.10       Priorities............................................................29
6.11       Undertaking for Costs.................................................29
6.12       Waiver of Stay; Extension or Usury Laws...............................29

                                    ARTICLE 7
                                   THE TRUSTEE

7.01       Duties of the Trustee.................................................30
7.02       Rights of the Trustee.................................................31
7.03       Individual Rights of the Trustee......................................32
7.04       The Trustee's Disclaimer..............................................32
7.05       Notice of Defaults....................................................32
7.06       Reports by Trustee to Holders.........................................33
7.07       Compensation and Indemnity............................................33
7.08       Replacement of Trustee................................................34
7.09       Successor Trustee by Merger...........................................34
7.10       Eligibility: Disqualification.........................................35
7.11       Preferential Collection of Claims Against the Company.................35

                                    ARTICLE 8
                    SATISFACTION AND DISCHARGE OF INDENTURE;
               DEFEASANCE OF CERTAIN OBLIGATIONS; UNCLAIMED MONEYS

8.01       Satisfaction and Discharge of Indenture...............................35
8.02       Application by Trustee of Funds Deposited for Payment of Debentures...36



                                       iii





                                                                           
8.03       Repayment of Moneys Held by Paying Agent..............................36
8.04       Return of Moneys Held by the Trustee and Paying Agent Unclaimed for
                Three Years......................................................37

                                    ARTICLE 9
                                   AMENDMENTS

9.01       Without Consent of Holders............................................37
9.02       With Consent of Holders...............................................38
9.03       Compliance with Trust Indenture Act...................................39
9.04       Revocation and Effect of Consents; Waivers and Actions................39
9.05       Notation on or Exchange of Debentures.................................39
9.06       Trustee to Execute Supplemental Indentures............................40
9.07       Effect of Supplemental Indentures.....................................40

                                   ARTICLE 10
                                  SUBORDINATION

10.01      Applicability of Article; Debentures Subordinated to Senior
           Indebtedness..........................................................40
10.02      Priority and Payment of Proceeds in Certain Events:
           Remedies Standstill...................................................40
10.03      Payments which May Be Made Prior to Notice............................41
10.04      Rights of Holders of Senior Indebtedness Not to Be Impaired...........42
10.05      Trustee May Take Action to Effectuate Subordination...................42
10.06      Subrogation...........................................................42
10.07      Obligations of Company Unconditional: Reinstatement...................43
10.08      Trustee Entitled to Assume Payments Not Prohibited in
           Absence of Notice.....................................................43
10.09      Right of Trustee to Hold Senior Indebtedness..........................44

                                   ARTICLE 11
                                  MISCELLANEOUS

11.01      Trust Indenture Act Controls..........................................44
11.02      Notices...............................................................44
11.03      Communication by Holders with Other Holders...........................45
11.04      Certificate and Opinion as to Conditions Precedent....................45
11.05      Statements Required in Certificate or Opinion.........................46
11.06      Severability Clause...................................................46
11.07      Rules by Trustee, Paying Agent and Registrar..........................46
11.08      Legal Holidays........................................................46
11.09      Governing Law.........................................................47
11.10      No Recourse Against Others............................................47
11.11      Successors............................................................47
11.12      Multiple Original Copies of this Indenture............................47
11.13      No Adverse Interpretation of Other Agreements.........................47
11.14      Table of Contents: Headings. Etc......................................47



                                       iv





                                                                           
11.15      Benefits of the Indenture.............................................47



                                       v


      INDENTURE, dated as of December 17, 2002, by and between Public Service
Enterprise Group Incorporated, a corporation duly organized and existing under
the laws of the State of New Jersey (the "Company"), and Wachovia Bank, National
Association, a national banking association duly organized and existing under
the laws of the United States of America, as trustee (the "Trustee").

      WHEREAS, the Company may from time to time create or establish one or more
statutory trusts for the purpose of issuing undivided beneficial interests in
the assets thereof (the "Trust Securities") and using the proceeds thereof to
acquire the Company's Debentures.

      WHEREAS, pursuant to an Amended and Restated Trust Agreement dated as of
December 17, 2002 (the "Trust II Agreement") among the Company, as depositor,
Wachovia Bank, National Association, as Property Trustee, the Delaware Trustee
named therein and the Administrative Trustee named therein, there has been
declared and established PSEG Funding Trust II, a Delaware statutory trust
("Trust II").

      WHEREAS, Trust II intends to issue its Trust Securities, including its
8.75% Preferred Securities, representing undivided beneficial interests in the
assets of Trust II, having a liquidation amount of $25 per security and having
terms provided therefor in the Trust II Agreement.

      WHEREAS, the Company has authorized the issuance of its 8.75% Deferrable
Interest Junior Subordinated Debentures, Series D (the "Series D Debentures") to
be purchased by Trust II with the proceeds from the issuance and sale of its
Trust Securities, and to provide therefor, the Company has duly authorized the
execution and delivery of this Indenture.

      WHEREAS, all things necessary to make the securities issued hereunder,
when duly issued and executed by the Company and authenticated and delivered
hereunder, the valid obligations of the Company, and to make this Indenture a
valid and binding agreement of the Company, enforceable in accordance with its
terms, have been done.

      NOW THEREFORE:

      Each of the Company and the Trustee, intending to be legally bound hereby,
agrees as follows for the benefit of the other party and for the equal and
ratable benefit of the Holders (as hereinafter defined) of the securities issued
hereunder, including the Series D Debentures:

                                   ARTICLE 1
                   DEFINITIONS AND INCORPORATION BY REFERENCE

      1.01 Definitions.

      "Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. When used with respect to any Person,
"control" means the power to direct the management and policies of such Person,
directly or indirectly, whether through the ownership


                                       1


of voting securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.

      "Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.

      "Board Resolution" means (i) a copy of a resolution certified by the
Secretary or the Assistant Secretary of the Company to have been duly adopted by
the Board of Directors and to be in full force and effect on the date of such
certification and delivered to the Trustee or (ii) a certificate signed by the
authorized officer or officers to whom the Board of Directors has delegated its
authority, and in each case, delivered to the Trustee.

      "Business Day" means any day that is not a Saturday, a Sunday or a day on
which banking institutions in The City of New York or the State of New Jersey
are authorized or required by law or executive order to close.

      "Capital Stock" means any and all shares, interests, rights to purchase,
warrants, options, participation or other equivalents of or interests in
(however designated) corporate stock, including limited liability company
membership interests.

      "Common Securities" means the Common Trust Securities of a Trust,
representing undivided beneficial interests in the assets of such Trust.

      "Company" means Public Service Enterprise Group Incorporated, a New Jersey
corporation, or any permitted successor thereto.

      "Company Order" means a written request or order signed in the name of the
Company by an Officer of the Company and delivered to the Trustee.

      "Debentureholder" or "Holder" means a Person in whose name a Debenture is
registered on the Registrar's books.

      "Debentures" means any of the securities of any series issued,
authenticated and delivered under this Indenture.

      "Default" means any event which is, or after notice or passage of time, or
both, would be, an Event of Default pursuant to Section 6.01 hereof.

      "Exchange Act" means the Securities Exchange Act of 1934, as amended.

      "Extension Period", with respect to any series of Debentures, means the
period during which the Company may elect to extend the interest payment period
on such series of the Debentures pursuant to Section 4.01(b) hereof; provided
that no Extension Period shall extend beyond the Stated Maturity Date or the
Redemption Date of any Debenture of such series.

      "GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified


                                       2


Public Accountants and statements and pronouncements of the Financial Accounting
Standards Board.

      "Guarantee Agreement" means a Guarantee Agreement, dated as of the date
any Debentures are issued, from the Company, as guarantor, to Wachovia Bank,
National Association, as guarantee trustee, with respect to the Preferred
Securities issued on the date of such Guarantee Agreement.

      "Indenture" means this indenture, as amended or supplemented from time to
time in accordance with the terms hereof, including the provisions of the TIA
that are deemed to be a part hereof.

      "Interest Payment Date", when used with respect to the Debentures of any
series, means the stated maturity of any installment of interest on the
Debentures of that series.

      "Issue Date", with respect to a series of Debentures, means the date on
which the Debentures of such series are originally issued.

      "Officer" means, with respect to any corporation, the Chairman of the
Board, the Chief Executive Officer, the President, any Vice President, the
Treasurer, any Assistant Treasurer, the Secretary or any Assistant Secretary of
such corporation.

      "Officer's Certificate" means a written certificate containing the
applicable information specified in Sections 11.04 and 11.05 hereof, signed in
the name of the Company by any one of its Officers, and delivered to the
Trustee.

      "Opinion of Counsel" means a written opinion containing the applicable
information specified in Sections 11.04 and 11.05 hereof, by legal counsel who
is reasonably acceptable to the Trustee.

      "Paying Agent" means any Person authorized by the Company to pay the
principal of and premium, if any, and interest on the Debentures of any series
on behalf of the Company.

      "Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.

      "Predecessor Debentures" of any particular Debenture means every previous
Debenture evidencing all or a portion of the same debt as that evidenced by such
particular Debenture; and for purposes of this definition, any Debenture
authenticated and delivered under Section 2.09 hereof in exchange for or in lieu
of a mutilated, destroyed, lost or stolen Debenture shall be deemed to evidence
the same debt as the mutilated, destroyed, lost or stolen Debenture.

      "Preferred Securities" means the Trust Preferred Securities of a Trust,
representing undivided beneficial interests in the assets of such Trust.


                                       3


      "Property Trustee" means the entity named as property trustee under a
Trust Agreement and its successors and assigns under such Trust Agreement.

      "Record Date", with respect to any series of the Debentures, means the
Regular Record Date, the Special Record Date or any date set to determine the
Holders of Debentures of such series entitled to vote, consent, make a request
or exercise any other right associated with such Debentures.

      "Redemption Date", with respect to the Debentures of any series to be
redeemed, means the date specified for the redemption thereof in accordance with
the terms thereof and pursuant to Article 3 of this Indenture.

      "Redemption Price", with respect to the Debentures of any series to be
redeemed, means the price at which such Debenture is to be redeemed in
accordance with the terms thereof and pursuant to Article 3 of this Indenture.

      "Regular Record Date", with respect to an interest payment on the
Debentures of a series, means the date set forth in this Indenture or the
supplemental indenture creating such series for the determination of Holders
entitled to receive payment of interest on the next succeeding Interest Payment
Date.

      "Responsible Officer", when used with respect to the Trustee, means any
Vice President, any Assistant Vice President, any Trust Officer, or Assistant
Trust Officer or any other officer of the Corporate Trust Department of the
Trustee customarily performing functions similar to those performed by any of
the above designated officers and also means, with respect to a particular
corporate trust matter, any other officer to whom such matter is referred
because of that officer's knowledge of and familiarity with the particular
subject.

      "SEC" or "Commission" means the Securities and Exchange Commission.

      "Securities Act" means the Securities Act of 1933, amended.

      "Senior Indebtedness" means the principal of and premium, if any, and
unpaid interest on (i) indebtedness of the Company (including indebtedness of
others guaranteed by the Company and any Debentures to which the provisions of
Article 10 hereof are not applicable), whether outstanding on the date hereof or
hereafter created, incurred, assumed or guaranteed, for money borrowed, unless
in the instrument creating or evidencing the same or pursuant to which the same
is outstanding it is provided that such indebtedness is not senior or prior in
right of payment to the Debentures, and (ii) renewals, extensions, modifications
and refundings of any such indebtedness. Nothwithstanding the foregoing, the
term Senior Indebtedness shall not include any series of Deferrable Interest
Subordinated Debentures issued under the Indenture dated as of January 1, 1998
between the Company and Wachovia Bank, National Association (formerly known as
First Union National Bank).

      "Series D Debentures" means any of the Company's 8.75% Deferrable Interest
Junior Subordinated Debentures, Series D issued under this Indenture.


                                       4


      "Special Record Date" for the payment of any Defaulted Interest on the
Debentures of any series means the date determined pursuant to Section 2.03
hereof.

      "Stated Maturity Date", with respect to any Debenture, means the date
specified for such Debenture as the fixed date on which the principal of such
Debenture is due and payable.

      "Subsidiary" means any corporation, association, partnership, trust or
other business entity of which more than 50% of the total voting power of shares
of Capital Stock or other interests (including partnership interests) entitled
(without regard to the occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof is at the time owned or controlled,
directly or indirectly, by (i) the Company, (ii) the Company and one or more
Subsidiaries, or (iii) one or more Subsidiaries.

      "TIA" means the Trust Indenture Act of 1939, as amended and as in effect
on the date of this Indenture; provided, however, that if the TIA is amended
after such date, TIA means, to the extent required by any such amendment, the
TIA as so amended.

      "Trust" means any statutory trust created by the Company to issue Trust
Securities and to use the proceeds from the sale thereof to purchase Debentures.

      "Trust Agreement" means an Amended and Restated Trust Agreement dated as
of the date any Debentures are issued among the Company, as Depositor, and the
Property Trustee and the other trustees named therein.

      "Trust II" means PSEG Funding Trust II, a Delaware statutory trust created
under the Delaware Business Trust Act, Chapter 38 of Title 12 of the Delaware
Code, 12 Del. C. ss. 3801, et seq.

      "Trust II Agreement" means the Amended and Restated Trust Agreement dated
as of December 17, 2002, among the Company, as Depositor, Wachovia Bank,
National Association (formerly known as First Union National Bank), as Property
Trustee, the Delaware Trustee named therein and the Administrative Trustee named
therein, as the same may be amended and modified from time to time.

      "Trust Securities" means the undivided beneficial interests in the assets
of a Trust and includes the Preferred Securities and the Common Securities of
such Trust.

      "Trustee" means Wachovia Bank, National Association, until a successor
replaces it pursuant to the applicable provisions of this Indenture and,
thereafter, shall mean such successor.

      "U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable at the issuer's option.


                                       5


      "Wholly Owned Subsidiary" means a Subsidiary all the Capital Stock of
which (other than directors' qualifying shares) is owned by the Company or
another Wholly Owned Subsidiary.

      1.02 Other Definitions.

    TERM                                                 DEFINED IN SECTION
    ----                                                 ------------------
    "Act" ...................................................     1.05
    "Bankruptcy Law" ........................................     6.01
    "Custodian" .............................................     6.01
    "Defaulted Interest" ....................................     2.03
    "Depositary" ............................................     2.12
    "global Debenture" ......................................     2.12
    "Legal Holiday" .........................................    11.08
    "Notice of Default" .....................................     6.01
    "Register" ..............................................     2.05
    "Registrar" .............................................     2.05
    "Successor" .............................................     5.01


      1.03 Incorporation by Reference of Trust Indenture Act.

      Whenever this Indenture refers to a provision of the TIA, such provision
is incorporated by reference in and made a part of this Indenture. The following
TIA terms used in this Indenture have the following meanings:

            "indenture securities" means the Debentures.

            "indenture security holder" means a Debentureholder or Holder.

            "indenture to be qualified" means this Indenture.

            "indenture trustee" or "institutional trustee" means the Trustee.

            "obligor" on the indenture securities means the Company and any
other obligor on the Debentures.

      All other TIA terms used in this Indenture that are defined by the TIA,
defined by TIA reference to another statute or defined by SEC rule have the
meanings assigned to them by such definitions.

      1.04 Rules of Construction.

      Unless the context otherwise requires:

      (1) Each capitalized term has the meaning assigned to it;

      (2) an accounting term not otherwise defined has the meaning assigned to
it in accordance with GAAP;


                                       6


      (3) "or" is not exclusive;

      (4) "including" means including, without limitation;

      (5) words in the singular include the plural, and words in the plural
include the singular; and

      (6) "herein," "hereof" and other words of similar import refer to this
Indenture as a whole and not to any particular Article, Section or other
subdivision.

      1.05 Acts of Holders and Holders of Preferred Securities.

      (a) Any request, demand, authorization, direction, notice, consent, waiver
or other action provided by this Indenture to be given or taken by Holders or by
holders of Preferred Securities may be embodied in and evidenced by one or more
instruments of substantially similar tenor signed by such Holders or holders of
Preferred Securities, as applicable, in person or by an agent duly appointed in
writing and, except as herein otherwise expressly provided, such action shall
become effective when such instrument or instruments are delivered to the
Trustee and, where it is hereby expressly required, to the Company. Such
instrument or instruments (and the action embodied therein and evidenced
thereby) are herein sometimes referred to as the "Act" of Holders or holders of
Preferred Securities signing such instrument or instruments. Proof of execution
of any such instrument or of a writing appointing any such agent shall be
sufficient for any purpose of this Indenture and conclusive in favor of the
Trustee and the Company, if made in the manner provided in this Section.

      (b) The fact and date of the execution by any Person of any such
instrument or writing may be proved in any manner which the Trustee deems
sufficient.

      (c) The ownership of Debentures shall be proved by the Register.

      (d) Any request, demand, authorization, direction, notice, consent, waiver
or other Act of the Holder of any Debenture shall bind every future Holder of
the same Debenture and the Holder of every Debenture issued upon the
registration transfer thereof or in exchange therefor or in lieu thereof in
respect of anything done, omitted or suffered to be done by the Trustee or the
Company in reliance thereon, whether or not notation of such action is made upon
such Debenture.

      (e) If the Company solicits from the Holders any request, demand,
authorization, direction, notice, consent, waiver or other Act, the Company may,
at its option, by or pursuant to a resolution of its Board of Directors, fix in
advance a Record Date for the determination of Holders entitled to give such
request, demand, authorization, direction, notice, consent, waiver or other Act,
but the Company shall have no obligation to do so. If such a Record Date is
fixed, such request, demand, authorization, direction, notice, consent, waiver
or other Act may be given before or after such Record Date, but only Holders of
record at the close of business on such Record Date shall be deemed to be
Holders for the purposes of determining whether Holders of the requisite
proportion of outstanding Debentures have authorized or agreed


                                       7


or consented to such request, demand, authorization, direction, notice, consent,
waiver or other Act, and for that purpose the outstanding Debentures shall be
computed as of such Record Date.

                                   ARTICLE 2
                     THE DEBENTURES; THE SERIES D DEBENTURES

      2.01 Issue of Debentures Generally.

      The aggregate principal amount of any series of Debentures which may be
authenticated and delivered under this Indenture is limited to the aggregate
liquidation amount of the Trust Securities of the Trust purchasing such
Debentures.

      The Debentures may be issued in one or more series as from time to time
shall be authorized by the Board of Directors.

      The Debentures of each series and the Trustee's Certificate of
Authentication shall be substantially in the forms to be attached as exhibits to
the Indenture or supplemental indenture creating such series, but in the case of
any series of Debentures other than the Series D Debentures, with such
inclusions, omissions and variations as to letters, numbers or other marks of
identification or designation and such legends or endorsements printed,
lithographed or engraved thereon as the Company may deem appropriate and as are
not inconsistent with the provisions of this Indenture, or as may be required to
comply with any law or with any rule or regulation made pursuant thereto or with
any rule or regulation of any securities exchange on which such Debentures may
be listed, or to conform to usage.

      Other series of Debentures may differ from the Series D Debentures, and as
and between series, in respect of any or all of the following matters:

      (a) designation;

      (b) Stated Maturity Date or Dates, which may be serial and the Company's
option, if any, to change the Stated Maturity Date or Dates;

      (c) interest rate or method of determination of the interest rate;

      (d) the basis upon which interest shall be computed if other than a
360-day year composed of twelve 30-day months;

      (e) Interest Payment Dates and the Regular Record Dates therefor;

      (f) the maximum duration of the Extension Period;

      (g) Issue Date or Dates and interest accrual provisions;

      (h) authorized denominations;

      (i) the place or places for the payment of principal (and premium, if any)
and interest;


                                       8


      (j) the aggregate principal amount of Debentures of such series which may
be issued;

      (k) the optional and mandatory redemption provisions, if any;

      (l) provisions, if any, for any sinking or analogous fund;

      (m) the applicability to such series of the provisions of Article 10
hereof relating to subordination; and

      (n) any other provisions expressing or referring to the terms and
conditions upon which the Debentures of such series are to be issued under this
Indenture which are not in conflict with the provisions of this Indenture;

in each case as determined by the Board of Directors and specified in the
supplemental indenture creating such series.

      2.02 Terms and Form of the Series D Debentures.

      (a) The Series D Debentures shall be designated "Public Service Enterprise
Group Incorporated, 8.75% Deferrable Interest Junior Subordinated Debentures,
Series D." The Series D Debentures and the Trustee's Certificate of
Authentication shall be substantially in the form of Exhibit A attached hereto.
Any Series D Debentures to be issued as global Debentures shall be issued as
global Debentures in accordance with the provisions of Section 2.12 of this
Indenture, with The Depository Trust Company as Depositary. The terms and
provisions contained in the Series D Debentures shall constitute, and are hereby
expressly made, a part of this Indenture. The Company and the Trustee, by their
execution and delivery of this Indenture, expressly agree to such terms and
provisions and to be bound thereby.

      (b) The aggregate principal amount of Series D Debentures outstanding at
any time may not exceed $185,567,025 except as provided in Section 2.09 hereof.
The Series D Debentures shall be authenticated and delivered upon delivery to
the Trustee of items specified in Section 2.04(d) hereof.

      (c) The Stated Maturity Date of the Series D Debentures is December 31,
2032.

