Registration No. 333-95697
================================================================================
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   ----------

                                 Amendment No. 3

                                       to
                                    FORM S-4
                             REGISTRATION STATEMENT
                                      Under
                           THE SECURITIES ACT OF 1933

                                   ----------

                           PSEG Energy Holdings Inc.
             (Exact name of registrant as specified in its charter)

       New Jersey                        6719                   22-2983750
     (State or other               (Primary Standard          (I.R.S. Employer
jurisdiction of incorporation    Industrial Classification    Identification
    or organization)                  Code Number)                Number)


                               80 Park Plaza-T22
                          Newark, New Jersey 07102-4194
                                 (973) 456-3581

   (Address, including zip code and telephone number, including area code, of
                   Registrant's principal executive offices)

                                   ----------

                               Bruce E. Walenczyk
                             Vice President-Finance
                                80 Park Plaza-T22
                          Newark, New Jersey 07102-4194
                                 (973) 456-3581
 (Name, address, including zip code and telephone number, including area code,
                             of agent for service)

                                   ----------

                                   Copies to:
                             James T. Foran, Esquire
                           Associate General Counsel
                  Public Service Enterprise Group Incorporated
                                  80 Park Plaza
                                  P.O. Box 1171
                          Newark, New Jersey 07101-1171
                                 (973) 430-7000

                                   ----------

      Approximate  date of commencement of proposed sale to the public:  As soon
as practicable after this registration statement becomes effective.

     If any of the securities  being  registered on this Form are to be offered
in connection  with the  formation of a holding  company and there is compliance
with General Instruction G, check the following box. [ ]

      If this Form is filed to register  additional  securities  for an offering
pursuant to Rule 462 (b) under the  Securities  Act,  please check the following
box and list the Securities  Act  registration  statement  number of the earlier
effective registration statement for the same offering. [ ]

      If this Form is a post-effective  amendment filed pursuant to Rule 462 (c)
under the Securities Act, please check the following box and list the Securities
Act registration number of the earlier effective  registration statement for the
same offering. [ ]

                         CALCULATION OF REGISTRATION FEE
================================================================================
<TABLE>
<CAPTION>
                                                                Proposed         Proposed
                                                                 Maximum         Maximum
              Title of Each                    Amount           Offering         Aggregate          Amount of
           Class of Securities                  to be           Price Per        Offering          Registration
            to be Registered                 Registered           Unit             Price             Fee (1)
---------------------------------------------------------------------------------------------------------------------------
<S>                                         <C>                   <C>          <C>                   <C>
10% Senior Notes due 2009 ................  $400,000,000          100%         $400,000,000          $105,600
</TABLE>
================================================================================
(1)  The registration  fee has been calculated  pursuant to rule 457(f)(2) under
     the  Securities  Act.  The  proposed  maximum   aggregate   offering  price
     represents  the  total  value  of the  bonds  being  exchanged  under  this
     registration statement.

      The Registrant hereby amends this  registration  statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further  amendment  which  specifically  states  that  this  registration
statement shall thereafter  become effective in accordance with Section 8 (a) of
the Securities  Act of 1933 or until this  registration  statement  shall become
effective on such date as the Commission, acting pursuant to said Section 8 (a),
may determine.
================================================================================

<PAGE>

The  information in this  prospectus is not complete and may be changed.  We may
not sell  these  securities  until the  registration  statement  filed  with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to  sell  these  securities  and it is not  soliciting  an  offer  to buy  these
securities in any state where the offer or sale is not permitted.


                   Subject to completion, dated June 27,2000.


PROSPECTUS
[Logo] PSEG Energy Holdings

                                  $400,000,000

                            PSEG Energy Holdings Inc.

                                Offer to Exchange

                        10% Senior Notes due 2009
              Which have been registered under the Securities Act

                           For Any and All Outstanding
                            10% Senior Notes due 2009

                        Which have not been so registered

                           TERMS OF THE EXCHANGE OFFER

o     The  exchange  offer  expires  at 5:00 p.m.,  Eastern  Standard  Time,  on
      ______________,  unless extended by us in our sole  discretion  subject to
      applicable law.

o     The  terms  of the  exchange  notes  are  substantially  identical  to the
      original  notes,  except that the exchange notes are registered  under the
      Securities  Act and the  transfer  restrictions  and  registration  rights
      applicable to the original notes do not apply to the exchange notes.

o     All original  notes that are validly  tendered  and not validly  withdrawn
      will be exchanged.

o     Tenders of original notes may be withdrawn at any time prior to expiration
      of the exchange offer.

o     We do not  intend  to  apply  for  listing  of the  exchange  notes on any
      securities  exchange or to arrange for them to be quoted on any  quotation
      system.

o     The  exchange  offer is subject to  customary  conditions,  including  the
      condition  that the  exchange  offer  not  violate  applicable  law or any
      applicable  interpretation  of the staff of the  Securities  and  Exchange
      Commission.

o     We will not receive any proceeds from the exchange offer.

o     You will not incur any material federal income tax consequences  from your
      participation in the exchange offer.

      Please see "Risk Factors" beginning on page 13 for a discussion of factors
you should consider in connection with the exchange offer.

      Neither the  Securities and Exchange  Commission nor any state  securities
commission has approved or disapproved of the exchange  notes,  or determined if
this prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

                  The date of this prospectus is _______, 2000.

<PAGE>

                                TABLE OF CONTENTS

                                                                         Page
                                                                         ----

Where to Find More Information                                              3
Prospectus Summary                                                          4
Summary Consolidated Financial Data                                        12
Risk Factors                                                               13
Forward-Looking Statements                                                 17
Use of Proceeds                                                            18
Capitalization                                                             18
Selected Consolidated Financial Data                                       19
Management's Discussion and Analysis of Financial Condition
  and Results of Operations                                                20
Business                                                                   35
Management                                                                 57
The Exchange Offer                                                         59
Description of Exchange Notes                                              67
Federal Income Tax Considerations                                          82
Plan of Distribution                                                       85
Legal Opinions                                                             86
Experts                                                                    86
Independent Auditors' Report                                              F-1
Consolidated Financial Statements                                         F-2

      When we refer to the term "note" or "notes",  we are referring to both the
original notes and the exchange notes to be issued in the exchange  offer.  When
we refer to "holders" of the notes,  we are  referring to those  persons who are
the registered  holders of notes on the books of the registrar  appointed  under
the indenture.

      No  dealer,  salesperson  or  other  person  is  authorized  to  give  any
information or to represent anything not contained in this prospectus.  You must
not rely on any unauthorized information or representations.  This prospectus is
an offer to exchange only the notes offered by this  prospectus,  but only under
circumstances and in jurisdictions  where it is lawful to do so. The information
contained in this prospectus is current only as of its date.


                                       2
<PAGE>

                         WHERE TO FIND MORE INFORMATION

      In connection  with the exchange  offer, we have filed with the Securities
and Exchange  Commission a  registration  statement  under the  Securities  Act,
relating to the exchange notes to be issued in the exchange  offer. As permitted
by SEC rules,  this prospectus  omits  information  included in the registration
statement.  For a more complete understanding of this exchange offer, you should
refer to the registration statement, including its exhibits.

      The public may read and copy any reports or other information that we file
with the SEC at the SEC's public  reference room, Room 1024 at Judiciary  Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, or at the SEC's regional offices
located at 7 World Trade Center, 13th Floor, New York, New York 10048, and Suite
1400, 500 West Madison Street,  Chicago,  Illinois 60661.  The public may obtain
information on the operation of the public  reference room by calling the SEC at
1-800-SEC-0330. Our SEC filings are also available to the public from commercial
document  retrieval  services  and at the  web  site  maintained  by the  SEC at
http://www.sec.gov.   You  may  also  obtain  a  copy  of  the  exchange   offer
registration  statement at no cost by writing or telephoning us at the following
address:

                            PSEG Energy Holdings Inc.
                                80 Park Plaza-T22
                          Newark, New Jersey 07102-4194
                                 (973) 456-3581
                              Attention: Treasurer


                                       3
<PAGE>

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                               PROSPECTUS SUMMARY

      The  following  information  is  qualified  in its  entirety  by the  more
detailed  information  and  financial  statements  appearing  elsewhere  in this
prospectus.

                          Summary of the Exchange Offer

The Exchange Offer ...........     We are  offering to exchange an  aggregate of
                                   $400,000,000  principal  amount  of  exchange
                                   notes for $400,000,000 of original notes. The
                                   original  notes  may  be  exchanged  only  in
                                   multiples of $1,000.

Issuance of the Original .....     The  original  notes were  issued and sold on
  Notes                            October   8,  1999  in  a   transaction   not
                                   requiring  registration  under the Securities
                                   Act.

Exchange and Registration
  Rights .....................     At the time we issued the original  notes, we
                                   entered  into an  exchange  and  registration
                                   rights  agreement  which obligates us to make
                                   this exchange offer.

Required Representations .....     In  order  to  participate  in  the  exchange
                                   offer,  you  will be  required  to make  some
                                   representations  in a letter of  transmittal,
                                   including that:

                                   o you are not affiliated with us,

                                   o you are not a broker-dealer who bought your
                                     original notes directly from us,

                                   o you will acquire the exchange  notes in the
                                     ordinary course of business, and

                                   o  you  have  not  agreed   with   anyone  to
                                      distribute the exchange notes.

                                   If you  are a  broker-dealer  that  purchased
                                   original  notes for your own  account as part
                                   of market-making or trading  activities,  you
                                   may  represent to us that you have not agreed
                                   with us or our  affiliates to distribute  the
                                   exchange    notes.    If   you   make    this
                                   representation,  you  need  not make the last
                                   representation provided for above.

Resale of the Exchange .......     We are making the exchange  offer in reliance
  Notes                            on the  position of the staff of the Division
                                   of Corporation  Finance of the SEC as defined
                                   in  certain  interpretive  letters  issued to
                                   third  parties  in  other  transactions.   We
                                   believe that the exchange  notes  acquired in
                                   this  exchange  offer  may be  freely  traded
                                   without compliance with the provisions of the
                                   Securities Act that call for registration and
                                   delivery of a prospectus, except as described
                                   in the following paragraph.

                                   The  exchange  notes will be freely  tradable
                                   only  if  the  holders  meet  the  conditions
                                   described  under  "Required  Representations"
                                   above.  If  you  are  a  broker-dealer   that
                                   purchased original notes for your own account
                                   as   part   of   market-making   or   trading
                                   activities,  you must  deliver  a  prospectus
                                   when you sell exchange  notes. We have agreed
                                   in  the  exchange  and  registration   rights
                                   agreement  relating to the original  notes to
                                   allow  you to use  this  prospectus  for this
                                   purpose during the 180-day  period  following
                                   completion of the exchange offer,  subject to
                                   our  right   under  some   circumstances   to
                                   restrict  your  use of this  prospectus.  See
                                   "The  Exchange  Offer -- Resales of  Exchange
                                   Notes".

                                   Broker  dealers who acquired  original  notes
                                   directly  from us may not rely on the staff's
                                   interpretations  and  must  comply  with  the
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                                       4
<PAGE>

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                                   registration    and    prospectus    delivery
                                   requirements of the Securities Act, including
                                   being named as a selling security holder,  in
                                   order to  resell  the  original  notes or the
                                   exchange notes.

Accrued Interest on the
  Original Notes .............     The exchange  notes will bear  interest at an
                                   annual  rate of 10%.  Any  interest  that has
                                   accrued on the  original  notes  before their
                                   exchange  in  this  exchange  offer  will  be
                                   payable  on the  exchange  notes on the first
                                   interest payment date after the conclusion of
                                   this exchange offer.

Procedures for  Exchanging
  Notes ......................     The procedures for exchanging  original notes
                                   involve  notifying the exchange  agent before
                                   the expiration  date of the exchange offer of
                                   your  intention to do so. The  procedures for
                                   properly making notification are described in
                                   this   prospectus   under  the  heading  "The
                                   Exchange  Offer -  Procedures  for  Tendering
                                   Original Notes".

Expiration ...................     Date 5:00 p.m.,  Eastern  Standard  Time,  on
                                   _____________,   2000,  unless  the  exchange
                                   offer is extended.

Exchange Date ................     We will notify the exchange agent of the date
                                   of  acceptance  of  the  original  notes  for
                                   exchange.

Withdrawal Rights ............     If  you  tender  your   original   notes  for
                                   exchange  in this  exchange  offer  and later
                                   wish to withdraw  them,  you may do so at any
                                   time before 5:00 p.m., Eastern Standard Time,
                                   on the day this exchange offer expires.

Acceptance of Original
  Notes and Delivery of
  Exchange Notes .............     We will  accept any  original  notes that are
                                   properly  tendered for  exchange  before 5:00
                                   p.m.,  Eastern Standard Time, on the day this
                                   exchange  offer  expires.  The exchange notes
                                   will be delivered  promptly after  expiration
                                   of this exchange offer.

Tax Consequences .............     You  will  not  incur  any  material  federal
                                   income    tax    consequences    from    your
                                   participation in this exchange offer.

Use of Proceeds ..............     We will not  receive any cash  proceeds  from
                                   this exchange offer.

Exchange Agent ...............     First Union  National  Bank is serving as the
                                   exchange  agent.  Its address  and  telephone
                                   number are provided in this prospectus  under
                                   the heading "The  Exchange  Offer -- Exchange
                                   Agent".

Effect on Holders of
  Original Notes .............     Any  original  notes that remain  outstanding
                                   after this exchange offer will continue to be
                                   subject to  restrictions  on their  transfer.
                                   After  this   exchange   offer,   holders  of
                                   original   notes   will  not  (with   limited
                                   exceptions) have any further rights under the
                                   exchange and registration  rights  agreement.
                                   Any  market for  original  notes that are not
                                   exchanged could be adversely  affected by the
                                   conclusion of this exchange offer.


                          Summary of the Exchange Notes

      This exchange offer applies to $400,000,000  aggregate principal amount of
the original notes. The terms of the exchange notes will be essentially the same
as the original notes,  except that the exchange notes will not contain language
restricting their transfer, and holders of the exchange notes generally
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                                       5
<PAGE>
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will not be entitled  to further  registration  rights  under the  exchange  and
registration  rights agreement.  The exchange notes issued in the exchange offer
will evidence the same debt as the outstanding  original notes,  which they will
replace,  and both the original notes and the exchange notes are governed by the
same indenture.

Securities Offered ...........     $400,000,000  principal  amount of 10% Senior
                                   Notes due 2009  which  have  been  registered
                                   under the Securities Act.

Interest Payment Dates .......     April 1 and  October 1,  commencing  April 1,
                                   2000.

Stated Maturity Date .........     October 1, 2009

Optional Redemption ..........     The exchange  notes will be redeemable at our
                                   option in whole or in part at any time,  at a
                                   redemption price equal to the greater of

                                   o  100%  of  the  principal   amount  of  the
                                      exchange notes to be redeemed, and


                                   o  the  sum  of  the  present  values  of the
                                      principal   amount   and   the   remaining
                                      scheduled  payments  of  interest  on  the
                                      exchange  notes  to be  redeemed  from the
                                      redemption   date  to   October   1,  2009
                                      discounted on a semiannual basis (assuming
                                      a  360-day  year   consisting   of  30-day
                                      months) at a specified  Treasury Rate plus
                                      40 basis points,

                                   plus, in either case, accrued interest to the
                                   date  of  redemption.   See  "Description  of
                                   Exchange Notes -- Optional Redemption".

Ranking ......................     The exchange  notes will be senior  unsecured
                                   obligations  and will rank  equally  with our
                                   senior  unsecured  indebtedness.  As of March
                                   31, 2000, we had outstanding  $425 million of
                                   debt that ranks equal with the exchange notes
                                   and had no secured debt outstanding. Since we
                                   are a holding  company,  the  exchange  notes
                                   will  be  structurally  subordinated  to  any
                                   indebtedness  and  other  liabilities  of our
                                   operating subsidiaries.

Cross Acceleration ...........     The  exchange  notes  will be  subject to the
                                   acceleration  of their  maturity in the event
                                   of the acceleration of the indebtedness under
                                   our revolving  credit  facilities and certain
                                   other   indebtedness   as   described   under
                                   "Description  of Exchange  Notes -- Events of
                                   Default and Remedies".

Ratings ......................     The exchange notes have been assigned ratings
                                   of "BBB-" by Standard & Poor's  Ratings Group
                                   and Fitch  IBCA,  Inc.  and "Ba1" by  Moody's
                                   Investors Service, Inc.

                                   A security rating is not a recommendation  to
                                   buy,  sell  or  hold  securities  and  may be
                                   subject to revision or withdrawal at any time
                                   by the assigning  rating agency.  Each rating
                                   should  be  evaluated  independently  of  any
                                   other rating.

Sinking Fund .................     None.

Limitation on Liens ..........     Energy Holdings and its  subsidiaries may not
                                   incur  any   liens  to  secure   indebtedness
                                   without  providing  that the  exchange  notes
                                   will be equally and ratably secured with such
                                   indebtedness. These restrictions do not apply
                                   to liens granted by subsidiaries  (other than
                                   "Material  Subsidiaries"  as  defined on page
                                   71) in  connection  with project  financings,
                                   liens securing indebtedness not exceeding 10%
                                   of  Consolidated   Net  Tangible  Assets  (as
                                   defined  on  page  70)  and  other  specified
                                   liens.
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                                       6
<PAGE>
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Limitation on Sale and
  Leasebacks .................     Energy Holdings and its  subsidiaries may not
                                   enter  into sale and  leaseback  transactions
                                   unless  it  would  be  permissible  to  incur
                                   indebtedness  secured  by a  lien  under  the
                                   foregoing Limitation on Liens covenant in the
                                   amount of the  indebtedness  associated  with
                                   that sale and leaseback transaction or unless
                                   the proceeds of that sale and leaseback  were
                                   applied  to the  reduction  of  indebtedness.
                                   Also   not    restricted   is    indebtedness
                                   associated    with    sale   and    leaseback
                                   transactions    not    exceeding    10%    of
                                   Consolidated Net Tangible Assets.

Change of Control ............     Upon a "Change  of  Control"  (as  defined on
                                   page  70),  a holder  of  exchange  notes may
                                   require  us  to   repurchase   that  holder's
                                   exchange  notes, in whole or in part, at 101%
                                   of  the  principal  amount  of  the  exchange
                                   notes,  plus  accrued  interest.  A Change of
                                   Control  will not be deemed to have  occurred
                                   if,  after  giving  effect  to  circumstances
                                   otherwise  constituting  a Change of Control,
                                   the exchange notes are rated "BBB-" or better
                                   by Standard & Poor's  Ratings Group and "Ba1"
                                   or better by Moody's Investors Service, Inc.

Form .........................     The exchange notes will be represented by one
                                   or more  permanent  global  exchange notes in
                                   fully   registered   form  without   interest
                                   coupons,   deposited   with  the  Trustee  as
                                   custodian for, and registered in the name of,
                                   a nominee of DTC,  except in certain  limited
                                   circumstances described in this prospectus.

Risk Factors .................     Our  business,   and  an  investment  in  the
                                   exchange   notes,   is   subject   to  risks,
                                   including the following:

                                   o  Because  we  are a  holding  company,  our
                                      ability  to  service  our  debt  could  be
                                      limited.

                                   o  Our  ability to control the cash flow from
                                      our minority investments is limited.

                                   o  We  may  not  have  access  to  sufficient
                                      capital  in the  amounts  and at the times
                                      needed.

                                   o  We cannot assure  sufficient  cash flow to
                                      service the notes.

                                   o  Because  a   substantial   amount  of  our
                                      business is  conducted  outside the United
                                      States, adverse international developments
                                      could negatively impact our business.

                                   The Company

      PSEG Energy Holdings Inc.  participates in three  energy-related  lines of
business through its wholly-owned subsidiaries: PSEG Global Inc., PSEG Resources
Inc. and PSEG Energy  Technologies  Inc. Our  objective is to pursue  investment
opportunities  in the  rapidly  changing  worldwide  energy  markets  where  our
technical,  market and  regulatory  expertise can be applied to create  economic
value.

      We focus on

      o     supplying  reliable,  competitively  priced  energy  in high  growth
            markets,

      o     providing capital to finance energy-related assets and

      o     supplying  products  and  services  designed to assist  customers in
            efficient energy utilization.

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                                       7
<PAGE>
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      We are a direct,  wholly-owned  subsidiary  of Public  Service  Enterprise
Group  Incorporated  (PSEG) and an affiliate of Public Service  Electric and Gas
Company, a public utility operating in New Jersey,  which is also a wholly-owned
subsidiary of PSEG. We provide  administrative  support for our subsidiaries and
financing on the basis of a combined credit profile.  In addition,  PSEG Capital
Corporation,  our  subsidiary,  has  provided  debt  financing  in the  form  of
Medium-Term  Notes,  with maturities  ranging from 2000 to 2003, in an aggregate
principal amount of up to $650 million to our subsidiaries on the basis of a net
worth  maintenance  agreement  with PSEG.  As of March 31, 2000 and December 31,
1999, PSEG had approximately $1.4 billion of equity (including retained earnings
of approximately  $299 million and $276 million,  respectively)  invested in our
company.

Global

      Global  develops,  acquires,  owns and operates  electric  generation  and
distribution  facilities  and  engages  in power  production  and  distribution,
including  wholesale and retail sales of electricity,  in selected  domestic and
international  markets.  Global has  ownership  interests in nineteen  operating
generation projects totaling 2,026 MW (544 MW net) located in the United States,
Argentina,  China and  Venezuela.  Global has  ownership  interests in seventeen
projects   totaling  4,808  MW  (2,245  MW  net)  in  construction  or  advanced
development that are located in the United States, Argentina,  Venezuela, India,
Tunisia,  China, Italy and Poland. Of Global's generation projects in operation,
construction or advanced  development,  1,294 MW net, or 46%, are located in the
United  States.  Global is actively  involved,  through its joint  ventures,  in
managing  the  operations  of eight  operating  generation  projects and will be
actively  involved  in  managing  the  operations  of  five of the  projects  in
construction or advanced development.  Global owns interests in six distribution
companies,   which  as  of  March  31,  2000  and  December  31,  1999,  totaled
approximately 68% of Global's assets, providing electricity to approximately 2.7
million  customers  in  Argentina,  Brazil,  Chile and Peru.  Global is actively
involved in managing the operations of these distribution companies.  Global was
established in 1984 and as of March 31, 2000 and December 31, 1999 had assets of
approximately $1.8 billion and $1.7 billion, respectively.

Resources

      Resources provides energy infrastructure financing in developed countries.
Resources  invests  in  energy-related  financial  transactions  and  manages  a
diversified  portfolio of more than 60 investments  including  leveraged leases,
leveraged buyout funds,  limited partnerships and marketable  securities.  As of
March 31, 2000 and December 31, 1999,  Resources had approximately  $1.8 billion
invested  in  leveraged  leases  representing   approximately  83%  and  84%  of
Resources' assets, respectively. Approximately 79% of these leveraged leases are
with lessees that have  investment  grade credit  ratings.  Leveraged  leases of
energy-related plant and equipment totaled approximately,  $1.4 billion and $1.3
billion  or 75% and 73% of the  lease  portfolio  and 62% and 61% of  Resources'
assets as of March 31, 2000 and December 31, 1999,  respectively.  The remainder
of Resources'  portfolio is further  diversified across a wide spectrum of asset
types and business sectors,  including  leveraged leases of aircraft,  railcars,
real estate and industrial  equipment,  limited partnership interests in project
finance  transactions,   leveraged  buyout  and  venture  funds  and  marketable
securities.  All of Resources'  investments since 1992 have been energy-related.
Resources was established in 1985 and as of March 31, 2000 and December 31, 1999
had assets of approximately $2.2 billion and $2.1 billion, respectively.

Energy Technologies

      Energy  Technologies  is an energy  management  company  that  constructs,
operates and maintains heating,  ventilating and air conditioning (HVAC) systems
for,  and  provides  energy-related   engineering,   consulting  and  mechanical
contracting services to, industrial and commercial customers in the Northeastern
and Middle Atlantic United States.  Energy  Technologies was established in 1997
and as of March 31, 2000 and December 31, 1999 had assets of approximately  $300
million and $252 million, respectively.
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                                       8
<PAGE>
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                                Recent Activities

Energy Holdings

      o     In February  2000, we issued $300 million of 91/8 % senior notes due
            2004.  The net proceeds from the sale were used for the repayment of
            short-term debt outstanding under our revolving credit facilities.

      o     In October  1999,  we issued  $400  million of 10% senior  notes due
            2009.  These are the  original  notes being  offered  for  exchange.
            Interest  is  payable  semi-annually  on  April  1  and  October  1,
            commencing  April 1, 2000.  The net proceeds from the sale were used
            for the repayment of short-term debt outstanding under our revolving
            credit facilities.

      o     In June 1999, PSEG invested approximately $200 million in additional
            equity  in our  company,  which  we used to  repay  short-term  debt
            incurred in connection with recent investment activity.

Global

      o     In  February  2000,  Global  and its 50%  partner  completed  a $329
            million  project  financing for a 1,000 MW gas-fired  combined-cycle
            electric generation  facility to be located near Odessa,  Texas. The
            facility is under construction and commercial  operation is expected
            in 2001. Global's equity investment, including loans and guarantees,
            for its 50% interest is expected to be approximately $190 million.

      o     In November 1999, Global announced that it plans to build a combined
            heat and power plant of 220 MW of electricity  and 500 MW of thermal
            energy capacity  utilizing  circulating  fluidized bed technology in
            Poland.  Total  project  cost  is  estimated  at $320  million  with
            commercial operation targeted for 2003.

      o     In October 1999,  Global closed on the acquisition of a 70% interest
            in  Prisma  2000,  a power  project  development  company  in  Italy
            specializing  in  renewable   energy.   Prisma  2000  currently  has
            approximately  550 MW of power  projects  either in  development  or
            under  construction  consisting  of  biomass,  hydro and gas powered
            production. Global's investment requirements over the next two years
            are expected to be approximately $80 million.

      o     In October 1999, Global and its 50% partner completed a $312 million
            project  financing of a 1,000 MW gas-fired  combined-cycle  electric
            generation  facility in Guadalupe County in south central Texas. The
            plant is under construction and commercial  operation is expected to
            commence in late 2000.  Global's equity investment,  including loans
            and guarantees, for its 50% interest is expected to be approximately
            $193 million.

      o     In September 1999, Global and a partner closed on a tender offer for
            outstanding  publicly  traded  shares  of Luz del  Sur,  a  Peruvian
            distribution  company.  The  number of shares  tendered  constituted
            22.5%  of the  shares  of Luz del Sur.  At the  time of the  tender,
            Global and its  partner  already  owned 37% of Luz del Sur which was
            acquired  in June  1999 as part  of the  acquisition  of  Chilquinta
            Energia, S.A. discussed below. The tender was offered exclusively in
            Peru. Global and its partner also purchased an additional 25% of Luz
            del Sur upon closing of the tender  offer.  Global's  investment  in
            connection with these transactions was approximately $108 million.

      o     In August  1999,  Global  sold its 50%  partnership  interest in the
            Newark Bay cogeneration facility, a 137 MW gas-fired  combined-cycle
            plant  in  Newark,  NJ.  Global  recognized  an  after-tax  gain  of
            approximately $40 million as a result of this transaction.

      o     In August 1999, Global and its partners closed project financing for
            the  Rades  facility,  a 471 MW  gas-fired  combined-cycle  electric
            generation facility in Rades, Tunisia.  Construction of the facility
            began in August 1999 and is expected to be  completed  in the summer
            of 2001. Total cost is anticipated to be approximately $261 million.
            Global's equity  investment,  including  contingencies,  for its 35%
            interest is expected to be approximately $27 million.
--------------------------------------------------------------------------------

                                       9
<PAGE>
--------------------------------------------------------------------------------
      o     As  part  of  a  comprehensive  review  of  assets  and  development
            activities,  Global recognized an after-tax  write-down in the third
            quarter of 1999 of $27  million,  related to equity  investments  in
            generation  facilities in California and in development companies in
            Thailand and the Philippines.

      o     In June 1999,  Global and a partner  acquired  90.23% of  Chilquinta
            Energia,  S.A., a distribution  company  providing  electric and gas
            service to more than one  million  customers  in Chile and Peru.  In
            January  2000,  Global and its partner  completed the purchase of an
            additional  9.75%  of  the  shares  of  Chilquinta  Energia,   S.A.,
            increasing their total holdings to 99.98%. Global's 50% share of the
            acquisition was funded with approximately $268 million of equity and
            $160 million of debt that is non-recourse to Global and to us.

      o     In June 1999,  Global and a partner  closed  project  financing  for
            Parana,  an  830 MW  gas-fired  combined-cycle  electric  generation
            facility  to be  constructed  in San  Nicolas,  Argentina.  The  new
            facility is adjacent to the Central Termica San Nicolas (CTSN) power
            plant,  a 650 MW  facility  also  owned by Global  and its  partner.
            Construction began in August 1999 and is expected to be completed by
            2001 at a total cost of approximately $448 million.  Global's equity
            investment for its 33% interest is expected to be approximately  $86
            million, including contingencies.

      o     In May 1999,  Global  acquired a 63% interest in  Tri-Sakthi  Energy
            Private Limited, a company which is developing and will own a 525 MW
            coal-fired electric generation facility to be constructed in Ennore,
            Tamil Nadu, India. Upon scheduled completion in 2003, Global will be
            the operator of the plant.  The total project cost is expected to be
            approximately $630 million.  Global's equity  investment,  including
            contingencies, is expected to be approximately $180 million.

      o     In April 1999,  Global  announced  the  formation of a joint venture
            which plans to construct and operate up to three gas-fired  electric
            generation  facilities,  the Turboven project,  with total installed
            capacity  of up to 200 MW and  associated  distribution  systems  to
            serve, under contract,  industrial customers in Venezuela.  Turboven
            has essentially completed  construction of the first two facilities.
            Global has invested approximately $43 million in its 50% interest to
            date.

      o     In December 1998,  Global and its partners closed project  financing
            for the PPN  project,  a 330 MW  gas-fired  combined-cycle  electric
            generation   facility  currently  in  construction  and  located  in
            Pillaiperumanallur,  Tamil Nadu, India. Upon scheduled completion in
            2001,  Global will be the operator of the plant.  Total project cost
            is estimated to be  approximately  $328 million.  Global holds a 20%
            equity interest in the project and its equity investment,  including
            contingencies, is expected to be approximately $32 million.

Resources

      o     In February 2000,  Resources  negotiated the early  termination of a
            lease of electric generating equipment and received cash proceeds of
            $9 million and  recognized  an after-tax  gain of  approximately  $2
            million.

      o     In January and February 2000,  Resources invested $73 million in two
            leveraged lease transactions  including a gas distribution system in
            the Netherlands and an electric power plant in the United States.

      o     In  November  1999,   Resources  sold  its  interest  in  a  limited
            partnership and received cash proceeds of $11 million and recognized
            an after-tax gain of approximately $1 million.

      o     In  1999,  Resources  negotiated  the  early  termination  of  three
            leveraged  leases and  received  cash  proceeds of $126  million and
            recognized an after-tax gain of approximately $14 million.

      o     In  1999,  Resources  invested  approximately  $380  million  in six
            leveraged lease transactions of energy-related assets, including gas
            distribution  networks in the  Netherlands,  cogeneration  plants in
            Germany, a generation  facility in the United States and a liquefied
            natural gas storage facility in the United States.
--------------------------------------------------------------------------------

                                       10
<PAGE>
--------------------------------------------------------------------------------
      o     In 1999,  Resources,  through its  investment in a leveraged  buyout
            fund,  received  cash  distributions  of  approximately  $99 million
            resulting in an after-tax gain of approximately $23 million from the
            fund's sale of a portion of its equity interests.

Energy Technologies

      o     In  January  2000,  Energy  Technologies   acquired  two  mechanical
            contracting  companies  based  in  Pennsylvania  and New York for an
            aggregate cost of approximately  $21 million  including debt assumed
            of approximately $9 million.

      o     In 1999,  Energy  Technologies  acquired  six  mechanical,  HVAC and
            building  service  contractors  in  New  Jersey,  Rhode  Island  and
            Virginia for a total cost of approximately $63 million.

      o     In  January  1999,  PSEG  contributed  the  capital  stock of Public
            Service  Conservation   Resources  Corporation  (PSCRC),  an  energy
            management  contractor  with net  assets of $57  million,  to Energy
            Technologies.