      (d) The interest rate of the Series D Debentures shall be as follows:
8.75% per annum. The Interest Payment Dates for the Series D Debentures shall be
March 31, June 30, September 30 and December 31 of each year, commencing March
31, 2003. In the event that any date on which interest is payable on the Series
D Debentures is not a Business Day, then payment of interest payable on such
date will be made on the next day which is a Business Day (and without any
interest or other payment in respect of any such delay), except that if such
Business Day is in the next succeeding calendar year, such payment shall be made
on the immediately preceding Business Day, in each case with the same force and
effect as if made on such date. The Regular Record Date for each Interest
Payment Date for the Series D Debentures shall be the 15th day (whether or not a
Business Day) preceding the applicable Interest Payment


                                       9


Date, provided that if Trust II is the sole Holder of the Series D Debentures or
the Series D Debentures are issued in book-entry-only form, the Regular Record
Date shall be the close of business on the Business Day immediately preceding
such Interest Payment Date.

      Each Series D Debenture shall bear interest from its Issue Date or from
the most recent Interest Payment Date to which interest has been paid or duly
provided for with respect to such Series D Debenture; except that, so long as
there is no existing Defaulted Interest (as defined in Section 2.03 hereof) or
Extension Period on the Series D Debentures, any Series D Debenture
authenticated by the Trustee between the Regular Record Date for any Interest
Payment Date and such Interest Payment Date shall bear interest from such
Interest Payment Date.

      Overdue principal of and interest on any Series D Debenture and interest
which has been deferred pursuant to Section 4.01(b) hereof shall bear interest
(to the extent that the payment of such interest shall be legally enforceable)
at a rate per annum equal to the interest rate per annum payable on such Series
D Debenture.

      (e) The Series D Debentures shall be issuable only in registered form
without coupons and only in denominations of $25 and any integral multiple
thereof.

      (f) The maximum Extension Period for the Series D Debentures shall be five
years consisting of 20 consecutive quarterly interest periods.

      2.03 Payment of Principal and Interest.

      Unless otherwise specified pursuant to Section 2.01(d), interest on the
Debentures shall be computed on the basis of a 360-day year composed of twelve
30-day months.

      Unless otherwise provided with respect to a series of Debentures,

            (i)   the principal and Redemption Price of and interest on each
                  Debenture shall be payable in such coin or currency of the
                  United States of America as at the time of payment is legal
                  tender for the payment of public and private debts;

            (ii)  the principal and Redemption Price of any Debenture and
                  interest payable on the Stated Maturity Date (if other than an
                  Interest Payment Date) or Redemption Date shall be payable in
                  immediately available funds upon surrender of such Debenture
                  at the office or agency of any Paying Agent therefor; and

            (iii) interest on any Debenture shall be paid on each Interest
                  Payment Date therefor to the Holder thereof at the close of
                  business on the Record Date therefor, such interest to be
                  payable by check mailed to the address of the Person entitled
                  thereto as such address appears on the Register; provided
                  however, that (1) at the written request of the Holder of at
                  least $10,000,000 aggregate principal amount of Debentures
                  received by the


                                       10


                  Registrar not later than the Regular Record Date for such
                  Interest Payment Date, interest accrued on such Debenture will
                  be payable by wire transfer within the continental United
                  States in immediately available funds to the bank account
                  number of such Holder specified in such request and entered on
                  the Register by the Registrar and (2) payments made in respect
                  of global Debentures shall be made in immediately available
                  funds to the Depositary.

      Except as specified pursuant to Section 2.01 or Section 4.01(b) hereof,
interest on any Debenture which is payable, and is punctually paid or duly
provided for, on any Interest Payment Date shall be paid to the Person in whose
name that Debenture (or one or more Predecessor Debentures) is registered at the
close of business on the Regular Record Date for such interest. Any interest on
any Debenture which is payable, but is not punctually paid or duly provided for,
on any Interest Payment Date (herein called "Defaulted Interest") shall
forthwith cease to be payable to the Holder on the relevant Regular Record Date
by virtue of having been such Holder, and such Defaulted Interest may be paid by
the Company, at its election in each case, as provided in Clause (1) and (2)
below:

      (1) The Company may elect to make payment of any Defaulted Interest to the
      Persons in whose names the Debentures (or their respective Predecessor
      Debentures) are registered at the close of business on a Special Record
      Date for the payment of such Defaulted Interest, which shall be fixed in
      the following manner. The Company shall, not less than 15 Business Days
      prior to the date of the proposed payment, notify the Trustee and the
      Paying Agent in writing of the amount of Defaulted Interest proposed to be
      paid on each Debenture and the date of the proposed payment, and at the
      same time the Company shall deposit with the Paying Agent an amount of
      money equal to the aggregate amount proposed to be paid in respect of such
      Defaulted Interest or shall make arrangements satisfactory to the Paying
      Agent for such deposit prior to the date of the proposed payment, such
      money when deposited to be held in trust for the benefit of the Persons
      entitled to such Defaulted Interest as in this Clause provided. The
      Special Record Date for the payment of such Defaulted Interest shall be
      the close of business on the tenth calendar day prior to the date of the
      proposed payment. The Trustee shall, in the name and at the expense of the
      Company, cause notice of the proposed payment of such Defaulted Interest
      and the Special Record Date therefor to be given to the Holders thereof,
      not less than 7 calendar days prior to such Special Record Date. Notice of
      the proposed payment of such Defaulted Interest and the Special Record
      Date therefor having been given, such Defaulted Interest shall be paid to
      the Persons in whose names the Debentures (or their respective Predecessor
      Debentures) are registered at the close of business on such Special Record
      Date and shall no longer be payable pursuant to the following Clause (2).

      (2) The Company may make payment of any Defaulted Interest on the
      Debentures in any other lawful manner not inconsistent with the
      requirements of any securities exchange on which such Debentures may be
      listed, and upon such notice as may be required by such exchange, if,
      after notice given by the Company to the Trustee


                                       11


      and the Paying Agent of the proposed payment pursuant to this Clause, such
      manner of payment shall be deemed practicable by the Paying Agent.

      Subject to the foregoing provisions of this Section, each Debenture
delivered under this Indenture upon registration of transfer of or in exchange
for or in lieu of any other Debenture shall carry the rights to interest accrued
and unpaid, and to accrue, which were carried by such other Debenture.

      2.04 Execution, Authentication and Delivery.

      (a) The Debentures shall be executed on behalf of the Company by its
Chairman, its President or one of its Vice Presidents, under its corporate seal
imprinted or reproduced thereon and attested by its Secretary or one of its
Assistant Secretaries. The signature of any such Officer on the Debentures may
be manual or facsimile.

      (b) Debentures bearing the manual or facsimile signatures of individuals
who were at any time the proper Officers of the Company shall bind the Company,
notwithstanding that such individuals or any of them have ceased to hold such
offices prior to the authentication and delivery of such Debentures or did not
hold such offices at the date of such Debentures.

      (c) No Debenture shall be entitled to any benefit under this Indenture or
be valid or obligatory for any purpose unless there appears on such Debenture a
Certificate of Authentication duly executed by the Trustee by manual signature
of a Responsible Officer, and such Certificate of Authentication upon any
Debenture shall be conclusive evidence, and the only evidence, that such
Debenture has been duly authenticated and made available for delivery hereunder.

      (d) The Trustee shall authenticate and deliver Debentures of a series, for
original issue, at one time or from time to time in accordance with the Company
Order referred to below, upon receipt by the Trustee of:

      (1) a Board Resolution approving the form or forms and terms of such
      Debentures;

      (2) a Company Order requesting the authentication and delivery of such
      Debentures and stating the identity of the Trust and the aggregate
      liquidation amount of the Trust Securities to be issued concurrently with
      such Debentures;

      (3) unless previously delivered, this Indenture or a supplemental
      indenture hereto setting forth the form of such Debentures and
      establishing the terms thereof;

      (4) the Debentures of such series, executed on behalf of the Company in
      accordance with Section 2.04(a) hereof;

      (5) an Opinion of Counsel to the effect that:


                                       12


      (i) the form or forms of such Debentures have been duly authorized by the
      Company and have been established in conformity with the provisions of
      this Indenture; and

      (ii) such Debentures, when authenticated and delivered by the Trustee and
      issued and delivered by the Company in the manner and subject to any
      conditions specified in such Opinion of Counsel, will have been duly
      issued under this Indenture and will constitute valid and legally binding
      obligations of the Company, entitled to the benefits provided by this
      Indenture, and enforceable in accordance with their terms, subject, as to
      enforcement to laws relating to or affecting generally the enforcement of
      creditors' rights, including, without limitation, bankruptcy and
      insolvency laws and to general principles of equity (regardless of whether
      such enforceability is considered in a proceeding in equity or at law);
      and

      (iii) that this Indenture or any supplemental indenture referred to in
      clause (3) above has been duly authorized, executed and delivered by the
      Company and is a valid instrument legally binding upon the Company,
      enforceable in accordance with its terms, subject as to enforcement to
      laws relating to or affecting creditors' rights, including, without
      limitation, bankruptcy and insolvency laws and to general principles of
      equity (regardless of whether such enforceability is considered in a
      proceeding in equity or at law); and

      (iv) that all consents, approvals and orders of any commission,
      governmental authority or agency required in connection with the issuance
      and delivery of such Debentures have been obtained.

      (e) an Officer's Certificate certifying that no Default or Event of
Default has occurred and is continuing.

      (f) The Trustee shall act as the initial authenticating agent. Thereafter,
the Trustee may appoint an authenticating agent. An authenticating agent may
authenticate Debentures whenever the Trustee may do so. Each reference in this
Indenture to authentication by the Trustee includes authentication by such
agent. The Trustee shall pay any authenticating agent appointed by the Trustee
reasonable compensation for its services and the Trustee shall be reimbursed for
such payment by the Company pursuant to Section 7.07 hereof. The provisions set
forth in Section 7.02, Section 7.03, Section 7.04 and Section 7.07 hereof shall
be applicable to any authenticating agent.

      2.05 Registrar and Paying Agent.

      The Company shall maintain or cause to be maintained, within or outside
the State of New Jersey, an office or agency where the Debentures may be
presented for registration of transfer or for exchange ("Registrar"), a Paying
Agent at whose office the Debentures may be presented or surrendered for
payment, and an office or agency where notices and demands to or upon the
Company in respect of the Debentures and this Indenture may be served. The
Registrar shall keep a register (the "Register") of the Debentures and of their
transfer and exchange. The


                                       13


Company may have one or more co-Registrars and one or more additional Paying
Agents. The term Registrar includes any additional registrar and the term Paying
Agent includes any additional paying agent. The corporate office of the Trustee
in Morristown, New Jersey, shall initially be the Registrar for each series of
Debentures and agent for service of notice or demands on the Company, and the
Trustee shall initially be the Paying Agent for each series of Debentures.

      The Company shall enter into an appropriate agency agreement with any
Registrar, Paying Agent or co-Registrar (if not the Company or the Trustee or an
affiliate of the Trustee). The agreement shall implement the provisions of this
Indenture that relate to such agent. The Company shall give prompt written
notice to the Trustee and to the Holders of any change of location of such
office or agency. If at any time the Company shall fail to maintain or cause to
be maintained any such required office or agency or shall fail to furnish the
Trustee with the address thereof, such presentations, surrenders, notices and
demands may be made or served at the address of the Trustee set forth in Section
11.02 hereof. The Company shall notify the Trustee of the name and address of
any such agent. If the Company fails to maintain a Registrar, Paying Agent or
agent for service of notices or demands, the Trustee shall act as such and shall
be entitled to appropriate compensation therefor pursuant to Section 7.07
hereof. The Company or any Affiliate of the Company may act Paying Agent,
Registrar or co-Registrar or agent for service of notices and demands.

      The Company may also from time to time designate one or more other offices
or agencies where the Debentures may be presented or surrendered for any or all
such purposes and may from time to time rescind such designations. The Company
will give prompt written notice to the Trustee and to the Holders of any such
designation or rescission and of any change in location of any such other office
or agency.

      2.06 Paying Agent to Hold Money in Trust.

      Except as otherwise provided herein, prior to 10:00 a.m. on each due date
of the principal of and premium (if any) and interest on any Debenture, the
Company shall deposit with the Paying Agent a sum of money sufficient to pay
such principal, premium (if any) and interest so becoming due. The Company shall
require each Paying Agent (other than the Trustee or the Company) to agree in
writing that such Paying Agent shall hold in trust for the benefit of Holders or
the Trustee all money held by the Paying Agent for the payment of principal of
and premium (if any) and interest on the Debentures and shall notify the Trustee
of any Default by the Company in making any such payment. At any time during the
continuance of any such Default, the Paying Agent shall, upon the request of the
Trustee, forthwith pay to the Trustee all money so held in trust and account for
any money disbursed by it. The Company at any time may require a Paying Agent to
pay all money held by it to the Trustee and to account for any money disbursed
by it. Upon doing so, the Paying Agent shall have no further liability for the
money so paid over to the Trustee. If the Company, a Subsidiary or an Affiliate
of either of them acts as Paying Agent, it shall segregate the money held by it
as Paying Agent and hold it as a separate trust fund.


                                       14


      2.07 Debentureholder Lists.

      The Trustee shall preserve in as current a form as is reasonably
practicable the most recent list available to it of the names and addresses of
Debentureholders. If the Trustee is not the Registrar, the Company shall cause
to be furnished to the Trustee on or before the Record Date for each Interest
Payment Date and at such other times as the Trustee may request in writing,
within five Business Days of such request, a list, in such form as the Trustee
may reasonably require of the names and addresses of Debentureholders.

      2.08 Transfer and Exchange.

      When Debentures are presented to the Registrar or a co-Registrar with a
request to register the transfer or to exchange them for an equal principal
amount of Debentures of the same series of other authorized denominations, the
Registrar shall register the transfer or make the exchange as requested if its
reasonable requirements for such transactions are met. To permit registrations
of transfer and exchanges, the Company shall execute and the Trustee shall
authenticate Debentures, all at the Registrar's request.

      Every Debenture presented or surrendered for registration of transfer or
for exchange shall (if so required by the Company or the Registrar) be duly
endorsed, or be accompanied by a written instrument of transfer in form
satisfactory to the Registrar duly executed by the Holder or his attorney duly
authorized in writing.

      The Company shall not require payment of a service charge for any
registration of transfer or exchange of Debentures, but the Company may require
payment of a sum sufficient to pay all taxes, assessments or other governmental
charges that may be imposed in connection with the registration of the transfer
or exchange of Debentures from the Debentureholder requesting such transfer or
exchange (other than any exchange of a temporary Debenture for a definitive
Debenture not involving any change in ownership).

      The Company shall not be required to make, and the Registrar need not
register, transfers or exchanges of (a) any Debenture for a period beginning at
the opening of business 15 days before the mailing of a notice of redemption of
Debentures and ending at the close of business on the day of such mailing or (b)
any Debenture selected, called or being called for redemption, except, in the
case of any Debenture to be redeemed in part, the portion thereof not to be
redeemed.

      2.09 Replacement Debentures.

      If (a) any mutilated Debenture is surrendered to the Company or the
Trustee, or (b) the Company and the Trustee receive evidence to their
satisfaction of the destruction, loss or theft of any Debenture, and there is
delivered to the Company and the Trustee such security or indemnity as may be
required by them to save each of them harmless, then, in the absence of notice
to the Company or the Trustee that such Debenture has been acquired by a bona
fide purchaser, the Company shall execute in exchange for any such mutilated
Debenture or in lieu of any such destroyed, lost or stolen Debenture, a new
Debenture of the same series and of like


                                       15


tenor and principal amount, bearing a number not contemporaneously outstanding,
and the Trustee shall authenticate and make such new Debenture available for
delivery.

      In case any such mutilated, destroyed, lost or stolen Debenture has become
or is about to become due and payable, or is about to be redeemed by the Company
pursuant to Article 3 hereof, the Company in its discretion may, instead of
issuing a new Debenture, pay or purchase such Debenture, as the case may be.

      Upon the issuance of any new Debentures under this Section 2.09, the
Company may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Trustee) in connection
therewith.

      Every new Debenture issued pursuant to this Section 2.09 in lieu of any
mutilated, destroyed, lost or stolen Debenture shall constitute an original
additional contractual obligation of the Company (whether or not the mutilated,
destroyed, lost or stolen Debenture shall be at any time enforceable) and shall
be entitled to all benefits of this Indenture equally and ratably with any and
all other Debentures duly issued hereunder.

      The provisions of this Section 2.09 are exclusive and shall preclude (to
the extent lawful) all other rights and remedies with respect to the replacement
or payment of mutilated, destroyed, lost or stolen Debentures.

      2.10 Outstanding Debentures; Determinations of Holders' Action.

      Debentures outstanding at any time are all the Debentures authenticated by
the Trustee except for those canceled by it, those delivered to it for
cancellation, those mutilated, destroyed, lost or stolen Debentures referred to
in Section 2.09 hereof, those redeemed by the Company pursuant to Article 3
hereof, and those described in this Section 2.10 as not outstanding. A Debenture
does not cease to be outstanding because the Company or a Subsidiary or
Affiliate thereof holds the Debenture; provided, however, that in determining
whether the Holders of the requisite principal amount of Debentures have given
or concurred in any request, demand, authorization, direction, notice, consent
or waiver hereunder, Debentures owned by the Company or a Subsidiary or
Affiliate (other than any Trust so long as any of the Preferred Securities of
such Trust are outstanding) shall be disregarded and deemed not to be
outstanding.

      Subject to the foregoing, only Debentures outstanding at the time of such
determination shall be considered in any such determination (including
determinations pursuant to Articles 3, 6 and 9).

      If a Debenture is replaced pursuant to Section 2.09 hereof, it ceases to
be outstanding unless the Trustee receives proof satisfactory to it that the
replaced Debenture is held by a bona fide purchaser.

      If the Paying Agent (other than the Company) holds, in accordance with
this Indenture, at the Stated Maturity Date or on a Redemption Date, money
sufficient to pay the Debentures payable on that date, then immediately on the
Stated Maturity Date or such


                                       16


Redemption Date, as the case may be, such Debentures shall cease to be
outstanding, and interest, if any, on such Debentures shall cease to accrue.

      2.11 Temporary Debentures.

      The Company may execute temporary Debentures, and upon the Company's
Order, the Trustee shall authenticate and make such temporary Debentures
available for delivery. Temporary Debentures shall be printed, lithographed,
typewritten, mimeographed or otherwise produced, in any authorized denomination,
in the same series and principal amount and of like tenor as the definitive
Debentures in lieu of which they are issued and with such appropriate
insertions, omissions, substitutions and other variations as the Officers of the
Company executing such Debentures may determine, as conclusively evidenced by
their execution of such Debentures.

      After the preparation of definitive Debentures, the temporary Debentures
shall be exchangeable for definitive Debentures of the same series upon
surrender of the temporary Debentures at the office or agency of the Company
designated for such purpose pursuant to Section 2.05 hereof, without charge to
the Holders thereof. Upon surrender for cancellation of any one or more
temporary Debentures, the Company shall execute a like principal amount of
definitive Debentures of the same series of authorized denominations, and the
Trustee, upon receipt of a Company Order, shall authenticate and make such
Debentures available for delivery in exchange therefor. Until so exchanged, the
temporary Debentures shall in all respects be entitled to the same benefits
under this Indenture as definitive Debentures.

      2.12 Book-Entry System.

      In order to utilize a book-entry-only system for all or any portion of the
Debentures of any series, all or a portion of the Debentures of any series may
be issued in the form of one or more fully registered Debentures of the same
series for the aggregate principal amount of such Debentures of each Issue Date,
interest rate and Stated Maturity Date (a "global Debenture"), which global
Debenture shall be registered in the name of the depositary (the "Depositary")
selected by the Company or in the name of such Depositary's nominee. Each global
Debenture shall be delivered by the Trustee to the Depositary or pursuant to the
Depositary's instruction and shall bear a legend substantially to the following
effect: "Except as otherwise provided in Section 2.12 of the Indenture, this
Debenture may be transferred, in whole but not in part, only to another nominee
of the Depositary or to a successor Depositary or to a nominee of such successor
Depositary."

      Notwithstanding any other provision of this Section 2.12 or of Section
2.08 hereof, a global Debenture may be transferred in whole but not in part and
in the manner provided in Section 2.08 hereof, only by a nominee of the
Depositary for such series, or by the Depositary or any such nominee of a
successor Depositary for such series selected or approved by the Company or to a
nominee of such successor Depositary.

      If (i) at any time the Depositary for global Debentures of any series of
Debentures notifies the Company that it is unwilling or unable to continue as
Depositary for such global Debentures or if at any time the Depositary for such
global Debentures shall no longer be


                                       17


registered or in good standing under the Exchange Act or other applicable
statute or regulation, and a successor Depositary for such global Debentures is
not appointed by the Company within 90 days after the Company receives such
notice or becomes aware of such condition, as the case may be, (ii) the Company
determines in its sole discretion, that the Debentures of any series shall no
longer be represented by one or more global Debentures and delivers to the
Trustee an Officer's Certificate evidencing such determination or (iii) an Event
of Default occurs and is continuing, then the provisions of this Section 2.12
shall no longer apply to the Debentures of such series. In such event, the
Company will execute and the Trustee, upon receipt of an Officer's Certificate
evidencing such determination by the Company, will authenticate and deliver
Debentures of such series and of like tenor in definitive registered form, in
authorized denominations, and in aggregate principal amount equal to the
principal amount of the global Debentures of such series in exchange for such
global Debentures. Upon the exchange of global Debentures for such Debentures in
definitive registered form without coupons, in authorized denominations, the
global Debentures shall be cancelled by the Trustee. Such Debentures in
definitive registered form issued in exchange for global Debentures pursuant to
this Section 2.12 shall be registered in such names and in such authorized
denominations as the Depositary, pursuant to instructions from its direct or
indirect participants or otherwise, shall instruct the Trustee. The Trustee
shall deliver such Debentures to the Persons in whose names such Debentures are
so registered.

      Except as provided above, owners of beneficial interests in a global
Debenture shall not be entitled to receive physical delivery of Debentures in
definitive form and will not be considered the Holders thereof for any purpose
under this Indenture.

      Members of or participants in the Depositary shall have no rights under
this Indenture with respect to any global Debenture held on their behalf by the
Depositary, and such Depositary or its nominee, as the case may be, may be
treated by the Company, the Trustee, and any agent of the Company or the Trustee
as the Holder of such global Debentures for all purposes whatsoever.
Notwithstanding the foregoing, nothing herein shall prevent the Company, the
Trustee, or any agent of the Company or the Trustee, from giving effect to any
written certification proxy or other authorization furnished by the Depositary
or impair, as between the Depositary and its members or participants, the
operation of customary practices governing exercise of the rights of a Holder of
any Debenture, including without limitation the granting of proxies or other
authorization of participants to give or take any request, demand,
authorization, direction, notice, consent, waiver or other action which a Holder
is entitled to give or take under this Indenture.

      2.13 Cancellation.

      All Debentures surrendered for payment, redemption by the Company pursuant
to Article 3 hereof or registration of transfer or exchange shall, if
surrendered to any Person other than the Trustee, be delivered to the Trustee
and shall be promptly canceled by the Trustee. The Company may at any time
deliver to the Trustee for cancellation any Debentures previously authenticated
and made available for delivery hereunder which the Company may have acquired in
any manner whatsoever, and all Debentures so delivered shall be promptly
canceled by the Trustee. The Company may not reissue or issue new Debentures to
replace Debentures it has


                                       18


paid or delivered to the Trustee for cancellation. No Debentures shall be
authenticated in lieu of or in exchange for any Debentures canceled as provided
in this Section 2.13, except as expressly permitted by this Indenture. All
canceled Debentures held by the Trustee shall be disposed of in accordance with
its customary procedures.

                                   ARTICLE 3
                                   REDEMPTION

      3.01 Redemption: Notice to Trustee.

      (a) The Series D Debentures are subject to redemption prior to maturity as
provided therein.

      (b) The redemption terms for any additional series of Debentures shall be
as specified therein or in the supplemental indenture creating such series of
Debentures.

      (c) If any or all of the Debentures are to be redeemed pursuant to Section
3.01 (a) or (b) hereof, the Company shall deliver to the Trustee at least 45
days prior to the Redemption Date a Company Order specifying the series and
principal amount of Debentures to be redeemed and the Redemption Date and
Redemption Price for such Debentures. Such Company Order shall be accompanied by
a Board Resolution authorizing such redemption. If the Debentures of a series
are held by a Trust, the Company shall also deliver a copy of such Company Order
to the Property Trustee for such Trust.

      3.02 Selection of Debentures to be Redeemed.

      If less than all the outstanding Debentures of a series are to be redeemed
at any time, the Trustee shall select the Debentures of such series to be
redeemed by lot or by any other method the Trustee considers fair and
appropriate. The Trustee shall make the selection at least 30 but not more than
60 days before the Redemption Date from outstanding Debentures of such series
not previously called for redemption. Provisions of this Indenture that apply to
Debentures called for redemption also apply to portions of Debentures called for
redemption. The Trustee shall notify the Company promptly of the Debentures or
portions of Debentures to be redeemed.

      3.03 Notice of Redemption.

      At least 30 days but not more than 60 days before the Redemption Date, the
Trustee, in the Company's name and at the Company's expense, shall mail or cause
to be mailed a notice of redemption by first-class mail, postage prepaid, to
each Holder of Debentures to be redeemed at such Holder's last address as it
appears in the Register.

      The notice of redemption shall identify the Debentures to be redeemed,
including its CUSIP number (if applicable), the provision of the Debentures or
this Indenture pursuant to which the Debentures called for redemption are being
redeemed and shall state:


                                       19


      (1) the Redemption Date;

      (2) the Redemption Price;

      (3) the name and address of the Paying Agent;

      (4) that payment of the Redemption Price of Debentures called for
redemption will be made only upon surrender of such Debentures to the Paying
Agent;

      (5) if fewer than all the outstanding Debentures of any series are to be
redeemed, the identification and principal amounts of the particular Debentures
to be redeemed and that, on and after the Redemption Date, upon surrender of
such Debentures, a new Debenture or Debentures of the same series and of like
tenor and in a principal amount equal to the unredeemed portion thereof will be
issued; and

      (6) that, unless the Company defaults in paying the Redemption Price of
the Debentures called for redemption, plus accrued interest thereon to the
Redemption Date, interest will cease to accrue on such Debentures on and after
the Redemption Date.

      Any notice of redemption given in the manner provided herein shall be
conclusively presumed to have been given, whether or not such notice is actually
received. Failure to mail any notice or defect in the mailed notice or the
mailing thereof in respect of any Debenture shall not affect the validity of the
redemption of any other Debenture.

      3.04 Effect of Notice of Redemption.

      After notice of redemption has been given, Debentures called for
redemption shall become due and payable on the Redemption Date and at the
Redemption Price and from and after the Redemption Date (unless the Company
shall default in the payment of the Redemption Price and accrued interest), such
Debentures shall cease to bear interest. Upon the later of the Redemption Date
and the date such Debentures are surrendered to the Paying Agent, such
Debentures shall be paid at the Redemption Price, plus accrued interest to the
Redemption Date, provided that installments of interest on Debentures with an
Interest Payment Date which is on or prior to the Redemption Date shall be
payable to the Holders of such Debentures, or one or more Predecessor
Debentures, registered as such at the close of business on the Regular Record
Dates therefor according to their terms and provisions.

      3.05 Deposit of Redemption Price.

      Prior to 10:00 a.m. the Redemption Date, the Company shall deposit with
the Paying Agent (or if the Company or an Affiliate is the Paying Agent, shall
segregate and hold in trust or cause such Affiliate to segregate and hold in
trust) money sufficient to pay the Redemption Price of, and accrued interest on,
all Debentures to be redeemed on that Redemption Date. The Paying Agent shall
return to the Company any money in excess of the amount sufficient to pay the
Redemption Price of, and accrued interest on, all Debentures to be redeemed and
any interest accrued on the amount deposited pursuant to this Section 3.05.


                                       20


      3.06 Debentures Redeemed in Part.

      Upon surrender of a Debenture that is redeemed in part, the Trustee shall
authenticate for the Holder a new Debenture of the same series and in a
principal amount equal to the unredeemed portion of such Debenture.

                                    ARTICLE 4
                                    COVENANTS

      4.01 Payment of Debentures.

      (a) The Company shall pay the principal of and premium, if any, and
interest (including interest accruing during an Extension Period and/or on or
after the filing of a petition in bankruptcy or reorganization relating to the
Company, whether or not a claim for post-filing interest is allowed in such
proceeding) on the Debentures on or prior to the dates and in the manner
provided in such Debentures or pursuant to this Indenture. An installment of
principal, premium, if any, or interest shall be considered paid on the
applicable due date if on such date the Trustee or the Paying Agent holds, in
accordance with this Indenture, money sufficient to pay all of such installment
then due. With respect to any Debenture, the Company shall pay interest on
overdue principal and interest on overdue installments of interest (including
interest accruing during an Extension Period and/or on or after the filing of a
petition in bankruptcy or reorganization relating to the Company, whether or not
a claim for post-filing interest is allowed in such proceeding), to the extent
lawful, at the rate per annum borne by such Debenture, compounded quarterly.
Interest on overdue interest shall accrue from the date such amounts become
overdue.

      (b) Notwithstanding the provisions of Section 4.01(a) hereof or any other
provision herein to the contrary, the Company shall have the right in its sole
and absolute discretion at any time and from time to time while the Debentures
of any series are outstanding, so long as no Event of Default with respect to
such series of Debentures has occurred and is continuing, to defer payments of
interest by extending the interest payment period for such series of Debentures
for the Extension Period, if any, for such series of Debentures, provided that
such Extension Period shall not extend beyond the Stated Maturity Date or
Redemption Date of any Debenture of such series, and provided further that at
the end of each Extension Period the Company shall pay all interest then accrued
and unpaid (together with interest thereon to the extent permitted by applicable
law at the rate per annum then borne by such Debentures). Prior to the
termination of an Extension Period, the Company may shorten or may further
extend the interest payment period for such series of Debentures, provided that
such Extension Period together with all such previous and further extensions may
not exceed the maximum duration of the Extension Period for such series of
Debentures or extend beyond the Stated Maturity Date or Redemption Date of any
Debenture of such series. The Company shall give the Trustee notice of the
Company's election to begin an Extension Period for any series of Debentures and
any shortening or extension thereof at least one Business Day prior to the date
the notice of the record or payment date of the related distribution on the
Preferred Securities issued by the Trust which is the Holder of the Debentures
of such series or the date payment of interest on such Debentures is required to
be given to any national securities exchange on which such Preferred Securities
or Debentures are then listed or other applicable self-regulatory organization,
but in


                                       21


any event not less than two Business Days prior to the Record Date fixed by the
Company for the payment of such interest. The Company shall give or cause the
Trustee to give notice (a form of which shall be provided by the Company to the
Trustee) of the Company's election to begin an Extension Period to the Holders
by first class mail, postage prepaid.

      4.02 Prohibition Against Dividends. etc.

      The Company shall not declare or pay any dividend on, or redeem, purchase,
acquire or make a liquidation payment with respect to, any of its Capital Stock
(i) during an Extension Period, (ii) if at such time there shall have occurred
and is continuing any Default or Event of Default, or (iii) if the Company shall
be in default with respect to its payment or other obligations under any
Guarantee Agreement.

      4.03 SEC Reports.

      The Company shall file with the Trustee, within 15 days after it files
them with the SEC, copies of its annual report and of the information, documents
and other reports (or copies of such portions of any of the foregoing as the SEC
may by rules and regulations prescribe) which the Company is required to file
with the SEC pursuant to Section 13 or 15(d) of the Exchange Act. If the Company
is not subject to the reporting requirements of Section 13 or 15(d) of the
Exchange Act, the Company shall file with the Trustee such information,
documents and other reports (or copies of such portions of any of the foregoing
as the SEC may by rules and regulations prescribe) which are specified in
Sections 13 or 15(d) of the Exchange Act. The Company shall also comply with the
provisions of Section 314(a) of the TIA. Delivery of such reports, information
and documents to the Trustee is for informational purposes only and the
Trustee's receipt of such shall not constitute constructive notice of any
information contained therein or determinable from information contained
therein, including the Company's compliance with any of its covenants hereunder
(as to which the Trustee is entitled to conclusively rely exclusively on
Officer's Certificates).

      4.04 Compliance Certificates.

      (a) The Company shall deliver to the Trustee, within 90 days after the end
of each of the Company's fiscal years, an Officer's Certificate stating whether
or not the signer knows of any Default or Event of Default. Such certificate
shall contain a certification from the principal executive officer, principal
financial officer or principal accounting officer of the Company as to his or
her knowledge of the Company's compliance with all conditions and covenants
under this Indenture. For purposes of this Section 4.04(a), such compliance
shall be determined without regard to any period of grace or requirement of
notice provided under this Indenture. If such Officer does know of such a
Default or Event of Default, the Officer's Certificate shall describe any such
Default or Event of Default, and its status. Such Officer's Certificate need not
comply with Sections 11.04 and 11.05 hereof.

      (b) The Company shall deliver to the Trustee any information reasonably
requested by the Trustee in connection with the compliance by the Trustee or the
Company with the TIA.


                                       22


      4.05 Further Instruments and Acts.

      Upon request of the Trustee, the Company shall execute and deliver such
further instruments and do such further acts as may be reasonably necessary or
proper to carry out more effectively the purposes of this Indenture.

      4.06 Payments for Consents.

      Neither the Company nor any Subsidiary shall, directly or indirectly, pay
or cause to be paid any consideration, whether by way of interest, fee or
otherwise, to any Holder of any Debentures for or as an inducement to any
consent, waiver or amendment of any of the terms or provisions of this Indenture
or the Debentures unless such consideration is offered to be paid or agreed to
be paid to all Holders of the Debentures who so consent, waive or agree to amend
in the time frame set forth in the documents soliciting such consent, waiver or
agreement.

      4.07 Payment of Expenses of Trusts.

      The Company covenants for the benefit of the Holders of the Debentures to
pay all of the obligations, costs and expenses of the applicable Trust in
accordance with the applicable Trust agreement and to pay the taxes of such
Trust in accordance with such Trust agreement in order to permit such Trust to
make distributions on and redemptions of its Preferred Securities in accordance
with their terms.

                                    ARTICLE 5
                              SUCCESSOR CORPORATION

      5.01 When the Company May Merge, Etc.

      The Company may not consolidate with or merge with or into, or sell,
convey, transfer or lease its properties and assets as an entirety or
substantially as an entirety (either in one transaction or a series of
transactions) to, any Person unless:

      (1) the Person formed by or surviving such consolidation or merger or to
which such sale, conveyance, transfer or lease shall have been made (the
"Successor") if other than the Company (a) is a corporation organized and
existing under the laws of the United States of America or any State thereof or
the District of Columbia, and (b) shall expressly assume by a supplemental
indenture, executed and delivered to the Trustee, in form satisfactory to the
Trustee, all the obligations of the Company under the Debentures and the
Indenture;

      (2) immediately prior to and after giving effect to such transaction (and
treating any Indebtedness which becomes an obligation of the Successor Person or
any Subsidiary as a result of such transaction as having been incurred by such
Person or such Subsidiary at the time of such transaction), no Default or Event
of Default shall have occurred and be continuing; and


                                       23


      (3) the Company delivers to the Trustee an Officer's Certificate and an
Opinion of Counsel, each stating that such consolidation, merger, sale,
conveyance, transfer or lease and such supplemental indenture comply with this
Indenture.

      The Successor will be the successor to the Company, and will be
substituted for, and may exercise every right and power and become the obligor
on the Debentures with the same effect as if the Successor had been named as the
Company herein but, in the case of a sale, conveyance, transfer or lease of all
or substantially all of the assets of the Company, the predecessor Company will
not be released from its obligation to pay the principal of and premium, if any,
and interest on the Debentures.

                                    ARTICLE 6
                             DEFAULTS AND REMEDIES

      6.01 Events of Default.

      An "Event of Default" occurs with respect to the Debentures of any series
if one of the following shall have occurred and be continuing:

      (1) The Company defaults in the payment, when due and payable, of (a)
interest on any Debenture of that series and the default continues for a period
of 30 days; provided, that during an Extension Period for the Debentures of that
series, failure to pay interest on the Debentures of that series shall not
constitute a Default or Event of Default hereunder, or (b) the principal of or
premium, if any, on any Debentures of that series when the same becomes due and
payable on the Stated Maturity Date thereof, upon acceleration, on any
Redemption Date, or otherwise;

      (2) The Company defaults in the performance of or fails to comply with any
of its other covenants or agreements in the Debentures of that series or this
Indenture or in any supplemental indenture under which the Debentures of that
series may have been issued and such failure continues for 60 days after receipt
by the Company of a "Notice of Default";

      (3) The Company, pursuant to or within the meaning of any Bankruptcy Law:

            (a)   commences a voluntary case or proceeding;

            (b)   consents to the entry of an order for relief against it in an
                  involuntary case or proceeding;

            (c)   consents to the appointment of a Custodian of it or for all or
                  substantially all of its property, and such Custodian is not
                  discharged within 60 days;

            (d)   makes a general assignment for the benefit of its creditors;
                  or


                                       24


            (e)   admits in writing its inability to pay its debts generally as
                  they become due; or

      (4) A court of competent jurisdiction enters an order or decree under any
Bankruptcy Law that:

            (a)   is for relief against the Company in an involuntary case or
                  proceeding;

            (b)   appoints a Custodian of the Company for all or substantially
                  all of its properties;

            (c)   orders the liquidation of the Company;

            (d)   and in each case the order or decree remains unstayed and in
                  effect for 60 days.

      The foregoing will constitute an Event of Default whatever the reason for
any such Event of Default and whether it is voluntary or involuntary or is
effected by operation of law or pursuant to any judgment, decree or order of any
court or any order, rule or regulation of any administrative or governmental
body.

      The term "Bankruptcy Law" means Title 11 of the United States Code, or any
similar federal or state law for the relief of debtors. "Custodian" means any
receiver, trustee, assignee, liquidator, sequestrator, custodian or similar
official under any Bankruptcy Law.

      A Default under clause (2) above is not an Event of Default until (i) the
Trustee provides a "Notice of Default" to the Company or the Holders of at least
25% in aggregate principal amount of the Debentures of that series at the time
outstanding or, if that series of Debentures is held by a Trust, the holders of
at least 25% in aggregate liquidation amount of the outstanding Preferred
Securities of that Trust provide a "Notice of Default" to the Company and the
Trustee and (ii) the Company does not cure such Default within the time
specified in clause (2) above after receipt of such notice. Any such notice must
specify the Default, demand that it be remedied and state that such notice is a
"Notice of Default."

      6.02 Acceleration.

      If any Event of Default with respect to the Debentures of any series other
than an Event of Default under clause (3) or (4) of Section 6.01 hereof occurs
and is continuing, the Trustee or the Holders of at least 25% in aggregate
principal amount of the Debentures of that series then outstanding may declare
the principal of all the Debentures of that series due and payable, provided
that in the case of a series of Debentures then held by a Trust, if upon an
Event of Default with respect to the Debentures of that series the Trustee has
or the Holders of at least 25% in aggregate principal amount of the Debentures
of that series have failed to declare the principal of the Debentures of that
series to be immediately due and payable, the holders of at least 25% in
aggregate liquidation amount of the outstanding Preferred Securities of that
Trust shall have such right by a notice in writing to the Company and the
Trustee. If an Event of


                                       25


Default specified in clause (3) or (4) of Section 6.01 hereof occurs, the
principal of and interest on all the Debentures shall ipso facto become and be
immediately due and payable without any declaration or other act on the part of
the Trustee or any Debentureholders. Upon such an acceleration, such principal,
together with all interest accrued thereon, shall be due and payable
immediately.

      The Holders of a majority in aggregate principal amount of the Debentures
of that series at the time outstanding, in each case, by notice to the Trustee,
may rescind such an acceleration and its consequences if the rescission would
not conflict with any judgment or decree and if all existing Events of Default
with respect to such series of Debentures have been cured or waived except
nonpayment of principal or interest that has become due solely because of
acceleration, provided that if the principal of a series of Debentures has been
declared due and payable by the holders of the Preferred Series of a Trust, no
rescission of acceleration will be effective unless consented to by the holders
of a majority in aggregate liquidation amount of the Preferred Securities of
that Trust. No such rescission shall affect any subsequent Default or impair any
right consequent thereto.

      6.03 Other Remedies.

      If an Event of Default occurs and is continuing, the Trustee may, in its
own name or as trustee of an express trust, institute, pursue and prosecute any
proceeding, including, without limitation, any action at law or suit in equity
or other judicial or administrative proceeding to collect the payment of
principal of or premium, if any, or interest on the Debentures of the series
that is in default, to enforce the performance of any provision of the
Debentures of that series or this Indenture or to obtain any other available
remedy.

      The Trustee may maintain a proceeding even if it does not possess any of
the Debentures or does not produce any of the Debentures in the proceeding. A
delay or omission by the Trustee, any Debentureholder or the holders of
Preferred Securities in exercising any right or remedy accruing upon an Event of
Default shall not impair such right or remedy or constitute a waiver of, or
acquiescence in, such Event of Default. No remedy is exclusive of any other
remedy. All available remedies are cumulative.

      6.04 Waiver of Past Defaults.

      If a Default or Event of Default with respect to a series of Debentures
has occurred and is continuing, the Holders of a majority in aggregate principal
amount of the Debentures of that series at the time outstanding, or, if that
series of Debentures is held by a Trust, the holders of a majority in aggregate
liquidation amount of the Preferred Securities of that Trust, in each case by
notice to the Trustee and the Company, may waive an existing Default or Event of
Default and its consequences except a Default or Event of Default in the payment
of the principal of or premium, if any, or interest on any Debenture of that
series. When a Default or Event of Default is waived, it is deemed cured and
shall cease to exist, but no such waiver shall extend to any subsequent or other
Default or Event of Default or impair any consequent right.


                                       26


      6.05 Control by Majority.

      The Holders of a majority in aggregate principal amount of the Debentures
of each series affected or, if that series of Debentures is held by a Trust, the
holders of a majority in aggregate liquidation amount of the Preferred
Securities of that Trust, may direct the time, method and place of conducting
any proceeding for any remedy available to the Trustee or of exercising any
trust or power conferred on the Trustee. However, the Trustee may refuse to
follow any direction that conflicts with law or this Indenture or that the
Trustee determines in good faith is unduly prejudicial to the rights of other
Debentureholders or may involve the Trustee in personal liability. The Trustee
may take any other action deemed proper by the Trustee which is not inconsistent
with such direction, including withholding notice to the Holders of the
Debentures of continuing default (except in the payment of the principal of
(other than any mandatory sinking fund payment) or premium, if any, or interest
on any Debentures) if the Trustee considers it in the interest of the Holders of
the Debentures to do so.