      We are  incorporated  under  the  laws of the  State  of New  Jersey.  Our
headquarters  and  principal  executive  offices  are  located at 80 Park Plaza,
Newark, NJ 07102 and our telephone number is (973) 456-3581.
--------------------------------------------------------------------------------

                                       11
<PAGE>
--------------------------------------------------------------------------------
                       SUMMARY CONSOLIDATED FINANCIAL DATA

      The  following  table sets forth a summary of our  consolidated  financial
data for the periods indicated.  The summary consolidated financial data for the
three  months  ended  March 31,  2000 and 1999 was  derived  from the  unaudited
financial statements of Energy Holdings and its consolidated subsidiaries which,
in the opinion of management, have been prepared in a manner consistent with the
audited  financial  statements  for the four  years  ended  December  31,  1999.
Operating  results for the three months ended March 31, 2000 are not necessarily
indicative  of results  which may be  expected  for the full year.  The  summary
consolidated  financial data was derived from the audited consolidated financial
statements of Energy  Holdings and its  consolidated  subsidiaries  for the four
years  ended  December  31,  1999.  The summary  data for 1995 was derived  from
unaudited  financial  statements,  which  in the  opinion  of  management,  were
prepared in accordance  with  generally  accepted  accounting  principles.  This
summary data is qualified in its entirety by the more detailed  information  and
financial statements, including the notes thereto.

<TABLE>
<CAPTION>
                                    Three Months Ended
                                         March 31,                          Years Ended December 31,
                                  --------------------     ----------------------------------------------------------
                                    2000        1999         1999        1998         1997        1996         1995
                                  --------    --------     --------    --------     --------    --------     --------
                                       (unaudited)       (Thousands of Dollars, except ratios)
<S>                               <C>          <C>         <C>          <C>         <C>         <C>          <C>

Operating Data:
Total Revenues .................. $215,207     $128,673    $617,773     $440,284    $341,590    $302,800     $250,100
Total Operating Expenses ........  136,186       73,832     424,468      250,539     196,462     171,169      122,520
Interest, Net of Capitalized
   Interest .....................   35,071       19,277      94,685       90,367      72,363      58,261       56,894
Taxes ...........................   14,199       13,797      68,942       30,160      25,816      24,968       23,594
Income from Discontinued
   Operations (A)                       --           --          --           --          --      24,238       35,036
Net Income ......................   31,032       25,473     107,999       69,204      47,873      72,662       82,401
Preferred Stock Dividends (B) ...    6,252        6,252      25,007       17,478         598          --           --
Earnings Available to
   Common Stockholder ........... $ 24,780     $ 19,221    $ 82,992     $ 51,726    $ 47,275    $ 72,662     $ 82,401
</TABLE>


<TABLE>
<CAPTION>
                                    As of March 31,                               As of December 31,
                                 --------------------           -----------------------------------------------------------
                                         2000                     1999        1998         1997        1996         1995
                                       --------                 --------    --------     --------    --------     ---------
                                      (unaudited)
<S>                                    <C>                     <C>          <C>         <C>         <C>          <C>
Balance Sheet Data:
Total Assets ....................      $4,324,334              $4,114,385   $3,168,530  $3,022,956  $2,122,413   $2,295,803
Total Liabilities ...............       1,093,391               1,038,332      958,528     962,954     817,889      634,502
Total Capitalization:
   Debt (F) .....................       1,805,751               1,701,188      967,673   1,275,103     627,381      707,819
   Common Equity (B) ............         915,992                 865,665      733,129     709,899     677,143      953,482
   Preferred Equity (B) .........         509,200                 509,200      509,200      75,000          --           --
                                       ----------              ----------   ----------  ----------  ----------   ----------
   Total Stockholder's Equity ...       1,425,192               1,374,865    1,242,329     784,899     677,143      953,482
                                       ----------              ----------   ----------  ----------  ----------   ----------
   Total Capitalization .........      $3,230,943              $3,076,053   $2,210,002  $2,060,002  $1,304,524   $1,661,301
</TABLE>
<TABLE>
<CAPTION>
                                    Three Months Ended
                                        March 31,                          Years Ended December 31,
                                  --------------------     ----------------------------------------------------------
                                    2000        1999         1999        1998         1997        1996         1995
                                  --------    --------     --------    --------     --------    --------     --------
                                       (unaudited)
<S>                               <C>          <C>        <C>          <C>         <C>        <C>           <C>
Other Data:
Earnings Before Interest
   and Taxes (EBIT) ............. $ 80,082     $ 58,480   $ 270,709    $ 187,927   $ 145,813   $ 131,631    $ 127,540
Cash flows from:
   Operating .................... $ (6,567)    $ 15,697   $  92,396    $  52,780   $ 137,057   $ 232,411    $ 156,141
   Investing ....................  (74,811)     (29,436)   (960,372)    (160,133)   (998,424)    560,965     (212,473)
   Financing ....................   59,652       16,488     902,320      105,133     722,832    (726,442)     (85,033)
</TABLE>
<TABLE>
<CAPTION>
                                                        Three Months Ended
                                                             March 31,                 Years Ended December 31,
                                                       -------------------       ------------------------------------
                                                           2000     1999         1999    1998    1997    1996    1995
                                                           ----     ----         ----    ----    ----    ----    ----
<S>                                                         <C>     <C>          <C>     <C>     <C>     <C>     <C>
Earnings to Fixed Charges (C) ........................      2.1x    2.5x         2.7x    2.4x    1.4x    3.0x    2.4x
EBIT to Interest Expense (D) (H) .....................      2.3x    3.0x         2.9x    2.1x    2.0x    2.3x    2.2x
EBITDA to Interest Expense (E) (H) ...................      2.5x    3.2x         3.1x    2.4x    2.2x    2.5x    2.5x
Consolidated Debt to Capitalization (F) ..............       56%     46%          55%     44%     62%     48%     43%
Consolidated Recourse Debt to Recourse
    Capitalization (G) ...............................       51%     40%          50%     38%     57%     48%     43%
</TABLE>

----------

(A)   In 1996,  EDC was sold for an aggregate  price of $779 million.  This sale
      resulted in an after-tax gain of $13.5 million.

(B)   All outstanding preferred and common stock is owned by PSEG.

(C)   The ratio of earnings to fixed charges is computed by dividing earnings by
      fixed charges.  For this ratio,  earnings include net income before income
      taxes and all fixed  charges  (net of  capitalized  interest)  and exclude
      non-distributed   income  from   investments  in  which  Energy  Holdings'
      subsidiaries have less than a 50% interest. Fixed charges include interest
      expense, expensed or capitalized,  amortization of premiums,  discounts or
      capitalized  expenses  related to indebtedness and an estimate of interest
      expense included in rental expense.

(D)   EBIT includes operating income plus other income. For this ratio, interest
      expense is net of capitalized interest of $4.0 million, $0.6 million, $8.5
      million, $1.2 million, $5.1 million, $1.3 million and $1.9 million for the
      three  months  ended  March  31,  2000 and 1999  and for the  years  ended
      December 31, 1999, 1998, 1997, 1996 and 1995, respectively.

(E)   EBITDA includes  operating income plus other income plus  depreciation and
      amortization.  For this  ratio,  interest  expense  is net of  capitalized
      interest as noted above.

(F)   Includes  all  recourse  debt and debt  that is  non-recourse  to  Global,
      Resources,  Energy  Technologies and Energy Holdings which is consolidated
      on the balance sheet.

(G)   Excludes  consolidated  debt that is  non-recourse  to Global,  Resources,
      Energy  Technologies  and Energy  Holdings of $352 million,  $216 million,
      $327 million, $220 million and $232 million as of March 31, 2000 and 1999,
      and  December  31,  1999,  1998  and  1997,  respectively.  There  was  no
      consolidated non-recourse debt outstanding prior to 1997.

(H)   Information  concerning EBIT and EBITDA is presented here not as a measure
      of operating results,  but rather as a measure of ability to service debt.
      In addition,  EBIT and EBITDA may not be  comparable  to similarly  titled
      measures  by  other  companies.  EBITDA  should  not  be  construed  as an
      alternative to operating  income or cash flow from  operating  activities,
      each as determined according to generally accepted accounting  principles.
      Although we are not  required to meet  minimum  EBIT or EBITDA to interest
      charges tests as part of our debt covenants,  we use these measures in our
      financial and business  planning process to provide  reasonable  assurance
      that our forecasts will provide adequate  interest coverage to maintain or
      improve our target credit ratings.
--------------------------------------------------------------------------------

                                       12
<PAGE>

                                  RISK FACTORS

 You should carefully consider the risks described below. Each of the following
     factors could have a material adverse effect on our business, financial
     condition, results of operations, net cash flows and/or our ability to
           service our outstanding indebtedness, including the notes.

Because we are a holding  company,  our  ability  to  service  our debt could be
limited

      The notes will be our exclusive obligations and not the obligations of any
of our  subsidiaries or affiliates.  Our  obligations  with respect to the notes
will not be supported by PSEG.

      We are a holding  company with no material  assets other than the stock of
our subsidiaries and project affiliates.  Accordingly, all of our operations are
conducted  by our  subsidiaries  and project  affiliates  which are separate and
distinct legal entities that have no obligation, contingent or otherwise, to pay
any amounts  when due on the notes or to make any funds  available  to us to pay
such amounts.  As a result,  the notes will  effectively be  subordinated to all
existing  and  future  debt,  trade  creditors,  and  other  liabilities  of our
subsidiaries  and project  affiliates and our rights and hence the rights of our
creditors (including holders of the notes) to participate in any distribution of
assets of any such  subsidiary  or project  affiliate  upon its  liquidation  or
reorganization  or  otherwise  would be  subject  to the  prior  claims  of such
subsidiary's  or project  affiliate's  creditors,  except to the extent that our
claims as a creditor of such subsidiary or project affiliate may be recognized.

      We depend on our subsidiaries'  and project  affiliates' cash flow and our
access to capital in order to service our indebtedness, including the notes. The
project-related debt agreements of subsidiaries and project affiliates generally
restrict their ability to pay dividends,  make cash  distributions  or otherwise
transfer funds to us. These  restrictions may include  achieving and maintaining
financial performance or debt coverage ratios,  absence of events of default, or
priority in payment of other current or prospective obligations.

      Our subsidiaries have financed some investments using non-recourse project
level financing.  Each non-recourse project financing is structured to be repaid
out of cash flow provided by the  investment.  In the event of a default under a
financing  agreement which is not cured, the lenders would generally have rights
to the  related  assets.  In the  event  of  foreclosure  after a  default,  our
subsidiary  may lose its equity in the asset or may not be  entitled to any cash
that the asset  may  generate.  Although  a  default  under a project  financing
agreement will not cause a default with respect to the notes,  it may materially
affect our ability to service our outstanding indebtedness, including the notes.

Our ability to control the cash flow from our minority  investments  is limited,
which could limit our ability to service our debt

      Our ability to control  investments in which we own a minority interest is
limited.  As such, we and Global are unable  unilaterally  to cause dividends or
distributions to be made to us or Global from these operations.

      Minority   investments  may  involve  risks  not  otherwise   present  for
investments  made solely by us and our  subsidiaries,  including the possibility
that a partner, majority investor or co-venturer might become bankrupt, may have
different  interests or goals, and may take action contrary to our instructions,
requests,  policies or business objectives.  Also, if no party has full control,
there could be an impasse on  decisions.  In addition,  certain  investments  of
Resources are managed by unaffiliated  entities which limits Resources'  ability
to control the activities or performance of such investments and managers.

We may not have  access to  sufficient  capital in the  amounts and at the times
needed

      Equity capital for our  subsidiaries'  projects and our  investments  have
been provided by equity contributions from PSEG,  internally-generated cash flow
and  borrowings by ourselves and PSEG Capital.  We require  continued  access to
debt capital  from outside  sources in order to assure the success of our future
projects and  acquisitions.  Our ability to arrange  financing on a non-recourse
basis and the costs of capital depend on numerous factors including, among other
things, general economic


                                       13
<PAGE>

and market conditions, the availability of credit from banks and other financial
institutions,  investor  confidence,  the  success of current  projects  and the
quality of new projects.

      We can give no assurances that our current and future capital structure or
financial condition will permit access to bank and debt capital markets. We also
will require  capital from PSEG, the  availability of which is not assured since
it is dependent upon our performance and that of PSEG's other subsidiaries. As a
result,  there is no assurance that we will be successful in obtaining financing
for our projects and acquisitions or funding the equity commitments required for
such projects and acquisitions in the future.

We cannot assure sufficient cash flow to service the notes

      As of March 31,  2000 and  December  31,  1999,  we had total debt of $1.4
billion,  excluding  consolidated  non-recourse  debt  appearing  on our balance
sheet. We can give no assurances that our projects and investments will generate
sufficient cash to service our outstanding indebtedness, including the notes.

      Under the existing instruments governing our debt, including the indenture
under  which the notes  will be issued and our bank  agreements,  as well as the
agreement  governing debt of PSEG Capital,  debt may be accelerated or otherwise
be  subject  to  repayment  upon  certain  events of  default,  including  cross
defaults,  or if we undergo a change of control.  In addition,  a default on the
notes would result in a cross  default  under our bank  agreements.  If any such
event were to occur,  we may not have  sufficient  capital to pay holders of the
notes in full the  amounts  due under  the notes or to repay any notes  tendered
pursuant to the Change of Control Offer described under "Description of Exchange
Notes -- Certain Covenants -- Repayment of Notes Upon a Change of Control".

Because a  substantial  amount of our business is  conducted  outside the United
States, adverse international developments could negatively impact our business

      A key component of our business  strategy is the development,  acquisition
and operation of projects outside the United States.  The economic and political
conditions in certain countries where Global has interests or in which Global is
or could be exploring  development  or acquisition  opportunities  present risks
that may be different than those found in the United States including: delays in
permitting and licensing,  construction delays and interruption of business,  as
well  as  risks  of  war,  expropriation,   nationalization,   renegotiation  or
nullification of existing contracts and changes in law or tax policy. Changes in
the legal  environment  in foreign  countries  in which  Global  may  develop or
acquire  projects  could make it more difficult to obtain  non-recourse  project
refinancing on suitable terms and could impair  Global's  ability to enforce its
rights under agreements relating to such projects.

      Operations  in  foreign  countries  also  present  risks  associated  with
currency exchange and convertibility,  inflation,  and repatriation of earnings.
In some countries in which Global may develop or acquire projects in the future,
economic and monetary conditions and other factors could affect Global's ability
to convert  its cash  distributions  to United  States  Dollars or other  freely
convertible   currencies  or  to  move  funds  offshore  from  such   countries.
Furthermore,  the central  bank of any such  country may have the  authority  to
suspend,   restrict  or  otherwise   impose   conditions  on  foreign   exchange
transactions or to approve  distributions to foreign investors.  Although Global
generally seeks to structure power purchase  contracts and other project revenue
agreements  to provide for payments to be made in, or indexed to,  United States
Dollars or a currency freely convertible into United States Dollars, its ability
to do so in all cases may be limited.  See "-- Credit,  currency,  commodity and
financial market risks may have an adverse impact".

Our future  revenues from projects in development  could be limited  because our
project  development,   construction  and  acquisition  activities  may  not  be
successful

      Our project  development and acquisition  activities  require  significant
expenditures  for  evaluation,  engineering,  permitting,  legal  and  financial
advisory  services,  some of which may not  result in  increased  revenues.  For
example,  we may choose not to proceed with development or may not be successful
in competitive bids despite having incurred  significant  expenses in connection
with potential investments.


                                       14
<PAGE>

      The  construction,  expansion or  refurbishment  of a power  generation or
distribution  facility may involve equipment and material supply  interruptions,
labor disputes,  unforeseen  engineering,  environmental and geological problems
and  unanticipated  cost  overruns.  The  proceeds  of  any  insurance,   vendor
warranties or performance guarantees may not be adequate to cover lost revenues,
increased expenses or payments of liquidated  damages.  In addition,  some power
purchase contracts permit the customer to terminate the related contract, retain
security posted by the developer as liquidated damages or change the payments to
be  made  to the  subsidiary  or the  project  affiliate  in the  event  certain
milestones,  such as commencing commercial operation of the project, are not met
by specified  dates. If project  start-up is delayed and the customer  exercises
these rights,  the project may be unable to fund principal and interest payments
under its project financing agreements.

If our operating performance falls below projected levels, we may not be able to
service our debt

      The risks  associated with operating power generation  facilities  include
the  breakdown  or failure of equipment or  processes,  labor  disputes and fuel
supply  interruption,  each of which could result in performance  below expected
capacity  levels.  Operation  below expected  capacity levels may result in lost
revenues,  increased expenses,  higher maintenance costs and penalties, in which
case there may not be  sufficient  cash  available to service  project  debt. In
addition,  many of Global's  generation  projects rely on a single fuel supplier
and a single  customer  for the purchase of the  facility's  output under a long
term contract.  While Global generally has liquidated  damage  provisions in its
contracts, the default by a supplier under a fuel contract or a customer under a
power purchase  contract could  adversely  affect the facility's cash generation
and ability to service project debt.

      Countries in which Global owns and operates  electric and gas distribution
facilities may impose financial penalties if reliability  performance  standards
are not met. In addition, inefficient operation of the facilities may cause lost
revenue  and  higher  maintenance  expenses,  in  which  case  there  may not be
sufficient cash available to service project debt.

Credit, currency,  commodity and financial market risks may adversely impact our
business

      Adverse  changes in commodity  prices,  equity security  prices,  interest
rates and foreign currency exchange rates and  non-performance or non-payment by
counterparties  could  lower  revenues,  raise  costs and  adversely  affect our
financial condition, results of operations and net cash flows and our ability to
service our outstanding indebtedness, including the notes.

      We seek to manage  risk  consistent  with our  business  plans and prudent
practices.   For  further   discussion  of  financial  risk,  see  "Management's
Discussion  and Analysis of Financial  Condition  and Results of  Operations  --
Qualitative and Quantitative Disclosures About Market Risk".

We and our  subsidiaries  are  subject  to  substantial  competition  from  well
capitalized participants in the worldwide energy markets

      We and our  subsidiaries  are subject to  substantial  competition  in the
United States and in  international  markets from  independent  power producers,
domestic  and  multi-national   utility   generators,   fuel  supply  companies,
engineering   companies,   equipment   manufacturers  and  affiliates  of  other
industrial companies.  Restructuring of worldwide energy markets,  including the
privatization  of  government-owned  utilities  and the  sale  of  utility-owned
assets,  is  creating  opportunities  for,  and  substantial  competition  from,
well-capitalized  entities  which  may  adversely  affect  our  ability  to make
investments  on  favorable  terms and achieve our growth  objectives.  Increased
competition  could  contribute  to a reduction  in prices  offered for power and
could  result in lower  returns  which may  affect our  ability  to service  our
outstanding indebtedness, including the notes.

      Deregulation   may  continue  to  accelerate   the  current  trend  toward
consolidation among domestic utilities and could also result in the splitting of
vertically-integrated  utilities  into  separate  generation,  transmission  and
distribution businesses.  As a result,  additional significant competitors could
become active in the  independent  power industry.  Resources faces  competition
from numerous  well-capitalized  investment  and finance  company  affiliates of
banks, utilities and industrial companies. Energy Technologies faces substantial
competition  from  utilities  and  their  affiliates,  and HVAC  and  mechanical
contractors.


                                       15
<PAGE>

Compliance with  environmental and other  governmental  regulation is costly and
could negatively impact our business

      We and the  projects in which we invest are subject to a number of complex
and stringent  environmental  and other laws and  regulations,  including  those
which regulate the construction or permitting of new facilities and operation of
existing facilities.  Compliance is costly and could delay project operation and
the receipt of revenues.

      Global's  electric  and gas  distribution  facilities  are  rate-regulated
enterprises.   Rates  charged  to  customers  are  established  by  governmental
authorities  and are  currently  sufficient  to cover  all  operating  costs and
provide  a  return.  We can  give  no  assurances  that  future  rates  will  be
established at levels sufficient to cover such costs and provide a return on our
investment.  In addition,  future rates may not be adequate to provide cash flow
to pay principal and interest on our  subsidiaries'  and affiliates' debt and to
enable  such  subsidiaries  and  affiliates  to  comply  with the  terms of debt
agreements.

PSEG could exercise its power over us to the detriment of holders of the notes

      As our sole stockholder, PSEG has the power to control the election of the
directors  and all other  matters  submitted  for  stockholder  approval and has
control over our management and affairs.  In circumstances  involving a conflict
of interest  between PSEG,  as the sole  stockholder,  on the one hand,  and our
creditors,  on the other, we can give no assurances that PSEG would not exercise
its power to control us and allocate  resources  in a manner that would  benefit
PSEG or another subsidiary to the detriment of the holders of the notes.

      The indenture imposes no limitations on our ability to pay dividends or to
make other  payments to PSEG or on our ability to enter into  transactions  with
PSEG or our other  affiliates.  Payment of dividends to PSEG without limit could
impact our cash  available to service the notes.  PSEG could decide to no longer
continue to hold our stock, although failure to maintain ownership of a majority
of the common stock could trigger the change of control repurchase provisions in
the  indenture.  Any of these  actions  could  materially  adversely  affect our
business and thus ultimately our ability to service the notes.

      As a wholly-owned subsidiary of PSEG, we and our domestic subsidiaries are
included  in PSEG's  consolidated  tax filing for federal  income tax  purposes.
Generally,  the leveraged lease  transactions in which Resources invests provide
tax losses in the early  years of their term that  offset  taxable  income  from
other PSEG subsidiaries. We and our subsidiaries are parties to a tax allocation
agreement with PSEG under which we and each of our  subsidiaries are responsible
to pay the  respective  share of taxes due or entitled  to receive tax  benefits
earned.  If PSEG  were  to  modify  the tax  allocation  agreement,  our  future
investment strategy might change,  including  Resources' possible curtailment of
new leveraged  lease  investments  that generate tax  benefits.  For  additional
discussion, see "Business -- Regulation".

The exchange  notes may not be liquid  because there is no public market for the
exchange notes

      There is currently no trading  market for the exchange notes and we do not
intend to list the exchange notes on any  securities  exchange or to arrange for
them to be quoted on any quotation  system.  We can give no assurances as to the
liquidity of any market that may develop for the exchange notes,  the ability of
investors to sell the exchange  notes or the price at which  investors  would be
able to sell their exchange notes.

Consequences  of failure to exchange  original  notes -- original  notes  remain
subject to transfer restrictions

      Any original notes that remain  outstanding after this exchange offer will
continue to be subject to restrictions  on their  transfer.  After this exchange
offer,  holders of original  notes will not (with limited  exceptions)  have any
further rights under the exchange and registration rights agreement.  Any market
for original  notes that are not  exchanged  could be adversely  affected by the
conclusion of this exchange offer.


                                       16
<PAGE>

Exchange offer procedures--late deliveries of notes and other required documents
could prevent a holder from exchanging its notes

      Holders are responsible for complying with all exchange offer  procedures.
Issuance of exchange  notes in exchange for original  notes will only occur upon
completion of the procedures described in this prospectus under the heading "The
Exchange Offer--Procedures for Tendering Original Notes". Therefore,  holders of
original  notes  who wish to  exchange  them for  exchange  notes  should  allow
sufficient  time for timely  completion  of the exchange  procedure.  We are not
obligated to notify you of any failure to follow the proper procedure.

Restrictions   applicable  to   participating   broker-dealers--if   you  are  a
broker-dealer, your ability to transfer the notes may be restricted

      A broker-dealer  that purchased original notes for its own account as part
of market-making  or trading  activities must deliver a prospectus when it sells
the  exchange  notes.  Our  obligation  to make  this  prospectus  available  to
broker-dealers  is  limited.  Consequently,  we cannot  guarantee  that a proper
prospectus will be available to broker-dealers  wishing to resell their exchange
notes.

                           FORWARD-LOOKING STATEMENTS

      Except for the historical  information contained in this prospectus,  some
of  the  matters  discussed  in  this  prospectus  constitute   "forward-looking
statements".   These  forward-looking   statements  are  subject  to  risks  and
uncertainties  which could cause actual results to differ  materially from those
anticipated.  These  statements  are based on  management's  beliefs  as well as
assumptions made by and information currently available to management. When used
in this  prospectus,  the  words  "will",  "anticipate",  "intend",  "estimate",
"believe",  "expect", "plan",  "hypothetical",  "potential",  variations of such
words  and  similar   expressions  are  intended  to  identify   forward-looking
statements.  PSEG Energy  Holdings  Inc.  undertakes  no  obligation to publicly
update or revise  any  forward-looking  statements,  whether  as a result of new
information, future events or otherwise.

      In addition to any assumptions and other factors  referred to specifically
in connection with forward-looking  statements,  factors that could cause actual
results to differ  materially  from those  contemplated  in any  forward-looking
statements  include,  among others, the following,  some of which relate to PSEG
Energy  Holdings  Inc.  indirectly  as a result of their  potential  impact upon
Public Service Enterprise Group  Incorporated  (PSEG) or Public Service Electric
and Gas Company:

      o     deregulation  and the unbundling of energy supplies and services and
            the establishment of a competitive  energy  marketplace for products
            and services;

      o     managing  rapidly changing  wholesale  energy trading  operations in
            conjunction  with  electricity and gas production,  transmission and
            distribution systems;

      o     managing   foreign   investments   and   electric   generation   and
            distribution  operations  in  locations  outside of the  traditional
            utility service territory;

      o     political and foreign currency risks;

      o     an increasingly competitive energy marketplace;

      o     sales  retention  and growth  potential in a mature  Public  Service
            Electric and Gas Company service territory;

      o     ability to complete development or acquisition of current and future
            investments;

      o     partner and counterparty risk;

      o     exposure to market price  fluctuations  and  volatility  of fuel and
            power supply, power output and marketable securities, among others;

      o     ability to obtain  adequate and timely rate relief,  cost  recovery,
            and other necessary regulatory approvals;

      o     ability  of  Public  Service  Electric  and Gas  Company  to  obtain
            securitization proceeds;


                                       17
<PAGE>

      o     federal, state and foreign regulatory actions;

      o     regulatory   oversight  with  respect  to  utility  and  non-utility
            affiliate relations and activities;

      o     Year 2000 issues;

      o     operating  restrictions,  increased  costs and  construction  delays
            attributable to environmental regulations;

      o     nuclear  decommissioning  and the  availability of reprocessing  and
            storage facilities for spent nuclear fuel;

      o     licensing and regulatory  approvals  necessary for nuclear and other
            operating stations;

      o     the ability to economically and safely operate nuclear facilities in
            which  PSEG  has  an  interest   in   accordance   with   regulatory
            requirements;

      o     environmental concerns; and

      o     market  risk and debt and equity  market  concerns  associated  with
            these issues.

                                 USE OF PROCEEDS

      The exchange  offer is intended to satisfy some of our  obligations  under
the exchange and  registration  rights  agreement.  We will not receive any cash
proceeds  from the issuance of the  exchange  notes in the  exchange  offer.  In
exchange for issuing the exchange notes as described in this prospectus, we will
receive an equal principal amount of original notes, which will be canceled.

      The net  proceeds  from the sale of the  original  notes were used for the
repayment of short-term  debt  outstanding  under revolving  credit  facilities.
Borrowings  under  the  revolving   credit   facilities  were  used  to  finance
investments and acquisitions and for general corporate purposes.  The applicable
per annum  interest  rate on the  revolving  credit  facilities  was LIBOR  plus
1.375%.

                                 CAPITALIZATION

      The   following   table   sets   forth   Energy   Holdings'   consolidated
capitalization  as of March 31, 2000 and  December  31, 1999 which  reflects the
sale of the original notes.


                                 As of March 31, 2000    As of December 31, 1999
                                -----------------------  -----------------------
                                        Actual                     Actual
                                       -------                     ------
                                           (Thousands of Dollars)
   Short-term debt (A) ..........     $  305,167                $  525,856
   Long-term debt ...............      1,500,584                 1,175,332
                                      ----------                ----------
   Total debt ...................      1,805,751                 1,701,188
                                      ----------                ----------
   Total common equity (B) ......        915,992                   865,665
   Total preferred equity (B) ...        509,200                   509,200
                                      ----------                ----------
   Total stockholder's equity ...      1,425,192                 1,374,865
                                      ----------                ----------
   Total capitalization .........     $3,230,943                $3,076,053
                                      ==========                ==========

----------
(A)   Short-term  debt  includes  the portion of  long-term  debt due within one
      year.
(B)   Owned by PSEG.


                                       18
<PAGE>

                      SELECTED CONSOLIDATED FINANCIAL DATA

      The following  table sets forth selected  consolidated  financial data for
the periods indicated.  The selected  consolidated  financial data for the three
months ended March 31, 2000 and 1999 was derived,  from the unaudited  financial
statements of Energy Holdings and its  consolidated  subsidiaries  which, in the
opinion  of  management,  have been  prepared  in a manner  consistent  with the
audited  financial  statements  for the four  years  ended  December  31,  1999.
Operating  results for the three months ended March 31, 2000 are not necessarily
indicative  of results  which may be expected  for the full year.  The  selected
consolidated  financial data was derived from the audited consolidated financial
statements of Energy  Holdings and its  consolidated  subsidiaries  for the four
years ended  December  31,  1999.  The  selected  data for 1995 was derived from
unaudited  financial  statements,  which  in the  opinion  of  management,  were
prepared in accordance  with  generally  accepted  accounting  principles.  This
selected data is qualified in its entirety by the more detailed  information and
financial statements, including the notes thereto.

<TABLE>
<CAPTION>

                                   Three Months Ended
                                        March 31,                          Years Ended December 31,
                                ------------------------  -------------------------------------------------------------
                                    2000        1999         1999        1998         1997        1996         1995
                                  --------    --------     --------    --------     --------    --------     --------
                                       (unaudited)
                                                         (Thousands of Dollars, except ratios)
<S>                               <C>          <C>         <C>          <C>         <C>         <C>          <C>
Operating Data:
Total Revenues                    $215,207     $128,673    $617,773     $440,284    $341,590    $302,800     $250,100
Total Operating Expenses           136,186       73,832     424,468      250,539     196,462     171,169      122,520
Interest, Net of Capitalized
   Interest                         35,071       19,277      94,685       90,367      72,363      58,261       56,894
Taxes                               14,199       13,797      68,942       30,160      25,816      24,968       23,594
Income from Discontinued
   Operations (A)                       --           --          --           --          --      24,238       35,036
Net Income                          31,032       25,473     107,999       69,204      47,873      72,662       82,401
Preferred Stock Dividends (B)        6,252        6,252      25,007       17,478         598          --           --
Earnings Available to
   Common Stockholder             $ 24,780     $ 19,221    $ 82,992     $ 51,726    $ 47,275    $ 72,662     $ 82,401
</TABLE>


<TABLE>
<CAPTION>
                                          As of March 31,                           As of December 31,
                                        ------------------    -------------------------------------------------------------
                                               2000             1999         1998         1997         1996         1995
                                             --------         --------     --------     --------     --------     --------
                                            (unaudited)
<S>                                         <C>              <C>          <C>          <C>          <C>          <C>
Balance Sheet Data:
Total Assets ........................       $4,324,334       $4,114,385   $3,168,530   $3,022,956   $2,122,413   $2,295,803
Total Liabilities ...................        1,093,391        1,038,332      958,528      962,954      817,889      634,502
Total Capitalization:
   Debt (F) .........................        1,805,751        1,701,188      967,673    1,275,103      627,381      707,819
   Common Equity (B) ................          915,992          865,665      733,129      709,899      677,143      953,482
   Preferred Equity (B) .............          509,200          509,200      509,200       75,000           --           --
                                            ----------       ----------   ----------   ----------   ----------   ----------
   Total Stockholder's Equity .......        1,425,192        1,374,865    1,242,329      784,899      677,143      953,482
                                            ----------       ----------   ----------   ----------   ----------   ----------
   Total Capitalization .............       $3,230,943       $3,076,053   $2,210,002   $2,060,002   $1,304,524   $1,661,301
</TABLE>
<TABLE>
<CAPTION>
                                    Three Months Ended
                                        March 31,                          Years Ended December 31,
                              ---------------------------   --------------------------------------------------------------
                                    2000        1999         1999        1998         1997        1996         1995
                                  --------    --------     --------    --------     --------    --------     --------
                                        (unaudited)
<S>                             <C>          <C>          <C>          <C>          <C>          <C>          <C>
Other Data:
Earnings Before Interest
   and Taxes (EBIT) .......     $  80,082    $  58,480    $ 270,709    $ 187,927    $ 145,813    $ 131,631    $ 127,540
Cash flows from:
   Operating ..............     $  (6,567)   $  15,697    $  92,396    $  52,780    $ 137,057    $ 232,411    $ 156,141
   Investing ..............       (74,811)     (29,436)    (960,372)    (160,133)    (998,424)     560,965     (212,473)
   Financing ..............        59,652       16,488      902,320      105,133      722,832     (726,442)     (85,033)
</TABLE>
<TABLE>
<CAPTION>
                                                 Three Months Ended
                                                      March 31,                 Years Ended December 31,
                                                  -----------------      ------------------------------------
                                                   2000     1999         1999    1998    1997    1996    1995
                                                   ----     ----         ----    ----    ----    ----    ----
<S>                                                 <C>     <C>          <C>     <C>     <C>     <C>     <C>
Earnings to Fixed Charges (C) ...................   2.1x    2.5x         2.7x    2.4x    1.4x    3.0x    2.4x
EBIT to Interest Expense (D) (H) ................   2.3x    3.0x         2.9x    2.1x    2.0x    2.3x    2.2x
EBITDA to Interest Expense (E) (H) ..............   2.5x    3.2x         3.1x    2.4x    2.2x    2.5x    2.5x
Consolidated Debt to Capitalization (F) .........    56%     46%          55%     44%     62%     48%     43%
Consolidated Recourse Debt to Recourse
   Capitalization (G) ...........................    51%     40%          50%     38%     57%     48%     43%
</TABLE>


----------
(A)   In 1996,  EDC was sold for an aggregate  price of $779 million.  This sale
      resulted in an after-tax gain of $13.5 million.