      6.06 Limitation on Suits.

      Except as provided in Section 6.07 hereof, no holder of Debentures or
holder of Preferred Securities of the Trust which is the Holder of that series
of Debentures may pursue any remedy with respect to this Indenture or the
Debentures unless:

      (1) the Holders of Debentures or the holders of such Preferred Securities
give to the Trustee written notice stating that an Event of Default with respect
to the corresponding Debentures is continuing;

      (2) the Holders of at least 25% in aggregate principal amount of the
Debentures of that series or the holders of at least 25% in aggregate
liquidation amount of such Preferred Securities make a written request to the
Trustee to pursue a remedy;

      (3) the Holders of Debentures or the holders of such Preferred Securities
provide to the Trustee reasonable security and indemnity against any loss,
liability or expense satisfactory to the Trustee;

      (4) the Trustee does not comply with the request within 60 days after
receipt of the notice, the request and the offer of security and indemnity; and
(5) during such 60 day period, the Holders of a majority in aggregate principal
amount of the Debentures of that series or the holders of a majority in
aggregate liquidation amount of such Preferred Securities do not give the
Trustee a direction inconsistent with the request.

      A Holder of Debentures or a holder of Preferred Securities may not use
this Indenture to prejudice the rights of another Debentureholder or a holder of
Preferred Securities or to obtain a preference or priority over another
Debentureholder or holder of Preferred Securities.


                                       27


      6.07 Rights of Holders to Receive Payment.

      Notwithstanding any other provision of this Indenture, the right of any
Holder to receive payment of the principal of and premium (if any) or interest
on the Debentures held by such Holder, on or after the respective due dates
expressed in the Debentures (in the case of interest, as the same may be
extended pursuant to Section 4.01(b) hereof) or any Redemption Date, is absolute
and unconditional and such right and the right to bring suit for the enforcement
of any such payment on or after such respective dates shall not be impaired or
affected adversely without the consent of such Holder. If the Debentures of a
series are then held by a Trust, each holder of Preferred Securities of such
Trust shall have the right to bring suit for the enforcement of any payment due
in respect of Debentures of such series based on a principal amount thereof
equal to the aggregate liquidation amount of the Preferred Securities of such
holder.

      6.08 Collection Suit by the Trustee.

      If an Event of Default described in Section 6.01(1) hereof occurs and is
continuing, the Trustee may recover judgment in its own name and as trustee of
an express trust against the Company or any obligor on the Debentures for the
whole amount owing with respect to the Debentures and the amounts provided for
in Section 7.07 hereof.

      6.09 The Trustee May File Proofs of Claim.

      In case of the pendency of any receivership, insolvency, liquidation,
bankruptcy, reorganization, arrangement, adjustment, composition or other
judicial proceeding relative to the Company or its properties or assets, the
Trustee shall be entitled and empowered, by intervention in such proceeding or
otherwise:

      (1) to file and prove a claim for the whole amount of the principal of and
premium, if any, and interest on the Debentures and to file such other papers or
documents as may be necessary or advisable in order to have the claims of the
Trustee (including any claim for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel) and of the
Holders allowed in such judicial proceeding; and

      (2) to collect and receive any moneys or other property payable or
deliverable on any such claims and to distribute the same; and any Custodian in
any such judicial proceeding is hereby authorized by each Holder to make such
payments to the Trustee and, in the event that the Trustee shall consent to the
making of such payments directly to the Holders, to pay the Trustee any amount
due it for the reasonable compensation, expenses, disbursements and advances of
the Trustee, its agents and counsel, and any other amounts due the Trustee under
Section 7.07 hereof.

      Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Holder any plan of
reorganization, arrangement, adjustment or composition affecting the Debentures
or the rights of any Holder thereof, or to authorize the Trustee to vote in
respect of the claim of any Holder in any such proceeding.


                                       28


      6.10 Priorities.

      If the Trustee collects any money pursuant to this Article 6 with respect
to a series of Debentures, it shall, subject to Article 10 hereof (to the extent
that Article 10 hereof is applicable to such series), pay out the money in the
following order:

    First:  to the Trustee for amounts due under Section 7.07 hereof;

    Second: to Holders of Debentures of the particular series in respect of
            which or
            for the benefit of which such money has been collected for amounts
            due and unpaid on such Debentures for the principal amount,
            Redemption Price or interest, if any, as the case may be, ratably,
            without preference or priority of any kind, according to such
            amounts due and payable on such Debentures; and

    Third:  the balance, if any, to the Company.

      Except as otherwise set forth in the Debentures, the Trustee may fix a
Record Date and payment date for any payment to Debentureholders pursuant to
this Section 6.10.

      6.11 Undertaking for Costs.

      In any suit for the enforcement of any right or remedy under this
Indenture or in any suit against the Trustee for any action taken or omitted by
it as Trustee, a court in its discretion may require the filing by any party
litigant (other than the Trustee) in the suit of an undertaking to pay the costs
of the suit, and the court in its discretion may assess reasonable costs,
including reasonable attorneys' fees and expenses, against any party litigant in
the suit, having due regard to the merits and good faith of the claims or
defenses made by the party litigant. This Section 6.11 does not apply to a suit
by the Trustee, a suit by a Holder of Debentures or holder of Preferred
Securities pursuant to Section 6.07 hereof or a suit by Holders of Debentures of
more than 10% in aggregate principal amount of the Debentures of any series or,
if a series of Debentures is held by a Trust, the holders of more than 10% in
aggregate liquidation amount of the Preferred Securities of that Trust.

      6.12 Waiver of Stay; Extension or Usury Laws.

      The Company covenants (to the extent that it may lawfully do so) that it
will not at any time insist upon, or plead or in any manner whatsoever claim or
take the benefit or advantage of, any stay or extension law or any usury or
other law wherever enacted, now or at any time hereafter in force, that would
prohibit or forgive the Company from paying all or any portion of the principal
of or premium, if any, or interest on the Debentures as contemplated herein or
affect the covenants or the performance by the Company of its obligations under
this Indenture; and the Company (to the extent that it may lawfully do so)
hereby expressly waives all benefit or advantage of any such law, and covenants
that it will not hinder, delay or impede the execution of any power herein
granted to the Trustee, but will suffer and permit the execution of every such
power as though no such law had been enacted.


                                       29


                                    ARTICLE 7
                                   THE TRUSTEE

      7.01 Duties of the Trustee.

      (a) If an Event of Default occurs and is continuing with respect to the
Debentures of any series, the Trustee shall exercise the rights and powers
vested in it by this Indenture with respect to that series and use the same
degree of care and skill in its exercise as a prudent man would exercise or use
under the circumstances in the conduct of his own affairs.

      (b) Except during the continuance of an Event of Default with respect to
the Debentures of any series, (i) the Trustee need perform only those duties
with respect to that series that are specifically set forth in this Indenture or
the TIA and no implied covenants or obligations shall be read into the Indenture
against the Trustee; and (ii) in the absence of bad faith on its part, the
Trustee may conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon certificates or opinions
furnished to the Trustee and conforming to the requirements of this Indenture.
However, in the case of any certificates or opinions which by any provision
hereof are specifically required to be furnished to the Trustee, the Trustee
shall examine the certificates and opinions to determine whether or not they
conform to the requirements of this Indenture.

      (c) The Trustee may not be relieved from liability for its own negligent
action, its own negligent failure to act or its own willful misconduct, except
that:

            (i) this Section 7.01(c) does not limit the effect of Section
            7.01(b) hereof;

            (ii) the Trustee shall not be liable for any error of judgment made
            in good faith by a Responsible Officer unless it is proved that the
            Trustee was negligent in ascertaining the pertinent facts; and

            (iii) the Trustee shall not be liable with respect to any action it
            takes or omits to take in good faith in accordance with a direction
            received by it pursuant to Section 6.05 hereof.

      (d) Every provision of this Indenture that in any way relates to the
Trustee is subject to Section 7.01(a), (b), (c) and (e) and Section 7.02 hereof.

      (e) The Trustee may refuse to perform any duty or exercise any right or
power or extend or risk its own funds or otherwise incur any financial liability
unless it receives security and indemnity reasonably satisfactory to it against
any loss, liability or expense (including reasonable counsel fees).

      (f) Money held by the Trustee in trust hereunder need not be segregated
from other funds except to the extent required by law. Except as otherwise
provided in Section 3.05 and Section 8.01 hereof, the Trustee shall not be
liable for interest on any money held by it hereunder.


                                       30


      7.02 Rights of the Trustee.

      (a) The Trustee may conclusively rely on any document believed by it to be
genuine and to have been signed or presented by the proper person. The Trustee
need not investigate any fact or matter stated in the document.

      (b) Before the Trustee acts or refrains from acting, it may require an
Officer's Certificate and, if appropriate, an Opinion of Counsel. The Trustee
shall not be liable for any action it takes or omits to take in good faith in
reliance on such Officer's Certificate and Opinion of Counsel.

      (c) The Trustee may act through agents and shall not be responsible for
the misconduct or negligence of any agent appointed with due care.

      (d) The Trustee shall not be liable for any action it takes or omits to
take in good faith which it reasonably believes to be authorized or within its
rights or powers.

      (e) The Trustee may consult with counsel of its selection and the advice
of such counsel or any Opinion of Counsel shall be full and complete
authorization and protection in respect of any action taken, suffered or omitted
by it hereunder in good faith and in reliance thereon.

      (f) The Trustee shall be under no obligation to exercise any of the rights
or powers vested in it by this Indenture at the request or direction of any of
the Holders pursuant to this Indenture, unless such Holders shall have offered
to the Trustee reasonable security and indemnity against the costs, expenses and
liabilities (including reasonable counsel fees) which might be incurred by it in
compliance with such request or direction.

      (g) The Trustee shall not be bound to make any investigation into the
facts or matters stated in any resolution, certificate, statement, instrument,
opinion, report, notice, request, direction, consent, order, bond, debenture,
note, other evidence of indebtedness or other paper or document, but the
Trustee, in its discretion, may make such further inquiry or investigation into
such facts or matters as it may see fit, and, if the Trustee shall determine to
make such further inquiry or investigation, it shall be entitled to examine the
books, records and premises of the Company, personally or by agent or attorney
at the sole cost of the Company and shall incur no liability or additional
liability of any kind by reason of such inquiry or investigation.

      (h) The Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents or
attorneys and the Trustee shall not be responsible for any misconduct or
negligence on the part of any agent or attorney appointed with due care by it
hereunder.

      (i) The Trustee shall not be deemed to have notice of any Default or Event
of Default unless a Responsible Officer of the Trustee has actual knowledge
thereof or unless written notice of any event which is in fact such a default is
received by the Trustee at the


                                       31


Corporate Trust Office of the Trustee, and such notice references the Securities
and this Indenture.

      (j) The rights, privileges, protections, immunities and benefits given to
the Trustee, including, without limitation, its right to be indemnified, are
extended to, and shall be enforceable by, the Trustee in each of its capacities
hereunder, and each agent, custodian and other Person employed to act hereunder.

      (k) The Trustee may request that the Company deliver an Officers'
Certificate setting forth the names of individuals and/or titles of officers
authorized at such time to take specified actions pursuant to this Indenture,
which Officers' Certificate may be signed by any person authorized to sign an
Officers' Certificate, including any person specified as so authorized in any
such certificate previously delivered and not superseded.

      7.03 Individual Rights of the Trustee.

      The Trustee in its individual or any other capacity may become the owner
or pledgee of Debentures and may otherwise deal with the Company or its
Affiliates with the same rights it would have if it were not Trustee. Any Paying
Agent, Registrar or co-registrar may do the same with like rights. However, the
Trustee must comply with Sections 7.10 and 7.11 hereof.

      7.04 The Trustee's Disclaimer.

      The Trustee makes no representation as to the validity or adequacy of this
Indenture or the Debentures. The Trustee shall not be accountable for the
Company's use of the proceeds from the Debentures, and the Trustee shall not be
responsible for any statement in this Indenture or the Debentures or any report
or certificate issued by the Company hereunder or any registration statement
relating to the Debentures (other than the Trustee's Certificate of
Authentication and the Trustee's Statement of Eligibility on Form T-1), or the
determination as to which beneficial owners are entitled to receive any notices
hereunder.

      7.05 Notice of Defaults.

      If a Default occurs and is continuing with respect to the Debentures of
any series and if it is known to the Trustee, the Trustee shall mail to each
Holder of a Debenture of that series notice of the Default within 90 days after
it becomes known to the Trustee unless such Default shall have been cured or
waived. Except in the case of a Default described in Section 6.01(1) hereof, the
Trustee may withhold such notice if and so long as a committee of its Trust
Officers in good faith determines that the withholding of such notice is in the
interests of the Holders of the Debentures of that series. The Trustee shall not
be charged with knowledge of any Default (except in the case of a Default under
Section 6.01(1) hereof) unless a Responsible Officer assigned to the Corporate
Trust Department of the Trustee shall have actual knowledge of the Default. The
second sentence of this Section 7.05 shall be in lieu of the proviso to TIA
Section 315(b). Said proviso is hereby expressly excluded from this Indenture,
as permitted by the TIA.


                                       32


      7.06 Reports by Trustee to Holders. Within 60 days after each May 31,
beginning with the May 31 next following the date of this Indenture, the Trustee
shall mail to each Debentureholder, and such other holders that have submitted
their names to the Trustee for such purpose, a brief report dated as of such May
31 in accordance with and to the extent required under TIA Section 313.

      A copy of each report at the time of its mailing to Debentureholders shall
be filed with the Company, the SEC and any securities exchange on which the
Debentures are listed. The Company agrees to promptly notify the Trustee
whenever the Debentures become listed on any securities exchange and of any
listing thereof.

      7.07 Compensation and Indemnity.

      The Company agrees:

      (1) to pay to the Trustee from time to time such compensation as shall be
agreed in writing between the Company and the Trustee for all services rendered
by it hereunder (which compensation shall not be limited by any provision of law
in regard to the compensation of a trustee of an express trust);

      (2) to reimburse the Trustee upon its request for reasonable expenses,
disbursements and advances incurred or made by the Trustee in accordance with
any provision of this Indenture (including the reasonable compensation and the
expenses, and advances of its agents and counsel, provided that prior to any
Event of Default, the Trustee shall only have one counsel), including all
reasonable expenses and advances incurred or made by the Trustee in connection
with any Event of Default or any membership on any creditors' committee, except
any such expense or advance as may be attributable to its negligence or bad
faith; and

      (3) to indemnify the Trustee, its officers, directors and shareholders,
for, and to hold it harmless against, any and all loss, liability or expense,
including taxes (other than taxes based upon the income of the Trustee),
incurred without negligence or willful misconduct on its part, arising out of or
in connection with the acceptance or administration of this trust, including the
costs and expenses of defending itself against any claim (whether asserted by
the Company, any Holder or any other person) or liability in connection with the
exercise or performance of any of its powers or duties hereunder.

      Before, after or during an Event of Default with respect to the Debentures
of a series, the Trustee shall have a claim and lien prior to the Debentures of
that series as to all property and funds held by it hereunder for any amount
owing it for its fees and expenses or any predecessor Trustee pursuant to this
Section 7.07, except with respect to funds held by the Trustee or any Paying
Agent in trust for the payment of principal of or premium, if any, or interest
on particular Debentures pursuant to Section 2.06 or Section 8.01 hereof.

      The Company's obligations pursuant to this Section 7.07 are not subject to
Article 10 of this Indenture (regardless of the applicability of such Article to
a series of Debentures) and shall survive the discharge of this Indenture and
the removal or resignation of the Trustee. When


                                       33


the Trustee renders services or incurs expenses after the occurrence of a
Default specified in Section 6.01 hereof, the compensation for services and
expenses are intended to constitute expenses of administration under any
Bankruptcy Law.

      7.08 Replacement of Trustee.

      The Trustee may resign at any time, by so notifying the Company in writing
at least 30 days prior to the date of the proposed resignation; provided,
however, no such resignation shall be effective until a successor Trustee has
accepted its appointment pursuant to this Section 7.08. The Holders of at least
a majority in aggregate principal amount of the Debentures at the time
outstanding may remove the Trustee by so notifying the Trustee in writing and
may appoint a successor Trustee, which shall be subject to the consent of the
Company unless an Event of Default has occurred and is continuing. The Trustee
shall resign if:

      (1)   the Trustee fails to comply with Section 7.10 hereof;

      (2)   the Trustee is adjudged bankrupt or insolvent;

      (3)   a receiver or public officer takes charge of the Trustee or its
            property; or

      (4)   the Trustee otherwise becomes incapable of acting.

      If the Trustee resigns or is removed or if a vacancy exists in the office
of Trustee for any reason, the Company shall promptly appoint a successor
Trustee. A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Thereupon the
resignation or removal of the retiring Trustee shall become effective, and the
successor Trustee shall have all the rights, powers and duties of the Trustee
under this Indenture. The successor Trustee shall mail a notice of its
succession to Debentureholders. Subject to payment of all amounts owing to the
Trustee under Section 7.07 hereof and subject further to its lien under Section
7.07, the retiring Trustee shall promptly transfer all property held by it as
Trustee to the successor Trustee. If a successor Trustee does not take office
within 30 days after the retiring Trustee resigns or is removed, the retiring
Trustee (at the expense of the Company), the Company or the Holders of at least
a majority in aggregate principal amount of the Debentures at the time
outstanding may petition any court of competent jurisdiction for the appointment
of a successor Trustee.

      If the Trustee fails to comply with Section 7.10 hereof, any
Debentureholder may petition any court of competent jurisdiction for its removal
and the appointment of a successor Trustee.

      7.09 Successor Trustee by Merger.

      If the Trustee consolidates with, merges or converts into, or transfers
all or substantially all its corporate trust business or assets to another
corporation, the resulting, surviving or transferee corporation without any
further act shall be the successor Trustee.


                                       34


      7.10 Eligibility: Disqualification.

      The Trustee shall at all times satisfy the requirements of TIA Sections
310(a)(1) and 310(a)(2). The Trustee (or any Affiliate thereof which has
unconditionally guaranteed the obligations of the Trustee hereunder) shall have
a combined capital and surplus of at least $50,000,000 as set forth in its most
recently published annual report of condition. The Trustee shall comply with TIA
Section 310(b). In determining whether the Trustee has conflicting interests as
defined in TIA Section 310(b)(1), the provisions contained in the proviso to TIA
Section 310(b)(1) and the Trustee's Statement of Eligibility on Form T-1 shall
be deemed incorporated herein.

      7.11 Preferential Collection of Claims Against the Company.

      If and when the Trustee shall be or become a creditor of the Company, the
Trustee shall be subject to the provisions of the TIA regarding the collection
of claims against the Company.

                                    ARTICLE 8
                    SATISFACTION AND DISCHARGE OF INDENTURE;
               DEFEASANCE OF CERTAIN OBLIGATIONS; UNCLAIMED MONEYS

      8.01 Satisfaction and Discharge of Indenture.

      The Company shall be deemed to have paid and discharged the entire
indebtedness on any series of the Debentures outstanding on the date the Company
has irrevocably deposited or caused to be irrevocably deposited with the Trustee
or any Paying Agent as trust funds in trust, specifically pledged as security
for, and dedicated solely to, the benefit of the Holders of the Debentures of
such series (1) cash (which may be held in an interest bearing account insured
by the Federal Deposit Insurance Corporation) in an amount, or (2) U.S.
Government Obligations, maturing as to principal and interest at such times and
in such amounts as will ensure the availability of cash, or (3) a combination
thereof, sufficient to pay the principal of and premium, if any, and interest on
all Debentures of such series then outstanding on the scheduled due dates
therefor, provided that the following conditions shall have been met:

            (A) no Default or Event of Default with respect to the Debentures of
            such series has occurred and is continuing on the date of such
            deposit or occurs as a result of such deposit;

            (B) the Company has delivered to the Trustee an Officer's
            Certificate certifying that there does not exist (i) a default in
            the payment of all or any portion of any Senior Indebtedness or (ii)
            any other default affecting Senior Indebtedness permitting its
            acceleration as the result of which the maturity of Senior
            Indebtedness has been accelerated;

            (C) the Company has delivered to the Trustee (i) either a private
            Internal Revenue Service ruling or an Opinion of Counsel to the
            effect that, based on a change in law occurring after the execution
            of this Indenture, the


                                       35


            Holders of the Debentures of such series will not recognize income,
            gain or loss for federal income tax purposes as a result of such
            deposit, defeasance and discharge and will be subject to federal
            income tax on the same amount and in the manner and at the same
            times as would have been the case if such deposit, defeasance and
            discharge had not occurred, and an Opinion of Counsel to the effect
            that (A) the deposit shall not result in the Company, the Trustee
            or, if the Debentures of such series are held by a Trust, such Trust
            being deemed to be an "investment company" under the Investment
            Company Act of 1940, as amended, and (B) such deposit creates a
            valid trust in which the Holders of the Debentures of such series
            have the sole beneficial interest or that the Holders of the
            Debentures of such series have a nonavoidable first priority
            security interest in such trust; and

            (D) the Company has delivered to the Trustee an Officer's
            Certificate and an Opinion of Counsel, each stating that all
            conditions precedent relating to the defeasance contemplated by this
            provision have been complied with.

Upon such deposit, provisions of this Indenture with respect to such series of
Debentures shall no longer be in effect (except as to (1) the rights of
registration of transfer and exchange of Debentures of such series, (2) the
replacement of apparently mutilated, defaced, destroyed, lost or stolen
Debentures of such series, (3) the rights of the Holders of the Debentures of
such series to receive payments of the principal thereof and premium, if any,
and interest thereon, (4) the rights of the Holders of the Debentures of such
series as beneficiaries hereof with respect to the property so deposited with
the Trustee payable to all or any of them, (5) the obligation of the Company to
maintain an office or agency for payments on and registration of transfer of the
Debentures of such series, (6) the rights, obligations and immunities of the
Trustee hereunder, and (7) the obligations of the Company to the Trustee for
compensation and indemnity under Section 7.07 hereof), and the Trustee shall, at
the request and expense of the Company, execute proper instruments acknowledging
the same.