(B)   All outstanding preferred and common stock is owned by PSEG.

(C)   The ratio of earnings to fixed charges is computed by dividing earnings by
      fixed charges.  For this ratio,  earnings include net income before income
      taxes and all fixed  charges  (net of  capitalized  interest)  and exclude
      non-distributed   income  from   investments  in  which  Energy  Holdings'
      subsidiaries have less than a 50% interest. Fixed charges include interest
      expense, expensed or capitalized,  amortization of premiums,  discounts or
      capitalized  expenses  related to indebtedness and an estimate of interest
      expense included in rental expense.

(D)   EBIT includes operating income plus other income. For this ratio, interest
      expense is net of capitalized interest of $4.0 million, $0.6 million, $8.5
      million, $1.2 million, $5.1 million, $1.3 million and $1.9 million for the
      three  months  ended  March  31,  2000 and 1999  and for the  years  ended
      December 31, 1999, 1998, 1997, 1996 and 1995, respectively.

(E)   EBITDA includes  operating income plus other income plus  depreciation and
      amortization.  For this  ratio,  interest  expense  is net of  capitalized
      interest as noted above.

(F)   Includes  all  recourse  debt and debt  that is  non-recourse  to  Global,
      Resources,  Energy  Technologies and Energy Holdings which is consolidated
      on the balance sheet.

(G)   Excludes  consolidated  debt that is  non-recourse  to Global,  Resources,
      Energy  Technologies  and Energy  Holdings of $352 million,  $216 million,
      $327 million, $220 million and $232 million as of March 31, 2000 and 1999,
      and  December  31,  1999,  1998  and  1997,  respectively.  There  was  no
      consolidated non-recourse debt outstanding prior to 1997.

(H)   Information  concerning EBIT and EBITDA is presented here not as a measure
      of operating results,  but rather as a measure of ability to service debt.
      In addition,  EBIT and EBITDA may not be  comparable  to similarly  titled
      measures  by  other  companies.  EBITDA  should  not  be  construed  as an
      alternative to operating  income or cash flow from  operating  activities,
      each as determined according to generally accepted accounting  principles.
      Although we are not  required to meet  minimum  EBIT or EBITDA to interest
      charges tests as part of our debt covenants,  we use these measures in our
      financial and business  planning process to provide  reasonable  assurance
      that our forecasts will provide adequate  interest coverage to maintain or
      improve our target credit ratings.


                                       19
<PAGE>

          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

Overview and Future Outlook

      The electric and gas utility  industries  in the United  States and around
the   world   continue   to   experience   significant   change.   Deregulation,
restructuring,  privatization and  consolidation are creating  opportunities for
Energy Holdings. At the same time, competitive pressures are increasing.

      PSEG has positioned  Energy Holdings as a major part of its planned growth
strategy. In order to achieve this strategy, Global will focus on generation and
distribution  investments  within targeted  high-growth  regions.  A significant
portion of  Global's  growth is  expected  to occur  internationally  due to the
current and anticipated  growth in electric capacity required in certain regions
of the world.  Resources will utilize its market access,  industry knowledge and
transaction  structuring  capabilities  to expand its  energy-related  financial
investment  portfolio.   Energy  Technologies  will  continue  to  provide  HVAC
contracting  and other  energy-related  services to  industrial  and  commercial
customers in the Northeastern and Middle Atlantic United States. However, Energy
Holdings  will  assess  the  growth  prospects  and   opportunities  for  Energy
Technologies' business before committing additional capital.

      Global derives its revenues and earnings from independent power production
and the distribution of electricity.  Earnings will,  therefore,  be impacted by
the ability of Global and its partners to successfully manage the generation and
distribution  facilities  now  in  operation  and to  bring  those  projects  in
construction  and  development  into  operation.  The  acquisition of additional
facilities  and projects will be another  important  factor for future  earnings
growth  at  Global.  Future  revenue  growth  will be  partially  offset  by the
reduction of revenue,  beginning in 2000, from certain generation  facilities in
California  due to lower  energy  prices to be paid by the  purchaser  under the
energy  contracts  associated  with the plants.  Two-thirds  of such  California
facilities in which Global has an interest will change from fixed energy pricing
by December  31, 2000,  with the  remainder  changing in 2001.  Based on current
energy  prices,  Global's  share of annual income before income taxes from these
facilities is projected to decrease by approximately  $30 million to $35 million
when all such contracts  reflect the lower energy pricing.  Actual revenues over
the remaining  contract  terms,  which begin to expire in 2011, will depend on a
number  of  factors,  including  the  actual  energy  prices  in  effect  in the
applicable  future periods.  As a result of the projected  revenue loss,  Global
recognized a pre-tax write-down of $31 million in its equity investment in these
facilities in the third quarter of 1999.  Energy  Holdings  expects revenue from
projects in  operation,  construction  and  development  to offset this  revenue
shortfall, however, no assurances can be given. Since Global operates in foreign
countries, it may also be affected by changes in foreign currency exchange rates
versus  the United  States  Dollar.  Generally,  revenues  associated  with rate
regulated distribution assets in relatively limited competitive environments are
more stable and  predictable  than revenues  from  generation  assets.  Global's
revenue includes its share of the net income from joint ventures  recorded under
the equity method of accounting.

      Revenues from Resources'  existing  leveraged lease  investments are based
upon fixed rates of return. Generally, the leveraged lease transactions in which
Resources  invests  provide  tax  losses in the early  years of their  term that
offset taxable income from other PSEG subsidiaries. As a wholly-owned subsidiary
of PSEG,  Energy Holdings and its domestic  subsidiaries  are included in PSEG's
consolidated  tax filing group for federal income tax purposes.  Energy Holdings
and its subsidiaries  are parties to a tax allocation  agreement with PSEG under
which each of Energy  Holdings and its  subsidiaries  is  responsible to pay its
share of taxes due or entitled to receive tax benefits  earned.  If PSEG were to
modify the tax allocation agreement, Energy Holdings' future investment strategy
might change,  including  Resources' possible curtailment of new leveraged lease
investments.  Energy  Holdings  does not believe that its ability to service its
debt,  including  the notes,  would be  impaired  if a  modification  to the tax
allocation  agreement  were to  occur,  although  no  assurances  can be  given.
Resources'  revenues  in the future are  expected to be derived  primarily  from
energy-related  leveraged leases with a decrease in contribution  from leveraged
buyout funds,  other partnership  investments and  non-energy-related  leveraged
leases.  Revenues  from  Resources'  investments  in leveraged  buyout funds are
subject to the share price  performance  and dividend  income of the  securities
held by these funds.


                                       20
<PAGE>


      Having  acquired  nine  companies   involved  in  the   installation   and
maintenance  of energy  equipment  and HVAC  services for a total of $95 million
since its formation in 1997, Energy Technologies'  present strategic focus is to
consolidate its position as an energy services  supplier in the Northeastern and
Middle Atlantic United States.  Earnings at Energy  Technologies are expected to
be modest as it grows existing operations and integrates recent acquisitions. As
a  result  of  discontinuing   the  business  of  buying  and  selling  gas  and
electricity,  Energy Technologies recognized a charge to income of approximately
$6.6 million relating to severance costs, deferred  transportation costs and the
write-down  of fixed  assets  during the first  quarter of 2000.  An  additional
charge of up to approximately $3 million is likely in the second quarter of 2000
due to unhedged gas sale  positions  and the  increase in gas prices  during the
second quarter.


      Access to sufficient  capital from external  sources and from PSEG as well
as the  availability of cash flow and earnings from Global and Resources will be
essential to fund future investments. Energy Holdings continuously evaluates its
plans and capital structure in light of available  investment  opportunities and
seeks to  maintain  the  flexibility  to pursue  strategic  growth  investments.
Depending upon the level of investment  activity,  Energy  Holdings  anticipates
obtaining additional equity contributions from PSEG as necessary to maintain its
growth  objectives and targeted  capital  structure.  The availability of equity
capital from PSEG cannot be assured since it is dependent  upon the  performance
and needs of Energy Holdings and PSEG's other subsidiaries.

Results of  Operations  -- For the Three Months Ended March 31, 2000 compared to
March 31, 1999

      Earnings  improved  $6 million to $25  million in 2000 from $19 million in
1999.

      Revenues  increased  $86 million to $215 million in 2000 from $129 million
in 1999 while operating  expenses  increased $62 million to $136 million in 2000
from $74 million in 1999.

Revenues

      Revenues  increased  $86 million to $215 million from $129 million for the
quarter  ended  March 31,  2000 as  compared  to the same  period  in 1999.  The
increase resulted from a $55 million increase at Energy  Technologies due to the
addition of revenues from  acquisitions  of HVAC  companies in 1999 and 2000, an
increase  of $19  million  at  Resources  due to  higher  income  from  existing
financial  investments  and  from new  leveraged  lease  investments  and an $11
million  increase at Global  primarily  due to the  addition  of  revenues  from
distribution company investments in Chile and Peru.

Operating Expenses

      Operating  expenses increased $62 million to $136 million from $74 million
for the quarter ended March 31, 2000 as compared to the same period in 1999. The
increase  was  primarily  due to the  addition of  operating  expenses  from the
entities acquired by Energy  Technologies in 1999 and 2000. In addition,  Energy
Technologies will discontinue buying and selling natural gas and electricity and
has  entered  into a  business  arrangement  with a third  party to  provide  an
internet-based  auction exchange that will allow customers an alternative method
for  purchasing  their  energy  requirements.  As a  result  of this  change  in
strategic  direction,  Energy  Technologies  recognized  a charge  to  income of
approximately $6.6 million relating to severance costs, deferred  transportation
costs and the write-down of fixed assets.

Operating Income

      Operating  income  increased  $24 million  for the reasons  noted above in
Revenues and Operating Expenses.

Other Income (Loss)

      Other income  (loss)  decreased $3 million  primarily due to lower foreign
currency  exchange gains related to a foreign  currency loan associated with our
investment in a Brazilian distribution company.


                                       21
<PAGE>

Net Financing Expenses

      Net  financing  expenses  increased  $16 million to $35  million  from $19
million for the  quarter  ended March 31, 2000 as compared to the same period in
1999.  The  increase  was  primarily  due to higher  levels of debt  required to
finance investment and acquisition activities.

Income Before Income Taxes

      Income  before  income taxes  increased $6 million to $45 million from $39
million  primarily due to higher  operating  income,  partially offset by higher
financing expenses.


Income Taxes

      Income taxes remained relatively the same for the three months ended March
31, 2000 and 1999.  The quarter ended March 31, 2000 reflects a lower  effective
tax rate due to an increase in income from foreign  investments  at Global which
is assumed to be permanently reinvested outside of the United States.

Results of Operations -- 1999 Compared to 1998


      Energy Holdings' earnings improved $31 million from $52 million in 1998 to
$83 million in 1999.  Revenues  increased $178 million from $440 million to $618
million while  operating  expenses  increased  $129 million from $251 million to
$173 million.


Revenues

      The  increase  in  revenues  was driven by an  increase  of $17 million at
Global  from  additional  revenue of $8 million  from  generation  assets in the
United States,  augmented by an increase of $6 million due to the acquisition of
a 50% interest in a distribution  company serving customers in Chile and Peru in
June 1999.  Revenues from  Resources  improved $34 million  primarily due to the
addition of revenue from new leveraged lease investments in 1999.  Revenues from
Energy Technologies  improved  approximately $126 million due to the acquisition
of six mechanical service/HVAC companies in 1999.

Operating Expenses


      The  increase in  operating  expenses of $173 million was driven by Energy
Technologies' acquisitions noted above. In addition, Global recognized a pre-tax
charge of  approximately  $44  million to reduce the  carrying  value of certain
assets and EGDC  recognized a charge of $11 million to reflect a  write-down  to
net  realizable  value of a property in the portfolio  pending sale. The sale is
expected to be completed in 2000. For a further  discussion of the  write-downs,
see the expanded discussion of EBIT contribution below.


Operating Income

      Operating  income  increased  $47 million  for the reasons  noted above in
Revenues and Operating Expenses.

Other Income (Loss)


      Other income  (loss)  increased  $79 million  primarily due to the sale by
Global of its 50% interest in a 137 MW cogeneration facility in New Jersey which
yielded a gain of approximately $69 million.


Net Financing Expenses

      Interest expense  increased $5 million from $90 million to $95 million for
the year  ended  December  31,  1999 as  compared  to 1998  primarily  due to an
increase of $8 million  related to the debt financing  associated  with Global's
acquisition of an interest in distribution  facilities in Chile and Peru in


                                       22
<PAGE>

June 1999. While such debt is non-recourse to Global and Energy Holdings,  it is
consolidated  on the balance  sheet  since it was issued by  entities  which are
majority or wholly-owned by Global.  Interest  expense  associated with recourse
financing  activities at Energy Holdings decreased $3 million for the year ended
December  31, 1999 as  compared  to 1998  primarily  due to lower  average  debt
outstanding.  Preferred Stock dividends increased $8 million from $17 million to
$25 million due to the issuance of $509 million of cumulative preferred stock to
PSEG in January, June and July of 1998.

Income Before Income Taxes

      Income before income taxes  increased $78 million from $98 million to $176
million for the reasons noted above.

Income Taxes

      Income  taxes  increased  $39  million  from $30  million  to $69  million
primarily due to the increase in pre-tax income noted above. In addition,  state
income taxes increased by approximately  $11 million due to the payment of state
taxes associated with the early termination of a leveraged lease interest.

Results of Operations -- 1998 Compared to 1997

      Energy Holdings'  earnings improved $5 million from $47 million in 1997 to
$52 million in 1998.  Revenues  increased  $98 million from $342 million to $440
million while operating expenses increased $55 million from $196 million to $251
million.

Revenues

      The  increase in revenues was driven by an  improvement  of $33 million at
Global  primarily from additional  revenue from  investments made in three Latin
American distribution  companies in 1997. Resources' revenue improved $1 million
primarily due to the addition of revenue from new leveraged lease investments of
$19 million in 1997 partially offset by a pre-tax charge of $26 million taken to
restate two leveraged  lease  investments  due to a permanent  decline in market
value of the underlying leased property. In addition, Resources sold a leveraged
lease asset and recognized a pre-tax gain of approximately $8 million.  Revenues
from Energy Technologies  improved  approximately $67 million primarily from the
acquisition  of a  mechanical  contracting  firm that  added  approximately  $58
million in revenue.

Operating Expenses

      The  increase  in  operating  expenses of $55 million was driven by Energy
Technologies' acquisition noted above.

Operating Income

      Operating  income  increased  $45 million  for the reasons  noted above in
Revenues and Operating Expenses.

Other Income (Loss)

      Other  income  (loss)  decreased  $3  million  primarily  due to losses on
foreign currency  transactions related to Global's long-term debt. For a further
discussion, see Note 11 in Notes to Consolidated Financial Statements.

Net Financing Expenses

      Interest  expense  increased  $18 million for the year ended  December 31,
1998  as  compared  to 1997  primarily  due to debt  financing  associated  with
Global's  acquisition  of three Latin American  distribution  companies in 1997.
While the debt is non-recourse to Global and Energy Holdings, it is consolidated
on the  balance  sheet  since it was issued by  acquisition  entities  which are
majority or wholly-owned by Global.  The interest  expense  associated with such
debt increased $16 million from


                                       23
<PAGE>

1997 to 1998. Interest expense associated with recourse financing  activities at
Energy Holdings,  increased $2 million from 1997 to 1998 primarily due to higher
debt levels from the 1997 investment activity. Preferred stock dividends to PSEG
increased  $17 million in 1998 as  compared  to 1997 due to the  issuance of the
preferred stock in 1998.

Income Before Income Taxes

      Income before  income taxes  increased $25 million from $73 million to $98
million for the reasons noted above.

Income Taxes

      Income  taxes  increased  $4  million  from  $26  million  to $30  million
primarily  due to the  increase  in pre-tax  income  noted  above  offset by tax
credits recognized in 1998 income that were not utilized in 1997.

EBIT Contribution

      The results of operations for each of Energy Holdings'  business  segments
are explained further with reference to the EBIT  contribution.  Energy Holdings
borrows on the basis of a combined  credit  profile to finance the activities of
its  subsidiaries.  As such, the capital  structure of each of the businesses is
managed by Energy Holdings. Debt at each subsidiary is evidenced by demand notes
with Energy Holdings and PSEG Capital.

<TABLE>
<CAPTION>
EBIT Contribution -
Energy Holdings'
Subsidiaries                 Three Months Ended March 31        Years Ended December 31,
-------------------          ---------------------------        ------------------------
                                  2000      1999               1999      1998      1997
                                 ------    -------            -----     ------    ------
                                      (unaudited)
                                               (Millions of Dollars)
<S>                               <C>       <C>               <C>       <C>       <C>
Global .......................      $26       $18              $117      $ 72      $ 46
Resources ....................       63        44               169       135       134
Energy Technologies ..........       (8)       (3)               (8)      (16)      (25)
Other ........................       (1)       (1)               (7)       (3)       (9)
                                    ---       ---              ----       ---      ----
Total Consolidated EBIT ......      $80       $58              $271      $188      $146
                                    ===       ===              ====      ====      ====
</TABLE>

Global

      Global's  investments  consist of minority ownership positions in projects
and joint ventures, none of which it consolidates. Other than fees collected for
providing  operations and  maintenance  services,  Global's  revenues  primarily
represent  its  pro-rata  ownership  share of net  income  generated  by project
affiliates  which is  accounted  for by the  equity  method of  accounting.  The
expenses in the table below are those  required to develop  projects and general
and administrative expenses required to operate the business as a whole. Project
operating  expenses  are not  reported  as direct  expenses  of  Global  but are
deducted  to arrive at net income of  project  affiliates,  a pro-rata  share of
which is reported as revenues by Global.

      In the third quarter of 1999,  Global completed a comprehensive  review of
its existing assets and development  activities  focusing on  rationalizing  the
portfolio  to ensure  efficient  capital  deployment.  Global's  management  has
decided that Global will not commit  additional  resources to its investments in
Thailand  and the  Philippines  and will  focus its  current  Asian  development
activities  in China and Taiwan.  As a result,  Global  recognized a $13 million
pre-tax  write-down in the third quarter of 1999 to adjust the carrying value of
these assets to net  realizable  value.  One such  investment  in a  development
company  in  Thailand  was sold in the  fourth  quarter  of 1999  for an  amount
approximately  equal to the net realizable  value. In addition,  the substantial
decline in revenue related to energy contracts for six generation  facilities in
California  resulted in a third quarter  pre-tax  write-down of Global's  equity
investment in such facilities of $31 million.


                                       24
<PAGE>

<TABLE>
<CAPTION>
Summary Results -
Global                       Three Months Ended March 31,        Years Ended December 31,
------                       ----------------------------        ------------------------
                                   2000      1999               1999      1998        1997
                                   ----      ----               ----      ----        ----
                                    (unaudited)
                                                   (Millions of Dollars)
<S>                               <C>       <C>                 <C>       <C>        <C>

Revenues ....................       $38       $28                $141      $124        $91
Expenses ....................        13        14                  96        51         46
                                    ---       ---                ----      ----        ---
Operating Income ............        25        14                  45        73         45
Other Income/(Loss) .........         1         4                  72        (1)         1
                                    ---       ---                ----      ----        ---
EBIT ........................       $26       $18                $117      $ 72        $46
                                    ===       ===                ====      ====        ===
</TABLE>


      Global's EBIT contribution increased $8 million for the three months ended
March 31, 2000 from the  comparable  period in 1999.  The increase was primarily
due to marginally higher revenues from investments in the United States, Brazil,
Chile and Peru.


      Global's EBIT contribution  increased $45 million from $72 million to $117
million for the year ended  December  31,  1999 as compared to 1998.  The higher
contribution was due to an increase in revenues due to greater contribution from
Latin American assets of approximately $6 million due to higher revenue from the
investment in June 1999 in  distribution  companies in Chile and Peru  partially
offset by lower revenue from Global's Brazilian  distribution company due to the
devaluation  of the  currency in January  1999 and the overall  recession of the
Brazilian  economy in 1999. For further  discussion of the  devaluation  and its
impact on  Global,  see Note 5 in Notes to  Consolidated  Financial  Statements.
Further  augmenting EBIT was an increase in revenues from generation  facilities
in the United States  totaling $8 million due to enhanced  performance  of these
facilities.  Other income at Global increased  approximately  $73 million from a
loss of $1 million to income of $72 million,  due primarily to the sale of a 50%
interest in a cogeneration facility in New Jersey yielding a pre-tax gain of $69
million.


      Global's  EBIT  contribution  increased  $26  million  for the year  ended
December 31, 1998 as compared to 1997,  primarily  due to increased  revenues of
$33 million.  Revenue  improvement  was primarily due to the additional  revenue
from  investments made in three Latin American  distribution  companies in 1997.
The increase in operating expenses from $46 million to $51 million was primarily
caused by higher expenses  associated  with the  development of projects.  Other
income/(loss)  decreased  from  income  of $1  million  to a loss of $1  million
primarily  due to a foreign  currency  gain of $1  million  recorded  in 1997 as
compared to a loss of $3 million  recorded in 1998  related to the  consolidated
non-recourse debt noted above. In addition,  1998 included a net pre-tax gain of
$2 million from the sale of partnership interests in four generation facilities.

      Resources

      Resources  derives its  leveraged  lease  revenues  primarily  from rental
payments  and tax  benefits  associated  with  such  transactions.  As a passive
investor  in  limited  partnership  project  financing  transactions,  Resources
recognizes  revenue  from its  pro-rata  share of the income  generated by these
investments.  As an owner of beneficial interests in two leveraged buyout funds,
Resources  recognizes  revenue as the share  prices of public  companies  in the
leveraged  buyout  funds  fluctuate.  In  addition,  revenue  is  recognized  as
companies  in the  fund  distribute  dividend  income  through  the  fund to the
investors and as the fund liquidates its holdings.


<TABLE>
<CAPTION>
Summary Results -
Resources                      Three Months Ended March 31,     Years Ended December 31,
-----------------              ---------------------------      ------------------------
                                    2000      1999               1999     1998      1997
                                    ----      ----               ----     ----      ----
                                      (unaudited)
                                                   (Millions of Dollars)
<S>                                 <C>       <C>                <C>      <C>       <C>
Revenues .....................       $66       $46               179      $145      $144
Expenses .....................         3         2                10        10        10
                                     ---       ---              ----      ----      ----
Operating Income .............        63        44               169       135       134
Other Income .................        --        --                --        --        --
                                     ---       ---              ----      ----      ----
EBIT .........................       $63       $44              $169      $135      $134
                                     ===       ===              ====      ====      ====
</TABLE>


                                       25
<PAGE>


      Resources  EBIT  contribution  increased  $19 million for the three months
ended  March 31,  2000 from the  comparable  period in 1999.  The  increase  was
primarily  due to higher  income  from  leveraged  lease  investments.  Revenues
increased  $20 million from $46 million to $66 million,  primarily due to higher
leveraged  lease  income,  fair value  adjustment  related to  securities in two
leveraged buyout funds and an investment gain from the sale of assets associated
with the early  termination of a leveraged lease.  Operating  expenses  remained
relatively  constant  for  both  comparable  periods.  Based on  current  market
conditions as of the date of this Prospectus, a fair value adjustment related to
securities in the two leveraged buyout funds at the end of the second quarter of
2000 would likely result in a decrease in revenues at Resources of approximately
$18 million for the second quarter of 2000.


      Resources  EBIT  contribution  increased  $34 million from $135 million to
$169 million for the year ended  December 31, 1999 as compared to 1998 primarily
due  to  higher  leveraged  lease  income  of $36  million  from  the  continued
investment  by  Resources in such  financing  transactions.  Further  augmenting
revenues were higher  investment  gains from the sale of  properties  subject to
leveraged  lease and the sale of securities in leveraged  buyout funds  totaling
$19 million.  Offsetting  the above  benefits  were lower  interest and dividend
income  of $8  million  due to the  further  liquidation  of  securities  in the
leveraged  buyout funds and lower  income from  partnership  investments  of $12
million due to the continued liquidation of such investments.

      Resources'  EBIT  contribution  increased  $1  million  for the year ended
December 31, 1998 as compared to 1997 due to an increase in revenues. Resources'
revenues  increased  $1 million  primarily  due to an increase of $19 million in
lease revenues from the addition of leveraged lease investments to the portfolio
and the sale of an asset subject to a leveraged lease resulting in an $8 million
gain.  This  increase  was  offset by lower  revenues  of $26  million  from the
restatement of two leveraged lease investments in real estate recognized in 1998
due to the  decline  in market  values of the  underlying  property  subject  to
leveraged lease.  Revenues from investments in limited partnership  interests in
leveraged  buyout  funds and other  limited  partnership  interests  in  project
financing transactions remained constant over the period.

      Energy Technologies

      Energy  Technologies  derives its revenues from the sale of energy-related
equipment and services.  Prior to 2000, it also derived revenue from the sale of
natural gas and electricity.

<TABLE>
<CAPTION>
Summary Results -
Energy Technologies          Three Months Ended March 31,      Years Ended December 31,
-------------------          ----------------------------     -------------------------
                                   2000     1999              1999       1998     1997
                                   ----     ----              ----       ----     ----
                                   (unaudited)
                                                   (Millions of Dollars)
<S>                                <C>        <C>              <C>       <C>       <C>
Revenues .....................     $110       $55              $297      $171      $104
Expenses .....................      118        58               305       187       129
                                   ----       ---              ----      ----      ----
Operating Loss ...............       (8)       (3)               (8)      (16)      (25)
Other Income (Loss) ..........       --        --                --        --        --
                                   ----       ---              ----      ----      ----
EBIT .........................     $ (8)      $(3)             $ (8)     $(16)     $(25)
                                   ====       ===              ====      ====      ====
</TABLE>

      Energy Technologies' EBIT contribution  decreased $5 million for the three
months ended March 31, 2000 from the comparable period in 1999. The decrease was
primarily due to a charge to income of  approximately  $6.6 million  relating to
severance  costs and the  write-down  of fixed  assets.  Revenues  increased $55
million from $55 million to $110 million from the HVAC company  acquisitions  in
2000 and 1999.

      Energy  Technologies'  EBIT  contribution  increased $8 million from ($16)
million to ($8)  million  for the year ended  December  31,  1999 as compared to
1998.  The  improvement  was primarily due to the addition of EBIT  contribution
from the  acquisition  of six HVAC and mechanical  service  contractors in 1999.
Revenues increased $126 million from $171 million to $297 million, while related
operating expenses increased $118 million from $187 million to $305 million.

      Energy Holdings' Accounts Receivable-Trade  increased $58 million from $48
million to $106  million from  December  31, 1998 to December  31, 1999.  Energy
Technologies  accounted for $47 million of this increase.  Energy  Technologies'
Energy service  revenues  included in the revenue increase of $126


                                       26
<PAGE>

million  noted  above,  increased  $122 million from $74 million to $196 million
from December 31, 1998

to December 31, 1999. These increases  reflect the  acquisitions  made by Energy
Technologies during 1999 and therefore reflect only a minor increase in the days
sales outstanding over the period.

      Energy  Technologies' EBIT contribution  increased $9 million for the year
ended December 31, 1998 as compared to 1997 primarily due to improved  operating
results of $7 million in the existing  businesses.  The improvement was also due
to the  addition of EBIT  contribution  from the January 1998  acquisition  of a
mechanical contracting firm that added $58 million in revenue and $55 million in
expenses.

      Other

      Other  includes  primarily  EBIT from EGDC.  In 1999,  EGDC  recognized  a
pre-tax  charge of  approximately  $11 million to recognize a write-down  to net
realizable value of a property pending sale. This was recorded in operations and
maintenance  expense.  1998  EBIT  reflects  a  non-recurring  charge  at Energy
Holdings  related to taxes  incurred  as a result of Energy  Holdings'  previous
interest in EDC. In 1997, EGDC recognized a pre-tax charge of approximately  $10
million  to  reflect a decline in market  values of  certain  properties  in the
portfolio pending sale. This was recorded in operations and maintenance expense.
The recognition of pre-tax charges by EGDC in operations and maintenance expense
reflects the continued  controlled exit from the real estate business.  As such,
gains and losses from periodic  sales of real property are considered the normal
course of business for EGDC.

Liquidity and Capital Resources

      It is intended  that Global and Resources  provide  earnings and cash flow
for long-term growth for Energy Holdings. Resources' investments are designed to
produce  immediate  cash  flow  and  earnings  that  enable  Global  and  Energy
Technologies to focus on longer investment horizons. During the next five years,
Energy  Holdings  will need  significant  capital  to fund its  planned  growth.
Capital is expected to be provided from additional  debt financing,  equity from
PSEG and operating cash flows.

      Energy  Holdings'  cash  provided by (used in)  operating,  investing  and
financing activities was as follows:

<TABLE>
<CAPTION>
                                 Three Months Ended March 31,    Years Ended December 31,
                                 ----------------------------    ------------------------
                                       2000     1999              1999     1998     1997
                                       ----     ----              ----     ----     ----
                                       (unaudited)
                                                      (Millions of Dollars)
<S>                                    <C>      <C>              <C>      <C>      <C>
Operating Activities
Normal ............................    $ (7)    $ 16             $  92    $  53    $  70
Non-recurring  (A) ................      --       --                --       --       67
                                       ----     ----             -----    -----    -----
   Total Operating Activities .....    $ (7)    $ 16             $  92    $  53    $ 137
                                       ====     ====             =====    =====    =====
Investing Activities ..............    $(75)    $(29)            $(960)   $(160)   $(998)
                                       ----     ----             -----    -----    -----
   Total Investing Activities .....    $(75)    $(29)            $(960)   $(160)   $(998)
                                       ====     ====             =====    =====    =====
Financing Activities
  Debt ............................    $ 68     $ 22             $ 731    $(311)   $ 648
  Equity ..........................      (8)      (6)              171      416       75
                                       ----     ----             -----    -----    -----
   Total Financing Activities .....    $ 60     $ 16             $ 902    $ 105    $ 723
                                       ====     ====             =====    =====    =====
</TABLE>
----------
(A) In 1997 Resources received  additional cash from income tax benefits related
    to tax deductions  deferred in earlier years as a result of PSEG  previously
    paying  Alternative  Minimum  Tax.  These  benefits  had  been  deferred  by
    Resources  due to the overall  consolidated  position of the PSEG tax filing
    group  which  did not  permit  the full  recognition  of the tax  deductions
    associated with the leases in the tax return.  The aggregate  amount of cash
    received  related to such  deferrals  that is included in the operating cash
    flow for 1997 noted above was  approximately  $67 million.  Energy  Holdings
    does not anticipate that this situation will occur in the future.

      Operating Activities

      Cash flow from operating activities decreased $23 million from $16 million
to ($7  million)  for the three  months ended March 31, 2000 as compared to 1999
primarily due to an increase in days sales


                                       27
<PAGE>

outstanding at Energy Technologies  resulting from a delay in billing due to the
transition to outsource vendors.

      Cash flow from operating activities increased $39 million from $53 million
to $92  million  for the  year  ended  December  31,  1999 as  compared  to 1998
primarily due to increased cash generation at PSEG Resources.  Approximately $21
million was due to increased cash generation from new investments as well as the
addition of cash flow from existing investments.  Cash paid for interest expense
decreased $19 million due to the  refinancing of  approximately  $509 million of
outstanding  debt with preferred  stock in 1998 and additional  contribution  of
capital of approximately $200 million from PSEG in June of 1999.