      8.02 Application by Trustee of Funds Deposited for Payment of Debentures.

      Subject to Section 8.04 hereof, all moneys deposited with the Trustee
pursuant to Section 8.01 hereof shall be held in trust and applied by it to the
payment, either directly or through any Paying Agent (including the Company
acting as its own Paying Agent), to the Holders of the Debentures of the series
for the payment or redemption of which such moneys have been deposited with the
Trustee, of all sums due and to become due thereon for principal and interest;
but such money need not be segregated from other funds except to the extent
required by law.

      8.03 Repayment of Moneys Held by Paying Agent.

      In connection with the satisfaction and discharge of this Indenture, all
moneys then held by any Paying Agent under this Indenture shall, upon demand of
the Company, be


                                       36


repaid to it or paid to the Trustee, and thereupon such Paying Agent shall be
released from all further liability with respect to such moneys.

      8.04 Return of Moneys Held by the Trustee and Paying Agent Unclaimed for
Three Years.

      Any moneys deposited with or paid to the Trustee or any Paying Agent for
the payment of the principal of and premium, if any, or interest on the
Debentures of any series and not applied but remaining unclaimed for three years
after the date when such principal, premium, if any, or interest shall have
become due and payable shall, unless otherwise required by mandatory provisions
of applicable escheat or abandoned or unclaimed property law, be repaid to the
Company by the Trustee or such Paying Agent, and the Holders of such Debentures
shall, unless otherwise required by mandatory provisions of applicable escheat
or abandoned or unclaimed property laws, thereafter look only to the Company for
any payment which such Holder may be entitled to collect, and all liability of
the Trustee or any Paying Agent with respect to such moneys shall thereupon
cease.

                                    ARTICLE 9
                                   AMENDMENTS

      9.01 Without Consent of Holders.

      From time to time, when authorized by a resolution of the Board of
Directors, the Company and the Trustee, without notice to or the consent of any
Holders of the Debentures, may amend or supplement this Indenture:

      (1) to cure any ambiguity, defect or inconsistency;

      (2) to comply with Article 5 hereof;

      (3) to provide for uncertificated Debentures in addition to or in place of
certificated Debentures;

      (4) to make any other change that does not in the reasonable judgment of
the Company adversely affect the rights of any Debentureholder; provided that,
any amendment described in this clause (4) made solely to conform this Indenture
to the final prospectus provided to investors in connection with the initial
offering of the Preferred Securities will not be deemed to adversely affect the
rights of Debentureholders;

      (5) to comply with any requirement of the SEC in connection with the
qualification of this Indenture under the TIA;

      (6) to set forth the terms and conditions, which shall not be inconsistent
with this Indenture, of any series of Debentures (other than the Series D
Debentures) that are to be issued hereunder and the form of Debentures of such
series.


                                       37


      9.02 With Consent of Holders.

      The Company and the Trustee may amend this Indenture in any manner not
permitted by Section 9.01 or may waive future compliance by the Company with any
provisions of this Indenture with the consent of the Holders of a majority in
aggregate principal amount of the Debentures of each series affected thereby.
Such an amendment or waiver may not, without the consent of each Holder of the
Debentures affected thereby:

      (1) reduce the principal amount of such Debentures;

      (2) reduce the principal amount of such Debentures the Holders of which
must consent to an amendment of this Indenture or a waiver;

      (3) change the stated maturity of the principal of or the interest on or
rate of interest on such Debentures or the manner of calculation thereof;

      (4) change adversely to the Holders the redemption provisions of Article 3
hereof;

      (5) change the currency in respect of which the payments on such
Debentures are to be made;

      (6) to the extent Article 10 hereof is applicable to such Debentures, make
any change in Article 10 hereof that adversely affects the rights of the Holders
of such Debentures or any change to any other Section hereof that adversely
affects their rights under Article 10 hereof; or

      (7) change Section 6.07 hereof;

provided that, in the case of the outstanding Debentures of a series then held
by a Trust, no such amendment shall be made that adversely affects the holders
of the Preferred Securities of that Trust, and no waiver of any Event of Default
with respect to the Debentures of that series or compliance with any covenant
under this Indenture shall be effective, without the prior consent of the
holders of a majority of the aggregate liquidation amount of the outstanding
Preferred Securities of that Trust or the holder of each such Preferred
Security, as applicable.

      A supplemental indenture that changes or eliminates any covenant or other
provision of this Indenture that has expressly been included solely for the
benefit of one or more particular series of Debentures, or which modifies the
rights of the Holders of Debentures of such series with respect to such covenant
or other provision, shall be deemed not to affect the rights under this
Indenture of the Holders of Debentures of any other series.

      It shall not be necessary for the consent of the Holders of Debentures or
holders of Preferred Securities under this Section 9.02 to approve the
particular form of any proposed amendment, but it shall be sufficient if such
consent approves the substance thereof.


                                       38


      If certain Holders agree to defer or waive certain obligations of the
Company hereunder with respect to Debentures held by them, such deferral or
waiver shall not affect the rights of any other Holder to receive the payment or
performance required hereunder in a timely manner.

      After an amendment or waiver under this Section 9.02 becomes effective,
the Company shall mail to each Holder a notice briefly describing the amendment
or waiver. Any failure of the Company to mail such notices, or any defect
therein, shall not, however, in any way impair or affect the validity of such
amendment or waiver.

      9.03 Compliance with Trust Indenture Act.

      Every supplemental indenture executed pursuant to this Article 9 shall
comply with the TIA.

      9.04 Revocation and Effect of Consents; Waivers and Actions.

      Until an amendment, waiver or other action by Holders becomes effective, a
consent to it or any other action by a Holder of a Debenture hereunder is a
continuing consent by the Holder and every subsequent Holder of that Debenture
or portion of the Debenture that evidences the same obligation as the consenting
Holder's Debenture, even if notation of the consent, waiver or action is not
made on such Debenture. However, any such Holder or subsequent Holder may revoke
the consent, waiver or action as to such Holder's Debenture or portion of the
Debenture if the Trustee receives the notice of revocation before the consent of
the requisite aggregate principal amount of such Debentures then outstanding has
been obtained and not revoked. After an amendment, waiver or action becomes
effective, it shall bind every Holder of the Debentures of the related series,
except as provided in Section 9.02 hereof.

      The Company may, but shall not be obligated to, fix a Record Date for the
purpose of determining the Persons entitled to consent to any amendment or
waiver. If a Record Date is fixed, then, notwithstanding the first two sentences
of the immediately preceding paragraph, only Holders of Debentures or holders of
Preferred Securities, as applicable, on such Record Date or their duly
designated proxies, and only those Persons, shall be entitled to consent to such
amendment, supplement or waiver or to revoke any consent previously given,
whether or not such Persons continue to be such after such Record Date. No such
consent shall be valid or effective for more than 90 days after such Record
Date.

      9.05 Notation on or Exchange of Debentures.

      Debentures of the related series authenticated and made available for
delivery after the execution of any supplemental indenture pursuant to this
Article 9 may, and shall, if required by the Trustee, bear a notation in form
approved by the Trustee as to any matter provided for in such supplemental
indenture. If the Company shall so determine, new Debentures so modified as to
conform, in the opinion of the Trustee and the Board of Directors, to any such
supplemental indenture may be prepared and executed by the Company and
authenticated and made available for delivery by the Trustee in exchange for
outstanding Debentures.


                                       39


      9.06 Trustee to Execute Supplemental Indentures.

      The Trustee shall execute any supplemental indenture authorized pursuant
to this Article 9 if the supplemental indenture does not adversely affect the
rights, duties, liabilities or immunities of the Trustee. If it does, the
Trustee may, but need not, execute it. In executing such supplemental indenture
the Trustee shall be entitled to receive, and shall be fully protected in
relying upon, an Officer's Certificate and Opinion of Counsel stating that such
supplemental indenture is authorized or permitted by this Indenture.

      9.07 Effect of Supplemental Indentures.

      Upon the execution of any supplemental indenture under this Article 9,
this Indenture shall be modified in accordance therewith, and such supplemental
indenture shall form a part of this Indenture for all purposes and every Holder
of Debentures of the related series theretofore or thereafter authenticated and
made available for delivery hereunder shall be bound thereby.

                                   ARTICLE 10
                                  SUBORDINATION

      10.01 Applicability of Article; Debentures Subordinated to Senior
            Indebtedness.

      (a) The provision of this Article 10 shall be applicable to each series of
Debentures unless the Debentures of such series provide otherwise. As used in
this Article, the term "Debentures" shall, to the extent the context requires,
refer only to Debentures to which the provisions of this Article 10 are
applicable.

      (b) If not otherwise provided with respect to the Debentures of such
series, then notwithstanding the provisions of Section 6.10 hereof or any other
provision herein or in any Debenture, the Company and the Trustee and, by their
acceptance thereof, the Holders of the Debentures (i) covenant and agree that
all payments by the Company of the principal of and premium, if any, and
interest on the Debentures (other than Debentures which have been discharged
pursuant to Article 8) shall be subordinated in accordance with the provisions
of this Article 10 to the prior payment in full, in cash or cash equivalents, of
all amounts payable on, under or in connection with Senior Indebtedness, and
(ii) acknowledge that holders of Senior Indebtedness are or shall be relying on
this Article 10.

      10.02 Priority and Payment of Proceeds in Certain Events: Remedies
            Standstill.

      (a) Upon any payment or distribution of assets or securities of the
Company, as the case may be, of any kind or character, whether in cash, property
or securities, upon any dissolution or winding up or total or partial
liquidation or reorganization of the Company, whether voluntary or involuntary,
or in bankruptcy, insolvency, receivership or other proceedings, all amounts
payable on, under or in connection with Senior Indebtedness (including any
interest accruing on such Senior Indebtedness subsequent to the commencement of
a


                                       40


bankruptcy, insolvency or similar proceeding) shall first be paid in full in
cash, or payment provided for in cash or cash equivalents, before the Holders or
the Trustee on behalf of the Holders or the holders of Preferred Securities
shall be entitled to receive from the Company any payment of principal of or
premium, if any, or interest on the Debentures or distribution of any assets or
securities.

      (b) No direct or indirect payment by or on behalf of the Company of
principal of or premium, if any, or interest on the Debentures (other than
Debentures which have been discharged pursuant to Article 8), whether pursuant
to the terms of the Debentures or upon acceleration or otherwise, shall be made
if, any the time of such payment, there exists (i) a default in the payment of
all or any portion of any Senior Indebtedness and the Trustee has received
written notice thereof from the Company, from holders of Senior Indebtedness or
from any trustee, representative or agent therefor, or (ii) any other default
affecting Senior Indebtedness, as a result of which the maturity of Senior
Indebtedness has been accelerated and the Trustee has received written notice
from the Company, from holders of Senior Indebtedness or from any trustee,
representative or agent therefor, and such default shall not have been cured or
waived by or on behalf of the holders of such Senior Indebtedness.

      (c) If, notwithstanding the foregoing provisions prohibiting such payment
or distribution, the Trustee or any Holder shall have received any payment on
account of the principal of or premium, if any, or interest on the Debentures
when such payment is prohibited by this Section 10.02 and before all amounts
payable on, under or in connection with Senior Indebtedness are paid in full in
cash or cash equivalents, then and in such event (subject to the provisions of
Section 10.08 hereof) such payment or distribution shall be received and held in
trust for the holders of Senior Indebtedness and, at the written direction of
the trustee, representative or agent for the holders of the Senior Indebtedness,
shall be paid to the holders of the Senior Indebtedness remaining unpaid to the
extent necessary to pay such Senior Indebtedness in full in cash or cash
equivalents.

      Upon any payment or distribution of assets or securities referred to in
this Article 10, the Trustee and the Holders shall be entitled to rely upon any
order or decree of a court of competent jurisdiction in which such dissolution,
winding up, liquidation or reorganization proceedings are pending, and upon a
certificate of the receiver, trustee in bankruptcy, liquidating trustee, agent
or other Person making any such payment or distribution, delivered to the
Trustee for the purpose of ascertaining the Persons entitled to participate in
such distribution, the holders of Senior Indebtedness of the Company, the amount
thereof or payable thereon, the amount or amounts paid or distributed thereon
and all other facts pertinent thereto or to this Article 10.

      10.03 Payments which May Be Made Prior to Notice.

      Nothing in this Article 10 or elsewhere in this Indenture shall prevent
(i) the Company, except under the conditions described in Section 10.02 hereof,
from making payments of principal of or premium, if any, or interest on the
Debentures or from depositing with the Trustee any monies for such payments, or
(ii) the application by the Trustee of any monies deposited with it for the
purpose of making such payments of principal of or premium, if any, or interest
on the Debentures, to the Holders entitled thereto, unless at least one Business
Day prior to the date when such payment would otherwise (except for the
prohibitions contained in Section


                                       41


10.02 hereof) become due and payable the Trustee shall have received the written
notice provided for in Section 10.02(b)(i) or (ii) hereof.

      10.04 Rights of Holders of Senior Indebtedness Not to Be Impaired.

      No right of any present or future holder of any Senior Indebtedness to
enforce subordination as herein provided shall at any time or in any way be
prejudiced or impaired by any act or failure to act in good faith by any such
holder, or by any noncompliance by the Company with the terms and provisions and
covenants herein regardless of any knowledge thereof any such holder may have or
otherwise be charged with.

      The provisions of this Article 10 are intended to be for the benefit of,
and shall be enforceable directly by, the holders of Senior Indebtedness.
Notwithstanding anything to the contrary in this Article 10, to the extent any
Holders or the Trustee have paid over or delivered to any holder of Senior
Indebtedness any payment or distribution received on account of the principal of
or premium (if any) or interest on the Debentures to which any other holder of
Senior Indebtedness shall be entitled to share in accordance with Section 10.02
hereof, no holder of Senior Indebtedness shall have a claim or right against any
Holders or the Trustee with respect to any such payment or distribution or as a
result of the failure to make payments or distributions to such other holder of
Senior Indebtedness.

      10.05 Trustee May Take Action to Effectuate Subordination.

      Each Holder of a Debenture, by his acceptance thereof, authorizes and
directs the Trustee on his behalf to take such action as may be required by the
trustee, representative or agent for holders of Senior Indebtedness or by the
Company to effectuate, as between the holders of Senior Indebtedness and the
Holders, the subordination as provided in this Article 10 and appoints the
Trustee his attorney-in-fact for any and all such purposes.

      10.06 Subrogation.

      Upon the payment in full, in cash or cash equivalents, of all Senior
Indebtedness, any Holder shall be subrogated to the rights of the holders of
such Senior Indebtedness to receive payments or distributions of assets of the
Company made on such Senior Indebtedness until the Debentures shall be paid in
full; and for the purposes of such subrogation, no payments or distributions to
holders of such Senior Indebtedness of any cash property or securities to which
such Holders of the Debentures would be entitled except for this Article 10, and
no payment pursuant to this Article 10 to holders of such Senior Indebtedness by
such Holders of the Debentures, shall, as between the Company, its creditors
other than holders of such Senior Indebtedness and such Holders of the
Debentures, be deemed to be a payment by the Company to or on account of such
Senior Indebtedness, it being understood that the provisions of this Article 10
are solely for the purpose of defining the relative rights of the holders of
such Senior Indebtedness, on the one hand, and such Holders of the Debentures,
on the other hand.

      If any payment or distribution to which Holders of Debentures would
otherwise have been entitled but for the provisions of this Article 10 shall
have been applied, pursuant to this Article 10, to the payment of all Senior
Indebtedness then and in such case such Holders of


                                       42


the Debentures shall be entitled to receive from the holders of such Senior
Indebtedness at the time outstanding any payments or distributions received by
such holders of Senior Indebtedness in excess of the amount sufficient to pay,
in cash or cash equivalents, all such Senior Indebtedness in full.

      10.07 Obligations of Company Unconditional: Reinstatement.

      Nothing in this Article 10 or elsewhere in this Indenture or in any
Debenture is intended to or shall impair, as between the Company and Holders of
the Debentures, the obligations of the Company, which are absolute and
unconditional, to pay to such Holders the principal of and premium, if any, and
interest on the Debentures as and when the same shall become due and payable in
accordance with their terms, or is intended to or shall affect the relative
rights of such Holders of the Debentures and creditors of the Company other than
the holders of the Senior Indebtedness, nor shall anything herein or therein
prevent the Trustee or any Holder of Debentures or holder of Preferred
Securities, as applicable, from exercising all remedies otherwise permitted by
applicable law under this Indenture, subject to the rights, if any, under this
Article 10 of the holders of such Senior Indebtedness in respect of cash,
property or securities of the Company received upon the exercise of any such
remedy.

      The failure to make a scheduled payment of principal of or premium, if
any, or interest on the Debentures by reason of Section 10.02 shall not be
construed as preventing the occurrence of an Event of Default under Section 6.01
hereof; provided, however, that if (i) the conditions preventing the making of
such payment no longer exist, and (ii) such Holders of the Debentures are made
whole with respect to such omitted payments, the Event of Default relating
thereto (including any failure to pay any accelerated amounts) shall be
automatically waived, and the provisions of the Indenture shall be reinstated as
if no such Event of Default had occurred.

      10.08 Trustee Entitled to Assume Payments Not Prohibited in Absence of
Notice.

      The Trustee or Paying Agent shall not be charged with the knowledge of the
existence of any default in the payment of all or a portion of any Senior
Indebtedness or any other default affecting Senior Indebtedness, as a result of
which the maturity of the Senior Indebtedness has been accelerated, unless and
until the Trustee or Paying Agent shall have received written notice thereof
from the Company or one or more holders of Senior Indebtedness or from any
trustee, representative or agent therefor or unless the Trustee or Paying Agent
otherwise had actual knowledge thereof; and, prior to the receipt of any such
written notice or actual knowledge of a Responsible Officer in the Corporate
Trust Department of the Trustee or Paying Agent, the Trustee or Paying Agent may
conclusively assume that no such facts exist.

      Unless at least one Business Day prior to the date when by the terms of
this Indenture any monies are to be deposited by the Company with the Trustee or
any Paying Agent for any purpose (including, without limitation, the payment of
the principal of or premium, if any, or interest on any Debenture), the Trustee
or Paying Agent shall have received with respect to such monies the notice
provided for in Section 10.02 or a Responsible Officer in the Corporate Trust
Department of the Trustee or Paying Agent shall have actual knowledge of default
in the payment of all or a portion of any Senior Indebtedness or any other
default affecting Senior


                                       43


Indebtedness as the result of which the maturity of the Senior Indebtedness has
been accelerated, the Trustee or Paying Agent shall have full power and
authority to receive and apply such monies to the purpose for which they were
received. Neither of them shall be affected by any notice to the contrary, which
may be received by either on or after such date. The foregoing shall not apply
to the Paying Agent if the Company is acting as Paying Agent. Nothing in this
Section 10.08 shall limit the right of the holders of Senior Indebtedness to
recover payments as contemplated by Section 10.02 hereof. The Trustee or Paying
Agent shall be entitled to conclusively rely on the delivery to it of a written
notice by a Person representing himself or itself to be a holder of such Senior
Indebtedness (or a trustee, representative or agent on behalf of such holder) to
establish that such notice has been given by a holder of such Senior
Indebtedness or a trustee, representative or agent on behalf of any such holder.
The Trustee shall not be deemed to have any duty to the holders (and shall be
fully protected in relying upon such notice) of Senior Indebtedness.

      10.09 Right of Trustee to Hold Senior Indebtedness.

      The Trustee and any Paying Agent shall be entitled to all of the rights
set forth in this Article 10 in respect of any Senior Indebtedness at any time
held by them to the same extent as any other holder of such Senior Indebtedness,
and nothing in this Indenture shall be construed to deprive the Trustee or any
Paying Agent of any of its rights as such holder.

                                   ARTICLE 11
                                  MISCELLANEOUS

      11.01 Trust Indenture Act Controls.

      If any provision of this Indenture limits, qualifies or conflicts with the
duties imposed by operation of subsection (c) of Section 318 of the TIA, the
imposed duties shall control. The provisions of Sections 310 to 317, inclusive,
of the TIA that impose duties on any Person (including provisions automatically
deemed included in an indenture unless the indenture provides that such
provisions are excluded) are a part of and govern this Indenture, except as, and
to the extent, they are expressly excluded from this Indenture, as permitted by
the TIA.

      11.02 Notices.

      Any notice, request or other communication required or permitted to be
given hereunder shall be in writing and delivered, telecopied or mailed by
first-class mail, postage prepaid, addressed as follows:

      if to the Company:

                   Public Service Enterprise Group Incorporated
                   80 Park Plaza, T6B
                   P.O. Box 1171
                   Newark, New Jersey 07101-1171
                   Facsimile No.: (973) 242-1651
                   Attention: Treasurer


                                       44


      if to the Trustee:

                   Wachovia Bank, National Association
                   21 South Street
                   Morristown, New Jersey  07960
                   Facsimile No. (973) 682-4531
                   Attention: Corporate Trust Department

      The Company or the Trustee, by giving notice to the other, may designate
additional or different addresses for subsequent notices of communications. The
Company shall notify the holder, if any, of Senior Indebtedness of any such
additional or different addresses of which the Company receives notice from the
Trustee.

      Any notice or communication given to a Debentureholder shall be mailed or
delivered to the Debentureholder at the Debentureholder's address as it appears
on the Register of the Registrar and shall be sufficiently given if mailed
within the time prescribed.