      Cash flow from  operating  activities  decreased  $84  million  in 1998 as
compared to 1997  primarily due to a reduction in Resources'  cash flow from the
leveraged lease portfolio of $67 million related to the previous deferral of tax
deductions  as a result of PSEG's  consolidated  tax position  noted  above.  In
addition,  cash  generation  at Resources was affected by the  termination  of a
leveraged lease at a taxable gain resulting in an increase in the current income
tax  liability  of  approximately  $38  million  as noted  above.  Cash paid for
interest  expense  increased  by $24 million in 1998 due to higher  average debt
outstanding  resulting from 1997 and 1998 investing activity partially offset by
lower interest rates.  The above reductions were partially offset by overall net
improvement  in cash  generation by Energy  Holdings'  subsidiaries  aggregating
approximately  $38 million  primarily from improvement in the cash generation of
existing  investments  as  well as the  addition  of cash  generation  from  new
investments.

      Investing Activities

      In January  and  February  2000,  Resources  invested  $73  million in two
leveraged  lease  transactions  including  a  gas  distribution  system  in  the
Netherlands and an electric power plant in the United States.

      In 1999, Global invested  approximately  $536 million to acquire interests
in two energy  distribution  companies in Chile and Peru.  Of the total  capital
invested,  $160 million was  financed  with  project  debt  consolidated  on the
balance sheet which is non-recourse to Global and Energy  Holdings.  Global also
invested  approximately $237 million for construction of generation  projects in
the United  States,  Venezuela,  China,  India,  Tunisia  and  Italy.  Resources
invested  approximately $380 million primarily in six leveraged leases of energy
facilities: two gas distribution networks in the Netherlands, three cogeneration
plants in Germany,  two generations  plants in the United States and a liquefied
natural gas plant in the United States.  Energy  Technologies  acquired six HVAC
and  mechanical  service  contractors  for a  total  cost of  approximately  $63
million.

      In August 1999,  Global sold its  interest in the Newark Bay  cogeneration
facility and received net cash proceeds of  approximately  $69 million.  Also in
1999,  Resources  received net cash proceeds of approximately  $126 million from
early buyouts of leveraged leases of generation stations and an office building.

      In 1998,  Global  invested  approximately  $74  million  to  acquire a 30%
interest in an electric distribution system in Argentina and a 20% interest in a
generation project in India. In addition,  Global sold its partnership interests
in four generation facilities for approximately $137 million. Resources invested
approximately $251 million in five leveraged leases of energy-related assets and
received  proceeds of $59 million from the exercise of an early buyout option by
the lessee in a leveraged  lease.  Energy  Technologies  acquired one mechanical
service contracting firm at a total cost of $10 million.

      In  1997,  Global  invested  in two  electric  distribution  companies  in
Argentina and one in Brazil at a total cost of  approximately  $721 million,  of
which  approximately  $233 million was financed  with debt  consolidated  on the
balance sheet which is non-recourse to Global and Energy Holdings.  In addition,
Global  invested  approximately  $133 million in generation  projects  primarily
located in China, Colombia and the United States. The investment in Colombia was
subsequently  sold in 1998 for $55 million,  which was equal to Global's  equity
invested in the project.  In 1997,  Resources  entered into four leveraged lease
transactions of power plants, one located in the United Kingdom and three in the
Netherlands, for a total cost of approximately $145 million.


                                       28
<PAGE>

      Financing Activities

      During 1999,  PSEG  contributed  approximately  $200 million of additional
equity  to  Energy  Holdings,  the  proceeds  of  which  were  used to pay  down
short-term debt. In addition,  Energy Holdings  received  proceeds from new debt
issuances,  net of repayments,  totaling approximately $572 million primarily to
fund new investment activity for Global,  Resources and Energy Technologies.  In
addition,  Global issued  non-recourse  debt totalling $160 million primarily to
fund its acquisition of a Chilean  distribution  company.  At December 31, 1999,
Energy Holdings'  consolidated capital structure consisted of 28% common equity,
17% preferred stock and 55% debt.  Approximately $327 million, or 11%, of Energy
Holdings' total invested capital  represented  debt  consolidated on the balance
sheet that is non-recourse to Global and Energy Holdings.

      In January,  June and July 1998, PSEG invested $217 million,  $147 million
and $145 million,  respectively,  in Energy  Holdings  which issued to PSEG like
amounts of its 5.01%, 4.80% and 4.875% Cumulative  Preferred Stock. The proceeds
were used primarily to retire debt of Energy Holdings,  and to retire all of the
$75 million of 4.10% Cumulative  Preferred Stock issued to PSEG in October 1997.
The average dividend rate of all Cumulative Preferred Stock is 4.9%.

      In 1997,  Energy  Holdings,  through  PSEG  Capital and another  financing
subsidiary,  Enterprise Capital Funding  Corporation  (Funding),  issued net new
debt of $417  million  primarily to fund new  investment  activity by Global and
Resources.  In October 1997, Energy Holdings received  approximately $75 million
from the issuance of 4.10% Cumulative Preferred Stock to PSEG. The proceeds were
used to partially fund Global's investment in a Brazilian distribution company.

      Capital Requirements

      Energy  Holdings  plans to  continue  the growth of Global and  Resources.
Energy Holdings will assess the growth  prospects and  opportunities  for Energy
Technologies'  business  before  committing  substantial  amounts of  additional
capital.  In 1999,  Energy  Holdings'  subsidiaries  made  investments  totaling
approximately   $1.2  billion.   These  investments   included  leveraged  lease
investments  totaling $380 million by Resources and the acquisition by Global of
interests in distribution  companies in Chile and Peru.  Global's  investment in
such assets  totaled $536  million,  including  fees and closing  costs and $160
million  of  debt  consolidated  on  Energy  Holdings'  balance  sheet  that  is
non-recourse to Global and Energy Holdings. Investment expenditures for 2000 are
expected  to  be  approximately  $700  million,   comprised  of  investments  in
generation  and  distribution   facilities  and  projects  and  leveraged  lease
transactions. Investment activity in 2000 will be subject to periodic review and
revision and may vary significantly depending upon the opportunities  presented.
Factors affecting actual  expenditures and investments  include  availability of
capital and  suitable  investment  opportunities,  market  volatility  and local
economic trends. The anticipated sources of funds for such growth  opportunities
are  additional  equity  from  PSEG,  cash flow  from  operations  and  external
financings, including the notes.

      Over the next  several  years,  Energy  Holdings,  certain of its  project
affiliates and PSEG Capital will be required to refinance  maturing debt,  incur
additional debt and provide equity to fund investment activity. Any inability to
obtain required  additional  external  capital or to extend or replace  maturing
debt and/or existing  agreements at current levels and reasonable interest rates
may affect Energy Holdings' financial  condition,  results of operations and net
cash flows.

      Capital  resources  and  investment  requirements  may be  affected by the
outcome of the  proceedings  being  conducted  by the New Jersey Board of Public
Utilities  (BPU) pursuant to its Energy Master Plan and the New Jersey  Electric
Discount  and  Energy   Competition  Act  (Energy   Competition   Act)  and  the
requirements of the 1992 focused audit of PSEG's non-utility businesses (Focused
Audit).  As a result of the final  outcome of such  proceedings  and  accounting
impacts resulting from the deregulation of the generation of electricity and the
unbundling  of the  utility  business in New Jersey,  Energy  Holdings  does not
believe that the Focused Audit  provision  requiring  notification of the BPU if
PSEG's  non-utility  assets  exceed  20%  of  its  consolidated  assets  remains
appropriate  and believes  that  modifications  will be required.  On August 24,
1999,  the BPU issued its Final Order in the matter of Public  Service  Electric
and Gas Company's rate  unbundling,  stranded costs and  restructuring  filings.
Appeals  filed on behalf of several  Public  Service  Electric  and Gas  Company
customers are pending at


                                       29
<PAGE>

the New Jersey Supreme Court.  The Final Order directed Public Service  Electric
and Gas  Company  to file a  petition  with  the BPU to  maintain  the  existing
regulatory  parameters or to propose modifications to the Focused Audit order no
later than the end of the first quarter of 2000. In March 2000,  Public  Service
Electric and Gas Company submitted a letter to the BPU as its initial compliance
with this filing  requirement,  in which it notified the BPU of its intention to
make a filing to modify the terms of the Focused Audit within 120 days after the
Final Order becomes final and non-appealable. Regulatory oversight by the BPU to
ensure  that  there is no harm to utility  ratepayers  from  PSEG's  non-utility
investments is expected to continue.  Energy Holdings believes that these issues
will be satisfactorily resolved,  although no assurances can be given. Inability
to achieve satisfactory resolution of these matters could impact the future size
and financing activities of Energy Holdings and,  accordingly,  Energy Holdings'
future prospects,  including financial condition,  results of operations and net
cash flows.  Energy  Holdings  does not believe  that its ability to service its
debt, including the notes, would be impaired in such circumstances,  although no
assurances can be given.

      In addition, if PSEG were no longer to be exempt under PUHCA, PSEG and its
subsidiaries  would be subject to additional  regulation by the SEC with respect
to  financing  and  investing  activities,  including  the  amount  and  type of
non-utility investments.  We believe that this would not have a material adverse
effect on our company. See "Business -- Regulation".

      External Financings

      In May 1999,  Energy  Holdings  closed on two  separate  senior  revolving
credit  facilities,  with a  syndicate  of  banks,  a $495  million,  five  year
revolving  credit  and letter of credit  facility  and a $165  million,  364 day
revolving  credit  facility.  The interest rate on these  facilities is based on
LIBOR and the average  borrowing rate at Energy Holdings current rating level is
1.375%  over the one,  three or six  month  LIBOR  rate.  Interest  payments  on
LIBOR-based loans are paid on the last day of each quarter. The revolving credit
facilities  also permit  shorter  term base rate  borrowings  at the prime rate.
Interest  on the base rate loans is paid when the loan is repaid.  The five year
facility also permits up to $250 million of letters of credit to be issued.  The
five year facility matures on May 12, 2004 and the 364 day facility was extended
in May 2000 to a maturity of May 9, 2001.  These facilities  replaced  revolving
credit facilities  totaling $450 million at Funding,  a financing  subsidiary of
Energy Holdings which is not expected to be active in the future.

      Financial  covenants  contained in the new 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.  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 March 31,  2000,  the latest 12 months CFADS
coverage  ratio  was 8.9x and the ratio of  recourse  indebtedness  to  recourse
capitalization was 0.35 to 1.00.

      Compliance  with  applicable  financial  covenants will depend upon Energy
Holdings' future financial  position and the level of earnings and cash flow, as
to which no assurances can be given. In addition,  Energy  Holdings'  ability to
continue  to grow its  business  will depend to a  significant  degree on PSEG's
ability to access  capital  and Energy  Holdings'  ability to obtain  additional
financing beyond current levels. At March 31, 2000 and December 31, 1999, Energy
Holdings  had $125 million and $351  million,  respectively,  outstanding  under
existing revolving credit facilities.

      In October 1999,  Energy  Holdings,  in a private  placement,  issued $400
million of its 10% senior notes due 2009. These are the original notes for which
the  exchange  notes  are  being  offered  for the  exchange  by  means  of this
prospectus.  Interest  is  payable  semi-annually  on  April  1 and  October  1,


                                       30
<PAGE>

commencing  April 1,  2000.  The net  proceeds  from the sale  were used for the
repayment of short-term debt outstanding under Energy Holdings' revolving credit
facilities.

      In February 2000,  Energy Holdings,  in a private  placement,  issued $300
million of 91/8% senior  notes due 2004.  The proceeds of the sale were used for
repayment of short-term debt outstanding under Energy Holdings' revolving credit
facilities.

      In September  1999 and February  2000,  Energy  Holdings  entered into two
standby  letter  of  credit  agreements  with a group of banks in the  aggregate
principal amount of $340 million to support equity  contribution  obligations of
Global  with  respect  to two  of  its  investments.  These  agreements  contain
identical financial covenants to those in our revolving credit facilities.

      The  availability  and cost of external  capital  could be affected by the
performance of Energy Holdings and PSEG's other  subsidiaries and by any actions
ultimately  taken by the BPU and PSEG in response to the  proceedings  discussed
above.  They could also be affected by rating  agencies'  views of such matters,
including  the degree of  structural or  regulatory  separation  between  Public
Service  Electric  and  Gas  Company  and  its  non-utility  affiliates  and the
potential impact of affiliate ratings on the consolidated credit quality of PSEG
and other rated affiliates.

      PSEG Capital has a $750 million MTN program which provides for the private
placement  of MTNs.  This MTN  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.  In 1993, in connection  with the Focused Audit,  PSEG agreed
with the BPU to make a good faith effort to eliminate  such PSEG support  within
six to ten years.  Effective  January 31, 1995, PSEG Capital notified the BPU of
its  intention  not to have more than $650  million of debt  outstanding  at any
time. Energy Holdings believes it is capable of eliminating PSEG support of PSEG
Capital debt within the time period set forth in the Focused Audit.

      PSEG Capital's  assets  consist  principally of demand notes of Global and
Resources.   Intercompany  borrowing  rates  are  established  based  upon  PSEG
Capital's  cost of funds.  At December  31,  1998,  PSEG  Capital had total debt
outstanding  of $498  million,  all of which was comprised of MTNs. In March and
June 1999,  PSEG Capital  issued $252 million of 6.25% MTNs due May 2003 and $35
million of 6.73% MTNs due June 2001,  respectively.  The  proceeds  were used to
repay $100 million of PSEG Capital MTNs which  matured in February  1999 and $35
million  which  matured in May 1999 and to reduce  Energy  Holdings'  short-term
debt. At March 31, 2000 and December 31, 1999, total debt outstanding  under the
MTN program was $630 million, maturing from 2000 to 2003.

      For a discussion of  non-recourse  debt of Global,  See Note 8 in Notes to
Consolidated Financial Statements.

Qualitative and Quantitative Disclosures About Market Risk

      The risk inherent in Energy  Holdings'  market risk sensitive  instruments
and  positions is the potential  loss arising from adverse  changes in commodity
prices,  equity security prices,  interest rates and foreign  currency  exchange
rates  as  discussed  below.   Energy  Holdings'  policy  is  to  use  financial
instruments  to manage  risk  consistent  with its  business  plans and  prudent
practices. PSEG has a Risk Management Committee comprised of executive officers,
which utilizes an independent risk oversight  function to ensure compliance with
corporate  policies  and  prudent  risk  management  practices  for  all  of its
subsidiaries, including Energy Holdings and its subsidiaries.

      Energy Holdings is exposed to credit losses in the event of nonperformance
or nonpayment by counterparties. Energy Holdings has a credit management process
which is used to assess,  monitor and  mitigate  counterparty  exposure.  In the
event of  nonperformance or nonpayment by a major  counterparty,  there may be a
material  adverse impact on Energy  Holdings'  financial  condition,  results of
operations and net cash flows.


                                       31
<PAGE>

      Commodities

      During the three months ended March 31, 2000, Energy Technologies  entered
into futures contracts to buy natural gas and electricity related to fixed-price
sales commitments.  Such contracts hedged approximately 56% and 85% of its fixed
price natural gas and electric sales  commitments at March 31, 2000 and December
31, 1999,  respectively.  As of March 31, 2000 and  December  31,  1999,  Energy
Technologies  had a net unrealized  hedge gain of $2.6 million and hedge loss of
$0.1 million related to its electric and gas hedges, respectively.

      Energy  Technologies uses a value-at-risk  model to assess the market risk
of its commodity business. This model includes fixed price sales commitments and
financial derivative instruments.  Value-at-risk  represents the potential gains
or losses for the  portfolio  due to changes in market  factors,  for a specific
time period and a given  confidence  level.  The methodology used to measure the
value-at-risk is the  variance/co-variance  model based on historical volatility
and  correlation,  a 95% confidence  level and a one-week  holding  period.  The
measured  value-at-risk was approximately $990,000 at December 31, 1999 compared
to the December 31, 1998 level of approximately $400,000 due primarily to higher
natural gas price  volatility  and greater  sales volume.  Energy  Technologies'
calculated value-at-risk exposure represents an estimate of potential net losses
that could be recognized  on its portfolio of physical and financial  derivative
instruments   assuming  historical  movements  in  future  market  rates.  These
estimates,  however, are not necessarily  indicative of actual results which may
occur,  since actual  future gains and losses will differ from those  historical
estimates based upon actual fluctuations in market rates,  operating  exposures,
and the timing thereof, and changes in Energy Technologies' portfolio of hedging
instruments during the year.

      Equity Securities

      Resources has  investments in equity  securities and limited  partnerships
which invest in equity  securities.  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.  The aggregate fair values of such investments which
had  available  market  prices at March 31, 2000 and 1999 were $157  million and
$223 million,  respectively, and at December 31, 1999 and December 31, 1998 were
$131 million and $204 million,  respectively.  A  sensitivity  analysis has been
prepared to estimate  Energy  Holdings'  exposure to market  volatility of these
investments.  The potential  change in fair value  resulting from a hypothetical
10% change in quoted market prices of these investments  amounted to $12 million
and $11 million as of March 31, 2000 and December 31, 1999, respectively.

      Interest Rates

      Energy  Holdings is subject to the risk of  fluctuating  interest rates in
the normal course of business.  Energy  Holdings'  policy is to manage  interest
rates  through the use of fixed rate debt,  floating rate debt and interest rate
swaps. As of March 31, 2000 and December 31, 1999, a hypothetical  10% change in
market  interest  rates would  result in a $1 million  and $2 million  change in
interest costs related to short-term and floating rate debt, respectively.

      Global has $67 million of  consolidated  project debt  associated with the
investment in two  Argentine  distribution  companies  that is  non-recourse  to
Global and Energy  Holdings.  The debt was refinanced in June 1999 for a term of
one year.  An interest rate swap was entered into which  effectively  converts a
portion  of the  floating  rate  obligation  into a fixed rate  obligation.  The
interest  rate  differential  to be  received  or paid  under the  agreement  is
recorded over the life of the  agreement as an  adjustment to interest  expense.
See Note 8 in Notes to Consolidated Financial Statements.

      Foreign Operations

      In accordance  with their growth  strategies,  Global and  Resources  have
approximately  $1.5 billion and $1.1  billion,  respectively,  of  international
investments as of March 31, 2000.  These  investments  represented 59% of Energy
Holdings'  consolidated  assets.   Resources'   international   investments  are


                                       32
<PAGE>

primarily  leveraged  leases  of assets  located  in the  Netherlands,  Germany,
Australia and the United Kingdom with associated revenues  denominated in United
States Dollars and, therefore not subject to foreign currency risk.

      Global's   international   investments  are  primarily  in  projects  that
currently,  or upon  completion  will,  distribute  or generate  electricity  in
Argentina,  Brazil,  Chile,  China,  India,  Italy,  Peru,  Poland,  Tunisia and
Venezuela.  Investing in foreign  countries  involves  certain  risks.  Economic
conditions  that  result in higher  comparative  rates of  inflation  in foreign
countries  likely result in declining values in such countries'  currencies.  As
currencies  fluctuate against the United States Dollar, there is a corresponding
change in Global's  investment value in terms of the United States Dollar.  Such
change is  reflected  as an  increase or decrease  in  comprehensive  income,  a
separate component of stockholder's  equity.  Net foreign currency  devaluations
have reduced the reported amount of Global's total stockholder's  equity by $172
million,  $154 million of which was caused by the  devaluation  of the Brazilian
Real,  as of March 31,  2000.  In January  1999,  Brazil  abandoned  its managed
devaluation strategy and allowed its currency,  the Real, to float against other
currencies.  As of March 31, 2000 and, the Real had devalued  approximately  31%
against the United States Dollar since December 31, 1998, affecting the carrying
value of Global's investment in a Brazilian distribution company. For additional
information, see Note 16 in Notes to Consolidated Financial Statements.

      Higher comparative rates of inflation in foreign economies also means that
borrowing costs in local currency will be higher than in the United States. When
warranted,  Global has financed  certain foreign  investments with United States
Dollar  denominated debt. While less costly to service in terms of United States
Dollars, such debt is exposed to currency risk because a devaluation would cause
repayment to be more expensive in local currency terms since more units of local
currency would be required to repay the debt.  United States Dollar  denominated
debt was  incurred  by  Global  in  Argentina,  Chile  and Peru to  finance  the
acquisition of interests in rate regulated distribution entities. These entities
may be able to  recover  higher  costs  incurred  as a result  of a  devaluation
specifically through the terms of the concession agreement, or as a pass through
of higher inflation costs in rates over time although no assurances can be given
that this will occur. In evaluating its investment  decisions,  Global considers
the  social,  economic,  political  and  currency  risks  associated  with  each
potential  project  and,  if  warranted,  assumes  a certain  level of  currency
devaluation when making its investment decisions. In Argentina,  the currency is
pegged 1:1 with the United States Dollar,  and a legislative  act is required to
de-couple the currency from the Dollar.

      Global had  consolidated  debt  totaling $89 million and $90 million as of
March 31, 2000 and December  31, 1999,  respectively,  that is  non-recourse  to
Global  and Energy  Holdings  associated  with an  investment  in the  Brazilian
distribution  company noted above. The debt is denominated in the Brazilian Real
and is  indexed  to a basket of  currencies,  approximately  50% of which is the
United  States  Dollar.  As a result,  Global is  subject  to  foreign  currency
exchange rate risk which would result from exchange rate  movements  between the
indexed foreign  currencies and the United States Dollar.  Exchange rate changes
ultimately  impact the debt level  outstanding  in the  reporting  currency  and
result in foreign currency gains or losses in accordance with generally accepted
accounting  principles (GAAP). Any related gains or (losses) resulting from such
exchange rate movements are included in net income for the period,  and amounted
to a gain of $1.2  million,  $3 million  and a loss of $3 million  for the three
months  ended March 31,  2000,  and the years ended  December 31, 1999 and 1998,
respectively.

      Energy Holdings cannot predict  foreign  currency  exchange rate movements
and, therefore,  cannot predict the impact of such movements on Energy Holdings'
financial condition, results of operations and net cash flows.

Year 2000 Disclosure

      Many of Energy Holdings'  systems,  which include  information  technology
applications, plant control and telecommunications  infrastructure systems, were
modified due to computer program  limitations in recognizing  dates beyond 1999.
Energy  Holdings  has had a formal  project in place since 1997 to address  Year
2000 issues.  All mission  critical  systems were ready before  January 1, 2000.
Energy  Holdings' and its  subsidiaries did not experience any major problems or
Year 2000-related service


                                       33
<PAGE>

interruptions  as their systems rolled over from 1999 to 2000.  Energy Holdings'
and its  subsidiaries  expect most material Year 2000 compliance  problems would
have arisen on or shortly after January 1, 2000. To date,  Energy  Holdings' and
its  subsidiaries  are not  aware of any  material  Year  2000-related  problems
associated  with their  internal  systems or software or with the  software  and
systems of their vendors,  distributors  or suppliers.  Although not expected by
Energy  Holdings and its  subsidiaries,  it is possible  that Year  2000-related
problems may arise.

      Energy  Holdings  has no  outstanding  litigation  relating  to Year  2000
issues.  The  likelihood  of future  Year  2000  related  liabilities  cannot be
determined at this time.

      Energy  Holdings  estimates the total cost related to Year 2000  readiness
will  approximate  $5.3 million,  to be incurred through 2001, of which $150,000
was incurred in 1997, $1.1 million was incurred in 1998 and  approximately  $3.7
million  was  incurred  in 1999.  A portion  of these  costs is not likely to be
incremental  to Energy  Holdings,  but  rather,  represents  a  redeployment  of
existing  personnel/resources  and  its  share  of  partnership  assets.  Energy
Holdings' and its  subsidiaries  expect that expenses related to remediating any
remaining noncompliant non-critical systems will not be material.

Environmental Matters

      Global has ownership  interests in facilities,  including  operating power
plants and  distribution  companies  and power plants under  construction  or in
development, in numerous countries. These include the United States (California,
Hawaii, Maine, New Hampshire,  New Jersey,  Pennsylvania and Texas),  Argentina,
Brazil, Chile, China, India, Italy, Peru, Poland,  Tunisia and Venezuela.  These
operations are subject to compliance with  environmental laws and regulations by
relevant  authorities at each location,  which may include air and water quality
control, land use, disposal of wastes, aesthetics and other matters. In order to
achieve  compliance,  expenditures  may be needed  for  construction,  continued
operation or remediation of new and existing facilities and sites. As Global and
Energy  Technologies  pursue new opportunities,  they will be required to comply
with applicable environmental laws and regulations.

      Global and Energy  Technologies  attempt  to take such  expenditures  into
consideration when considering an investment; however, there can be no assurance
that  environmental  laws and regulations will not change. If environmental laws
or  regulations  change in the  future,  there can be no  assurance  that Energy
Holdings'  financial  condition,  results of operations and net cash flows would
not be  materially  and  adversely  affected.  Energy  Holdings is  committed to
operating its businesses cleanly, safely and reliably and strives to comply with
all environmental laws,  regulations,  permits, and licenses.  However,  despite
such  efforts,  there have been  instances of  non-compliance,  although no such
instance  resulted in revocation of any permit or license or caused a materially
adverse effect on Energy Holdings'  financial  condition,  results of operations
and net cash flows.

      We do not anticipate any material capital  expenditures for  environmental
control facilities or in connection with compliance with federal, state or local
environmental  laws and  regulations  in 2000 or 2001 or in connection  with the
generation projects currently in construction or advanced development. We do not
believe that compliance  with federal,  state and local  environmental  laws and
regulations  will have a material  adverse  effect on our  financial  condition,
results of operations and net cash flows.

Accounting Issues

      For a discussion of significant  accounting matters, see Notes 2 and 17 in
Notes to Consolidated Financial Statements.

Impact of New Accounting Pronouncements

      For a discussion of the impact of SFAS No. 133, "Accounting for Derivative
Instruments  and  Hedging  Activities"  (SFAS  133),  see  Note 17 in  Notes  to
Consolidated Financial Statements.


                                       34
<PAGE>


                                    BUSINESS

ENERGY HOLDINGS

      We  participate  in three  energy-related  lines of  business  through our
wholly-owned subsidiaries: Global, Resources and Energy Technologies.  Together,
these  operating   subsidiaries  have  more  than  90  financial  and  operating
investments.  We seek to pursue investment opportunities in the rapidly changing
global  energy  markets,  with  Global and Energy  Technologies  focusing on the
operating  segments of the electric and gas industries and Resources  seeking to
make financial investments in these industries.

      We have  developed a portfolio of  investments  which  supports  long-term
growth with near-term earnings. We balance risk, return, timing of cash flow and
growth objectives in creating a complementary  blend of investments.  Resources'
investments  generate cash flow and earnings in the near term, while investments
at Global and Energy Technologies  generally have a longer time horizon prior to
achieving expected cash flow and earnings.  Also,  Resources' passive lower-risk
investments  balance the higher risk  associated  with operating  investments at
Global and Energy Technologies.

      Our portfolio is  diversified by number,  type and geographic  location of
investments.  As of March 31,  2000 and  December  31,  1999,  our  assets  were
comprised of the following types of investments.

                                              March 31, 2000  December 31, 1999
                                              --------------  -----------------
     Leveraged Leases .......................        42%           43%
     Other Passive Financial Investments ....         7%            8%
     Domestic Generation Plants .............         4%            5%
     International Generation Plants ........         9%            7%
     International Distribution Facilities ..        26%           28%
     Energy Services ........................         3%            6%
     Other ..................................         9%            3%

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

      We are a  direct,  wholly-owned  subsidiary  of PSEG and an  affiliate  of
Public  Service  Electric and Gas  Company,  a public  utility  operating in New
Jersey,  which is also a  wholly-owned  subsidiary of PSEG. As of March 31, 2000
and December 31, 1999, PSEG had approximately  $1.4 billion of equity (including
retained earnings of approximately $299 million and $276 million,  respectively)
invested in our company.

GLOBAL

Strategic Overview

      Global's  goal is to develop,  own and  operate  electric  generation  and
distribution  facilities in selected  high-growth  areas of the worldwide energy
market.  In  carrying  out  its  strategy,   Global's  assessment  of  potential
opportunities  includes  a  multi-faceted  analysis  of  the  resident  country,
potential partners and transaction  economics.  Global identifies target markets
based  on  economic  fundamentals,  including  expected  growth  of  electricity
consumption, evaluation of the social, political and regulatory climate, and the
opportunities  for  participation  by private  power  developers.  Following the
identification of target market  prospects,  Global evaluates the possibility of
utilizing partners with local contacts and complementary expertise.  Global will
consider  investments or projects in which it is the sole or a majority owner if
justified by strategic  considerations,  anticipated  returns and other factors.
Global then focuses on projects which meet or exceed its specified risk-adjusted
rate of return and which present  potential  synergies with existing projects or
anticipated  future  investments.  As a  result  of the  implementation  of this
analytical  approach,  Global has  developed  or acquired  interests in electric
generation  and/or  distribution  facilities  in the United  States,  Argentina,
Brazil,  Chile,  Peru,  Venezuela  and  China.  In  addition,  projects  are  in
construction or advanced development in the United States, Argentina, Venezuela,
India, Tunisia, China, Italy and Poland.


                                       35
<PAGE>

Business Description

      Global,  formed in 1984 as an independent  power producer and developer of
qualifying  facilities (QFs) under the Public Utility Regulatory Policies Act of
1978 (PURPA), now develops,  acquires, owns and operates electric generation and
distribution  facilities and is engaged in power  production  and  distribution,
including  wholesale and retail sales of electricity,  in selected  domestic and
international markets.

      Deregulation  and  privatization  of energy markets,  as well as growth in
electricity  demand  throughout  the world,  have provided the  opportunity  for
Global to expand  the  scope of its  operations.  Global  has  concentrated  its
development activities on markets in which it believes most of the new worldwide
electric  generating  capacity will be installed in the next five years:  China,
India,  the Middle East, Latin America and selected regions in the United States
and Europe.  Global has  established a presence in these high growth  markets in
order to access and better evaluate potential investment opportunities.

      Global  has  ownership  interests  in  19  operating  generation  projects
totaling 2,026 MW (544 MW net) and 17 projects  totaling 4,808 MW (2,245 MW net)
in  construction or advanced  development.  Of Global's  generation  projects in
operation, construction or advanced development, 1,294 MW net or 46% are located
in the United States.  Global is actively involved,  through its joint ventures,
in managing the operations of eight  operating  generation  projects and will be
actively  involved  in  managing  the  operations  of  five of the  projects  in
construction or advanced development.  Global owns interests in six distribution
companies  providing  electricity  to over 2.7 million  customers in  Argentina,
Brazil,  Chile and Peru.  Global is actively involved in managing the operations
of these distribution companies in accordance with shareholder agreements and/or
operating  contracts.  As of March 31, 2000 and December  31,  1999,  Global had
assets of approximately $1.8 billion and $1.7 billion, respectively.

      Global  focuses on  multiple  project  acquisitions  or  development  in a
particular  geographic area in order to minimize development and operating costs
and maximize the value of existing and planned investments. By investing in both
generation and distribution facilities, Global seeks to balance revenue and cost
volatility   associated   with   generation   plants  with  the   stability   of
rate-regulated   revenues  from  distribution   facilities.   Global  will  seek
opportunities to divest assets which are no longer strategically important or do
not achieve profitability objectives.

Generation

      When  assessing  generation  development  and  acquisition  opportunities,
Global identifies regions that demonstrate a need for energy  infrastructure and
prospects for incremental  growth that Global believes will withstand  potential
short-term economic  turbulence.  Global expects that much of its new generation
investment will be in  international  markets due to the current and anticipated
growth in  required  electric  generating  capacity  in the  regions in which it
maintains a presence.

      Global  seeks to minimize  risk in the  development  and  operation of its
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,
selling the electricity produced for the majority of the project life.

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

      It is Global's policy to limit its financial  exposure to each project and
to mitigate  development and operating risk, including fuel and foreign currency
exposure,  through  contracts.  In  addition,  the project loan  agreements  are
structured on a non-recourse basis. Further, Global 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 the debt of Energy Holdings.


                                       36
<PAGE>

                              GENERATION FACILITIES

<TABLE>
<CAPTION>
                                                                                               Global's
                                                                                              Net Equity
                                                                                  Global's    Interest in
                                                                        Total     Ownership      Total
                                    Location        Primary Fuel         MW       Interest        MW
                                    --------        ------------        -----     ---------   -----------
<S>                                    <C>       <C>                      <C>         <C>         <C>
Operating Power Plants
United States
Eagle Point .......................    NJ        Natural gas              225         50%         113
Kalaeloa ..........................    HI        Oil                      180         50%          90
GWF
     Bay Area I ...................    CA        Petroleum coke            21         50%          10
     Bay Area II ..................    CA        Petroleum coke            21         50%          10
     Bay Area III .................    CA        Petroleum coke            21         50%          10
     Bay Area IV ..................    CA        Petroleum coke            21         50%          10
     Bay Area V ...................    CA        Petroleum coke            21         50%          10
Hanford ...........................    CA        Petroleum coke            27         50%          14
Tracy .............................    CA        Biomass                   21         35%           7
Bridgewater .......................    NH        Biomass                   16         40%           7
SEGS III ..........................    CA        Solar                     30          9%           3
Kennebec ..........................    ME        Hydro                     15         16%           2
Conemaugh .........................    PA        Hydro                     15         50%           8
                                                                        -----                    ----
     Total United States                                                  634                     294

International
CTSN .............................. Argentina    Coal/Natural gas/Oil     650         19%         124
MPC
     Jingyuan - Units 5 and 6 .....   China      Coal                     600         15%          90
     Jinqiao (Thermal Energy) .....   China      Coal/Oil                 N/A         30%         N/A
     Tongzhou .....................   China      Coal                      30         40%          12
     Zuojiang - Units 1, 2 and 3 ..   China      Hydro                     72         30%          21
TGM ............................... Venezuela   Natural gas                40          9%           3
                                                                        -----                    ----
     Total International                                                1,392                     250
                                                                        -----                    ----
     Total Operating Power Plants                                       2,026                     544
                                                                        -----                    ----

                                                                                                       In Service
                                                                                                          Date
                                                                                                       ----------
Power Plants in Construction or Advanced Development
Turboven
     Maracay ...................... Venezuela    Natural gas               60         50%          30       2000
     Cagua ........................ Venezuela    Natural gas               60         50%          30       2000
     Valencia ..................... Venezuela    Natural gas               80         50%          40       2001
MPC
     Shanghai BFG .................   China      Blast furnace gas         50         16%           8       2000
     Fushi ........................   China      Hydro                     54         35%          19       2000
     Nantong ......................   China      Coal                      24         46%          11       2000
Texas Independent Energy, L.P.
     Guadalupe ....................   Texas      Natural gas            1,000         50%         500       2000
     Odessa .......................   Texas      Natural gas            1,000         50%         500       2001
Prisma 2000
     Crotone ......................   Italy      Biomass                   20         70%          14       2001
     Bando ........................   Italy      Biomass                   20         70%          14       2001
     Strongoli ....................   Italy      Biomass                   40         70%          28       2002
     Porto Empedocle ..............   Italy      Biomass                   24         70%          17       2002
Parana ............................ Argentina    Natural gas              830         33%         274       2001
Rades .............................  Tunisia     Natural gas              471         35%         165       2001
PPN ...............................   India      Naptha/Natural gas       330         20%          66       2001
Tri-Sakthi ........................   India      Coal                     525         63%         331       2003
Chorzow ...........................  Poland      Coal                     220         90%         198       2003
                                                                        -----                   -----
     Total Construction or Advanced Development                         4,808                   2,245
                                                                        -----                   -----
     TOTAL Generation Facilities                                        6,834                   2,789
                                                                        =====                   =====
</TABLE>


                                       37
<PAGE>

Domestic Generation in Operation

      All of Global's domestic operating generation facilities were developed as
QFs under  PURPA and have power  purchase  contracts  for their  output with the
local utility  companies.  As a result of QF requirements,  Global is limited to
50% ownership or less of these facilities.

      Eagle Point

      The Eagle Point Power Plant is a 225 MW gas-fired  combined-cycle facility
located in West  Deptford,  New  Jersey.  Approximately  90% of the  electricity
generated by the Eagle Point Power Plant is sold to Public Service  Electric and
Gas Company under a 25-year power purchase contract terminating in May 2016. The
balance of the electricity  generated is sold to Coastal Eagle Point Oil Company
along  with  approximately  575,000  lbs./hr of steam  under a 20-year  contract
terminating  in May 2011.  Global  and its  partner,  ANR  Venture  Eagle  Point
Company, a subsidiary of The Coastal Corporation,  each own 50% of the facility.
The plant has been in commercial  operation  since May 1991. In 1999,  the Eagle
Point Power Plant generated approximately 1,779 gigawatt hours (GWH) of electric
energy and approximately  $131 million of gross revenue.  The plant availability
factor for 1999 was 98%.

      Kalaeloa

      The Kalaeloa Power Plant is a 180 MW oil-fired  cogeneration plant located
at Barbers Point,  Oahu,  Hawaii,  which began  operating in April 1990.  Global
purchased a 49% limited  partnership  interest in the  facility in 1997 and a 1%
general  partnership  interest in April 2000. Global's partner is Harbert Power.
All of the electricity generated by the Kalaeloa Power Plant is sold to Hawaiian
Electric  Company under a 25-year power  purchase  contract  terminating  in May
2016.  Under a steam  purchase  and sale  agreement  expiring  in May 2016,  the
Kalaeloa  Power Plant will supply  approximately  121,000  lbs./hr.  of steam to
Hawaiian Independent Refinery,  Inc. In 1999, the plant generated  approximately
1,350  GWH of  electric  energy  for  sale  to  Hawaiian  Electric  Company  and
approximately  $91 million of gross revenue.  The plant  availability  factor in
1999 was 93%.

      GWF and Hanford


      Global and Harbert Power each own 50% of GWF, which owns and operates five
petroleum  coke-fired  power plants  totaling  102.5 MW in the San Francisco Bay
area in California.  Power purchase  contracts for the plants' net output are in
place with Pacific Gas and Electric  Company  ending in 2020 and 2021.  In 1999,
the plants  generated  647 GWH of  electric  energy for sale to Pacific  Gas and
Electric  Company and  approximately  $112 million of gross revenue.  The plants
went  into  service   between  October  1989  and  December  1990.  The  average
availability factor of the five plants in 1999 was 82%.


      Global and Harbert Power each own 50% of Hanford,  which owns and operates
a 27 MW petroleum coke-fired facility in Hanford,  California.  A power purchase
contract  for the plant's net output is in place with  Pacific Gas and  Electric
Company  through 2011. In 1999, the Hanford plant  generated 160 GWH of electric
energy for sale to Pacific Gas and Electric  Company and steam which was sold to
Pirelli-Armstrong  Tire Corp.  pursuant to a 20-year contract  expiring in 2010.
The Hanford plant generated  approximately  $30 million of gross revenue in 1999
and had an availability factor of 81%.

      Power from the  California  facilities is sold pursuant to Pacific Gas and
Electric's  Standard  Long-Term  Energy and Capacity Power  Purchase  Agreements
(SO4). Power has been sold at fixed rates for energy and capacity.  Beginning in
2000,  energy prices under such contracts will be reduced from the current fixed
rates to short-run avoided costs energy prices approved by the California Public
Utilities  Commission.  As a result,  Global's  revenues from its investments in
California are expected to decrease.  See "Management's  Discussion and Analysis
of  Financial  Condition  and  Results  of  Operations  --  Overview  and Future
Outlook".

      Other  minority  investments  held by Global in five  domestic  generation
facilities  totaled 27 MW net and generated less than 5% of Global's total gross
revenues in 1999.


                                       38
<PAGE>

International Generation in Operation

      Global owns  interests in operating  generation  facilities  in Argentina,
China and  Venezuela.  Over the next five  years,  Global  anticipates  pursuing
additional  opportunities  resulting  from its presence in these  countries,  as
warranted by local market considerations.

   Argentina

      CTSN

      Central  Termica  San  Nicolas  (CTSN)  is a 650  MW  electric  generation
facility  located near the city of San Nicolas,  Argentina  that is 19% owned by
Global and 69% by The AES  Corporation,  with the  remaining 12% owned by CTSN's
employees.  CTSN was acquired in 1993 in conjunction with the initial  Argentine
privatization  process,  and  is  the  third  largest  thermal  power  plant  in
Argentina,  consisting of one 350 MW and four 75 MW steam turbines. CTSN, as the
only  multi-fuel  generation  facility in Argentina,  is capable of operating on
natural gas, oil or coal. At the time of privatization,  CTSN's availability was
below 45%. The plant availability factor in 1999 was 66%.

      The facility  sells its output through a combination of spot market sales,
contracts with distributors and contracts with a wide variety of large or medium
sized  industrial  users.  Approximately  half of the output is sold pursuant to
power  purchase  contracts  that expire in 2001.  Upon  expiration  of its power
purchase  contracts,  Global  expects  that CTSN's  output will be sold into the
merchant  market.  Although CTSN is an older facility and will face  substantial
competition from more efficient plants, the facility has direct access by vessel
to its own port,  rail and motorway,  and is located in  Argentina's  industrial
belt on the Parana River.  It is also  situated  near the Argentine  natural gas
transportation  system and is connected to the regional transmission lines which
provide  access to the wholesale  electricity  market.  In 1999,  CTSN generated
2,241 GWH of electric energy.  Experience  gained through this investment led to
Global's subsequent  investments in Argentine electric  distribution systems and
the development of a new power plant adjacent to CTSN, as described  below.  See
"-- Power Plants in Construction or Advanced Development -- Argentina -- Parana"
and "--Distribution -- Argentina -- EDEN, EDES, EDELAP".

   China

      Global's activities in China are exclusively conducted through Meiya Power
Company Limited (MPC), a joint venture with the Asian  Infrastructure Fund (AIF)
and Hydro Quebec  International (HQI). Global owns 50% of MPC, while AIF and HQI
own 30% and 20%,  respectively.  AIF is a private equity fund whose sponsors and
investors  include Frank Russell  Company,  International  Finance  Corporation,
Asian Development Bank and Asian Infrastructure Development Fund.

      As the result of its existing  investments in China,  MPC has  established
relationships  and partnerships  with local  authorities.  Its focus has been on
investment  opportunities  in  eastern  China,  where  power  demand is high and
cogeneration opportunities exist, central China, where heavy industry is located
and there are  abundant  supplies  of coal,  and  northwest  China,  where power
shortages  prevail and central  government policy continues to support growth in
designated  areas.  MPC's  strategy is to identify  projects that are consistent
with central government policies, to pursue negotiated investment  opportunities
rather than  competitive  bid situations and to seek projects with  demonstrated
expansion possibilities.

      MPC is focused on  developing,  acquiring,  owning and operating  electric
generation  facilities  in China 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.  MPC's  projects,   either  under  construction  or  in
operation, have obtained all required approvals to enable issuance of a business
license  in their  respective  localities.  As legal  business  entities,  these
projects generally have access to foreign currency swap markets.


                                       39
<PAGE>

      Jingyuan

      MPC,  through a wholly-owned  subsidiary,  owns a 30% interest in Jingyuan
Units 5 and 6, two 300 MW mine-mouth  coal-fired  power plants  located in Gansu
Province,  China. The plants are 50% owned by the State  Development  Investment
Corporation,  15%  by the  Gansu  Electric  Power  Construction  Investment  and
Development Co. and 5% by the Gansu Electric Power Company (GEPC),  which is the
operator. GEPC has a take-or-pay power purchase contract for 22 years, ending in
2017.  The power purchase  contract  provides for a minimum take of 5,500 hours,
supporting the debt service and a specified equity return. The contract provides
incentives  for power taken above the minimum  level.  The minimum level was not
met in 1998 and 1999. Payment terms are being discussed between MPC and GEPC. In
addition,  MPC is seeking  final tariff  approval  for 1999 from the  Provincial
Government.  EnergyHoldings believes the impact of these matters will not have a
material adverse effect on it. The power contract provides for a pass through of
foreign  currency  debt service  payments.  Foreign  currency  protection of the
equity  return  resulting  from the  minimum  take is  covered  under a separate
agreement with MPC's partner,  the Gansu Electric Power Construction  Investment
and  Development Co. Equity return beyond the minimum take is exposed to foreign
currency   fluctuations.   MPC's  investment   consists  of  direct  equity  and
shareholder loans to the Jingyuan  project.  The shareholder loans were provided
in part by a  non-recourse  loan  from  international  banks  to a  wholly-owned
subsidiary of MPC. This non-recourse loan totaled  approximately $50 million and
will  mature in 2006.  The  balance of the  project  debt was  provided in local
currency by Chinese banks. The Jingyuan units have been in commercial  operation
since October 1996 and October 1997,  respectively.  In 1999, the Jingyuan units
generated 2,637 GWH of electric energy and had an availability factor of 92%.

      Jinqiao

      MPC  is  a  partner  in  the  Meiya  Jinqiao  Energy  Project,  a  thermal
distribution system located in Shanghai,  China. Jinqiao is owned 60% by MPC and
40% by the Shanghai Jinqiao Heat Power Corporation. Fuel is supplied by Shanghai
General Fuel Corporation, which has a 60% ownership interest in Shanghai Jingiao
Heat Power Corporation.  The plant's output is sold under approximately 60 steam
purchase  agreements  in place with  commercial  tenants of the  Jinqiao  Export
Processing  Zone.  Most of the  tenants  are  foreign  multinationals  and large
Chinese firms.  Approximately 25% of the contracted  capacity is sold to General
Motors and NEC Electronics  pursuant to contracts that expire in 2025. Financing
for the project was provided by local banks.  MPC is evaluating the  possibility
of constructing a cogeneration facility within the Zone.

      Tongzhou

      MPC  owns  80% of  the  Tongzhou  facility,  which  is a 30 MW  coal-fired
cogeneration  plant consisting of two 15 MW units located at Tongzhou in Jiangsu
Province,  China. MPC's 20% partner is the Tongzhou Municipal Government through
Jiangsu Tongzhou Co-Generation Plant, a company established to hold its interest
in the project. The two units began operating in July and August 1999. The plant
is located  within the Tongzhou  Development  Zone on the outskirts of the city.
Based on a governmental  restructuring of the electric power distribution system
in Jiangsu Province, responsibility for electric sales and distribution has been
removed from the municipal authority with whom MPC had originally entered into a
25 year take-or-pay power purchase agreement. Electric output is now sold to the
Jiangsu Provincial Power Bureau,  which has assumed  responsibility for electric
sales and distribution, on a merchant basis at prices established by the Jiangsu
Provincial  Pricing  Bureau.  Steam is sold  directly to  customers  and fuel is
purchased on the spot market.  As a result,  MPC and its partners  have recently
reached an agreement on a  restructuring  of the  partnership  agreement and MPC
will  receive  100%  of the  partnership  cash  distributions.  Energy  Holdings
believes that the restructuring will not have a material adverse effect on it.


                                       40
<PAGE>

      Zuojiang

      MPC owns 60% of the Zuojiang facility,  which is a 72 MW  run-of-the-river
hydroelectric  station comprised of three 24 MW units located near Nanning,  the
capital  of Guangxi  Province  in  Southwest  China.  All three  units have been
completed  and  are  currently  in  operation.   MPC's  investment,   through  a
combination of equity and shareholder loans, is expected to total  approximately
$39 million.  MPC's 40% partner is Nanning Regional Power Company,  the original
developer of the project and a state enterprise owned by the Nanning government.
The joint venture will build, own, operate and eventually  transfer the facility
to its partner,  Nanning Regional Power Company. Power from the facility will be
sold to the Guangxi  Electric Power Bureau  pursuant to a 23-year power purchase
contract that commits the Guangxi  Electric Power Bureau to  take-or-pay  for an
annual minimum amount of power that is equal to  approximately  80% of the total
average annual electricity expected to be produced by the facility. The price of
power will be comprised of a base price and formula  adjustments  to  compensate
for changes in inflation and laws regarding taxes,  fees and required  reserves.
In  addition,  approximately  50% of the  tariff is  indexed  to  United  States
Dollars.

   Venezuela

      TGM

      Global, in partnership with Corporacion  Industrial de Energia (CIE), owns
Turbogeneradores de Maracay (TGM), a 40 MW natural gas-fired plant in Venezuela.
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. Through its 9% ownership interest in TGM, which
has been held since 1995, and its  relationship  with CIE and MANPA,  Global has
obtained an  understanding of the power  requirements of potential  customers in
the north-central  industrial region of Venezuela and the supply dynamics of the
existing  system.  This has  created  additional  opportunities  to develop  new
generating  projects  and  provide   electricity  to  industrial   customers  in
Venezuela.  See "-- Power  Plants in  Construction  or Advanced  Development  --
Venezuela -- Turboven".

   Other

      Global  currently  holds a  minority  interest  in a  project  development
company  located  in the  Philippines.  The  total  investment  in this  company
represented  less than 1% of Global's assets as of December 31, 1999. As part of
a comprehensive review of existing assets and development  activities,  Global's
management  has  decided  that it will not commit  additional  resources  to its
investment  in the  Philippines  and will focus its  current  Asian  development
activities in China. For further  discussion,  see "Management's  Discussion and
Analysis  of  Financial  Condition  and  Results  of  Operations  --  Results of
Operations -- Global".

Power Plants in Construction or Advanced Development

      Global has  seventeen  projects in  construction  or advanced  development
totaling 4,808 MW (2,245 MW net) located in Venezuela, China, the United States,
Argentina,  India,  Italy,  Poland and  Tunisia.  Global  seeks to obtain  power
purchase  contracts for the output of its plants.  Global has obtained long-term
power purchase  contracts for the output of its plants in China,  India,  Italy,
Poland,  Tunisia and  Venezuela.  Conditions in certain  markets,  including the
United  States,  dictate  that  Global's  generation  projects  will be merchant
facilities  that sell their output under  short-term  contracts or into the open
market.  Global's assessment of investments in merchant generation facilities is
based on an underlying  analysis of the  wholesale  power market in the relevant
geographic area. This analysis includes models which simulate the market and the
dispatch order of existing and planned power  facilities.  These models form the
basis for the economic evaluation of projects and their expected performance.

   Venezuela

      Turboven

      In April 1999, Global and CIE, its partner in the TGM facility,  announced
plans to  construct  and operate up to three  gas-fired  simple  cycle  electric
generation  facilities  with  total  installed  capacity  of up


                                       41
<PAGE>

to 200 MW and associated  distribution  systems to serve industrial customers in
Maracay (60 MW), Cagua (60 MW) and Valencia (80 MW),  Venezuela.  The facilities
will be owned and  operated by  Turboven,  an entity  which is jointly  owned by
Global and CIE. The  facilities  will utilize 10  refurbished  General  Electric
turbines and local fuel.  Through its previous  investment in Venezuela,  Global
determined that industrial users were  dissatisfied  with the quality of service
from the  existing  power grid.  To date,  power  purchase  contracts  have been
entered  into for the sale of  approximately  50% of the output of the first two
plants, Maracay and Cagua, to various industrial customers, approximately 33% of
whom are  subsidiaries  or  affiliates  of  multinational  companies.  The power
purchase  contracts  are  structured  to provide  energy only with  minimum take
provisions.  Fuel costs will be passed  through  directly to  customers  and the
energy  tariffs will be calculated  in United  States  Dollars and paid in local
currency.  Construction  of the first two facilities is  essentially  completed.
Global and its partner will secure power  contracts  with  additional  customers
before  proceeding  with  construction  of the third facility which is currently
scheduled to be completed in late 2001.  Global's investment for all three units
is not expected to exceed approximately $70 million.


     On May 24, 2000,  CA de  Administracion  y Fomento  Electrico  (CADAFE),  a
Venezuelan state-owned  electricity company, a subsidiary of CADAFE and Turboven
entered into an agreement to coordinate the operations and  maintenance of their
respective  installations.  Litigation had been instituted  against  Turboven by
CADAFE's  subsidiary that alleged that  Turboven's  operation of the Cagua plant
interfered  with its  installations  and  that  Turboven  did not  meet  certain
Venezuelan  legal  requirements.  On February  4, 2000,  the  Superior  Court in
Maracay,  Venezuela  issued an injunction  prohibiting the start-up of the Cagua
plant.  Global  believes  that  Turboven  has met  all  legal  requirements  for
operation  of Cagua.  On May 17,  2000,  the First Court for the  Litigation  of
Administrative  Matters of Venezuela  issued an order lifting the injunction and
rejecting  the  arguments  of  CADAFE's  subsidiary.  The  period for appeal has
expired. Any final decision preventing operation of Cagua would likely also have
affected  Turboven's  ability to operate Maracay and its planned  development of
the Valencia  project.  Global's total indirect  investment to date in the Cagua
and Maracay  facilities  is  approximately  $43  million.  The Maracay and Cagua
facilities are currently in testing with commercial  operation  expected in June
and July 2000, respectively.


   China

      MPC is a partner in several  projects under  construction in China.  These
projects described below are expected to require a total investment by Global of
approximately $24 million.

      Shanghai BFG

      Shanghai BFG is a 50 MW blast furnace  gas-fired  facility  located at the
Shanghai No. 1 Iron and Steel Company (No. 1 Steel).  MPC and  Westcoast  Energy
Inc.  each own 50% of Can Am  Energy  Holding  LLC which in turn owns 65% of the
facility.  No. 1 Steel, which owns the remaining 35%, will provide blast furnace
gas and heavy fuel oil to fuel the power plant and is  expected to purchase  all
of the electricity generated pursuant to a 25-year power purchase contract.  The
power purchase  contract  requires No. 1 Steel to take or pay for the full plant
output at an annual operating  factor of approximately  80%. Pricing will be the
same as or less than published retail grid prices for industrial  customers with
escalation clauses and protection against inflation. In addition,  approximately
28% of the  tariff is indexed to United  States  Dollars.  The total cost of the
facility is  expected to be  approximately  $52  million  with MPC's  investment
expected to be  approximately  $17 million.  The facility is in the start up and
testing phase and is expected to be  operational  in the second quarter of 2000.
This project has received government support due to its favorable  environmental
impact stemming from the use of blast furnace gas as fuel.

      Nantong

      The  Nantong  project  is  located in  Nantong  Development  zone  located
approximately  15 miles from MPC's  Tongzhou  project in Jiangsu.  The  facility
consists   of  3  x  75  T/H   coal-fired   boilers,   2  x  12  MW   extracting
turbine-generating  units and a 4 kilometer steam pipeline network.  The project
has a power purchase contract and  interconnection  and dispatch  agreement with
the Jiangsu Power  Company and will sell power to the Jiangsu power grid.  Steam
and  soft  water  will be sold to  industrial  users  in the  Development  Zone.
Completion of both 12 MW units is scheduled for the third quarter of 2000.


                                       42
<PAGE>

      Fushi

      The Fushi Hydropower Project, currently under construction, is a 3 x 18 MW
run-of-river,  hydroelectric  station  located  along  the  Rongjiang  River  in
Guangxi.  MPC owns 70% of the project  with the  remaining  30% owned by Liuzhou
Development,   formed  under  two  23-year  cooperative  joint-ventures.   MPC's
investment,  through a combination of equity and shareholder  loans, is expected
to total approximately $21 million.  Power from the facility will be sold to the
Guangxi Electric Power Bureau pursuant to a 23-year power purchase contract that
commits the Guangxi  Electric Power Bureau to take-or-pay  for an annual minimum
amount of power that is equal to  approximately  80% of the total average annual
electricity expected to be produced by the facility.  The price of power will be
comprised of a base price and formula  adjustments  to compensate for changes in
inflation and laws regarding  taxes,  fees and required  reserves.  In addition,
approximately 50% of the tariff is indexed to UnitedStates  Dollars.  Completion
of the first 18 MW unit is  scheduled  for the  second  quarter of 2000 with the
second and third units scheduled for completion later in the year.

   Italy

      Prisma 2000

      Global acquired 70% of Prisma 2000 in November 1999.  Global's 30% partner
is Societive Financiere Cremonese,  a project development company.  Prisma is an
Italian  power  project  development  company  with  four  biomass  projects  in
construction or advanced  development  totaling 104 MW with commercial operation
scheduled for 2001 and 2002. These projects'  capacity will be sold to ENEL, the
Italian  Government  owned electric  company.  Prisma is also actively  pursuing
other development opportunities in Italy. Global's investment is not expected to
exceed $80 million over the next two years.

   United States

      Guadalupe

      In April 1999, Global and its partner,  Panda Energy International,  Inc.,
established  Texas  Independent  Energy,  L.P. (TIE), a 50/50 joint venture,  to
develop,  construct,  own, and operate electric generation  facilities in Texas.
The first TIE facility, a 1,000 MW gas-fired  combined-cycle electric generation
facility  in  Guadalupe  County  in  south  central  Texas  is  currently  under
construction.  The first 500 MW phase of this  merchant  plant is expected to be
operational  in late  2000.  It is  anticipated  that  approximately  50% of the
plant's  output  will be sold into the Texas spot market and the  remaining  50%
will be sold under various bi-lateral power purchase and tolling agreements with
terms of one to five years.  Global  believes that  relatively low capital costs
resulting from long standing  equipment  orders will provide the facility with a
competitive advantage in selling its output into the Texas grid. Global believes
that  the  Texas  market   provides   particularly   favorable   merchant  plant
opportunities due to its low reserve margins and relative  isolation.  The total
cost of this facility is estimated to be  approximately  $460 million.  Global's
investment, including loans and guarantees, is expected to be approximately $193
million. Construction began on the Guadalupe facility in August 1999. Global and
Panda have announced plans to develop two additional projects in Texas under the
TIE joint venture, including the Odessa facility discussed below.

      Odessa

      TIE  is  constructing  a  1,000  MW  gas-fired   combined-cycle   electric
generation facility near Odessa, Texas. The first block of 500 MW is expected to
be  operational in June 2001. It is anticipated  that  approximately  50% of the
output of the facility will be sold through  various  bi-lateral  power purchase
and  tolling  agreements  with terms of one to five  years.  The  balance of the
output will be sold on a spot or  short-term  basis into the Texas  market.  The
total cost of the  facility  is  estimated  to be  approximately  $528  million.
Global's  investment,   including  loans  and  guarantees,  is  expected  to  be
approximately  $190  million.  Non-recourse  project  financing  relative to the
Odessa facility totaling $329 million was completed in February 2000.


                                       43
<PAGE>

   Argentina

      Parana

      In June 1999, Global and AES closed on the non-recourse  project financing
of the Parana  facility,  an 830 MW natural  gas-fired  combined-cycle  electric
generation  facility to be  constructed  on land to be  purchased  from CTSN and
adjacent to the CTSN facility in San Nicolas.  Global has a 33% ownership  share
in AES Parana,  S.A.,  the joint venture  entity that is  constructing  and will
operate the Parana project. AES owns the remaining 67%. The Parana facility will
utilize  infrastructure  and services  provided  under contract from CTSN and is
expected to be completed in 2001 at a total cost of approximately  $448 million.
Global's equity investment in Parana, including contingencies, is expected to be
approximately   $86  million.   Global  expects  that  this  facility's   design
technology,  along with construction and operating efficiencies derived from the
proximity  to CTSN,  will  enable it to  compete  effectively.  Parana  has been
designed to serve as a base load  generator and will operate as a merchant plant
selling into the wholesale power market.

   Tunisia

      Rades

      Global and its partners,  Sithe Energies,  Inc. and Marubeni  Corporation,
closed  project  financing  for  a  471  MW  gas-fired  combined-cycle  electric
generation  facility in Rades,  Tunisia,  in August 1999. Global will own 35% of
the  facility,  with Sithe and  Marubeni  each owning  32.5%.  Sithe will be 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  power  purchase  contract  tariff  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)  and  indexed  to  actual  costs or a
combination of United States  Dollars and Euros.  The facility is expected to be
completed in the summer of 2001 at a total cost of  approximately  $261 million.
Global's  equity  investment  is  expected  to  be  approximately  $27  million,
including contingencies.

   India

      PPN

      Global owns a 20% interest in PPN Power Generating  Company Limited (PPN),
which has a 330 MW gas-fired  combined-cycle  facility under construction in the
State of Tamil Nadu,  India.  Global's  partners  include  Marubeni,  with a 26%
interest,  El Paso Energy Corporation,  with a 26% interest and the Reddy Group,
with a 28% interest. Upon completion, scheduled for January 2001, Global will be
the operator.  A take-or-pay  power purchase  contract has been entered into for
the sale of 100% of the output to the State  Electricity Board of Tamil Nadu for
30 years.  The contract is supported by letters of credit, a State guarantee and
an escrow arrangement. Foreign currency exposure has been minimized by utilizing
local currency (rupee) financing and providing for devaluation protection, up to
a base  return,  in the  power  purchase  contract.  The total  project  cost is
estimated  to  be  approximately  $328  million.   Global's  equity  investment,
including contingencies, is not expected to exceed $32 million.

      Tri-Sakthi

      In May 1999,  Global  acquired an interest in  Tri-Sakthi  Energy  Private
Limited, a company which is developing and will own a 525 MW coal-fired electric
generation  facility  to be  constructed  in Ennore,  Tamil  Nadu,  India.  Upon
scheduled completion in 2003, Global will be the operator of the plant. Global's
partner is Pembinaan Redzai Bhd Sdn (PR Group) of Malaysia.  A take-or-pay power
purchase  contract  has been  entered into for the sale of 100% of the output to
the  State  Electricity  Board  of Tamil  Nadu for 30  years.  The  contract  is
supported by letters of credit, an escrow arrangement and a State guarantee. The
total project cost is approximately $630 million. Project financing negotiations
are underway with local Indian  institutions and  international  banks.  Foreign
currency exposure will be minimized by utilizing rupee financing and as a result
of devaluation protection,  up to a base return, in the power purchase contract.
The cost of fuel is a pass through to the State Electricity Board.  Global plans
to close  financing  for this  project and commence  construction  in the fourth
quarter of 2000. Global's equity investment,  including  contingencies,  for its
63% interest is expected to be approximately $180 million.


                                       44
<PAGE>

   Poland

      Chorzow

      In November 1999, Global announced that, through its majority shareholding
in  Elektrocieplownia  Chorzow  ELCHO Sp zo.o  (ELCHO),  it plans to construct a
combined heat and power plant in Poland. The capacity of the facility which will
be located in Chorzow,  near Katowice in upper Silesia,  is planned to be 220 MW
(electrical) and 500 MW (thermal). Global will hold a 90% interest in ELCHO with
the balance held by local Polish  companies.  Total project cost is estimated at
$320 million with Global's  investment totaling  approximately $94 million.  The
plant has a targeted  commercial  operation  date in early 2003.  Polskie  Sieci
Elektroenergetyczne  SA, the Polish  power grid  company,  has entered into a 20
year power purchase  agreement with ELCHO for 100% of the electrical output. All
of the thermal energy will be sold to Przedsiebiorstwo  Energetyki Cieplnej, the
district  heating  company  serving  the city of  Katowice  and its  surrounding
communities, for a term of 20 years.

Distribution

      Global has expanded its business to include electric distribution where it
can be linked to existing or prospective generation  opportunities.  Since 1997,
Global has invested in six distribution  companies which serve approximately 2.7
million customers and a population of 10 million in Argentina, Brazil, Chile and
Peru. Investments in these rate-regulated distribution companies represented 28%
of Energy Holdings' assets, or $1.2 billion,  as of December 31, 1999. Global is
actively involved in managing the operations of these distribution  companies in
accordance with shareholder agreements and/or operating contracts.

      Global's  analysis  of  distribution  investments  is based on an in-depth
assessment of the regulatory  environment,  expected  growth in the service area
and related generation  opportunities.  Global's experience in the technical and
operating  aspects of electric  distribution  systems enables it to identify and
correct   operational   deficiencies   and  thereby   enhance   efficiency   and
profitability.  Global's approach to management of its distribution  investments
is to appoint a  transition  team,  which  includes  its own  experts  and local
representatives,  with appropriate  experience to assess operational  activities
and implement improvements as required. The team then recruits local managers to
assume  operational  responsibility   ultimately.   When  required,  Global  has
contracted  with its  affiliate,  Public  Service  Electric and Gas Company,  to
assist in investment  evaluation  and project  assessment  and provide  facility
management and operation services.

                             DISTRIBUTION OPERATIONS

                                                Number of          Global's
                                  Location      Customers     Ownership Interest

                                  --------     ----------      ----------------
EDEN .........................    Argentina       270,000              30%
EDES .........................    Argentina       130,000              30%
EDELAP .......................    Argentina       290,000              30%
Rio Grande Energia ...........     Brazil         940,000              31%
Chilquinta Energia ...........      Chile         410,000              50%
Luz del Sur ..................      Peru          690,000              43%
                                                 --------
      Total ..................                  2,730,000
                                                =========

   Argentina

      EDEN, EDES and EDELAP

      In 1997, Global and its partner,  AES,  acquired Empresa  Distribuidora de
Energia Norte S.A. (EDEN) and Empresa  Distribuidora  de Energia Sur S.A. (EDES)
which  distribute  electricity  to areas  within the  Province of Buenos  Aires.
Global has a 30% ownership interest in each of EDEN and EDES. EDEN and EDES each
have a 95-year exclusive territorial franchise concession and collectively serve
a total of approximately 400,000 customers. In 1998, Global purchased from AES a
30% interest in Empresa  Distribuidora La Plata S.A.  (EDELAP) which distributes
electricity  predominantly  in the provincial  capital,  La Plata.  EDELAP has a
95-year exclusive territorial franchise concession,  granted


                                       45
<PAGE>

in 1992, and serves a total of approximately  290,000 customers.  EDEN, EDES and
EDELAP  purchase  electric  power from the spot market and pursuant to contracts
with CTSN,  which is partially  owned by Global and AES. The CTSN power purchase
contracts expire in May 2001.