      Failure to mail a notice or communication to a Debentureholder or any
defect in it shall not affect its sufficiency with respect to other
Debentureholders. If a notice or communication is mailed in the manner provided
above, it is duly given, whether or not received by the addressee.

      If the Company mails a notice or communication to the Debentureholders, it
shall mail a copy to the Trustee and each Registrar, Paying Agent or
co-Registrar.

      11.03 Communication by Holders with Other Holders.

      Debentureholders may communicate, pursuant to TIA Section 312(b), with
other Debentureholders with respect to their rights under this Indenture or the
Debentures. The Company, the Trustee, the Registrar, the Paying Agent and anyone
else shall have the protection of TIA Section 312(c).

      11.04 Certificate and Opinion as to Conditions Precedent.

      Upon any request or application by the Company to the Trustee to take any
action under this Indenture, the Company shall furnish to the Trustee:

      (1) an Officer's Certificate (complying with Section 11.05 hereof) stating
that, in the opinion of such Officer, all conditions precedent to the taking of
such action have been complied with; and

      (2) if appropriate, an Opinion of Counsel (complying with Section 11.05
hereof) stating that, in the opinion of such counsel all such conditions
precedent to the taking of such action have been complied with.


                                       45


      11.05 Statements Required in Certificate or Opinion.

      Each Officer's Certificate and Opinion of Counsel with respect to
compliance with a covenant or condition provided for in this Indenture shall
include:

      (1) a statement that each Person making such Officer's Certificate or
Opinion of Counsel has read such covenant or condition;

      (2) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such Officer's
Certificate or Opinion of Counsel are based;

      (3) a statement that, in the opinion of each such Person, such Person has
made such examination or investigation as is necessary to enable such Person to
express an informed opinion as to whether or not such covenant or condition has
been complied with; and

      (4) a statement that, in the opinion of such Person, such covenant or
condition has been complied with; provided, however, that with respect to
matters of fact not involving any legal conclusion, an Opinion of Counsel may
rely on an Officer's Certificate or certificates of public officials.

      11.06 Severability Clause.

      If any provision in this Indenture or in the Debentures shall be invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.

      11.07 Rules by Trustee, Paying Agent and Registrar.

      The Trustee may make reasonable rules for action by or a meeting of
Debentureholders. The Registrar and Paying Agent may make reasonable rules for
their functions.

      11.08 Legal Holidays.

      A "Legal Holiday" is any day other than a Business Day. If any specified
date (including a date for giving notice) is a Legal Holiday, the action to be
taken on such date shall be taken on the next succeeding day that is not a Legal
Holiday, and if such action is a payment in respect of the Debentures, unless
otherwise specified pursuant to Section 2.01 hereof no principal, premium (if
any) or interest installment shall accrue for the intervening period; except
that if any interest payment is due on a Legal Holiday and the next succeeding
day is in the next succeeding calendar year, such payment shall be made on the
Business Day immediately preceding such Legal Holiday.


                                       46


      11.09 Governing Law.

      This Indenture and the Debentures shall be governed by and construed in
accordance with the laws of the State of New Jersey as applied to contracts made
and performed within the State of New Jersey, without regard to its principles
of conflicts of laws.

      11.10 No Recourse Against Others.

      No director, officer, employee or stockholder, as such, of the Company
shall have any liability for any obligations of the Company under the Debentures
or this Indenture or for any claim based on, in respect of or by reason of such
obligations their creation. By accepting a Debenture, each Debentureholder shall
waive and release all such liability. The waiver and release shall be part of
the consideration for the issue of the Debentures.

      11.11 Successors.

      All agreements of the Company in this Indenture and Debentures shall bind
its successors and assigns. All agreements of the Trustee in this Indenture
shall bind its successors and assigns.

      11.12 Multiple Original Copies of this Indenture.

      The parties may sign any number of copies of this Indenture. Each signed
copy shall be an original, but all of them together represent the same
agreement. Any signed copy shall be sufficient proof of this Indenture.

      11.13 No Adverse Interpretation of Other Agreements.

      This Indenture may not be used to interpret another indenture, loan or
debt agreement of the Company or any subsidiary. Any such indenture, loan or
debt agreement may not be used to interpret this Indenture.

      11.14 Table of Contents: Headings, Etc.

      The Table of Contents, Cross-Reference Table, and headings of the Articles
and Sections of this Indenture have been inserted for convenience of reference
only, are not to be considered a part hereof, and shall in no way modify or
restrict any of the terms or provisions hereof.

      11.15 Benefits of the Indenture.

      Except as otherwise expressly provided herein with respect to holders of
Senior Indebtedness and holders of Preferred Securities, nothing in this
Indenture or in the Debentures, express or implied, shall give to any person,
other than the parties hereto and their successors hereunder and the Holders of
the Debentures, any benefit or any legal or equitable right, remedy or claim
under this Indenture.


                                       47


      SIGNATURES

      IN WITNESS WHEREOF, the undersigned, being duly authorized, have executed
this Indenture on behalf of the respective parties hereto as of the date first
above written.

                                        PUBLIC SERVICE ENTERPRISE GROUP
                                        INCORPORATED

                                        By:
                                           -------------------------------------
                                           Name:
                                           Title:


                                        WACHOVIA BANK, NATIONAL
                                        ASSOCIATION,
                                        as Trustee

                                        By:
                                           -------------------------------------
                                           Name:
                                           Title:


                                       48


                                    Exhibit A

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
            8.75% Deferrable Interest Junior Subordinated Debenture,
                                    Series D

No. R-1

      Public Service Enterprise Group Incorporated, a New Jersey corporation
(the "Company", which term includes any successor company under the Indenture
hereinafter referred to), for value received, hereby promises to pay to
____________________ or registered assigns, the principal sum of $185,567,025
Dollars on December 31, 2032, and to pay interest on said principal sum from
December 17, 2002 or from the most recent Interest Payment Date (as defined
below) to which interest has been paid or duly provided for, in arrears on March
31, June 30, September 30 and December 31, commencing March 31, 2003 (each, an
"Interest Payment Date") at a rate equal to 8.75% until the principal hereof
shall have become due and payable, and on any overdue principal and (to the
extent that payment of such interest is enforceable under applicable law) on any
overdue installment of interest at the same rate per annum. In the event that
any Interest Payment Date is not a Business Day, then interest will be payable
on the next succeeding day which is a Business Day (and without any interest or
other payment in respect of any such delay), except that, if such Business Day
is in the next succeeding calendar year, such payment shall be made on the
immediately preceding Business Day, in each case with the same force and effect
as if made on such date. The interest installment so payable, and punctually
paid or duly provided for, on any Interest Payment Date will, as provided in the
Indenture, be paid to the Person in whose name this Debenture is registered at
the close of business on the Regular Record Date for such interest installment,
which shall be the 15th day (whether or not a Business Day) preceding the
applicable Interest Payment Date, provided that if all of the Series D
Debentures (as defined below) are then held by PSEG Funding Trust II (the
"Trust") or the Series D Debentures are held in book-entry-only form, the
Regular Record Date shall be the close of business on the Business Day next
preceding such Interest Payment Date. Any such interest installment not
punctually paid or duly provided for shall forthwith cease to be payable to the
Holder on such Regular Record Date, and may be paid to the Person in whose name
this Debenture is registered at the close of business on a Special Record Date
to be fixed by the Trustee (as defined below) for the payment of such defaulted
interest, notice whereof shall be given to the Holders of the Series D
Debentures not less than 7 days prior to such Special Record Date, as more fully
provided in the Indenture.

      Payment of the principal of, premium, if any, and interest on this
Debenture will be made in such coin or currency of the United States of America
as at the time of payment is legal tender for payment of public and private
debts. Payments of interest on an Interest Payment Date will be made by check
mailed to the Holder hereof at the address shown in the Register or, at the
option of the Holder hereof, to such other place in the United States of America
as the Holder hereof shall designate to the Trustee in writing. At the request
of a Holder of at least $10,000,000 aggregate principal amount of Series D
Debentures, interest on such Debentures will be payable by wire transfer within
the continental United States in immediately available


                                      A-1


funds to the bank account number specified in writing by such Holder to the
Registrar prior to the Regular Record Date.

      The principal and any premium and interest due hereon on the Stated
Maturity Date or a Redemption Date (other than an Interest Payment Date) will be
paid in immediately available funds only upon surrender of this Debenture at the
principal corporate office of Wachovia Bank, National Association, Paying Agent,
in Morristown, New Jersey, or at such other office or agency of the Paying Agent
as the Company shall designate by written notice to the Holder of this
Debenture.

      The indebtedness evidenced by this Debenture is, to the extent provided in
the Indenture, subordinate and subject in right of payment to the prior payment
in full of all Senior Indebtedness, and this Debenture is issued subject to the
provisions of the Indenture with respect thereto. The Holder of this Debenture,
by accepting the same, (a) agrees to and shall be bound by such provisions, (b)
authorizes and directs the Trustee on his behalf to take such action as may be
necessary or appropriate to acknowledge or effectuate the subordination so
provided and (c) appoints the Trustee his attorney-in-fact for any and all such
purposes. The Holder of this Debenture, by his acceptance hereof, hereby waives
all notice of the acceptance of the subordination provisions contained herein
and in the Indenture by each holder of Senior Indebtedness, whether now
outstanding or hereafter incurred, and waives reliance by each such holder upon
said provisions.

      This Debenture is one of a duly authorized series of Junior Subordinated
Debentures of the Company (herein sometimes referred to as the "Series D
Debentures"), specified in the Indenture, limited in aggregate principal amount
to $185,567,025, issued under and pursuant to an Indenture dated as of December
17, 2002 (the "Indenture") executed and delivered between the Company and
Wachovia Bank, National Association, as trustee (the "Trustee"). The Series D
Debentures are initially being issued to the Trust, to be held on behalf of the
Trust by its property trustee (the "Property Trustee"). Concurrently with the
issuance of the Series D Debentures, the Trust is issuing its trust securities,
representing undivided beneficial interests in the assets of the Trust and
having an aggregate liquidation amount equal to the principal amount of the
Series D Debentures, including the Trust's 8.75% Trust Preferred Securities,
(the "Preferred Securities"). By the terms of the Indenture, Debentures are
issuable in series which may vary as to amount, date of maturity, rate of
interest and in other respects as in the Indenture provided. Reference is made
to the Indenture for a description of the rights, limitations of rights,
obligations, duties and immunities thereunder of the Trustee, the Company and
Holders of the Debentures. Each term used in this Debenture which is defined in
the Indenture and not defined herein shall have the meaning assigned to it in
the Indenture.

      In the event that the Property Trustee is the holder of all of the
outstanding Debentures, the Company shall pay to the Trust (and any permitted
successor or assign under the Trust II Agreement (as such term is defined in the
Indenture)) for so long as the Trust (or its permitted successor or assignee) is
the registered holder of any Debentures, such additional amounts as may be
necessary in order that the amount of distributions then due and payable by the
Trust on the related Preferred Securities and Common Securities (the "Common
Securities") of the Trust that at any time remain outstanding in accordance with
the terms thereof shall not be


                                      A-2


reduced as a result of any taxes, duties, assessments and governmental charges
of whatever nature imposed by the United States or any other taxing authority to
which the Trust has become subject (but not including withholding taxes imposed
on holders of such Preferred Securities and Common Securities) (the "Additional
Interest"). Whenever in the Indenture or the Debentures there is a reference in
any context to the payment of principal of or interest on the Debentures, such
reference shall be deemed to include payment of the Additional Interest provided
for in this paragraph to the extent that, in such context, Additional Interest
is, were or would be payable in respect thereof pursuant to the provisions of
this paragraph and express reference to the payment of Additional Interest (if
applicable) in any provisions hereof shall not be construed as excluding
Additional Interest in those provisions hereof where such express reference is
not made.

      At the option of the Company, the Series D Debentures are redeemable prior
to maturity (i) at any time on or after December 17, 2007, in whole or in part,
and (ii) within 90 days following the occurrence and continuance of a Special
Event, in whole (but not in part), in either case, at a price equal to 100% of
the principal amount of the Series D Debentures to be redeemed plus accrued
interest to the Redemption Date. A "Special Event" shall mean either a "Tax
Event" or an "Investment Company Event." "Tax Event" shall mean that the Company
shall have received an opinion of counsel (which may be regular counsel to the
Company or an Affiliate, but not an employee thereof and which must be
acceptable to the Property Trustee of the Trust) experienced in such matters to
the effect that, as a result of any amendment to, or change (including any
announced prospective change) in, the laws (or any regulations thereunder) of
the United States or any political subdivision or taxing authority thereof or
therein affecting taxation, or as a result of any official administrative
pronouncement or judicial decision interpreting or applying such laws or
regulations, which amendment or change is effective or such interpretation or
pronouncement is announced on or after the date of original issuance of
Preferred Securities, there is more than an insubstantial risk that (i) the
Trust is, or will be, subject to United States Federal income tax with respect
to interest received on the Debentures, (ii) interest payable by the Company to
the Trust on the Series D Debentures is not, or will not be, deductible for
United States Federal income tax purposes or (iii) the Trust is, or will be,
subject to more than a de minimis amount of other taxes, duties, assessments or
other governmental charges. "Investment Company Event" shall mean the occurrence
of a change in law or regulation or a change in interpretation or application of
law or regulation by any legislative body, court, governmental agency or
regulatory authority (a "Change in 1940 Act Law") to the effect that the Trust
is or will be considered an "investment company" that is required to be
registered under the Investment Company Act of 1940, as amended, which Change in
1940 Act Law becomes effective on or after the date of original issuance of the
Preferred Securities.

      At least 30 days but not more than 60 days before the Redemption Date, the
Trustee shall mail or caused to be mailed a notice of redemption by first-class
mail, postage prepaid, to each Holder of Series D Debentures to be redeemed.

      In the event of redemption of this Debenture in part only, a new Series D
Debenture or Debentures for the unredeemed portion hereof will be issued in the
name of the Holder hereof upon the cancellation hereof.


                                      A-3


      In case an Event of Default with respect to the Series D Debentures occurs
and is continuing, the principal of and premium, if any, and interest on the
Series D Debentures may (and, in certain circumstances, shall) be declared, and
upon such declaration shall become, due and payable, in the manner, with the
effect and subject to the conditions provided in the Indenture.

      The Indenture contains provisions for defeasance at any time of the entire
indebtedness of this Debenture upon compliance by the Company with certain
conditions set forth therein.

      Subject to certain exceptions in the Indenture which require the consent
of every Holder, the Company and the Trustee may amend the Indenture or may
waive future compliance by the Company with any provisions of the Indenture,
with the consent of the Holders of at least a majority in aggregate principal
amount of the Debentures of each series affected thereby, provided that if the
Series D Debentures are held by the Trust, no such amendment or waiver that
adversely affects the holders of the Preferred Securities shall be effective
without the prior consent of the holders of at least a majority in aggregate
liquidation amount of the outstanding Preferred Securities. Subject to certain
exceptions in the Indenture, without the consent of any Debentureholder, the
Company and the Trustee may amend the Indenture to cure any ambiguity, defect or
inconsistency, to bind a successor to the obligations of the Indenture, to
provide for uncertificated Debentures in addition to certificated Debentures, to
comply with any requirements of the Debentures and the Securities and Exchange
Commission in connection with the qualification of the Indenture under the TIA,
or to make any change that, in the reasonable judgment of the Company, does not
adversely affect the rights of any Debentureholder. Amendments bind all Holders
and subsequent Holders.

      No reference herein to the Indenture and no provision of this Debenture or
the Indenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of and premium, if any, and
interest on this Debenture at the time and place and at the rate and in the
money herein prescribed.

      So long as no Event of Default with respect to the Series D Debentures has
occurred and is continuing, the Company shall have the right at any time and
from time to time to extend the interest payment period of the Series D
Debentures for up to 20 consecutive quarterly distribution periods (the
"Extension Period"), provided that no Extension Period shall extend beyond the
Stated Maturity Date or Redemption Date of any Series D Debenture. At the end of
the Extension Period, the Company shall pay all interest then accrued and unpaid
(together with interest thereon at the rate specified for the Series D
Debentures, compounded quarterly, to the extent that payment of such interest is
enforceable under applicable law). Prior to the termination of any such
Extension Period, the Company may further extend such Extension Period, provided
that such Extension Period, together with all such previous and further
extensions, shall not exceed 20 consecutive quarterly distribution periods and
shall not extend beyond the Stated Maturity Date or Redemption Date of any
Series D Debenture. At the termination of any such Extension Period and upon the
payment of all amounts then due, the Company may elect to begin a new Extension
Period, subject to the foregoing restrictions.


                                      A-4


      Series D Debentures are issuable only in registered form without coupons
in denominations of $25 and any integral multiple thereof. As provided in the
Indenture and subject to certain limitations therein set forth, this Debenture
is exchangeable for a like aggregate principal amount of Series D Debentures of
a different authorized denomination, as requested by the Holder surrendering the
same.

      As provided in the Indenture and subject to certain limitations therein
set forth, this Debenture is transferable by the Holder hereof upon surrender of
this Debenture for registration of transfer at the office or agency of the
Registrar accompanied by a written instrument or instruments of transfer inform
satisfactory to the Registrar duly executed by the Holder hereof or his attorney
duly authorized in writing, and thereupon one or more new Series D Debentures of
authorized denominations and for the same aggregate principal amount will be
issued to the designated transferee or transferees. No service charge will be
made for any such transfer, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge payable in relation
thereto.

      Prior to presentment for registration of transfer of this Debenture, the
Company, the Trustee, any Paying Agent and any Registrar may deem and treat the
Holder hereof as the absolute owner hereof (whether or not this Debenture shall
be overdue and notwithstanding any notice of ownership or writing hereon made by
anyone other than the Registrar) for the purpose of receiving payment of or on
account of the principal hereof and premium, if any, and interest due hereon and
for all other purposes, and neither the Company nor the Trustee nor any Paying
Agent nor any Registrar shall be affected by any notice to the contrary.

      The Company agrees, and by acceptance of a beneficial ownership interest
in the Series D Debentures, each beneficial owner of the Series D Debentures
will be deemed to have agreed, to treat the Series D Debentures as indebtedness
of the Company for United States federal income tax purposes.

      No recourse shall be had for the payment of the principal of or the
interest on this Debenture, or for any claim based hereon, or otherwise in
respect hereof, or based on or in respect of the Indenture, against any
incorporator, stockholder officer or director, past, present or future, as such,
of the Company or of any predecessor or successor corporation, whether by virtue
of any constitution, statute or rule of law, or by the enforcement of any
assessment or penalty or otherwise, all such liability being, by the acceptance
hereof and as part of the consideration for the issuance hereof, expressly
waived and released.

      This Debenture shall not be valid until an authorized signatory of the
Trustee manually signs and dates the Trustee's Certificate of Authentication
below.


                                      A-5


      IN WITNESS WHEREOF, the Company has caused this Debenture to be signed
manually or by facsimile by its duly authorized officers and a facsimile of its
corporate seal to be affixed hereto or imprinted hereon.

                                        PUBLIC SERVICE ENTERPRISE
                                        GROUP INCORPORATED

                                        By:
                                           -------------------------------------
[SEAL]                                     Name:
                                           Title:
Attest:

- --------------------------
(Assistant) Secretary


                                      A-6


                     TRUSTEE'S CERTIFICATE OF AUTHENTICATION

      This is one of the Debentures, of the series designated, referred to in
the within-mentioned Indenture.

                                        WACHOVIA BANK, NATIONAL ASSOCIATION,
                                        as Trustee

                                        By:
                                           -------------------------------------
                                                  Authorized Signatory

Dated: December 17, 2002


                                      A-7


                                 ASSIGNMENT FORM

      To assign this Debenture, fill in the form below: (I) or (we) assign and
transfer this Debenture to:

________________________________________________________________________________
         (Insert assignee's social security or tax I.D. number)

________________________________________________________________________________
         (Print or type assignee's name, address and zip code)

and irrevocably appoint ____________________ agent to transfer this Debenture on
the books of the Register. The agent may substitute another to act for him.

Dated: _______________                  Signature:
                                                  ------------------------------
                                                 (Sign exactly as your name
                                                  appears on the other side of
                                                  this Debenture)

Signature Guaranty: ____________________

Signatures must be guaranteed by an "eligible guarantor institution" meeting the
requirements of the Trustee, which requirements include membership or
participation in the Security Transfer Agent Medallion Program ("STAMP:) or such
other "signature guarantee program" as may be determined by the Trustee in
addition to, or in substitution for, STAMP, all in accordance with the
Securities Exchange Act of 1934, as amended.

                                      A-8

EX-10.(A)(17)

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                        STOCK PLAN FOR OUTSIDE DIRECTORS
                            EFFECTIVE JANUARY 1, 1996
                            AMENDED JANUARY 21, 2003

I.    PURPOSE

      The purpose of this Public Service Enterprise Group Incorporated Stock
Plan for Outside Directors is to advance the interests of the Company and its
stockholders by assisting the Company in attracting and retaining individuals of
superior talent, ability and achievement to serve on its Board of Directors.