      Pursuant to contracts  and  operating  practices,  Global has  significant
operating  responsibilities  with respect to these three  distribution  systems.
Shareholder  agreements  specify  corporate  governance,  voting  rights and key
financial elements. Global has veto power over major decisions including,  among
other things,  material  contracts,  indebtedness,  bankruptcy,  sale of assets,
operating  and capital  budgets  and  dividend  policy.  In order to satisfy the
requirements  of the  EDEN  and  EDES  privatization  process  with  respect  to
experience  managing  distribution  systems,  Global was identified as the named
operator.

      In its first year of ownership,  the following technical improvements were
achieved  at EDEN and EDES:  outage  duration  decreased  2%;  outage  frequency
decreased  43%;  line losses were reduced from 15% to 13%; and staff was reduced
from 2,000 to 1,206. The costs associated with achieving these improvements were
funded by  internally  generated  cash flow and did not require  any  additional
investment  by  Global.   With  regard  to  EDELAP,   many  of  the  operational
improvements expected in privatization had already been achieved by the previous
owners.  Global and AES have combined certain EDELAP  operations with the nearby
EDEN and EDES distribution systems operations to provide  opportunities for cost
savings and efficiencies.

      EDELAP's  tariffs are  regulated by the  national  agency,  Ente  Nacional
Regulador  de la  Electricidad,  while  EDEN  and  EDES  are  regulated  by  the
provincial  authority,  Ente  Provincial  Regulador  de  la  Electricidad.  Each
privatized  system was granted rate certainty for the ten year period  following
privatization,  which  occurred in 1997 in the case of EDEN and EDES and 1992 in
the case of EDELAP.  Although  regulated  by different  authorities,  ratemaking
principles  adopted under Argentine  national law and provincial law are similar
and can be characterized as "price-cap with periodic review" methodology, a type
of incentive  regulation which allows regulated companies to retain a portion of
the economic  benefits arising from efficiency  gains. As a general matter,  the
tariff is  intended  to allow  distribution  companies  to  recover  the cost of
electricity and to earn a margin for  distribution  services.  Large  industrial
users may purchase  electricity  from  distributors  or directly from generators
with the local distributor  collecting a toll. Any loss of such customers is not
expected  to have a material  impact on the  profitability  of the  distribution
system.

      Rate cases are held every five years with periodic adjustments as follows:
changes in the United States Producer Price Index (PPI) and Consumer Price Index
(CPI) -- every 12 months;  changes in cost of  electricity  -- every six months;
and  efficiency  factor -- 1% annual  reduction in margin  starting  January 31,
2002.  The tariffs are  denominated  in United  States  Dollars and converted to
Argentine pesos when billed to customers.

      Semi-annually,  the  quality  of service  of each  distribution  system is
measured against established  standards and penalties may be imposed and paid to
compensate  customers if such  standards  are not  achieved.  Global  intends to
implement  capital  improvement  budgets  which will  attempt to meet quality of
service standards.  Failure to meet required standards would result in penalties
which are not  expected to have a material  impact on the  distribution  system,
although no assurances can be given.

      With the combined EDEN,  EDES and EDELAP systems,  Global,  along with its
partner AES, is the third  largest  power  distributor  in  Argentina.  Global's
electric  distribution  facilities  in Argentina  now provide over 6,200 GWH per
annum to a population of nearly two million within the Province of Buenos Aires.

   Brazil

      Rio Grande Energia

      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 Rio Grande  Energia  (RGE),  a Brazilian  distribution  company
privatized in 1997. Global's ownership interest in RGE is approximately 31%. Due
to Global's distribution experience,  it was designated as and remains the named
operator for the system in order to satisfy  requirements  of the  privatization
process. A shareholder's  agreement


                                       46
<PAGE>

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.

      RGE serves  approximately  940,000 customers in the state of Rio Grande do
Sul in Southern  Brazil and operates under a 30-year  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 also  purchases  20% of its  requirements  through 2013 under the
terms of contracts which are denominated in United States Dollars.

      Since the  acquisition in 1997,  RGE has achieved the following  technical
improvements:  outage  duration  has  been  reduced  by  45%  and  frequency  of
interruption  has dropped by 39%; line losses were reduced from 15% to 9%, while
during the same time period costs were  lowered by reducing  staff from 2,092 to
1,470 employees.

      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  for which RGE applies every April and 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 annual  adjustment  is designed to permit the  distribution  system to
recover  inflationary  cost  increases  as well as to pass  through to consumers
increases in energy  purchase  costs,  subject to timing  differences.  The rate
calculation  formula also  includes an "X" factor which  permits ANEEL to adjust
for  productivity.  ANEEL has set the "X" factor at zero for the first five-year
period.

      RGE has  filed  for and been  granted  three  annual  adjustments  per the
specified  formula.  In 1998,  RGE  received a 4% increase,  in April 1999,  RGE
received a 10.9% increase, and in April 2000, RGE received a 9.5% increase based
on its annual review.  RGE was also granted a special  adjustment of 2.6% in May
1999 to account for increased costs related to United States Dollar  denominated
energy  supply  contracts  during the January to April 1999 time period prior to
the  annual  review.  This  special  adjustment  was  granted as a result of the
devaluation of the Brazilian  Real. In April 2000,  this special  adjustment was
continued in the amount of 1.9%.

      The second  component  of the rate  setting  process is the tariff  review
conducted every five years by ANEEL. The tariff setting considers changes in the
structure  of costs and in the market of the  distribution  system,  the tariffs
charged by similar companies and efficiency factors.  RGE's first rate review is
scheduled to be performed in 2003.  During this rate revision,  ANEEL can revise
the "X" factor which would be in place for the following five year period.

      ANEEL also monitors service quality by auditing  duration and frequency of
outages  as well as  several  other  performance  measures.  Global  intends  to
implement  capital  improvement  budgets  which will  attempt to meet quality of
service standards.  Failure to meet required standards would result in penalties
which are not expected to have a material  negative  impact on the  distribution
system, although no assurances can be given.

   Chile and Peru

      Chilquinta Energia

      In June 1999, Global together with its partner,  Sempra,  jointly acquired
90.23%  of the  shares  of  Chilquinta  Energia,  S.A.  (Chilquinta),  an energy
distribution company with numerous energy holdings, based in Valparaiso,  Chile.
In January  2000,  Global and  Sempra  jointly  acquired  an  additional  9.75%,


                                       47
<PAGE>

increasing  their total share holding to 99.98% of the company.  Funding for the
purchase  of the  incremental  shares was  provided  at the time of the  initial
investment.  Chilquinta  provides  growth  opportunities  and enhances  Global's
market position in the region by adding electric and gas distribution facilities
in Chile. Gas distribution is provided through Energas,  a start-up company that
provides  service  to more than  18,000  natural  gas  customers  in Chile as of
December 1999. The  Chilquinta  acquisition  also included a 37% interest in Luz
del Sur which owns electric distribution  facilities in Peru.  Simultaneous with
the closing of this  acquisition,  Global and its partner sold  Chilquinta's 32%
interest in Central Puerto,  S.A., an Argentine thermal electric  generator.  In
September  1999,  Global and  Sempra  closed on a tender  offer for  outstanding
publicly traded shares of Luz del Sur. The number of shares tendered constitutes
22.5% of the shares of Luz del Sur. The tender was offered  exclusively in Peru.
Global and Sempra also  purchased an additional  25% of Luz del Sur upon closing
of the tender offer,  which gives them approximately 85% control of Luz del Sur.
Global's investment in connection with these transactions was approximately $108
million.

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

      Chilquinta sells approximately 4,500 GWH per year to approximately 410,000
customers  in  Chile.   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 uneconomic  for potential  competitors.  Luz del Sur 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  approximately 690,000
customers. Both Chilquinta and Luz del Sur purchase energy for distribution from
generators in their respective markets on a contract basis.

      Distribution  companies  in Chile are  subject to rate  regulation  by the
Comision Nacional de Energia, 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 8% to 14% based on the new
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 Chilquinta, are not affected by changes in the generation sector which
affect  prices.  The next setting of tariff levels based on the model company is
scheduled  to take place in November  2000.  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 devaluation protection.

      Distribution  companies  in Peru are  subject  to rate  regulation  by the
Comision de Tarifas Electricas,  a national  governmental  regulatory authority.
The Peruvian rate setting  mechanism was  established  in 1992 and is similar to
the Chilean system  described  above.  Rates are set every four years.  The next
regularly scheduled rate setting for Luz del Sur will be in November 2001.

      In April 1999, Chile implemented  service quality standards and penalties,
however,  specific  regulations have not yet been published.  Quality of service
limits have been published in Peru in November 1999 and  distribution  companies
will be subject to penalties if the standards are not met. Requirements in Chile
and Peru are expected to be consistent  with those  established in Argentina and
Brazil.  Global  intends to implement  capital  improvement  budgets  which will
attempt to meet quality of service standards. Failure to meet required standards
would  result in penalties  which are not expected to have a material  impact on
the distribution system, although no assurances can be given.


                                       48
<PAGE>

RESOURCES

Strategic Overview

      Resources  focuses  on  providing  energy   infrastructure   financing  in
developed countries.  Resources invests in energy-related financial transactions
and manages a diversified portfolio of investments,  including leveraged leases,
leveraged  buyout  funds,  limited   partnerships  and  marketable   securities.
Resources seeks to invest in transactions  where its expertise and understanding
of the inherent risks and operating  characteristics  of  energy-related  assets
provide a competitive advantage.  Resources currently expects to concentrate its
future investment activity on energy-related  financial  transactions.  Since it
was established in 1985,  Resources has grown its portfolio to include more than
60 separate investments.

      Worldwide  deregulation  of energy  markets  is  creating  new  investment
opportunities for Resources. As energy assets are privatized or sold, purchasers
require significant  amounts of acquisition  capital. In addition to traditional
bank and debt financing,  leveraged  leases provide  purchasers with a source of
funding for such acquisitions.  Resources,  as an experienced participant in the
leveraged  lease  financing  market  for energy  assets,  is  actively  pursuing
domestic and  international  opportunities to invest in these highly  structured
transactions.

      Recently,  Resources  has entered into  leveraged  lease  transactions  of
electric  generation  plants and electric  and gas  distribution  networks  with
utilities located in Western Europe. In addition, Resources acquired investments
in lease  transactions of utility assets in the United States nearing the end of
their initial lease term.  Resources  has invested in 16  energy-related  leases
since 1997.

      As of March 31, 2000 and December 31, 1999,  Resources  had  approximately
$1.8  billion  invested  in  leveraged  lease   transactions  which  represented
approximately  83% and 84% of  Resources'  total assets of $2.2 billion and $2.1
billion,  respectively.  Leveraged leases of energy-related  plant and equipment
totaled  approximately $1.4 billion and $1.3 billion or 75% and 73% of the lease
portfolio and 62% and 61% of Resources' assets as of March 31, 2000 and December
31,  1999,  respectively.  The  remainder  of  Resources'  portfolio  is further
diversified across a wide spectrum of asset types and business sectors including
leveraged  leases of aircraft,  railcars and real  estate,  limited  partnership
interests in project  finance  transactions,  and  leveraged  buyout and venture
funds.  Approximately 79% of the lease  investments in Resources'  portfolio are
with lessees that have investment grade credit ratings.

Portfolio Segments

      The major  components of Resources'  investment  portfolio as a percent of
its total assets as of March 31, 2000 and December 31, 1999 were:

                                                     March 31,    December 31,
                                                        2000          1999
                                                      ---------   ------------
      Leveraged Lease Investments
        Energy-Related ...........................       62%         61%
        Real Estate ..............................        8%          9%
        Aircraft .................................        9%         10%
        Railcars and Industrial Equipment ........        4%          4%
      Leveraged Buyout Funds .....................       12%         11%
      Other Limited Partnerships
        and Venture Funds ........................        2%          2%
      Marketable Securities and other ............        3%          1%

      As of  March  31,  2000  and  December  31,  1999,  no  single  investment
represented more than 7% of Resources' total assets.

Leveraged Lease Investments

      Resources' equity investments in leveraged leases help to diversify Energy
Holdings'  portfolio.  In  addition,  they  provide  a  fixed  rate  of  return,
predictable  income and cash flow, and depreciation and amortization  deductions
for federal income tax purposes.


                                       49
<PAGE>

      Leveraged lease  investments are complex  transactions  that are carefully
structured to achieve  specific  economic  results.  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 tax guidelines.  In addition, the lessor receives income from
lease  payments  made by the lessee  during  the term of the lease and  interest
deductions   associated   with  the  lease  debt.   Lease  rental  payments  are
unconditional  obligations  of the  lessee and are always 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 lease
term. An evaluation of the  after-tax  cash flows to the lessor  determines  the
return on the investment.  Under GAAP, the lease investment is recorded on a net
basis and  income  is  recorded  periodically  as a  constant  return on the net
unrecovered investment.

      Resources  evaluates  lease  investment   opportunities  with  respect  to
specific risk factors.  The assumed residual value risk, if any, is analyzed and
verified by third-party  experts 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 therefore  structured  with rental  payments  denominated  and
payable in United States  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.

      As an equity  investor  in  leveraged  leases  since 1985,  Resources  has
developed  significant  expertise in evaluating  leveraged lease  opportunities,
structuring transactions to satisfy its investment criteria and the requirements
of lessees and completing  transactions  in a timely manner.  Resources'  market
presence, reputation and access to capital are expected to provide opportunities
to invest in future transactions.

      Energy-Related Leases

      The Resources'  portfolio contains twenty two separate leveraged leases of
energy-related  assets.  The  total  amount  invested  in such  transactions  is
approximately  $1.4 billion,  or 62%, of Resources' assets as of March 31, 2000.
This portion of the portfolio,  along with  anticipated  new investments of this
type, is expected to contribute  approximately 76% to 88% of Resources' revenues
over the next  five  years.  Over 95% of this  portion  of the  lease  portfolio
represents  investment grade credit risk. The energy-related  sector is expected
to be the primary focus of Resources' future investment activity.

      Included  in  Resources'  energy-related  leveraged  lease  portfolio  are
transactions  with United States  utilities and independent  power producers for
peaking plants, combined-cycle facilities, a nuclear power plant, a cogeneration
facility  and a  reservoir  storage  facility.  Resources  has  also  structured
leveraged lease  investments for electric  generation  plants,  gas distribution
networks  and a  waste-to-energy  facility for lessees in the  Netherlands,  the
United Kingdom,  Germany and New Zealand.  Resources currently retains undivided
interests  in  approximately   4,323  MW  of  generation   capacity,   of  which
approximately 3% is nuclear.

      Real Estate Leases

      The real estate  leveraged  lease  portion of the portfolio is expected to
generate revenue of approximately $10 million per annum on average over the next
five years.  This  represents  approximately  5% of  Resources'  average  annual
revenue.  Real estate  leveraged leases  represented  approximately 8% and 9% of
Resources'  assets at March 31, 2000 and  December 31,  1999,  respectively  and
totaled approximately $163 million and $193 million, respectively. The portfolio


                                       50
<PAGE>

consists of separate  leases on 48 properties  with seven lessees.  Resources is
not currently planning to invest in any new leveraged leases of real property.

      Aircraft Leases

      The  aircraft   leveraged   lease   portion  of  the   portfolio   totaled
approximately  $199  million and $200  million as of March 31, 2000 and December
31,  1999,   respectively,   which   represented   approximately   9%  and  10%,
respectively, of Resources' assets. Revenue associated with these investments is
expected to be less than 1% of Resources'  revenue or  approximately  $1 million
per annum on average over the next five years.  The current  portfolio  contains
sixteen  aircraft leased to six separate  lessees.  Resources  believes that the
lessees in this portion of the portfolio represent acceptable credit risk except
in one situation where United States Treasuries have been provided as additional
collateral.  Resources is not  currently  planning to invest in any new aircraft
leveraged lease transactions.

      Railcars and Industrial Equipment Leases

      The  remaining   portion  of  the  leveraged  lease   portfolio   totaling
approximately $91 million as of March 31, 2000 is expected to contribute revenue
of less than $2 million per annum on average over the next five years.

      Leveraged Buyout Funds/Limited Partnerships

      As of December  31,  1999,  approximately  11% of  Resources'  assets were
invested in leveraged  buyout  funds and 2% in other  limited  partnerships  and
venture funds.  Approximately $292 million and $279 million was invested in this
segment  of  the  portfolio  as  of  March  31,  2000  and  December  31,  1999.
Approximately $157 million included in the leveraged buyout funds represents the
fair value of Resources'  share of publicly traded common stock in six companies
as of March  31,  2000.  The  leveraged  buyout  funds and  limited  partnership
investments  in  Resources'  portfolio  are  expected to  contribute,  excluding
distributions associated with asset sales, approximately 15% of total revenue in
2000 and diminish to approximately  6% in 2004 as they mature.  Resources is not
currently planning to make investments of this nature in the future.

      Resources does not manage any fund or partnership in this  portfolio.  The
timing of distributions from these investments is not within Resources' control.

      For  more  information  on  Resources'  operations  and  investments,  see
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations -- Liquidity and Capital Resources".


                                       51
<PAGE>

      SCHEDULE OF ASSETS AS OF March 31, 2000  (unaudited) and December 31, 1999
(Thousands of Dollars)

<TABLE>
<CAPTION>
                                            (unaudited)
                                       As of March 31, 2000                 As of December 31, 1999
                                       --------------------                 -----------------------
                                                  % of Resources'                       % of Resources'
                                    Amount         Total Assets           Amount         Total Assets
                                    ------        --------------          ------        --------------
<S>                             <C>                   <C>             <C>                   <C>
Leveraged Leases
   Energy-Related
      Foreign .........         $  838,330            38.2%           $  758,431            36.2%
      Domestic ........            529,096            24.2%              516,865            24.7%
   Real Estate
      Foreign .........                 --              --                    --              --
      Domestic ........            163,436             7.5%              192,704             9.2%
   Aircraft
      Foreign .........            132,526             6.0%              132,254             6.3%
      Domestic ........             66,499             3.0%               68,204             3.2%
   Commuter Railcars
      Foreign .........             81,614             3.7%               81,012             3.9%
      Domestic ........                 --              --                    --              --
   Industrial
      Foreign .........                 --              --                    --              --
      Domestic ........              9,244             0.4%                9,244             0.4%
                                ----------            ----             ---------             ----
        Total Leveraged
         Leases, Net ..          1,820,745            83.0%            1,758,714            83.9%

Limited Partnerships
   Leveraged Buyout
    Funds .............            256,262            11.7%              230,104            11.0%
   Other ..............             35,833             1.6%               49,182             2.3%
                                ----------            ----             ---------             ----
        Total Limited
         Partnerships .            292,095            13.3%              279,286            13.3%

Marketable Securities .              8,336             0.4%                7,336             0.4%
Owned Property and
   Equipment ..........             61,483             2.8%                7,591             0.4%
Current Assets ........             11,513             0.5%               42,761             2.0%
                                ----------            ----             ---------             ----
Total Resources'
   Assets .............         $2,194,172           100.0%           $2,095,688           100.0%
                                ==========           =====            ==========           =====
</TABLE>


                                       52
<PAGE>

ENERGY TECHNOLOGIES

      Energy   Technologies  is  an  energy  management  company  that  provides
energy-related  engineering,  consulting and mechanical  contracting services to
and constructs, operates and maintains heating, ventilating and air conditioning
(HVAC) systems for industrial and commercial  customers in the  Northeastern and
Middle  Atlantic  United  States.  As of March 31, 2000 and  December  31, 1999,
Energy  Technologies had assets of $300 million and $252 million,  respectively.
Energy Holdings will assess the growth  prospects and  opportunities  for Energy
Technologies' business before committing additional capital.

      Since  its  formation  in 1997,  Energy  Technologies  has  established  a
presence  in the energy  services  business  through  the  acquisition  of seven
companies involved in the engineering, construction, installation, operation and
maintenance  of energy  equipment  and HVAC  systems.  In January  1998,  Energy
Technologies  acquired  Fluidics,  Inc., a diversified  mechanical  and building
services  contractor  with  operations  from  Pennsylvania  and  New  Jersey  to
Virginia.  During 1999, Energy Technologies acquired six mechanical and building
service companies  headquartered in New Jersey,  Rhode Island and Virginia.  The
combination of these companies created a regional energy service capability from
New England to Virginia. In addition,  PSEG transferred one of its subsidiaries,
Public Service Conservation  Resources Corporation (PSCRC), an energy management
contractor, to Energy Technologies effective January 1, 1999.

      Energy Technologies  previously supplied electricity and gas to industrial
and commercial  customers.  In February 2000, Energy Technologies entered into a
business  arrangement with  Enermetrix.com to provide an internet-based  auction
exchange  that will allow their  customers an  alternative  method in purchasing
their energy requirements.  As a result of this new strategic direction,  Energy
Technologies  will  discontinue  the  business  of buying  and  selling  gas and
electricity.  Energy  Technologies plans to grow existing operations and utilize
the recently acquired companies to deliver expanded  energy-related services and
products to new and existing customers.

OTHER SUBSIDIARIES

      EGDC, a nonresidential real estate property management business,  has been
conducting a controlled  exit from the real estate business since 1993. EGDC has
investments  in  eight  commercial  real  estate  properties  (one of  which  is
developed) in several  states.  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. As of December 31, 1999 and 1998, EGDC's consolidated
assets  aggregated  $67 million and $75 million,  respectively.  As of March 31,
2000 and  1999,  EGDC's  consolidated  assets  aggregated  $67  million  and $75
million, respectively.

      PSEG Capital has served as our financing  vehicle,  borrowing on the basis
of a minimum net worth maintenance  agreement with PSEG. As of December 31, 1999
and 1998,  PSEG Capital had debt  outstanding  of $630 million and $498 million,
respectively.  As of March 31, 2000 and 1999, PSEG Capital had debt  outstanding
of $630 million and $650 million, respectively.  Existing debt matures from 2000
to 2003. For additional  information  including certain restrictions relating to
the BPU Focused Audit,  see  "Management's  Discussion and Analysis of Financial
Condition  and Results of  Operations  --  Liquidity  and Capital  Resources  --
External Financings".

      Funding  formerly  served  as our  financing  vehicle  on the basis of our
consolidated  financial  position.  At  December  31,  1998,  Funding  had  debt
outstanding  of  $251  million.  At  December  31,  1999,  Funding  had no  debt
outstanding. As of March 31, 1999, Funding had debt outstanding of $123 million.
At March 31, 2000, Funding had no debt outstanding.


                                       53
<PAGE>

COMPETITIVE ENVIRONMENT

      Our businesses face increasing competition from numerous  well-capitalized
competitors.  See  "Risk  Factors  -- We and our  subsidiaries  are  subject  to
substantial competition".

REGULATION

      We are not subject to direct  regulation  by the BPU,  except  potentially
with respect to some transfers of control and reporting requirements.

      Our parent,  PSEG, is also the parent of Public  Service  Electric and Gas
Company,  an  operating  public  utility  company  engaged  principally  in  the
generation,  transmission,  distribution and sale of electric energy service and
in the transmission,  distribution and sale of gas service in New Jersey. Public
Service Electric and Gas Company is subject to regulation by the BPU.

      As a result of the 1992 Focused  Audit of PSEG's  non-utility  businesses,
the BPU approved a plan which, among other things, provides that:

      (1)   PSEG will not permit Energy  Holdings'  non-utility  investments  to
            exceed 20% of PSEG's consolidated assets without prior notice to the
            BPU;

      (2)   the Public Service  Electric and Gas Company Board of Directors will
            provide an annual  certification  that the  business  and  financing
            plans of Energy  Holdings will not adversely  affect Public  Service
            Electric and Gas Company;

      (3)   PSEG  will  (a)  limit  debt  supported  by the  minimum  net  worth
            maintenance  agreement between PSEG and PSEG Capital to $650 million
            and (b) make a good-faith  effort to  eliminate  such support over a
            six to ten year period from May 1993; and

      (4)   Energy Holdings will pay Public Service  Electric and Gas Company an
            affiliation fee of up to $2 million a year.

      PSEG and Energy Holdings and its subsidiaries continue to reimburse Public
Service Electric and Gas Company for the costs of all services  provided to them
by employees of Public Service Electric and Gas Company.

      The Energy  Competition Act empowers the BPU to impose  requirements  with
respect to affiliate  transactions between and among Public Service Electric and
Gas Company, PSEG and Energy Holdings.  The BPU has been conducting  proceedings
pursuant  to the  Energy  Master  Plan  and the  Energy  Competition  Act and is
expected to issue a series of orders that will  decide both  generic  issues for
the energy industry,  including affiliate standards  (including fair competition
and  affiliate  transactions),  and company  specific  matters for each utility,
including Public Service Electric and Gas Company. In March 2000, the BPU issued
an  order  establishing   affiliate   standards.   This  will  primarily  affect
transactions  between Energy  Technologies  and Public Service  Electric and Gas
Company. However, we do not believe this will have an adverse material effect on
us.

      As a result of the final  outcome of the BPU's  proceedings  in connection
with the Energy Master Plan and Energy  Competition  Act and accounting  impacts
resulting from  deregulation of the generation of electricity and the unbundling
of the utility  business,  we do not believe  that the Focused  Audit  provision
requiring  notification  to the BPU that PSEG's  non-utility  assets  exceed 20%
remains  appropriate and believe that  modifications  will be required.  In July
1999,  Public  Service  Electric  and Gas Company  notified  the BPU that PSEG's
non-utility  assets were  expected to exceed 20% of its  consolidated  assets in
1999. On August 24, 1999, the BPU issued its Final Order in the matter of Public
Service  Electric  and  Gas  Company's  rate  unbundling,   stranded  costs  and
restructuring  filings.  Appeals  filed on  behalf  of  several  Public  Service
Electric and Gas Company  customers are pending at the New Jersey Supreme Court.
Pending   resolution  of  these   appeals,   stranded   cost  recovery   through
securitization  financing and sale of generation-related  assets to an affiliate
by Public Service  Electric and Gas Company have not been  completed.  The Final
Order noted that PSEG's  non-regulated  assets would likely  exceed 20% of total
PSEG  assets  once  the  utility's  generating  assets  were  transferred  to  a
non-regulated  subsidiary,  as provided in the Final Order. The Final Order also
noted that,  due to


                                       54
<PAGE>

significant  changes  in the  industry  and,  in  particular,  PSEG's  corporate
structure  as a result of the Final Order,  modifications  to or relief from the
Focused Audit order might be warranted.  The Final Order directed Public Service
Electric  and Gas  Company  to file a  petition  with  the BPU to  maintain  the
existing regulatory  parameters or to propose modifications to the Focused Audit
order no later than the end of the first quarter of 2000. In March 2000,  Public
Service  Electric  and Gas Company  submitted a letter to the BPU as its initial
compliance  with the filing  requirement,  in which it  notified  the BPU of its
intention  to make a filing to modify the terms of the Focused  Audit within 120
days  after  the  Final  Order  becomes  final  and  non-appealable.  Regulatory
oversight by the BPU to assure that there is no harm to utility  ratepayers from
PSEG's  non-utility  investments  is  expected  to  continue.  Such  assets were
approximately  23% and 22% of PSEG's  consolidated  assets at March 31, 2000 and
December  31, 1999,  respectively.  We believe  that if still  required,  we are
capable of eliminating  PSEG support of PSEG Capital debt within the time period
set forth in the Focused  Audit.  See  "Management's  Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital Resources
-- External Financings".

      We believe that these issues will be satisfactorily resolved,  although no
assurances can be given.

      PSEG has claimed an exemption  from  regulation by the SEC as a registered
holding  company  under PUHCA,  except for the  provision  which  relates to the
acquisition of 5% or more of the voting securities of an electric or gas utility
company.   PUHCA   regulates   public  utility   holding   companies  and  their
subsidiaries.  Global's  investments include exempt wholesale  generators (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 under PUHCA.

      PURPA provides to QFs certain  exemptions  from Federal and state laws and
regulations,  including organizational,  rate and financial regulation. Global's
investments include QFs under PURPA. If any of the plants in which Global has an
interest  lose  their QF  status or if  amendments  to PURPA  are  enacted  that
substantially  reduce the benefits  currently  afforded QFs, PSEG could lose its
exemption under PUHCA unless that  generation  plant was able to qualify for EWG
status.

      In addition,  actions of PSEG,  Public  Service  Electric and Gas Company,
Resources  or  Energy   Technologies   could  cause  PSEG,   and  therefore  its
subsidiaries,  including us and our  subsidiaries,  to be no longer  exempt from
regulation  under PUHCA. At the present time,  PSEG and its  subsidiaries do not
expect to take any actions that would result in a loss of exemption under PUHCA.
If PSEG were no longer  exempt from 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.
We believe that this would not have a material adverse effect on our company.

      Global's  electric and gas  distribution  facilities  in Latin America are
rate-regulated  enterprises.  Rates  charged to  customers  are  established  by
governmental  authorities,  and are currently  sufficient to cover all operating
costs and provide a fair  return.  We can give no  assurances  that future rates
will be established at levels  sufficient to cover such costs,  provide a return
on our  investment or generate  adequate cash flow to pay principal and interest
on its debt or to enable us to comply with the terms of our debt agreements.

      Global and Energy  Technologies  are subject to  regulation by the Federal
Energy  Regulatory  Commission  with  respect  to  certain  matters,   including
interstate  sales and exchanges of electric  transmission,  capacity and energy.
Additionally,  Global is  subject  to the rules and  regulations  of the  United
States  Environmental  Protection  Agency,   Department  of  Transportation  and
Department of Energy and state and foreign environmental rules and regulations.

INCOME TAXES

      Energy Holdings and its domestic  subsidiaries file a consolidated federal
income tax return with PSEG.  Energy Holdings and its subsidiaries  have entered
into tax allocation  agreements with PSEG which provide that Energy Holdings and
its  subsidiaries  will record their tax  liabilities as though they were filing
separate returns and will record tax benefits to the extent that PSEG is able to
receive those benefits.


                                       55
<PAGE>

      In a case affecting  another  utility in which PSEG, we and Public Service
Electric  and Gas Company  were not parties,  the BPU  considered  the extent to
which  tax  savings  generated  by  non-utility   affiliates   included  in  the
consolidated  tax return of that utility's  holding company should be considered
in setting  that  utility's  rates.  The issue of PSEG  sharing the  benefits of
consolidated  tax savings  with Public  Service  Electric and Gas Company or its
ratepayers  was  addressed by the BPU in a July 28, 1995 letter  which  informed
Public  Service  Electric  and Gas Company  that the issue of  consolidated  tax
savings can be  discussed  in the  context of Public  Service  Electric  and Gas
Company's next base rate case or plan for an alternative form of regulation.

      While PSEG continues to account for its direct  wholly-owned  subsidiaries
on a stand-alone basis, resulting in a realization of tax benefits by the entity
assuming the risk and generating the benefit, an ultimate unfavorable resolution
of the  consolidated  tax issue could  reduce  Public  Service  Electric and Gas
Company's and PSEG's  revenues,  net income or net cash flows.  In addition,  an
unfavorable  resolution  may  adversely  impact  PSEG's  non-utility  investment
strategy. In that event, Resources would consider curtailing new leveraged lease
investments.  PSEG believes that Public Service Electric and Gas Company's taxes
should be treated on a stand-alone basis for rate-making purposes,  based on the
separate nature of the utility and  non-utility  businesses and on the fact that
shareholders,  not  utility  customers,  assume  the  risk  of the  investments.
However,  neither we nor PSEG are able to predict what  action,  if any, the BPU
may take concerning consolidation of tax benefits in future proceedings.

EMPLOYEES

      At December 31, 1999,  we and our majority  owned  subsidiaries  had 1,656
employees.  We  believe  that  we and  our  subsidiaries  maintain  satisfactory
relationships with employees.

ENVIRONMENTAL MATTERS

      For a discussion of applicable  environmental  laws and  regulations,  see
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations -- Environmental Matters".

PROPERTIES

      Energy Holdings owns no real property.  Energy Holdings  subleases  office
space for its corporate  headquarters at 80 Park Plaza,  Newark, New Jersey from
Public  Service  Electric and Gas Company.  Our  subsidiaries  also lease office
space at various locations  throughout the world to support business activities.
We maintain adequate insurance coverage for properties in which our subsidiaries
have an equity  interest,  to the extent that properties of a similar nature are
usually insured and insurance is available at a reasonable cost.

      Global, a New Jersey  corporation,  has its principal executive offices at
35 Waterview Boulevard,  Parsippany,  New Jersey 07054.  Resources, a New Jersey
corporation,  has its principal executive offices at 80 Park Plaza,  Newark, New
Jersey 07102. Energy Technologies,  a New Jersey corporation,  has its principal
executive offices at 499 Thornall Street,  Edison, New Jersey 08837. EGDC, a New
Jersey  corporation,  has its  principal  executive  offices  at 80 Park  Plaza,
Newark,  New Jersey  07102.  PSEG  Capital,  a New Jersey  corporation,  has its
principal executive offices at 80 Park Plaza, Newark, New Jersey 07102.

LEGAL PROCEEDINGS

      Litigation had been brought regarding electric generation facilities owned
and  operated  by  Turboven  in  Venezuela  in which  Global has  invested.  The
proceeding  was instituted in January 2000. In May 2000, the First Court for the
Litigation of  Administrative  Matters of Venezuela  lifted the injunction which
had been issued. See page 41 for a more detailed description of the proceedings.


                                       56
<PAGE>

                                   MANAGEMENT

      As our sole stockholder, PSEG has the power to control the election of the
directors  and all other  matters  submitted  for  stockholder  approval and has
control over our management  and affairs.  Mr. E. James Ferland is a director of
Public Service Electric and Gas Company.

      Following are our executive officers and directors of Energy Holdings:

Executive Officers

      E.  JAMES  FERLAND  has been a Director  since  June 1989 and was  elected
Chairman  of the Board and Chief  Executive  Officer of Energy  Holdings in June
1989.  Age 58. He was elected a Director of Global in 1986 and of  Resources  in
1985.  Mr.  Ferland  has also been  Chairman of the Board,  President  and Chief
Executive  Officer of PSEG since July 1986 and  Chairman  of the Board and Chief
Executive  Officer of Public  Service  Electric and Gas Company since  September
1991.

      ROBERT J.  DOUGHERTY,  JR. has been a Director  since January 1997 and was
elected  President  and Chief  Operating  Officer of Energy  Holdings in January
1997. Age 48. He was also elected  Chairman of the Board of Energy  Technologies
in 1997. Mr.  Dougherty  joined Public Service  Electric and Gas Company in 1973
and was President of Enterprise Ventures and Services  Corporation from February
1995 to  December  1996.  He was Senior  Vice  President  --  Electric of Public
Service Electric and Gas Company from September 1991 to February 1995.


      MICHAEL J.  THOMSON was named  President  and Chief  Executive  Officer of
Global in  January  1997.  Age 41.  Mr.  Thomson  had  served  as a Senior  Vice
President  for Global  from July 1993 to February  1994 and was Chief  Operating
Officer  from  February  1994 to December  1996.  Before  coming to Global,  Mr.
Thomson was employed by Energy  Holdings  beginning in 1990,  where he served as
Business Strategy Manager and then as Vice President of Business Development and
Planning.

      EILEEN A.  MORAN was  elected  President  and Chief  Executive  Officer of
Resources  in May  1990.  Age 45.  She  also was  elected  President  and  Chief
Executive  Officer of EGDC in January 1997.  Prior to that, Ms. Moran had served
as Vice President -- Investments of Resources from 1986. Ms. Moran joined Public
Service Electric and Gas Company in 1977.

      STANLEY M. KOSIEROWSKI was named President and Chief Executive  Officer of
Energy  Technologies in June 1999. Age 48. Previously he had been Executive Vice
President and Chief Operating Officer of Energy  Technologies from February 1999
to June  1999.  He had been Vice  President  --  Customer  Operations  of Public
Service  Electric  and Gas  Company  from  January  1997 to February  1999.  Mr.
Kosierowski  joined Public Service Electric and Gas Company in 1974 and has held
a number of senior management positions.


      BRUCE E.  WALENCZYK  was  elected  Vice  President  --  Finance  of Energy
Holdings in March 1998. Age 48. He is also a Director and Vice President of PSEG
Capital.  Prior to joining Energy  Holdings,  Mr. Walenczyk served as a Managing
Director at Paine Webber and Kidder,  Peabody & Co., Inc.,  beginning in January
1991. He had been with Kidder,  Peabody since 1983 and was primarily  engaged in
capital raising and other financial  advisory services for a variety of entities
including major electric and gas utilities and energy companies.

      DEREK M.  DIRISIO was elected  Vice  President  and  Controller  of Energy
Holdings in June 1998.  Age 35. He had been Director -- Accounting  Services for
Energy Holdings since November 1997. Mr. DiRisio joined Public Service  Electric
and Gas Company in September  1991,  where he served in a number of positions in
corporate planning and accounting.

Directors


      FRANK CASSIDY has been a Director  since January 2000. Age 53. He has been
President of PSEG Power LLC, a subsidiary of PSEG,  since July 1999.  Previously
he had been  President of Energy  Technologies  from November 1996 to July 1999,
Senior Vice  President--Fossil  Generation  of Public  Service  Electric and Gas
Company from  February  1995 to November  1996 and Vice  President--Transmission
Systems  of Public  Service  Electric  and Gas  Company  from  November  1989 to
February 1995.



                                       57
<PAGE>

      ROBERT C. MURRAY has been a Director  since January  2000.  Age 54. He has
been Vice President and Chief  Financial  Officer of PSEG since January 1992 and
Executive Vice  President--Finance  of Public  Service  Electric and Gas Company
since June 1997. He had been Senior Vice President and Chief  Financial  Officer
of Public Service Electric and Gas Company from January 1992 to June 1997.

      R. EDWIN SELOVER has been a Director  since  January 2000.  Age 54. He has
been Vice President and General Counsel of PSEG since April 1988 and Senior Vice
President and General  Counsel of Public Service  Electric and Gas Company since
January 1988.


                                       58
<PAGE>

                               THE EXCHANGE OFFER

Purpose of the Exchange Offer

      In  connection  with the sale of the  original  notes,  we entered into an
exchange and registration  rights agreement with the initial  purchasers.  Under
the exchange and registration rights agreement,  we agreed to use our reasonable
best  efforts to  complete  the  exchange  offer and to file and cause to become
effective with the SEC a registration statement for the exchange of the original
notes for exchange notes.

      The terms of the exchange  notes are the same as the terms of the original
notes except that the exchange notes have been  registered  under the Securities
Act and will not be subject to some  restrictions  on transfer that apply to the
original notes. In that regard, the original notes provide,  among other things,
that if a  registration  statement  relating to the exchange  offer has not been
filed and declared  effective within the period specified in the original notes,
the interest  rate on the original  notes will  increase by 0.25% per annum each
90-day period that such  additional  interest rate continues to accrue under any
such  circumstance,  up to an aggregate  maximum increase equal to 1% per annum,
until the registration statement is filed or declared effective, as the case may
be.

      Upon completion of the exchange offer,  holders of original notes will not
be  entitled  to  any  further   registration  rights  under  the  exchange  and
registration  rights agreement,  except under limited  circumstances.  See "Risk
Factors -- Consequences of failure to exchange  original notes" and "Description
of Exchange Notes".  The exchange offer is not being made to holders of original
notes in any  jurisdiction  in which the exchange offer or the acceptance of the
notes  would not comply  with  securities  or blue sky laws.  Unless the context
requires  otherwise,  the term "holder" with respect to the exchange offer means
any person who has obtained a properly  completed bond power from the registered
holder,  or any person whose original notes are held of record by The Depository
Trust  Company  (DTC) who desires to deliver such  original  notes by book-entry
transfer at DTC. We will exchange as soon as  practicable  after the  expiration
date of the exchange  offer the original  notes for a like  aggregate  principal
amount of the exchange notes

      Completion  of the exchange  offer is subject to the  conditions  that the
exchange offer not violate any applicable law or  interpretation of the staff of
the Division of Corporate  Finance of the SEC and that no  injunction,  order or
decree has been issued which would  prohibit,  prevent or materially  impair our
ability to proceed with the exchange  offer.  The exchange offer is also subject
to various  procedural  requirements  discussed  below with which  holders  must
comply.  We reserve the right, in our absolute  discretion,  to waive compliance
with these requirements subject to applicable law.

Terms of the Exchange Offer

      We are offering, upon the terms and subject to the conditions described in
this prospectus and in the accompanying letter of transmittal, to exchange up to
$400,000,000  aggregate  principal amount of exchange notes for a like aggregate
principal amount of original notes properly tendered on or before the expiration
date of the exchange  offer and not properly  withdrawn in  accordance  with the
procedures described below. We will issue, promptly after the expiration date of
the exchange  offer,  an aggregate  principal  amount of up to  $400,000,000  of
exchange notes in exchange for a like principal  amount of outstanding  original
notes tendered and accepted in connection  with the exchange  offer. We will pay
all charges and expenses,  other than certain  applicable taxes described below,
in connection with the exchange offer. See "-- Fees and Expenses".

      Holders  may  tender  their  original  notes  in  whole  or in part in any
integral  multiple  of  $1,000  principal  amount.  The  exchange  offer  is not
conditioned upon any minimum  principal amount of original notes being tendered.
As of the date of this prospectus,  $400,000,000  aggregate  principal amount of
the original  notes is  outstanding.  Holders of original  notes do not have any
appraisal or dissenters' rights in connection with the exchange offer.  Original
notes which are not tendered for or are tendered but not accepted in  connection
with the exchange offer will remain  outstanding and be entitled to the benefits
of the indenture,  but will not be entitled to any further  registration  rights
under the exchange  and  registration  rights  agreement,  except under  limited
circumstances. See "Risk Factors -- Consequences


                                       59
<PAGE>

of failure to exchange  original notes" and "Description of exchange notes".  If
any tendered  original notes are not accepted for exchange because of an invalid
tender,  the  occurrence  of  other  events  described  in  this  prospectus  or
otherwise, appropriate book-entry transfer will be made, without expense, to the
tendering holder of the notes promptly after the expiration date of the exchange
offer.  Holders who tender  original notes in connection with the exchange offer
will not be required to pay  brokerage  commissions  or fees or,  subject to the
instructions  in the letter of  transmittal,  transfer taxes with respect to the
exchange of original notes in connection with the exchange offer.

      Neither  Energy  Holdings nor the Board of  Directors  of Energy  Holdings
makes any recommendation to holders of original notes as to whether to tender or
refrain  from  tendering  all or any  portion  of  their  original  notes in the
exchange  offer.   In  addition,   no  one  has  been  authorized  to  make  any
recommendation  as to whether holders should tender notes in the exchange offer.
Holders  of  original  notes  must make  their own  decisions  whether to tender
original  notes in the  exchange  offer  and,  if so,  the  aggregate  amount of
original  notes to tender  based on the  holders' own  financial  positions  and
requirements.

Expiration Date; Extensions; Amendments

      The term  "expiration  date" means 5:00 p.m.,  Eastern Standard Time, on ,
2000.  However,  if the exchange  offer is extended by us, the term  "expiration
date" will mean the latest date and time to which we extend the exchange offer.

      We  expressly  reserve  the  right in our sole  and  absolute  discretion,
subject to applicable law, at any time and from time to time:

      o     to delay the acceptance of the original notes for exchange,

      o     to extend the  expiration  date of the exchange offer and retain all
            original notes tendered in the exchange offer, subject,  however, to
            the right of holders of original  notes to withdraw  their  tendered
            original notes as described under "--Withdrawal Rights", and

      o     to waive any condition or otherwise  amend the terms of the exchange
            offer in any respect.

      If  the  exchange  offer  is  amended  in a  manner  determined  by  us to
constitute a material change, we will promptly

      o     disclose  the  amendment  in a  prospectus  supplement  that will be
            distributed to the registered holders of the original notes,

      o     we  will  file  a  post-effective   amendment  to  the  registration
            statement  filed with the SEC with regard to the exchange  notes and
            the exchange offer, and

      o     we will  extend the  exchange  offer to the extent  required by Rule
            14e-1 under the Exchange Act.

      We will  promptly  notify the exchange  agent by making an oral or written
public  announcement  of any  delay in  acceptance,  extension,  termination  or
amendment.  This  announcement in the case of an extension will be made no later
than 9:00  a.m.,  Eastern  Standard  Time,  on the next  business  day after the
previously  scheduled  expiration date.  Without limiting the manner in which we
may choose to make any public  announcement  and,  subject to applicable law, we
will have no obligation to publish,  advertise or otherwise communicate any such
public  announcement  other  than by issuing a release  to an  appropriate  news
agency.

Acceptance for Exchange and Issuance of Exchange Notes

      Upon the terms and subject to the  conditions  of the exchange  offer,  we
will exchange and issue to the exchange agent, exchange notes for original notes
validly  tendered and not withdrawn  promptly after the expiration  date. In all
cases,  delivery of exchange  notes in exchange for original  notes tendered and
accepted  for exchange  pursuant to the  exchange  offer will be made only after
timely receipt by the exchange agent of:


                                       60
<PAGE>

      -     original notes or a book-entry confirmation of a book-entry transfer
            of  original  notes  into  the  exchange  agent's  account  at  DTC,
            including  an agent's  message (as defined  below) if the  tendering
            holder has not delivered a letter of transmittal,

      -     the letter of transmittal (or facsimile thereof), properly completed
            and duly executed, with any required signature guarantees or (in the
            case of a  book-entry  transfer) an agent's  message  instead of the
            letter of transmittal, and

      -     any other documents required by the letter of transmittal.

      The  term  "book-entry  confirmation"  means a  timely  confirmation  of a
book-entry  transfer of original notes into the exchange agent's account at DTC.
The term "agent's  message" means a message,  transmitted by DTC to and received
by the  exchange  agent and forming a part of a book-entry  confirmation,  which
states that DTC has received an express  acknowledgment  from the  tendering DTC
participant.  This  acknowledgment  states that the participant has received and
agrees to be bound by the letter of  transmittal  and that Energy  Holdings  may
enforce the letter of transmittal against the participant.

      Subject to the terms and  conditions  of the  exchange  offer,  we will be
deemed to have accepted for exchange,  and therefore  exchanged,  original notes
validly  tendered  and not  withdrawn  as, if and when we give  oral or  written
notice  to the  exchange  agent of our  acceptance  of such  original  notes for
exchange  pursuant to the exchange  offer.  The exchange agent will act as agent
for us for the  purpose of  receiving  tenders  of  original  notes,  letters of
transmittal and related  documents,  and as agent for tendering  holders for the
purpose  of  receiving  original  notes,  letters  of  transmittal  and  related
documents and transmitting  exchange notes to validly  tendering  holders.  This
exchange will be made promptly after the expiration date.

      If, for any reason whatsoever,  acceptance for exchange or the exchange of
any tendered  original notes is delayed,  whether before or after our acceptance
for exchange of original notes, or we extend the exchange offer or are unable to
accept for exchange or exchange tendered original notes, then, without prejudice
to  the  rights  we  have  in  the  exchange  offer,  the  exchange  agent  may,
nevertheless, on our behalf and subject to Rule 14e-1(c) under the Exchange Act,
retain tendered original notes. These original notes may not be withdrawn except
to the extent tendering  holders are entitled to withdrawal  rights as described
under " Withdrawal Rights".

      Under the letter of transmittal or agent's  message,  a holder of original
notes will  warrant  and agree that it has full power and  authority  to tender,
exchange,  sell,  assign and transfer original notes, that we will acquire good,
marketable and unencumbered title to the tendered original notes, free and clear
of all liens,  restrictions,  charges and  encumbrances,  and the original notes
tendered  for  exchange  are not subject to any adverse  claims or proxies.  The
holder  also will  warrant  and agree that it will,  upon  request,  execute and
deliver  any  additional  documents  deemed  by us or the  exchange  agent to be
necessary or desirable to complete the exchange, sale, assignment,  and transfer
of the original notes tendered in the exchange offer.

Procedures for Tendering Original Notes

      Valid Tender. Except as indicated below, in order for original notes to be
validly  tendered in the  exchange  offer,  an original  copy or  facsimile of a
properly  completed and duly executed letter of  transmittal,  with any required
signature guarantees, or, in the case of a book-entry tender, an agent's message
instead of the letter of transmittal,  and any other required documents, must be
received by the exchange agent at one of its addresses listed under "-- Exchange
Agent". In addition, either:

      -     tendered original notes must be received by the exchange agent,

      -     the  tender  of  original  notes  must  follow  the  procedures  for
            book-entry  transfer described below and a book-entry  confirmation,
            including  an  agent's  message  if the  tendering  holder  has  not
            delivered a letter of transmittal,  must be received by the exchange
            agent, in each case on or before the expiration date, or

      -     the guaranteed delivery procedures  described below must be complied
            with.


                                       61
<PAGE>

      If less than all of the original  notes are tendered,  a tendering  holder
should fill in the amount of original  notes being  tendered in the  appropriate
box on the letter of transmittal.  The entire amount of original notes delivered
to the  exchange  agent will be deemed to have been  tendered  unless  otherwise
indicated.

      The method of delivery of certificates,  the letter of transmittal and all
other required documents is at the option and sole risk of the tendering holder.
Delivery will be deemed made only when actually  received by the exchange agent.
If delivery is by mail, we recommend  properly insured  registered mail,  return
receipt requested,  or an overnight  delivery service.  In all cases, you should
allow sufficient time to ensure timely delivery.

      Book-Entry  Transfer.  The exchange  agent will  establish an account with
respect to the original  notes at DTC for purposes of the exchange  offer within
two business days after the date of this prospectus.  Any financial  institution
that is a participant in DTC's  book-entry  transfer  facility system may make a
book-entry  delivery  of the  original  notes by causing  DTC to  transfer  such
Original Notes into the exchange agent's account at DTC in accordance with DTC's
procedures for transfers.  However,  although  delivery of original notes may be
effected through  book-entry  transfer into the exchange agent's account at DTC,
the letter of transmittal (or facsimile  thereof),  properly  completed and duly
executed, with any required signature guarantees,  or an agent's message instead
of the letter of transmittal, and any other required documents, must in any case
be delivered to and received by the exchange  agent at its address  listed under
"--  Exchange  Agent" on or  before  the  expiration  date.  Alternatively,  the
guaranteed delivery procedure described below must be complied with.

      Delivery of documents to DTC in accordance with DTC's  procedures does not
constitute delivery to the exchange agent.

      Signature  Guarantees.  Certificates  for the  original  notes need not be
endorsed and signature  guarantees on the letter of transmittal  are unnecessary
unless

      (1) a  certificate  for the original  notes is  registered in a name other
than  that  of the  person  surrendering  the  certificate  or (2)  such  holder
completes the box entitled "Special Issuance  Instructions" or "Special Delivery
Instructions" in the letter of transmittal. In the case of (1) or (2) above, the
certificates  for  original  notes must be duly  endorsed  or  accompanied  by a
properly  executed  bond power,  with the  endorsement  or signature on the bond
power and on the  letter of  transmittal  guaranteed  by a firm or other  entity
identified  in Rule 17Ad-15  under the  Exchange  Act as an "eligible  guarantor
institution," including (as such terms are defined therein):

      -     a bank;

      -     a  broker,   dealer,   municipal  securities  broker  or  dealer  or
            government securities broker or dealer;

      -     a credit union;

      -     a national securities exchange, registered securities association or
            clearing agency; or

      -     a savings association that is a participant in a Securities Transfer
            Association  (an  "Eligible  Institution"),  unless  surrendered  on
            behalf of that Eligible Institution. See Instruction 1 to the letter
            of transmittal.

      Guaranteed  Delivery.  If a holder desires to tender original notes in the
exchange offer and the  certificates  for the original notes are not immediately
available or time will not permit all  required  documents to reach the exchange
agent on or  before  the  expiration  date,  or the  procedures  for  book-entry
transfer  cannot  be  completed  on a  timely  basis,  the  original  notes  may
nevertheless be tendered, provided that all of the following guaranteed delivery
procedures are complied with:

      (1) the tenders are made by or through an Eligible Institution;

      (2) a properly completed and duly executed Notice of Guaranteed  Delivery,
substantially in the form accompanying the letter of transmittal, is received by
the exchange agent, as provided below, on or before the expiration date; and


                                       62
<PAGE>

      (3) the  certificates  (or a  book-entry  confirmation)  representing  all
tendered  original notes, in proper form for transfer,  together with a properly
completed and duly executed letter of transmittal (or facsimile  thereof),  with
any required signature  guarantees,  or an agent's message instead of the letter
of transmittal,  and any other documents  required by the letter of transmittal,
are received by the exchange agent within three New York Stock Exchange  trading
days after the date of execution of the Notice of Guaranteed Delivery.

      The Notice of Guaranteed Delivery may be delivered by hand, or transmitted
by facsimile  or mail to the  exchange  agent and must include a guarantee by an
Eligible  Institution  in the form shown in the notice.  Regardless of any other
provision in this  prospectus,  the  delivery of exchange  notes in exchange for
original  notes tendered and accepted for exchange in the exchange offer will in
all cases be made only after timely  receipt by the  exchange  agent of original
notes, or of a book-entry confirmation with respect to those original notes, and
an original copy or facsimile of a properly  completed and duly executed  letter
of transmittal,  together with any required signature guarantees,  or an agent's
message instead of the letter of transmittal,  and any other documents  required
by the letter of transmittal.  Accordingly, the delivery of exchange notes might
not be made to all tendering holders at the same time, and will depend upon when
original  notes,  book-entry  confirmations  with respect to original  notes and
other required  documents are received by the exchange agent. Our acceptance for
exchange of original notes tendered under any of the procedures  described above
will constitute a binding agreement between the tendering holder and us upon the
terms and subject to the conditions of the exchange offer.

      Determination  of Validity.  All  questions  as to the form of  documents,
validity, eligibility, including time of receipt, and acceptance for exchange of
any tendered  original  notes will be determined by us, in our sole  discretion.
The  interpretation  by us of the terms and  conditions  of the exchange  offer,
including the letter of transmittal and the accompanying  instructions,  will be
final and binding.

      We reserve the absolute  right,  in our sole and absolute  discretion,  to
reject  any and all  tenders  determined  by us not to be in proper  form or the
acceptance of which,  or exchange  for,  may, in the opinion of our counsel,  be
unlawful.  We also reserve the absolute  right,  subject to  applicable  law, to
waive any  condition  or  irregularity  in any tender of  original  notes of any
particular holder whether or not similar conditions or irregularities are waived
in the case of other holders. No tender of original notes will be deemed to have
been validly made until all irregularities with respect to such tender have been
cured or waived.  Neither we, any of our  affiliates  or assigns,  the  exchange
agent nor any other  person will be under any duty to give any  notification  of
any  irregularities  in tenders or incur any  liability  for failure to give any
notification.

      If any letter of transmittal,  endorsement, bond power, power of attorney,
or any other  document  required  by the  letter of  transmittal  is signed by a
trustee,  executor,  administrator,  guardian,  attorney-in-fact,  officer  of a
corporation  or other person acting in a fiduciary or  representative  capacity,
that person  should so indicate  when  signing,  and unless waived by us, proper
evidence satisfactory to us, in our sole discretion,  of that person's authority
must be  submitted.  A  beneficial  owner of original  notes that are held by or
registered in the name of a broker,  dealer,  commercial  bank, trust company or
other  nominee or  custodian  is urged to contact  that entity  promptly if that
beneficial holder wishes to participate in the exchange offer.

Resales of Exchange Notes

      We are making the exchange offer for the exchange notes in reliance on the
position  of the staff of the  Division  of  Corporation  Finance  of the SEC as
defined in certain  interpretive  letters  addressed  to third  parties in other
transactions. However, we did not seek our own interpretive letter and we cannot
assure that the staff of the  Division of  Corporation  Finance of the SEC would
make a similar  determination  with respect to the  exchange  offer as it has in
other interpretive letters to third parties.  Based on these  interpretations by
the staff of the Division of Corporation  Finance of the SEC, and subject to the
two  immediately  following  sentences,  we believe that  exchange  notes issued
pursuant to this  exchange  offer in exchange for original  notes may be offered
for resale,  resold and otherwise  transferred by a holder thereof (other than a
holder who is a broker-dealer)  without further compliance with the registration
and prospectus  delivery  requirements of the Securities Act, provided that such


                                       63
<PAGE>

exchange notes are acquired in the ordinary course of the holder's  business and
that the holder is not  participating,  and has no arrangement or  understanding
with any person to  participate,  in a  distribution  (within the meaning of the
Securities Act) of the exchange notes.

      However, any holder of original notes who is an "affiliate" of ours or who
intends to  participate  in the exchange  offer for the purpose of  distributing
exchange notes,  or any  broker-dealer  who purchased  original notes from us to
resell  pursuant  to Rule  144A  or any  other  available  exemption  under  the
Securities Act,

      (a) will not be able to rely on the  interpretations  of the  staff of the
Division  of  Corporation  Finance  of the SEC  defined  in the  above-mentioned
interpretive letters,

      (b) will not be permitted or entitled to tender such original notes in the
exchange offer and

      (c) must comply with the registration and prospectus delivery requirements
of the  Securities  Act in  connection  with any sale or other  transfer of such
original  notes  unless  such sale is made  pursuant to an  exemption  from such
requirements.

      In addition, as described below, if any broker-dealer holds original notes
acquired  for its own  account  as a result of  market-making  or other  trading
activities  and exchanges  those original  notes for exchange  notes,  then that
broker-dealer  must  deliver  a  prospectus  meeting  the  requirements  of  the
Securities  Act in connection  with any resales of those  exchange  notes.  Each
holder of original  notes who wishes to  exchange  original  notes for  exchange
notes in the exchange offer will be required to represent that:

      -     it is not an "affiliate" of Energy Holdings,

      -     any  exchange  notes to be received by it are being  acquired in the
            ordinary course of its business,

      -     it  has  no  arrangement  or   understanding   with  any  person  to
            participate in a distribution  (within the meaning of the Securities
            Act) of such exchange notes, and

      -     if the tendering holder is not a  broker-dealer,  that holder is not
            engaged in, and does not intend to engage in, a distribution (within
            the meaning of the Securities Act) of its exchange notes.

      In addition,  we may require the holder,  as a condition to that  holder's
eligibility to participate in the exchange  offer, to furnish to us (or an agent
of ours) in writing, information as to the number of "beneficial owners" (within
the meaning of Rule 13d-3 under the Exchange  Act) on behalf of whom that holder
holds the original notes to be exchanged in the exchange offer.

      Each broker-dealer that receives exchange notes for its own account in the
exchange offer must  acknowledge that it acquired the original notes for its own
account as the result of  market-making  activities or other trading  activities
and must agree that it will deliver a prospectus meeting the requirements of the
Securities Act in connection with any resale of those exchange notes. The letter
of  transmittal  states that by making that  acknowledgement  and  delivering  a
prospectus,  a  broker-dealer  will  not  be  deemed  to  admit  that  it  is an
"underwriter"  within the meaning of the  Securities  Act. Based on the position
taken by the staff of the  Division  of  Corporation  Finance  of the SEC in the
interpretive   letters   referred  to  above,  we  believe  that   participating
broker-dealers who acquired original notes for their own accounts as a result of
market-making   activities  or  other  trading   activities  may  fulfill  their
prospectus  delivery  requirements  with respect to the exchange  notes received
upon exchange of original  notes (other than original  notes which  represent an
unsold  allotment from the initial sale of the original notes) with a prospectus
meeting the  requirements  of the  Securities  Act,  which may be the prospectus
prepared for this  exchange  offer so long as it contains a  description  of the
plan of distribution regarding the resale of the exchange notes.

      Accordingly,  this prospectus,  as it may be amended or supplemented  from
time to time, may be used by a  participating  broker-dealer  in connection with
resales of exchange  notes  received in exchange  for  original  notes where the
original  notes were  acquired by the  participating  broker-dealer  for its own
account as a result of market-making or other trading  activities.  See "Plan of
Distribution".  Subject to certain  provisions  contained  in the  exchange  and
registration rights agreement, we have agreed that this prospectus, as it may be
amended  or  supplemented  from  time to  time,  may be used by


                                       64
<PAGE>

a participating broker-dealer in connection with resales of exchange notes for a
period  not  exceeding  180  days  after  the  expiration   date.   However,   a
participating  broker-dealer  who intends to use this  prospectus  in connection
with the resale of  exchange  notes  received  in exchange  for  original  notes
pursuant to the exchange offer must notify us on or before the expiration  date,
that it is a participating broker-dealer.  This notice may be given in the space
provided  for that purpose in the letter of  transmittal  or may be delivered to
the exchange  agent at one of the  addresses set forth herein under "-- Exchange
Agent".

      Any  participating  broker-dealer who is an "affiliate" of Energy Holdings
may not rely on these interpretive letters and must comply with the registration
and prospectus  delivery  requirements  of the Securities Act in connection with
any resale  transaction.  In that regard,  each participating  broker-dealer who
surrenders  original  notes in the exchange offer will be deemed to have agreed,
by  execution  of the letter of  transmittal  or an agent's  message,  that upon
receipt of notice from Energy  Holdings  of the  occurrence  of any event or the
discovery of:

      (1) any fact  which  makes any  statement  contained  or  incorporated  by
reference in this prospectus untrue in any
material respect or

      (2) any fact which causes this prospectus to omit to state a material fact
necessary in order to make the statements contained or incorporated by reference
in this prospectus,  in light of the  circumstances  under which they were made,
not misleading, or

      (3)  the  occurrence  of  other  events  specified  in  the  exchange  and
registration rights agreement,

that  participating  broker-dealer will suspend the sale of exchange notes under
this prospectus until we have amended or supplemented this prospectus to correct
the  misstatement  or  omission  and have  furnished  copies of the  amended  or
supplemented  prospectus to the  participating  broker-dealer,  or we have given
notice that the sale of the exchange notes may be resumed, as the case may be.

Withdrawal Rights

      Except as otherwise provided in this prospectus, tenders of original notes
may be withdrawn at any time on or before the  expiration  date.  In order for a
withdrawal  to  be  effective  a  written,   telegraphic,   telex  or  facsimile
transmission of the notice of withdrawal must be timely received by the exchange
agent  at its  address  listed  under  "--  Exchange  Agent"  on or  before  the
expiration  date.  Any notice of withdrawal  must specify the name of the person
who tendered the original notes to be withdrawn,  the aggregate principal amount
of original notes to be withdrawn,  and, if certificates  for the original notes
have been tendered,  the name of the registered holder of the original notes, if
different from that of the person who tendered the original notes.

      If original  notes have been  delivered  or  otherwise  identified  to the
exchange  agent,  then before the physical  release of the original  notes,  the
tendering holder must submit the serial numbers shown on the particular original
notes to be  withdrawn  and the  signature on the notice of  withdrawal  must be
guaranteed  by an Eligible  Institution,  except in the case of  original  notes
tendered for the account of an Eligible Institution. For original notes tendered
under the  procedures for  book-entry  transfer  described in "-- Procedures for
Tendering  Original  Notes",  the notice of withdrawal must specify the name and
number of the  account at DTC to be  credited  with the  withdrawal  of original
notes,  in which case a notice of  withdrawal  will be effective if delivered to
the exchange  agent by written,  telegraphic,  telex or facsimile  transmission.
Withdrawals  of tenders of original  notes may not be rescinded.  Original notes
properly  withdrawn  will not be deemed  validly  tendered  for  purposes of the
exchange  offer,  but may be retendered at any subsequent  time on or before the
expiration  date by following any of the  procedures  described  above under "--
Procedures for Tendering Original Notes". All questions as to the validity, form
and  eligibility,  including  time of receipt,  of  withdrawal  notices  will be
determined by us, in our sole discretion, whose determination shall be final and
binding on all parties.  Neither  Energy  Holdings,  the exchange  agent nor any
other person is under any duty to give any notification of any irregularities in
any notice of withdrawal  nor will those parties incur any liability for failure
to give that notice.  Any original  notes which have been tendered but which are
withdrawn will be returned to the holder promptly after withdrawal.


                                       65
<PAGE>

Interest on Exchange Notes

      Interest on the notes is payable semi-annually on April 1 and October 1 of
each year,  beginning April 1, 2000, at the rate of 10% per annum.  The exchange
notes will bear interest  from and  including the last interest  payment date on
the original notes, or if one has not yet occurred,  the date of issuance of the
original  notes.  Accordingly,  holders of original  notes that are accepted for
exchange will not receive  accrued but unpaid  interest on original notes at the
time of tender.  Rather,  that  interest  will be payable on the exchange  notes
delivered in exchange for the original notes on the first interest  payment date
after the expiration date.