II.   DEFINITIONS

      The following words and phrases shall have the meanings set forth below
unless a different meaning is required by the context:

      a)    Adjustment Shares: New or additional or different shares of Common
            Stock or other securities (other than rights or warrants to purchase
            securities) received or entitled to be received by an owner of
            Restricted Stock as a result of a change in capitalization of the
            Company as set forth in Article VIII hereof.

      b)    Annual Meeting: The Annual Meeting of Stockholders of the Company.

      c)    Board: The Board of Directors of the Company.

      d)    Committee: Those persons who are members of the Board but who are
            not Outside Directors.

      e)    Common Stock: The Common Stock without nominal or par value of the
            Company.

      f)    Company: Public Service Enterprise Group Incorporated, a corporation
            organized and existing under the laws of the State of New Jersey, or
            its successor or successors.

      g)    Disability: Any physical or mental condition of a permanent nature
            which, in sole reasonable judgment of the Committee, renders an
            Outside Director incapable of performing the duties of a member of
            the Board.

      h)    Effective Date: January 1, 1996.

      i)    Eligible Director: An Outside Director who meets the eligibility
            requirements for stock awards as set forth in Article IV hereof.



                                       2


      j)    Exchange Act: The Securities and Exchange Act of 1934, as amended,
            or as it may be amended from time to time.

      k)    NYSE: The New York Stock Exchange, Inc.

      l)    Outside Director: A member of the Board on or after the Effective
            Date who never has been employed by the Company or any of its
            affiliates.

      m)    Outside Directors' Pension Plan: The Public Service Enterprise Group
            Incorporated Pension Plan for Outside Directors Effective January 1,
            1989.

      n)    Plan: This Public Service Enterprise Group Incorporated Stock Plan
            for Outside Directors, as it may be amended from time to time.

      o)    Restricted Stock: Shares of Common Stock subject to restrictions
            awarded pursuant to Article IV hereof.

      p)    Securities Act: The Securities Act of 1933, as amended, or as it may
            be amended from time to time.

      q)    Service: A Director's service as a member of the Board.

      r)    Year of Service: The annual period commencing the day of each Annual
            Meeting and ending on the day before the next Annual Meeting. For
            any person first elected a member of the Board after the date of an
            Annual Meeting, his/her first Year of Service shall commence upon
            his/her election as a Director and shall end on the day before the
            next Annual Meeting.

III.  SHARES SUBJECT TO THE PLAN

      100,000 shares of Common Stock may be awarded as Restricted Stock pursuant
to the terms of this Plan. Such shares may be acquired directly from the Company
or, at the discretion of the Company, purchased on the open market by the
Company or its agent. In the event that any shares of Restricted Stock shall be
forfeited, the shares so forfeited shall again be available for the awarding of
Restricted Stock under the Plan.

IV.   RESTRICTED STOCK AWARDS

      A.    Upon the commencement of each Year of Service as a member of the
            Board, each Outside Director shall be granted an award of of
            Restricted Stock in an amount as shall be eastblish from time to
            time by the Board of Directors. The date of grant shall be the first
            business day of the month following the Annual Meeting or the
            Outside Director's first election as a member of the Board.



                                       3


      B.    Upon the Effective Date of this Plan, (i) each Outside Director who
            shall have completed five Years of Service as of December 31, 1995
            shall be granted an award of shares of Restricted Stock equal to the
            present value (assuming commencement of payment at age 70) of what
            his/her vested accrued benefit under the Outside Directors' Pension
            Plan would have been had he/she terminated Service as of December
            31, 1995. The actual number of shares will be determined by dividing
            said Outside Directors' Pension Plan assumed vested accrued benefit
            by the closing price of the Common Stock on the NYSE on December 29,
            1995 and rounding up to the next whole share; (ii) each Outside
            Director who shall not have completed five Years of Service as of
            December 31, 1995 shall be granted an award of shares of Restricted
            Stock equal in number to 300 times the number of years he/she has
            been a member of the Board, all as reflected in Schedule A to the
            Plan.

      C.    The award of shares of Restricted Stock, including the restrictions
            thereon, shall be evidenced by a written instrument in such form and
            upon such terms and conditions as the Committee shall determine and
            as are consistent with the following provisions of the Plan:

            i)    Upon the retirement of an Outside Director as a member of the
                  Board at the Annual Meeting next following the Outside
                  Director's 70th birthday, the restrictions on the Restricted
                  Stock shall lapse and the Company shall issue to the Outside
                  Director a certificate for the shares which have been awarded
                  to him/her without any legend or restriction of any kind and
                  the Company shall return to the Outside Director or destroy
                  any and all blank stock powers previously provided to it by
                  such Outside Director.

            ii)   If the service as a member of the Board of an Outside Director
                  who is the recipient of the shares of Restricted Stock
                  terminates for any reason, other than on account of
                  Disability, before the Annual Meeting next following said
                  Outside Director's 70th birthday, such Outside Director shall
                  forfeit any and all rights in and to the shares of Restricted
                  Stock; provided, however, that, the Committee may, for good
                  and valid business reasons, waive such restriction as the
                  Committee deems appropriate. Notwithstanding any other
                  provision of this Plan, upon the occurrence of a termination
                  of Service following a Change in Control (as defined below),
                  all restrictions on the Restricted Stock shall immediately
                  lapse and be of no effect.

      For the purposes of this Plan, "Change in Control" shall mean the
occurrence of any of the following events:

            a)    any "person" (within the meaning of Section 13(d) of the
                  Exchange Act is or becomes the beneficial owner within the
                  meaning of Rule 13d-3 under the Exchange Act (a "Beneficial
                  Owner"), directly or indirectly, of securities of the Company
                  (not including in the securities beneficially



                                       4

                  owned by such person any securities acquired directly from the
                  Company or its affiliates) representing 25% or more of the
                  combined voting power of the Company's then outstanding
                  securities, excluding any person who becomes such a Beneficial
                  Owner in connection with a transaction described in clause (1)
                  of paragraph (c) below; or

            b)    the following individuals cease for any reason to constitute a
                  majority of the number of directors then serving: individuals
                  who, on December 15, 1998, constitute the Board of Directors
                  and any new director (other than a director whose initial
                  assumption of office is in connection with an actual or
                  threatened election contest, including but not limited to a
                  consent solicitation. relating to the election of directors of
                  the Company) whose appointment or election by the Board of
                  Directors or nomination for election by the Company's
                  stockholders was approved or recommended by a vote of at least
                  two-thirds (2/3) of the directors then still in office who
                  either were directors on December 15, 1998 or whose
                  appointment, election or nomination for election was
                  previously so approved or recommended: or

            c)    there is consummated a merger or consolidation of the Company
                  or any direct or indirect wholly owned subsidiary of the
                  Company with any other corporation other than (1) a merger or
                  consolidation which would result in the voting securities of
                  the Company outstanding immediately prior to such merger or
                  consolidation continuing to represent (either by remaining
                  outstanding or by being converted into voting securities of
                  the surviving entity or any parent thereof), in combination
                  with the ownership of any trustee or other fiduciary holding
                  securities under an employee benefit plan of the Company or
                  any subsidiary of the Company, at least 75% of the combined
                  voting power of the securities of the Company or such
                  surviving entity or any parent thereof outstanding immediately
                  after such merger or consolidation, or (2) a merger or
                  consolidation effected to implement a recapitalization of the
                  Company (or similar transaction) in which no person is or
                  becomes the Beneficial Owner, directly or indirectly, of
                  securities of the Company representing 25% or more of the
                  combined voting power of the Company's then outstanding
                  securities; or

            d)    the stockholders of the Company approve a plan of complete
                  liquidation or dissolution of the Company or there is
                  consummated an agreement for the sale or disposition by the
                  Company of all or substantially all of the Company's assets,
                  other than a sale or disposition by the Company of all or
                  substantially all of the Company's assets to an entity, at
                  least 75% of the combined voting power of the voting
                  securities of which are owned by stockholders of the Company
                  in substantially the same proportions as their ownership of
                  the Company immediately prior to such sale.


                                       5


          Notwithstanding the foregoing subparagraphs (a), (b), (c) and (d), a
          "Change in Control" shall not be deemed to have occurred by virtue of
          the consummation of any transaction or series of integrated
          transactions immediately following which the record holders of the
          common stock of the Company immediately prior to such transaction or
          series of transactions continue to have substantially the same
          proportionate ownership in an entity which owns all or substantially
          all of the assets of the Company immediately following such
          transaction or series of transactions.

            (iii) Shares of Restricted Stock may not be sold, assigned,
                  transferred, pledged, hypothecated or otherwise disposed of,
                  except by will or the laws of descent and distribution, for
                  the period specified in or in accordance with Section IV(c)(i)
                  and except in accordance with applicable laws and regulations.
                  Any attempted sale, assignment, transfer, pledge,
                  hypothecation or other disposition in contravention of the
                  foregoing shall be null and void and without effect.

            (iv)  Shares of Restricted Stock will be issued in the name of the
                  Outside Director receiving the award, but will be held by the
                  Company for the account of such Outside Director (together
                  with a blank stock power which such Outside Director shall
                  execute and deliver to the Company), subject to all of the
                  terms and conditions of the Plan, for the period specified in
                  or in accordance with Section IV(c)(i).

            (v)   Except as otherwise provided herein and in the instrument
                  evidencing the award of shares of Restricted Stock, the
                  Outside Director receiving same shall have all rights of a
                  stockholder with respect to shares of Restricted Stock issued
                  in his/her name, including the right to vote and to receive
                  dividends and other distributions.

            (vi)  If an Outside Director dies while serving as a member of the
                  Board, and more than six months after the date on which the
                  shares of Restricted Stock were awarded to him have elapsed,
                  the restriction provided for in Section IV(c)(i) shall be
                  deemed to have lapsed immediately prior to death.

            (vii) If an Outside Director, as owner of shares of Restricted
                  Stock, receives or shall be entitled to receive Adjustment
                  Shares, the certificates representing the Adjustment Shares
                  (together with a blank stock power executed by such Outside
                  Director) shall be delivered to and held by the Company,
                  subject to all of the terms and conditions of the Plan, for
                  the period specified in or in accordance with Section
                  IV(c)(i). Any Adjustment Shares shall be Restricted Stock for
                  all purposes of the Plan, subject to the same restrictions as
                  the shares of Restricted Stock to which they relate. If such
                  Participant shall receive rights or warrants with respect to
                  any shares of Restricted Stock or any Adjustment Shares, such
                  rights or warrants may be held, exercised, sold or otherwise
                  disposed of by such Outside Director, and any shares or other
                  securities acquired by such Outside Director as a result of
                  the exercise of such rights or warrants likewise may be held,
                  sold, or otherwise disposed of by such Outside Director, free
                  and clear of any restrictions.


                                       6


V.    FURTHER CONDITIONS

      A.    Unless the shares of Restricted Stock to be awarded under the Plan
            have been registered with the Securities and Exchange Commission
            under the Securities Act prior the issuance of the shares of
            Restricted Stock, the Outside Director receiving such Restricted
            Stock must represent in writing to the Company that such shares of
            Common Stock are being acquired for investment purposes only and not
            with a view towards the further resale or distribution thereof and
            must supply to the Company such other documentation as may be
            required by the Company, unless in the opinion of counsel to the
            Company such representation, agreement or documentation is not
            necessary to comply with the Securities Act.

      B.    The Company shall not be obligated to deliver any shares of Common
            Stock until they have been listed on each securities exchange on
            which the shares of Common Stock may then be listed or until there
            has been qualification under or compliance with such state or
            federal laws, rules or regulations as the Company may deem
            applicable. The Company shall use reasonable efforts to obtain such
            listing, qualification and compliance.

      C.    The Committee may make such provisions and take such steps as it may
            deem necessary or appropriate for the withholding of any taxes that
            the Company is required by any law or regulation of any governmental
            authority, whether federal, state or local, domestic or foreign, to
            withhold in connection with the award of any Restricted Stock,
            including, but not limited to (i) the withholding of delivery of
            certificates for shares of Common Stock until the Outside Director
            reimburses the Company for the amount the Company is required to
            withhold with respect to such taxes, (ii) the canceling of any
            number of shares of Common Stock issuable in an amount sufficient to
            reimburse the Company for the amount it is required to so withhold
            or (iii) withholding the amount due from any such Outside Director's
            other compensation.

VI.   FORFEITURE OF BENEFITS

      As long as an Outside Director is receiving or is a recipient of a
Restricted Stock Award under the Plan, such Outside Director will not directly
or indirectly enter into or in any manner take part in any business or other
endeavor, as an employee, agent, independent contractor, owner or otherwise,
which in any manner competes or conflicts with the business of the Company or is
detrimental to the best interests of the Company, unless the Company consents
thereto in writing. The failure of an Outside Director to comply with the
provisions of this Article shall result in the forfeiture all Restricted Stock
grants under the Plan. Before any such forfeiture, the Company shall mail notice
to the Outside Director that consideration is being given to forfeiture pursuant
to this Article. On written request of the Outside Director within sixty days
following the mailing by the Company of the notice, the Committee shall afford
the Outside Director an opportunity to demonstrate to the Committee that
forfeiture would not be justified.


                                       7


VII.  ADMINISTRATION

      The Plan shall be administered by the Committee, which shall have full and
final authority to interpret the provisions of the Plan and to establish rules
and regulations and otherwise make determinations regarding the administration
and operation of the Plan. All decisions and determinations by the Committee
with respect to the Plan or awards payable thereunder shall be final and binding
upon all parties.

VIII. ADJUSTMENT UPON CHANCES IN CAPITALIZATION

      In the event that the outstanding shares of Common Stock are hereafter
changed by reason of recapitalization, reclassification, stock split,
combination or exchange of shares of Common Stock or the like, or by the
issuance of dividends payable in shares of Common Stock, an appropriate
adjustment shall be made by the Committee in the number of shares of Restricted
Stock outstanding

IX.   TERMINATION, MODIFICATION AND AMENDMENT

      A.    The Board may, at any time, terminate the Plan or, from time to
            time, make such modifications or amendments of the Plan as it may
            deem advisable.

      B.    No termination, modification or amendment of the Plan may adversely
            affect the rights under any outstanding shares of Restricted Stock
            without the consent of the Outside Director to whom such shares of
            Restricted Stock shall have been previously awarded.

X.    NOT A CONTRACT FOR CONTINUED SERVICE

      Nothing contained in the Plan or in any restricted stock agreement
executed pursuant hereto shall be deemed to confer upon any Outside Director to
whom shares of Restricted Stock are or may be awarded hereunder any right to
remain a member of the Board or in any way limit the right of the Board or the
Stockholders to terminate or fail to renominate or reelect any such Outside
Director as a member of the Board.

XI.   MISCELLANEOUS

      A.    The costs and expenses of administering the Plan shall be borne by
            the Company and shall not be charged against any award or to any
            Outside Director receiving an award.

      B.    Any restricted stock agreement may contain, among other things,
            provisions prohibiting the Outside Director from competing with the
            Company or any affiliate in a form or forms acceptable to the
            Committee, in its sole discretion.

      C.    This Plan and actions taken in connection herewith shall be governed
            and construed in accordance with the laws of the State of New
            Jersey.


                                       8


      D.    The captions and section numbers appearing in this Plan are inserted
            only as a matter of convenience. They do not define, limit or
            describe the scope or intent of the provisions of this Plan. In this
            Plan, words in the singular number include the plural and in the
            plural include the singular; and words of the masculine gender
            include the feminine and the neuter, and when the sense so
            indicates, words of the neuter gender may refer to any gender.

      E.    Whenever the time for payment or performance hereunder shall fall on
            a weekend or public holiday, such payment or performance shall be
            deemed to be timely if made on the next succeeding business day.

EX-10.(A)(20)

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                     COMPENSATION PLAN FOR OUTSIDE DIRECTORS
                            EFFECTIVE JANUARY 1, 2003

I.    PURPOSE

      The purpose of this Public Service Enterprise Group Incorporated
Compensation Plan for Outside Directors is to advance the interests of the
Company and its stockholders by assisting the Company in attracting and
retaining individuals of superior talent, ability and achievement to serve on
its Board of Directors.

II.   DEFINITIONS

      The following words and phrases shall have the meanings set forth below
unless a different meaning is required by the context:

      A)    Annual Retainer: The amount of annual compensation paid to Outside
            Directors for service as a member of the Board.

      B)    Board: The Board of Directors of the Company.

      C)    Committee: Those persons who are members of the Board but who are
            not Outside Directors.

      D)    Common Stock: The Common Stock without nominal or par value of the
            Company.

      E)    Company: Public Service Enterprise Group Incorporated, a corporation
            organized and existing under the laws of the State of New Jersey, or
            its successor or successors.

      F)    Date of Grant: The date provided for in Article IV hereof.

      G)    Effective Date: January 1, 2003.

      H)    NYSE: The New York Stock Exchange, Inc.

      I)    Outside Director: A member of the Board on or after the Effective
            Date who never has been employed by the Company or any of its
            affiliates.

      J)    Plan: This Public Service Enterprise Group Incorporated Compensation
            Plan for Outside Directors, as it may be amended from time to time.

      K)    Securities Act: The Securities Act of 1933, as amended, or as it may
            be amended from time to time.


                                       2


III.  SHARES SUBJECT TO THE PLAN

      100,000 shares of Common Stock may be awarded pursuant to the terms of
this Plan. Such shares may be acquired directly from the Company or, at the
discretion of the Company, purchased on the open market by the Company or its
agent.

IV.   STOCK AWARDS

      A.    The compensation of each Outside Director shall be determined by the
            Board from time to time in its discretion. Such compensation shall
            include the Annual Retainer, meeting attendance fees and such other
            amounts, as the Board shall deem to be appropriate.

      B.    As determined from time to time by the Board, a portion of the
            amount of each Outside Director's Annual Retainer is to be paid in
            cash and the remainder is to be paid in shares of Common Stock
            awarded under this Plan.

      C.    The shares of Common Stock awarded pursuant to this Plan shall, at
            the Company's discretion, be acquired directly from it or shall be
            purchased on the open market by the Company or its agent. The date
            of grant of such awards shall be May 1 of each year. If May 1 in any
            year shall not be a day on which trading is being conducted on the
            NYSE, the Date of Grant for that year shall be the next succeeding
            day on which trading is being conducted on the NYSE.

      D.    The number of shares of Common Stock to be awarded on any particular
            Date of Grant shall be determined as follows:

            i)    if the shares are acquired directly from the Company, the
                  number of shares to be awarded shall be equal to the amount of
                  the portion of the Annual Retainer to be paid in stock divided
                  by the closing price of the Common Stock on the NYSE on the
                  business day immediately preceding the Date of Grant, rounded
                  up to the next whole share; and

            ii)   if the shares are purchased on the open market by the Company
                  or its agent, the number of shares to be awarded shall be
                  equal to the amount of the portion of the Annual Retainer to
                  be paid in stock divided by the actual purchase price of the
                  Common Stock, rounded up to the next whole share.


                                       3


V.    FURTHER CONDITIONS

      A.    Unless the shares of Common Stock to be awarded under the Plan have
            been registered with the Securities and Exchange Commission under
            the Securities Act prior the issuance of the shares of Common Stock,
            the Outside Director receiving such shares must represent in writing
            to the Company that such shares of Common Stock are being acquired
            for investment purposes only and not with a view towards the further
            resale or distribution thereof and must supply to the Company such
            other documentation as may be required by the Company, unless in the
            opinion of counsel to the Company such representation, agreement or
            documentation is not necessary to comply with the Securities Act.

      B.    The Company shall not be obligated to deliver any shares of Common
            Stock until they have been listed on each securities exchange on
            which the shares of Common Stock may then be listed or until there
            has been qualification under or compliance with such state or
            federal laws, rules or regulations as the Company may deem
            applicable. The Company shall use reasonable efforts to obtain such
            listing, qualification and compliance.

      C.    The Committee may make such provisions and take such steps as it may
            deem necessary or appropriate for the withholding of any taxes that
            the Company is required by any law or regulation of any governmental
            authority, whether federal, state or local, domestic or foreign, to
            withhold in connection with the award of any shares of Common Stock,
            including, but not limited to (i) the withholding of delivery of
            certificates for shares of Common Stock until the Outside Director
            reimburses the Company for the amount the Company is required to
            withhold with respect to such taxes, (ii) the canceling of any
            number of shares of Common Stock issuable in an amount sufficient to
            reimburse the Company for the amount it is required to so withhold
            or (iii) withholding the amount due from any such Outside Director's
            other compensation.

VI.   ADMINISTRATION

      This Plan shall be administered by the Committee, which shall have full
and final authority to interpret the provisions of the Plan and to establish
rules and regulations and otherwise make determinations regarding the
administration and operation of the Plan. All decisions and determinations by
the Committee with respect to the Plan or awards payable thereunder shall be
final and binding upon all parties.

VII.  TERMINATION, MODIFICATION AND AMENDMENT

      A.    The Board may, at any time, terminate the Plan or, from time to
            time, make such modifications or amendments of the Plan, as it may
            deem advisable.


                                       4


      B.    No termination, modification or amendment of the Plan may adversely
            affect the rights under any award hereunder without the consent of
            the Outside Director to whom such award shall have been previously
            been made.

VIII. NOT A CONTRACT FOR CONTINUED SERVICE

      Nothing contained in the Plan or in any agreement executed pursuant hereto
shall be deemed to confer upon any Outside Director to whom an award has or may
be made hereunder any right to remain a member of the Board or in any way limit
the right of the Board or the Stockholders to terminate or fail to renominate or
reelect any such Outside Director as a member of the Board.

IX.   MISCELLANEOUS

      A.    The costs and expenses of administering the Plan and acquiring the
            shares of Common Stock shall be borne by the Company and shall not
            be charged against any award or to any Outside Director receiving an
            award.

      B.    This Plan and actions taken in connection herewith shall be governed
            and construed in accordance with the laws of the State of New
            Jersey.

      C.    The captions and section numbers appearing in this Plan are inserted
            only as a matter of convenience. They do not define, limit or
            describe the scope or intent of the provisions of this Plan. In this
            Plan, words in the singular number include the plural and in the
            plural include the singular; and words of the masculine gender
            include the feminine and the neuter, and when the sense so
            indicates, words of the neuter gender may refer to any gender.

      D.    Whenever the time for payment or performance hereunder shall fall on
            a weekend or public holiday, such payment or performance shall be
            deemed to be timely if made on the next succeeding business day.

EX-12

                                                                      EXHIBIT 12

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED

               COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES



                                                                     Years Ended December 31,
                                                      --------------------------------------------------------
                                                        1998        1999         2000       2001       2002
                                                      -------     -------     -------     -------     -------
                                                                             (millions)
                                                                                       
Earnings as Defined in Regulation S-K (A):

Pre-tax Income from Continuing Operations             $ 1,077     $ 1,288     $ 1,272     $ 1,157     $   664

Loss/(Income) from Equity Investees, Net of
Distributions                                              28           9         (11)        (74)         11
Fixed Charges                                             577         615         718         894         966
Capitalized Interest and AFUDC                            (11)        (16)        (33)        (81)       (109)
Preferred Securities Dividends Requirements
of Subsidiaries                                           (85)        (99)       (100)        (75)        (60)
                                                      =======     =======     =======     =======     =======
Earnings                                              $ 1,586     $ 1,797     $ 1,846     $ 1,821     $ 1,472
                                                      =======     =======     =======     =======     =======

Fixed Charges as Defined in Regulation S-K (B)

Interest Expense                                          481         506         604         803         892
Interest Factor in Rentals                                 11          10          14          16          14
Preferred Securities Dividends Requirements
of Subsidiaries                                            85          99         100          75          60
Total Fixed Charges                                   $   577     $   615     $   718     $   894     $   966
                                                      =======     =======     =======     =======     =======

Ratio of Earnings to Fixed Charges                       2.75        2.92        2.57        2.04        1.52
                                                      =======     =======     =======     =======     =======


(A)   The term "earnings" shall be defined as pretax income from continuing
      operations before income or loss from equity investees plus distributed
      income from equity investees. Add to pretax income the amount of fixed
      charges adjusted to exclude (a) the amount of any interest capitalized
      during the period and (b) the actual amount of any preferred securities
      dividend requirements of majority-owned subsidiaries stated on a pre-tax
      level.

(B)   Fixed Charges represent (a) interest, whether expensed or capitalized, (b)
      amortization of debt discount, premium and expense, (c) an estimate of
      interest implicit in rentals and (d) preferred securities dividends
      requirements of majority-owned subsidiaries stated on a pre-tax level.


                                       1

EX-12.A

                                                                      Exhibit 12

                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
               COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES



                                                        For the Year Ended December 31,
                                                2002        2001       2000        1999       1998
                                               ----------------------------------------------------
                                                                    (Millions)
                                                                            
Earnings as Defined in regulation S-K (A):

Pre-tax Income from Continuing Operations      $ 320     $ 324     $   994     $ 1,163     $ 1,006
Fixed Charges
                                                 422       479         447         442         436
Preferred Securities Dividend Requirements
      of Consolidated Subsidiaries
                                                 (13)      (24)        (46)        (46)        (44)
AFUDC
                                                  (1)       (2)         (1)         (7)        (12)
                                               ----------------------------------------------------
Total Earnings                                 $ 728     $ 777     $ 1,394     $ 1,552     $ 1,386
                                               ====================================================

Fixed Charges as Defined in regulation S-K (B):

Total Interest Expense                         $ 407     $ 452     $   398     $   394     $   390
Interest Factor in Rentals
                                                   2         3           3           2           2
Preferred Securities Dividend Requirements
      of Consolidated Subsidiaries
                                                  13        24          46          46          44
                                               ----------------------------------------------------
Total Fixed Charges                            $ 422     $ 479     $   447     $   442     $   436
                                               ====================================================

Ratio of Earnings to Fixed Charges              1.73      1.62        3.12        3.51        3.18


(A) The term "earnings" shall be defined as pretax income from continuing
operations. Add to pretax income the amount of fixed charges adjusted to exclude
(a) the amount of any interest capitalized during the period (b) the actual
amount of any preferred securities dividend requirements of majority-owned
subsidiaries.

(B) Fixed Charges represent (a) interest, whether expensed or capitalized,
(including interest on the securitized debt) (b) amortization of debt discount,
premium and expense, (c) an estimate of interest implicit in rentals, and (d)
preferred securities dividend requirements of majority-owned subsidiaries.

EX-12.B

                                                                   Exhibit 12(b)

                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
               COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
                   PLUS PREFERRED STOCK DIVIDEND REQUIREMENTS



                                                        For the Year Ended December 31,
                                               2002      2001       2000        1999        1998
                                              ----------------------------------------------------
                                                                  (Millions)
                                                                           
Earnings as Defined in regulation S-K (A):

Pre-tax Income from Continuing Operations     $ 320     $ 324     $   994     $ 1,163     $ 1,006
Fixed Charges
                                                429       487         462         457         451
Preferred Securities Dividend Requirements
      of Consolidated Subsidiaries
                                                (13)      (24)        (46)        (46)        (44)
Preferred Stock Dividends, pre-tax
                                                 (7)       (8)        (15)        (15)        (15)
AFUDC
                                                 (1)       (2)         (1)         (7)        (12)
                                              ----------------------------------------------------
Total Earnings                                $ 728     $ 777     $ 1,394     $ 1,552     $ 1,386
                                              ====================================================

Fixed Charges as Defined in regulation S-K (B):

Total Interest Expense                        $ 407     $ 452     $   398     $   394     $   390
Interest Factor in Rentals
                                                  2         3           3           2           2
Preferred Securities Dividend Requirements
      of Consolidated Subsidiaries
                                                 13        24          46          46          44
Preferred Stock Dividends
                                                  4         5           9           9           9
Adjustment to Preferred Stock Dividends
     Requirements to state on a pre-income
       tax basis                                  3         3           6           6           6
                                              ----------------------------------------------------
Total Fixed Charges                           $ 429     $ 487     $   462     $   457     $   451
                                              ====================================================

Ratio of Earnings to Fixed Charges
                                               1.70      1.60        3.02        3.40        3.07


(A) The term "earnings" shall be defined as pretax income from continuing
operations. Add to pretax income the amount of fixed charges adjusted to exclude
(a) the amount of any interest capitalized during the period (b) the actual
amount of any preferred securities dividend requirements of majority-owned
subsidiaries (c) preferred stock dividends which were included in such fixed
charges amount but not deducted in the determination of pretax income.

(B) Fixed Charges represent (a) interest, whether expensed or capitalized,
(including interest on the securitized debt) (b) amortization of debt discount,
premium and expense, (c) an estimate of interest implicit in rentals, and (d)
preferred securities dividend requirements of majority-owned subsidiaries and
preferred stock dividends, increased to reflect the pre-tax earnings requirement
for Public Service Electric and Gas Company.

EX-12.C

================================================================================
                              PSEG POWER LLC
================================================================================

EXHIBIT 12



                                                            Years Ended December 31,
                                                  ----------------------------------------------
                                                   2002     2001      2000      1999       1998
                                                  ------- -------- -------- ----------  --------
                                                                    (Millions)
                                                                           
Earnings as Defined in Regulation S-K (A):

Pre-Tax Income from Continuing Operations         $ 781     $ 644     $ 521     $ 807     $ 393
Fixed Charges                                       221       213       210       131       256
Capitalized Interest                                (97)      (63)      (12)       (2)       (7)
                                                  ----------------------------------------------
Earnings
                                                  $ 905     $ 794     $ 719     $ 936     $ 642
                                                  ==============================================

Fixed Charges as Defined in Regulation S-K (B)

Interest Expense                                  $ 219     $ 206     $ 210     $ 114     $ 223
Subsidiaries' Preferred Securities
    Dividend Requirements                          --        --        --          12        25
Preferred Stock Dividends                          --        --        --           3         5
Adjustment to Preferred Stock Dividends
     to state on a pre-income tax basis            --        --        --           2         3
Interest Factor in Rentals                            2         7      --        --        --
                                                  ----------------------------------------------
Total Fixed Charges
                                                  $ 221     $ 213     $ 210     $ 131     $ 256
                                                  ==============================================

Ratio of Earnings to Fixed Charges
                                                   4.10      3.73      3.42      7.15      2.51
                                                  ==============================================


(A) The term "earnings" shall be defined as pretax income from continuing
operations. Add to pretax income the amount of fixed charges adjusted to exclude
the amount of any interest capitalized during the period.

(B) Fixed Charges represent (a) interest, whether expensed or capitalized, (b)
amortization of debt discount, premium and expense and (c) an estimate of
interest implicit in rentals.

EX-12.D

                                                                      EXHIBIT 12

                            PSEG ENERGY HOLDINGS LLC
               COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES



                                                                 For the Year Ended December 31,
                                                            -----------------------------------------
                                                             2002     2001     2000     1999     1998
                                                            -----    -----    -----    -----    -----
                                                                            (Millions)
                                                                                 
Earnings as Defined in Regulation S-K (A):

Pre-tax (Loss)  Income from Continuing Operations           $(357)   $ 255    $ 176    $ 195    $ 116

Loss/(Income) from Equity Investees, Net of Distributions
                                                               11      (74)     (11)       9       28
Fixed Charges                                                 229      199      157      105       96
Capitalized Interest                                          (12)     (16)     (21)      (6)       1
                                                            -----    -----    -----    -----    -----
Earnings                                                    $(129)   $ 364    $ 301    $ 303    $ 241
                                                            =====    =====    =====    =====    =====

Fixed Charges as Defined in Regulation S-K (B)

Interest Expense                                              227      196      154      102       93
Interest Factor in Rentals                                      2        3        3        3        3
                                                            -----    -----    -----    -----    -----
Total Fixed Charges                                         $ 229    $ 199    $ 157    $ 105    $  96
                                                            =====    =====    =====    =====    =====

Ratio of Earnings to Fixed Charges (C)                      (0.56)    1.83     1.92    $2.89     2.51
                                                            =====    =====    =====    =====    =====


(A)  The term "earnings" shall be defined as pretax income from continuing
     operations before income or loss from equity investees plus distributed
     income from equity investees. Add to pretax income the amount of fixed
     charges adjusted to exclude the amount of any interest capitalized during
     the period.

(B)  Fixed Charges represent (a) interest, whether expensed or capitalized, (b)
     amortization of debt discount, premium and expense and (c) an estimate of
     interest implicit in rentals.

(C)  The ratio of Earnings to Fixed Charges for the year ended December 31, 2002
     was (.56), as noted above, which represents a deficiency of $100 million.

EX-18

February 7, 2003

Public Service Enterprise Group Incorporated
80 Park Plaza
Newark, New Jersey 07102

We have audited the financial statements of Public Service Enterprise Group
Incorporated and its subsidiaries as of December 31, 2002 and 2001, and for each
of the three years in the period ended December 31, 2002, included in your
Annual Report on Form 10-K to the Securities and Exchange Commission and have
issued our report thereon dated February 7, 2003, which expresses an unqualified
opinion. Note 3 to such financial statements contains a description of your
adoption during the year ended December 31, 2002, of a change in the method of
accounting to present certain energy trading contract assets and liabilities on
a net basis where the legal right of offset exists. In our judgment, such change
is to an alternative accounting principle that is preferable under the
circumstances.

Yours truly,

Deloitte & Touche LLP
Parsippany, New Jersey

EX-18.A

February 7, 2003

Public Service Electric and Gas Company
80 Park Plaza
Newark, New Jersey 07102

We have audited the financial statements of Public Service Electric and Gas
Company and its subsidiaries as of December 31, 2002 and 2001, and for each of
the three years in the period ended December 31, 2002, included in your Annual
Report on Form 10-K to the Securities and Exchange Commission and have issued
our report thereon dated February 7, 2003, which expresses an unqualified
opinion. Note 3 to such financial statements contains a description of your
adoption, during the year ended December 31, 2002, of a change in the method of
accounting to present certain energy trading contract assets and liabilities on
a net basis where the legal right of offset exists. In our judgment, such change
is to an alternative accounting principle that is preferable under the
circumstances.

Yours truly,

Deloitte & Touche LLP
Parsippany, New Jersey

EX-18.B

February 7, 2003

PSEG Power LLC
80 Park Plaza
Newark, New Jersey 07102

We have audited the financial statements of PSEG Power LLC and its subsidiaries
as of December 31, 2002 and 2001, and for each of the three years in the period
ended December 31, 2002, included in your Annual Report on Form 10-K to the
Securities and Exchange Commission and have issued our report thereon dated
February 7, 2003, which expresses an unqualified opinion. Note 3 to such
financial statements contains a description of your adoption, during the year
ended December 31, 2002, of a change in the method of accounting to present
certain energy trading contract assets and liabilities on a net basis where the
legal right of offset exists. In our judgment, such change is to an alternative
accounting principle that is preferable under the circumstances.

Yours truly,

Deloitte & Touche LLP
Parsippany, New Jersey

EX-21

                                                                      EXHIBIT 21

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED

                            SIGNIFICANT SUBSIDIARIES

                                                                     State of
Name                                                 Ownership %   Incorporation
- ----                                                 -----------   -------------

Public Service Electric and Gas Company ..........       100         New Jersey
PSEG Power LLC ...................................       100         Delaware
PSEG Fossil LLC ..................................       100         Delaware
PSEG Energy Resources & Trade LLC ................       100         Delaware
PSEG Energy Holdings LLC .........................       100         New Jersey
PSEG Resources LLC ...............................       100         New Jersey
PSEG Global Inc. .................................       100         New Jersey

     The remaining subsidiaries of Public Service Enterprise Group Incorporated
are not significant subsidiaries as defined in Regulation S-X.

                                       1

EX-21

                                                                      EXHIBIT 21

                    PUBLIC SERVICE ELECTRIC AND GAS COMPANY

                            SIGNIFICANT SUBSIDIARIES

                                                                     State of
Name                                                Ownership %    Incorporation
- ----                                                -----------    -------------
PSEG Transition Funding LLC....................         100          Delaware

     The remaining subsidiaries of Public Service Electric and Gas Company are
not significant subsidiaries as defined in Regulation S-X.


                                       1

EX-23.A

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in Registration Statement Nos.
033-51309, 033-50199, 333-02763, 333-76020 and 333-98617 of Public Service
Electric and Gas Company on Form S-3 of our report dated February 7, 2003,
appearing in this Annual Report on Form 10-K of Public Service Electric and Gas
Company for the year ended December 31, 2002.

Deloitte & Touche LLP
Parsippany, New Jersey

February 25, 2003

EX-23.A

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in Registration Statement Nos.
33-44581, 33-44582, 33-45491, 333-39738 and 333-66426 of Public Service
Enterprise Group Incorporated (the "Company") on Form S-8 and Registration
Statement Nos. 33-49123, 333-47714, 333-86372, and 333-101400 on Form S-3 of the
Company dated February 7, 2003, appearing in the Annual Report on Form 10-K of
the Company for the year ended December 31, 2002.

Deloitte & Touche LLP
Parsippany, New Jersey

February 25, 2003

EX-99

                               PSEG CONFIDENTIAL

                                                                      EXHIBIT 99

        Certification Pursuant to Section 1350 of Chapter 63 of Title 18
                            of the United States Code

     I, E. James Ferland, Chief Executive Officer of Public Service Enterprise
Group Incorporated, to the best of my knowledge, certify that (i) the Annual
Report of Public Service Enterprise Group Incorporated on Form 10-K for the year
ended December 31, 2002 (the "Periodic Report") fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934
and (ii) the information contained in the Periodic Report fairly presents, in
all material respects, the financial condition and results of operations of
Public Service Enterprise Group Incorporated.

                                         /s/ E. James Ferland
                                         ---------------------------------------
                                         E. James Ferland
                                         Public Service Enterprise Group
                                           Incorporated
                                         Chairman of the Board, President and
                                         Chief Executive Officer
                                         February 25, 2003

EX-99.A

                                                                    EXHIBIT 99.1

        Certification Pursuant to Section 1350 of Chapter 63 of Title 18
                            of the United States Code

     I, Thomas M. O'Flynn, Chief Financial Officer of Public Service Enterprise
Group Incorporated, to the best of my knowledge, certify that (i) the Annual
Report of Public Service Enterprise Group Incorporated on Form 10-K for the year
ended December 31, 2002 (the "Periodic Report") fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934
and (ii) the information contained in the Periodic Report fairly presents, in
all material respects, the financial condition and results of operations of
Public Service Enterprise Group Incorporated.

                                         /s/ Thomas M. O'Flynn
                                         ---------------------------------------
                                         Thomas M. O'Flynn
                                         Public Service Enterprise Group
                                           Incorporated
                                         Executive Vice President and Chief
                                         Financial Officer
                                         February 25, 2003

EX-99.B

                                                                      EXHIBIT 99

        Certification Pursuant to Section 1350 of Chapter 63 of Title 18
                            of the United States Code

     I, E. James Ferland, Chief Executive Officer of Public Service Electric and
Gas Company, to the best of my knowledge, certify that (i) the Annual Report of
Public Service Electric and Gas Company on Form 10-K for the year ended December
31, 2002 (the "Periodic Report") fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the information
contained in the Periodic Report fairly presents, in all material respects, the
financial condition and results of operations of Public Service Electric and Gas
Company.

                                        /s/ E. James Ferland
                                        ----------------------------------------
                                        E. James Ferland
                                        Public Service Electric and Gas Company
                                        Chairman of the Board and Chief
                                        Executive Officer
                                        February 25, 2003

EX-99.C

                                                                    EXHIBIT 99.1

        Certification Pursuant to Section 1350 of Chapter 63 of Title 18
                            of the United States Code

     I, Robert E. Busch, Chief Financial Officer of Public Service Electric and
Gas Company, to the best of my knowledge, certify that (i) the Annual Report of
Public Service Electric and Gas Company on Form 10-K for the year ended December
31, 2002 (the "Periodic Report") fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the information
contained in the Periodic Report fairly presents, in all material respects, the
financial condition and results of operations of Public Service Electric and Gas
Company.

                                        /s/ Robert E. Busch
                                        ----------------------------------------
                                        Robert E. Busch
                                        Public Service Electric and Gas Company
                                        Senior Vice President - Finance and
                                        Chief Financial Officer
                                        February 25, 2003

EX-99.D

                                                                      EXHIBIT 99

        Certification Pursuant to Section 1350 of Chapter 63 of Title 18
                            of the United States Code

     I, E. James Ferland, Chief Executive Officer of PSEG Power LLC, to the best
of my knowledge, certify that (i) the Annual Report of PSEG Power LLC on Form
10-K for the year ended December 31, 2002 (the "Periodic Report") fully complies
with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act
of 1934 and (ii) the information contained in the Periodic Report fairly
presents, in all material respects, the financial condition and results of
operations of PSEG Power LLC.


                                        /s/ E. James Ferland
                                        ----------------------------------------
                                        E. James Ferland
                                        PSEG Power LLC
                                        Chairman of the Board and Chief
                                        Executive Officer
                                        February 25, 2003

EX-99.E

                                                                    EXHIBIT 99.1

        Certification Pursuant to Section 1350 of Chapter 63 of Title 18
                            of the United States Code

     I, Thomas M. O'Flynn, Chief Financial Officer of PSEG Power LLC, to the
best of my knowledge, certify that (i) the Annual Report of PSEG Power LLC on
Form 10-K for the year ended December 31, 2002 (the "Periodic Report") fully
complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 and (ii) the information contained in the Periodic Report
fairly presents, in all material respects, the financial condition and results
of operations of PSEG Power LLC.


                                        /s/ Thomas M. O'Flynn
                                        ----------------------------------------
                                        Thomas M. O'Flynn
                                        PSEG Power LLC
                                        Executive Vice President and Chief
                                        Financial Officer
                                        February 25, 2003

EX-99.F

                                                                      EXHIBIT 99

        Certification Pursuant to Section 1350 of Chapter 63 of Title 18
                            of the United States Code

     I, E. James Ferland, Chief Executive Officer of PSEG Energy Holdings LLC,
to the best of my knowledge, certify that (i) the Annual Report of PSEG Energy
Holdings LLC on Form 10-K for the year ended December 31, 2002 (the "Periodic
Report") fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 and (ii) the information contained in the
Periodic Report fairly presents, in all material respects, the financial
condition and results of operations of the PSEG Energy Holdings LLC.


                                        /s/ E. James Ferland
                                        ----------------------------------------
                                        E. James Ferland
                                        PSEG Energy Holdings LLC
                                        Chairman of the Board and Chief
                                        Executive Officer
                                        February 25, 2003

EX-99.G

                                                                    EXHIBIT 99.1

        Certification Pursuant to Section 1350 of Chapter 63 of Title 18
                            of the United States Code

     I, Thomas M. O'Flynn, Chief Financial Officer of PSEG Energy Holdings LLC,
to the best of my knowledge, certify that (i) the Annual Report of PSEG Energy
Holdings LLC on Form 10-K for the year ended December 31, 2002 (the "Periodic
Report") fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 and (ii) the information contained in the
Periodic Report fairly presents, in all material respects, the financial
condition and results of operations of PSEG Energy Holdings LLC.



                                        /s/ Thomas M. O'Flynn
                                        ----------------------------------------
                                        Thomas M. O'Flynn
                                        PSEG Energy Holdings LLC
                                        Executive Vice President and Chief
                                        Financial Officer
                                        February 25, 2003