Accounting Treatment

      The  exchange  notes will be  recorded at the same  carrying  value as the
original  notes for which they are exchanged,  which is the aggregate  principal
amount of the original notes, as reflected in our accounting records on the date
of  exchange.  Accordingly,  no gain or loss  for  accounting  purposes  will be
recognized in connection with the exchange offer. The cost of the exchange offer
will be amortized over the term of the exchange notes.

Exchange Agent

      First Union  National  Bank has been  appointed as exchange  agent for the
exchange  offer.  Delivery of the letters of transmittal  and any other required
documents,  questions,  requests for  assistance,  and  requests for  additional
copies of this prospectus or of the letter of transmittal  should be directed to
the exchange agent as follows:

                        By Registered or Certified Mail:
                   First Union National Bank of North Carolina
                     First Union Customer Information Center
                         1525 West W.T. Harris Blvd.-3C3
                            Reorganization Department
                         Charlotte, North Carolina 28288
                         Attention: Michael Klotz (6110)

                     By Hand or Overnight Delivery Service:
                   First Union National Bank of North Carolina
                     First Union Customer Information Center
                         1525 West W.T. Harris Blvd.-3C3
                            Reorganization Department
                         Charlotte, North Carolina 28288
                         Attention: Michael Klotz (6110)

           By Facsimile Transmission (for Eligible Institutions only):
                                 (704) 590-7619

                              Confirm by Telephone:
                        (800) 829-8432 or (704) 590-7408

      Delivery to other than the above  addresses or  facsimile  number will not
constitute a valid delivery.

Fees and Expenses

      We have agreed to pay the exchange agent reasonable and customary fees for
its services and will reimburse it for its reasonable out-of-pocket expenses. We
will also pay brokerage  houses and other  custodians,  nominees and fiduciaries
the reasonable  out-of-pocket  expenses incurred by them in forwarding copies of
this  prospectus  and related  documents  to the  beneficial  owners of original
notes,  and in handling or  tendering  for their  customers.  Holders who tender
their  original  notes for  exchange  will not be  obligated to pay any transfer
taxes in connection  with the transfer.  If,  however,  exchange notes are to be
delivered  to, or are to be issued in the name of,  any  person  other  than the
registered  holder of the  original  notes  tendered,  or if a  transfer  tax is
imposed for any reason other than the


                                       66
<PAGE>

exchange of original  notes in  connection  with the  exchange  offer,  then the
amount of any such transfer taxes,  whether imposed on the registered  holder or
any other  persons,  will be payable by the tendering  holder.  If  satisfactory
evidence of payment of such taxes or exemption  therefrom is not submitted  with
the  letter of  transmittal,  the amount of such  transfer  taxes will be billed
directly  to such  tendering  holder.  We will not make any  payment to brokers,
dealers or other nominees soliciting acceptances of the exchange offer.

                          DESCRIPTION OF EXCHANGE NOTES

      Holders can find the  definitions  of some terms used in this  description
under the subheading "Certain Definitions".

      The terms of the  exchange  notes to be issued in the  exchange  offer are
identical in all material  respects to the terms of the original  notes,  except
for the transfer restrictions relating to the original notes. The exchange notes
will be issued,  and the original  notes were issued,  under an indenture  dated
October 8, 1999,  between  Energy  Holdings and First Union  National  Bank,  as
trustee.  The exchange notes will evidence the same debt as the original  notes,
and both series of notes will be entitled to the benefits of the  indenture  and
will be treated as a single class of debt securities.  Upon effectiveness of the
registration statement of which this prospectus is a part, the indenture will be
subject to and governed by the Trust Indenture Act of 1939.

      The following  description is a summary of the material  provisions of the
notes, the indenture and the exchange and registration rights agreement relating
to the notes.  It does not restate those  documents in their  entirety.  We urge
holders to read the notes, the indenture and the  registration  rights agreement
because  they,  and not this  description,  define your rights as holders of the
notes.  Copies  of the  indenture,  including  a  form  of the  notes,  and  the
registration   rights   agreement  are   available  as  described   below  under
"--Additional Information".

Brief Description of the Notes

      The notes are general senior unsecured  obligations of Energy Holdings and
rank  equally  in  right  of  payment  with  all  of  the  other  unsecured  and
unsubordinated  indebtedness of Energy  Holdings.  Although the notes are senior
unsecured  obligations,  Energy  Holdings has not issued,  and does not have any
current firm arrangements to issue, any significant  additional  indebtedness to
which the notes  would be senior.  In  addition,  the notes will be  effectively
subordinate  to any  secured  indebtedness  issued  by Energy  Holdings.  Energy
Holdings  has not issued,  and does not have any current  firm  arrangements  to
issue,  any  secured  obligations  to  which  the  notes  would  be  effectively
subordinate.

      Because  Energy  Holdings is a holding  company  that  conducts all of its
operations through its subsidiaries,  holders of the notes will generally have a
junior  position to claims of creditors of those  subsidiaries,  including trade
creditors, debtholders, secured creditors and taxing authorities.

Principal, Maturity and Interest

      The  indenture  does not  limit  the  aggregate  principal  amount of debt
securities  which may be issued under it. The exchange  notes will  initially be
limited to  $400,000,000  and will be issued in  registered  form only,  without
coupons,  in minimum  denominations of $1,000.  Energy Holdings may "reopen" any
series of debt  securities and issue  additional debt securities of that series.
The notes  will  mature on October 1, 2009,  the stated  maturity  date,  unless
redeemed or repurchased prior to that date.

      Interest on the notes  accrues at the rate of 10% per annum and is payable
semi-annually in arrears on April 1 and October 1 of each year,  beginning April
1, 2000. Energy Holdings will make each interest payment to the persons in whose
names the  notes are  registered  at the close of  business  on the March 15 and
September 15 immediately preceding any interest payment date.

      Interest  on the  exchange  notes will  accrue  from the date of  original
issuance or, if interest has already  been paid,  from the most recent  interest
payment date to which  interest was paid or duly provided for.  Interest will be
computed on the basis of a 360-day year  comprised of twelve 30-day  months.  If
any  interest  payment  date or the  stated  maturity  date  or date of  earlier
redemption or


                                       67
<PAGE>

repurchase is not a business day, the required payment shall be made on the next
succeeding day which is a business day, without any interest or other payment in
respect of the  payment  subject to delay,  with the same force and effect as if
made on the  interest  payment date or stated  maturity  date or date of earlier
redemption or repurchase.

      "Business Day" means each Monday, Tuesday, Wednesday,  Thursday and Friday
which is not a day on which banking  institutions in Newark,  New Jersey and The
City of New York are authorized or obligated by law or executive order to close.

Payment and Paying Agents

      Interest on the notes is payable at any office or agency to be  maintained
by Energy Holdings in Newark, New Jersey and The City of New York. At the option
of Energy Holdings, however, interest may be paid

      o     by  check  mailed  to the  address  of the  person  entitled  to the
            interest  payment  at the  address  that  appears  in the  "security
            register" maintained by Energy Holdings or

      o     by wire transfer to an account  maintained by the person entitled to
            the  interest  payment  as  specified  in  the  security   register.
            (Sections 301, 1001 and 1002 of the Indenture).

Transfer and Exchange

      Under the indenture,  debt securities of any series,  including the notes,
may be presented for registration of transfer and may be presented for exchange

      o     at each  office  or  agency  required  to be  maintained  by  Energy
            Holdings for payment of such series as described in  "--Payment  and
            Paying Agents", and

      o     at each other office or agency that Energy  Holdings  may  designate
            from time to time for such purposes.

      No  service  charge  will be made for any  transfer  or  exchange  of debt
securities,  including the notes, but Energy Holdings may require payment of any
tax or other  governmental  charge  payable in  connection  with the transfer or
exchange. (Section 305 of the indenture).

            The indenture does not require Energy Holdings to

      o     issue, register the transfer of or exchange debt securities during a
            period  beginning  at the  opening of  business  15 days  before any
            selection  of debt  securities  of that  series to be  redeemed  and
            ending at the close of  business  on (A) if debt  securities  of the
            series are issuable only in registered  form,  the day of mailing of
            the relevant  notice of redemption and (B) if debt securities of the
            series are issuable in bearer form, the day of the first publication
            of the relevant notice of redemption,  or, if debt securities of the
            series  are  also  issuable  in  registered  form  and  there  is no
            publication,   the  day  of  mailing  of  the  relevant   notice  of
            redemption;

      o     register the transfer of or exchange any debt security in registered
            form,  or  portion  thereof,  called  for  redemption,   except  the
            unredeemed  portion of any debt  security in  registered  form being
            redeemed in part;

      o     exchange  any debt  security in bearer  form called for  redemption,
            except to  exchange  such debt  security  in bearer  form for a debt
            security  in  registered  form of that series and like tenor that is
            simultaneously surrendered for redemption; or

      o     issue,  register the transfer of or exchange any debt security which
            has been  surrendered  for  repayment  at the option of the  holder,
            except the portion,  if any, of that debt security not to be repaid.
            (Section 305 of the Indenture).

            The  registered  holder of a note will be treated as the owner of it
            for all purposes.


                                       68
<PAGE>

Optional Redemption

      The notes will be redeemable at the option of Energy Holdings, in whole or
in part at any time, on at least 30 days but not more than 60 days prior written
notice mailed to the registered holders thereof,  at a redemption price equal to
the greater of

      o     100% of the principal amount of the notes to be redeemed, and

      o     the sum, as determined by the Quotation Agent (as defined below), of
            the  present  values  of the  principal  amount  of the  notes to be
            redeemed and the remaining  scheduled  payments of interest  thereon
            from the  redemption  date to October 1, 2009,  which we refer to as
            the remaining life,  discounted from their respective  payment dates
            to the date of redemption on a semiannual basis,  assuming a 360-day
            year  consisting of twelve 30-day  months,  at the Treasury Rate (as
            defined below) plus 40 basis points

plus, in either case, accrued interest thereon to the date of redemption.

      If money sufficient to pay the redemption price of and accrued interest on
all of the notes to be redeemed on the  redemption  date is  deposited  with the
trustee or paying agent on or before the  redemption  date and other  conditions
under the  indenture  are  satisfied,  then on and after that  redemption  date,
interest will cease to accrue on those notes called for redemption.

      "Comparable  Treasury  Issue" means the United  States  Treasury  security
selected by the Quotation Agent as having a maturity comparable to the remaining
life that would be utilized,  at the time of selection  and in  accordance  with
customary financial practice, in pricing new issues of corporate debt securities
of comparable maturity with the remaining life of the notes to be redeemed.

      "Comparable  Treasury Price" means,  with respect to any redemption  date,
the average of four Reference  Treasury  Dealer  Quotations for such  redemption
date,  after excluding the highest and lowest of such Reference  Treasury Dealer
Quotations, or, if the trustee obtains fewer than four Reference Treasury Dealer
Quotations, the average of all of the quotations.

      "Quotation Agent" means the Reference  Treasury Dealer appointed by Energy
Holdings.  "Reference  Treasury Dealer" means (i) Goldman,  Sachs & Co., Banc of
America  Securities  LLC,  Lehman  Brothers Inc.,  and Merrill Lynch  Government
Securities, Inc. and their respective successors; provided, however, that if any
of them shall cease to be a primary United States  Government  securities dealer
in New  York  City,  which  we refer to as a  Primary  Treasury  Dealer,  Energy
Holdings shall substitute therefor another Primary Treasury Dealer, and (ii) any
other Primary Treasury Dealer selected by Energy Holdings.

      "Reference  Treasury  Dealer  Quotations"  means,  with  respect  to  each
Reference Treasury Dealer and any redemption date, the average, as determined by
the trustee,  of the bid and asked  prices for the  Comparable  Treasury  Issue,
expressed  in each  case as a  percentage  of its  principal  amount,  quoted in
writing to the trustee by such Reference  Treasury Dealer at 5:00 p.m., New York
City time, on the third business day preceding such redemption date.

      "Treasury Rate" means,  with respect to any redemption  date, the rate per
annum  equal to the  semiannual  yield to maturity  of the  Comparable  Treasury
Issue,  calculated on the third business day preceding the redemption date using
a price for the  Comparable  Treasury  Issue,  expressed as a percentage  of its
principal  amount,  equal to the Comparable  Treasury Price for such  redemption
date.

      Energy Holdings may at any time, and from time to time, purchase the notes
at any price or prices in the open market or otherwise.

Mandatory Redemption

      Energy  Holdings is not required to make  mandatory  redemption or sinking
fund payments with respect to the notes.


                                       69
<PAGE>

Certain Definitions

      The following is a summary of certain defined terms used in the indenture.
Article One of the indenture contains the full definition of all such terms.

      "Attributable Debt" in respect of a Sale and Leaseback  Transaction means,
as at the time of  determination,  the present value  (discounted  at a rate per
annum  equal to the  weighted  average  interest  rate of all  outstanding  debt
securities, compounded semi-annually) of the total obligations of the lessee for
rental payments during the remaining term of the lease included in such Sale and
Leaseback  Transaction  (including  any  period  for which  such  lease has been
extended).

      "Capitalized  Lease  Obligations"  means all rental  obligations as lessee
which,  under GAAP,  are or will be required to be  capitalized  on the books of
Energy  Holdings  or any of its  subsidiaries,  in each case taken at the amount
thereof accounted for as indebtedness in accordance with such principles.

      "Change of Control"  means the  occurrence of one or more of the following
events:

      (1)   PSEG  (or its  successors)  shall  cease  to own a  majority  of the
            outstanding voting stock of Energy Holdings,

      (2)   at any time  following  the  occurrence  of the event  described  in
            clause  (1),  a person  or group  (as that  term is used in  Section
            13(d)(3) of the  Securities  Exchange Act of 1934) of persons (other
            than PSEG) shall have become, directly or indirectly, the beneficial
            owner or shall have acquired the absolute  power to direct the vote,
            of more than 35% of the outstanding voting stock of Energy Holdings,

      (3)   during any twelve-month period,  individuals who at the beginning of
            such period  constitute  the Board of Directors  of Energy  Holdings
            (together  with any new directors  whose  election or nomination was
            approved  by a  majority  of the  directors  then in office who were
            either  directors  at the  beginning  of  such  period  or who  were
            previously  so approved)  shall cease for any reason to constitute a
            majority  of the  Board of  Directors  of  Energy  Holdings,  unless
            approved  by a majority of the Board of  Directors  in office at the
            beginning of such period (including such new directors), or

      (4)   Energy  Holdings  shall have merged or  consolidated  with any other
            corporation or the  properties  and assets of Energy  Holdings shall
            have been conveyed or  transferred  substantially  as an entirety to
            any  person in  accordance  with  Section  801 of the  indenture  as
            described under "-- Merger or Consolidation".

However,  regardless  of  whether  one or more of the  above  events  occurs  or
circumstances exist, a Change of Control shall be deemed not to have occurred if
after giving effect to the event or circumstance, the debt securities, including
the notes,  are rated no less than "BBB-" by Standard & Poor's Ratings Group and
"Ba1" by Moody's Investors Service.

      "Consolidated Net Tangible Assets" means, as of any date of determination,
the total  amount of assets,  less  accumulated  depreciation  or  amortization,
valuation  allowances,  other applicable  reserves and other properly deductible
items in  accordance  with GAAP,  which would appear on a  consolidated  balance
sheet of Energy  Holdings and its  consolidated  subsidiaries,  determined  on a
consolidated  basis in  accordance  with GAAP,  after giving  effect to purchase
accounting and after deduction therefrom,  to the extent otherwise included, the
amounts of

      o     consolidated current liabilities;

      o     deferred income taxes;

      o     minority  interests  in  consolidated  Subsidiaries  held by persons
            other than Energy Holdings or a subsidiary;

      o     excess of cost over fair value of assets of businesses acquired,  as
            determined by the Board of Directors; and


                                       70
<PAGE>

      o     unamortized debt discount and expense and other unamortized deferred
            changes,   goodwill   (including   the  amounts  of  investments  in
            affiliates that consist of goodwill),  patents, trademarks,  service
            names, trade names,  copyrights,  licenses,  deferred project costs,
            organizational  or other  development  expenses and other intangible
            items.

      "Indebtedness" of any person means

      o     all  indebtedness of such person for borrowed money,  whether or not
            represented by bonds, debentures, notes or other securities,

      o     the  deferred   purchase  price  of  assets  or  services  which  in
            accordance  with GAAP  would be shown on the  liability  side of the
            balance sheet of such person,

      o     all  Indebtedness  of  another  person  secured  by any  Lien on any
            property owned by such person,  whether or not such Indebtedness has
            been assumed,

      o     all obligations of such person to pay a specified purchase price for
            goods or services  whether or not delivered,  i.e.,  take-or-pay and
            similar obligations,

      o     all Capitalized Lease Obligations of such person and

      o     all obligations of such person guaranteeing any Indebtedness, lease,
            dividend  or other  obligation  of any  other  person,  directly  or
            indirectly, whether contingent or otherwise.

      "Lien" means any  mortgage,  pledge,  hypothecation,  assignment,  deposit
arrangement,  encumbrance,  lien (statutory or other),  preference,  priority or
other security  agreement of any kind or nature whatsoever  (including,  without
limitation,  any  conditional  sale or  other  title  retention  agreement,  any
financing  or  similar  statement  or  notice  filed  under the UCC or any other
similar recording or notice statute, and any lease having substantially the same
effect as any of the foregoing).

      "Material   Subsidiary"  means  any  subsidiary  of  Energy  Holdings  the
consolidated  assets  of  which,  as of the date of any  determination  of those
assets,  constitute at least 10% of the  consolidated  assets of Energy Holdings
and its  subsidiaries,  or the  consolidated  earnings  before  taxes  of  which
constituted  at least 10% of the  consolidated  earnings  before taxes of Energy
Holdings  and its  subsidiaries  for the most  recently  completed  fiscal year,
provided, however, that

      o     no  subsidiary  of  a  Material   Subsidiary  shall  be  a  Material
            Subsidiary, and

      o     in all instances each of Global, Resources and PSEG Capital shall be
            a Material Subsidiary.

      "Sale and Leaseback Transaction" means an arrangement relating to property
or assets now owned or acquired  after the date of the indenture  whereby Energy
Holdings  or a  subsidiary  transfers  such  property  or assets to a person and
leases it back from such  person,  other than leases for a term of not more than
36 months or between Energy  Holdings and a  wholly-owned  subsidiary or between
wholly-owned subsidiaries.

Certain Covenants

      The notes and other series of debt securities issuable under the indenture
will have the  benefit  of the  following  covenants  which may be waived by the
holders of at least a majority  in  principal  amount of the notes  outstanding.
These covenants may not be waived by us or the Trustee.

      Limitation on Liens

      Energy Holdings  covenants in the indenture that it will not, and will not
permit any of its subsidiaries to create,  incur,  assume or suffer to exist any
Lien upon or with respect to any property or assets (real or personal,  tangible
or intangible) of Energy Holdings or any of its subsidiaries,  whether now owned
or acquired after the date of the indenture,  to secure any Indebtedness that is
incurred,  issued,  assumed  or  guaranteed  by  Energy  Holdings  or any of its
subsidiaries without in any such case effectively  providing,  concurrently with
the incurrence,  issuance, assumption or guaranty of any such Indebtedness, that
the debt  securities  shall be equally and ratably secured with any and all such


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<PAGE>

Indebtedness;  provided,  however,  that these  restrictions  shall not apply to
orprevent the creation, incurrence, assumption or existence of:

      o     Liens existing on the date of the indenture;

      o     Liens to secure or provide for the payment of all or any part of the
            purchase  price  of any  such  property  or  assets  or the  cost of
            construction  or  improvement  thereof;  provided  that no such Lien
            shall  extend  to or cover any  other  property  or assets of Energy
            Holdings or such Subsidiary of Energy Holdings;

      o     Liens  granted or  assumed  by  subsidiaries  (other  than  Material
            Subsidiaries)  in  connection  with  project   financings  or  other
            Indebtedness that is not guaranteed by or otherwise an obligation of
            a Material Subsidiary;

      o     Liens  on the  equity  interest  of  any  subsidiary  that  is not a
            Material Subsidiary in connection with project financings;

      o     Liens for taxes not yet due, or Liens for taxes being  contested  in
            good  faith  and  by  appropriate  proceedings  for  which  adequate
            reserves have been established;

      o     Liens  incidental to the conduct of the business of or the ownership
            of property by Energy Holdings or any of its subsidiaries which were
            not  incurred  in  connection  with  the  borrowing  of money or the
            obtaining  of advances  of credit and which do not in the  aggregate
            materially  detract  from the  value of its  property  or  assets or
            materially impair the use thereof in the operation of its business;

      o     Liens created in connection with worker's compensation, unemployment
            insurance and other social security legislation;

      o     the replacement,  extension or renewal (or successive  replacements,
            extensions or  renewals),  as a whole or in part, of any Lien, or of
            any agreement,  referred to above, or the replacement,  extension or
            renewal (not exceeding the principal amount of Indebtedness  secured
            thereby together with any premium,  interest, fee or expense payable
            in connection  with any such  replacement,  extension or renewal) of
            the Indebtedness  secured thereby;  provided that such  replacement,
            extension  or  renewal  is  limited  to all or a  part  of the  same
            property that secured the Lien  replaced,  extended or renewed (plus
            improvements thereon or additions or accessions thereto); or

      o     any other Lien not excepted by the foregoing clauses; provided that,
            immediately  after the creation or assumption of such Lien,  the sum
            of (x) the amount of  outstanding  Indebtedness  of Energy  Holdings
            secured by all Liens created or assumed under the provisions of this
            clause  plus  (y)  the   Attributable   Debt  with  respect  to  all
            outstanding   leases  in   connection   with   Sale  and   Leaseback
            transactions   entered   into   pursuant   to  the   proviso   under
            "--Limitation on Sale and Leaseback Transactions" does not exceed an
            amount equal to 10% of Consolidated Net Tangible Assets, as shown on
            the   consolidated   balance  sheet  of  Energy   Holdings  and  its
            subsidiaries  as of the end of the most  recent  fiscal  quarter for
            which  financial  statements  are  available.  (Section  1005 of the
            indenture).

      Limitation on Sale and Leaseback Transactions

      Energy Holdings  covenants in the indenture that it will not, and will not
permit any Subsidiary to, enter into any Sale and Leaseback Transaction unless

      (1)   Energy  Holdings  or such  Subsidiary  would be entitled to create a
            Lien on such property or assets  securing  Indebtedness in an amount
            equal to the  Attributable  Debt with  respect  to such  transaction
            without  equally  and  ratably   securing  the  debt  securities  as
            described under the preceding subsection "--Limitation on Liens" or

      (2)   the net proceeds of such sale are

            o     at least equal to the fair value (as  determined  by our board
                  of directors) of such property and


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<PAGE>

            o     Energy Holdings or such Subsidiary  shall apply or cause to be
                  applied  an amount in cash equal to the net  proceeds  of such
                  sale to the  retirement,  within 90 days of the effective date
                  of any such arrangement, of debt securities or Indebtedness of
                  Energy  Holdings  which  ranks  senior or equal  with the debt
                  securities or with  Indebtedness  of a Subsidiary  (other than
                  Indebtedness  owed to Energy  Holdings or a  Subsidiary  or to
                  PSEG).

However,  in addition to the transactions  permitted as described in the clauses
(1) and  (2),  Energy  Holdings  or any  subsidiary  may  enter  into a Sale and
Leaseback Transaction as long as the sum of

      (x)   the  Attributable  Debt  with  respect  to such  Sale and  Leaseback
            Transaction  and all other Sale and Leaseback  Transactions  entered
            into as described in this proviso, plus

      (y)   the amount of outstanding  Indebtedness secured by Liens incurred as
            described in the last bullet  paragraph of the preceding  subsection
            "Limitation on Liens",

does not exceed an amount equal to 10% of Consolidated Net Tangible  Assets,  as
shown on the consolidated  balance sheet of Energy Holdings and its subsidiaries
as of the end of the most recent fiscal quarter for which  financial  statements
are available. (Section 1006 of the indenture).

      Repayment of Notes Upon a Change of Control

      Upon a Change of  Control,  holders  of the  notes  will have the right to
require  Energy  Holdings to repurchase  their notes,  in whole or in part, at a
repayment price of 101% of their principal  amount plus accrued  interest to the
repayment  date. The holder of debt securities of each other series to be issued
under the indenture will have the right to require Energy Holdings to repurchase
its debt securities at a repayment price in cash equal to a specified percentage
of the  principal  amount of the notes to be  repurchased  established  for that
series plus accrued  interest,  if any, to the date of repayment,  in accordance
with the terms described below and in Article 13 of the indenture.

      Within 30 days following any Change of Control,  Energy Holdings will mail
a notice to each holder of debt  securities  of each series  (with a copy to the
trustee) stating:

      o     that a Change of Control  has  occurred  and that the holder has the
            right to  require  Energy  Holdings  to  repay  that  holder's  debt
            securities,  in  whole  or in part,  in not  less  than the  minimum
            denomination  required  for debt  securities  of that  series,  at a
            repayment  price in cash equal to the  percentage  of the  principal
            amount  of the debt  securities  established  for that  series  plus
            accrued interest, if any, to the date of repayment;

      o     the  circumstances  and  relevant  facts  regarding  such  Change of
            Control,  including information with respect to pro forma historical
            income, cash flow and capitalization of Energy Holdings after giving
            effect to the Change of Control;

      o     the repayment date,  which will be a Business Day and be not earlier
            than 45 days or later  than 60 days  from the date  such  notice  is
            mailed;

      o     that any debt  security of the series not tendered for purchase will
            continue to accrue interest;

      o     that  interest  on any debt  security  of the  series  accepted  for
            repayment  pursuant  to the change of control  offer  shall cease to
            accrue  after the  repayment of the debt  security on the  repayment
            date;

      o     that holders electing to have any debt security repaid pursuant to a
            change of  control  offer will be  required  to  surrender  the debt
            security,  with the form entitled "Option to Elect Repayment" on the
            reverse  of the  debt  security  completed,  to the  trustee  at the
            address  specified  in the notice not  earlier  than 45 days and not
            later than 30 days prior to the repayment date;

      o     that  holders  will be entitled to  withdraw  their  election if the
            paying agent  receives,  not later than the close of business on the
            third  business day preceding  the  repayment  date, or such shorter
            period as may be required  by  applicable  law, a  telegram,  telex,
            facsimile  transmission or letter  providing the name of the holder,
            the principal  amount of debt  securities  the holder  delivered for
            repayment,  and a  statement  that the  holder  is  withdrawing  its
            election to have those debt securities repaid; and


                                       73
<PAGE>

      o     that holders of the series that elect to have their debt  securities
            purchased  only in part will be issued  new debt  securities  of the
            series in a principal  amount equal to then  unpurchased  portion of
            the debt securities surrendered.

      Energy Holdings has covenanted to comply with the tender offer  provisions
of Rule 14e-1 under the Securities Exchange Act of 1934 and any other applicable
laws and  regulations  in the event that a Change of  Control  occurs and Energy
Holdings  is required to make a change of control  offer.  (Section  1007 of the
indenture).

      Our $300  million  91/8% Senior Notes due 2004 rank equally with the notes
and contain the same change of control
provisions.

      Energy  Holdings has change of control  provisions in four bank agreements
(two  revolving  credit and two letters of credit) with an  aggregate  principal
amount of $1,000,000,000 and expiration dates from May 2001 through May 2003.

Borrowings under these agreements rank equally with the exchange notes.

      Specific change of control  provisions in the bank lending  agreements are
as follows:

      o     Default if PSEG ceases to own at least 80% of Energy Holdings

      o     Default  if  Energy   Holdings   ceases  to  own  100%  of  Material
            Subsidiaries (Global and Resources)

      Energy Holdings' ability to repay its Indebtedness, including the exchange
notes, will depend upon the amount of debt outstanding at the time of the change
of control.

Events of Default and Remedies

      The following will constitute events of default under the indenture:

      o     default in the payment of any interest upon any debt  security,  any
            coupon appertaining  thereto or any "additional  amounts" (which, if
            the terms of the  particular  series of debt  securities so specify,
            will be  payable  upon the  occurrence  of  certain  events  of tax,
            assessment  or  governmental  charge with respect to payments on the
            debt  securities)  payable in respect of any debt  security  of that
            series when such interest,  coupon or additional  amounts become due
            and payable,  and the continuance of such default for a period of 30
            days;

      o     default in the payment of the principal of (or premium,  if any, on)
            any debt  security  of that  series,  when the same  becomes due and
            payable at maturity, upon redemption;

      o     default in the deposit of any sinking  fund  payment when due by the
            terms of any debt security of that series;

      o     default in the performance,  or breach, of any covenant or agreement
            of  Energy  Holdings  in the  indenture  with  respect  to any  debt
            security of that series,  and the continuance of such default for 60
            days after written notice of such default to Energy Holdings;

      o     acceleration  of any  bond,  debenture,  note or other  evidence  of
            Indebtedness  or  under  any  mortgage,  indenture,   including  the
            indenture, or instrument under which there may be issued or by which
            there  may be  secured  or  evidenced  any  Indebtedness  by  Energy
            Holdings or any subsidiary in excess of $25,000,000 in the aggregate
            other than

      (1)   any  Indebtedness  arising  from the  obligation  to make an  equity
            investment in a subsidiary or

      (2)   Indebtedness  which is payable  solely out of the property or assets
            of a  partnership,  joint venture or similar  entity of which Energy
            Holdings  or any  such  subsidiary  is a  participant,  or  which is
            secured by a Lien on the  property  or assets  owned or held by such
            entity,  without further recourse to or liability of Energy Holdings
            or any such subsidiary,

      whether such Indebtedness now exists or shall be created later;


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<PAGE>

      o     certain events in bankruptcy, insolvency or reorganization affecting
            Energy Holdings; and

      o     any other event of default  provided with respect to debt securities
            of that series. (Section 501 of the indenture).

      Energy  Holdings  is  required  to file  with the  trustee,  annually,  an
officer's  certificate as to Energy Holdings' compliance with all conditions and
covenants under the indenture.  (Section 1008 of the  indenture).  The indenture
provides that the trustee may withhold  notice to the holders of debt securities
of a series, including the notes, of any default (except payment defaults on the
debt  securities  of that  series) if it  considers  it in the  interest  of the
holders  of  debt  securities  of  the  series  to do  so.  (Section  601 of the
indenture).

      If an event of  default  with  respect  to debt  securities  of a  series,
including the notes, has occurred and is continuing,  the trustee or the holders
of not less than 25% in principal  amount of outstanding debt securities of that
series may declare the principal of all of the debt securities of that series to
be due and  payable  immediately,  by a notice in  writing  to Energy  Holdings.
However,  if the debt  securities of that series are issued with original  issue
discount or are  "indexed  debt  securities,"  the trustee or the holders of not
less than 25% of the debt  securities  may declare that portion of the principal
as may be  specified  in the  terms of those  debt  securities  due and  payable
immediately.  (Section 502 of the  indenture).  Indexed debt securities are debt
securities,  the  interest and  principal  payments on which are  determined  by
reference to a particular index, such as a foreign currency or commodity.

      Subject to the  provisions of the indenture  relating to the duties of the
trustee,  in case an event of default  with  respect to debt  securities  of any
series,  including  the notes,  has occurred and is  continuing,  the trustee is
under no  obligation to exercise any of its rights or powers under the indenture
at the request,  order or direction  of the holders of debt  securities  of that
series,  unless  those  holders have  offered the trustee  reasonable  indemnity
against the expenses and liabilities which might be incurred by it in compliance
with such request. (Section 507 of the indenture).

      Subject to the  provisions  for the  indemnification  of the trustee,  the
holders of a majority in principal  amount of the outstanding debt securities of
any  series of debt  securities,  including  the  notes,  will have the right to
direct the time,  method and place of conducting  any  proceeding for any remedy
available  to the trustee,  or  exercising  any trust or power  conferred on the
trustee with respect to the debt securities of that series.  (Section 512 of the
indenture).

      The  holders of a majority in  principal  amount of the  outstanding  debt
securities of a series,  including  the notes,  may, on behalf of the holders of
all debt  securities  of such  series and any  related  coupons,  waive any past
default  under the indenture  with respect to that series and its  consequences,
except a default

      o     in the payment of the principal of (or premium, if any) or interest,
            if any,  on or  additional  amounts  payable  in respect of any debt
            security of such series or any related coupons or

      o     in respect of a covenant  or  provision  that  cannot be modified or
            amended without the consent of the holder of each  outstanding  debt
            security of that series. (Section 513 of the indenture).

Repayment of Notes Upon Certain Events Involving Resources

If

      (1)   Energy  Holdings  shall no longer own 100% of the  equity  ownership
            interest in Resources, or

      (2) (a) a  transaction  or series of related  transactions  (a  "Resources
              Transaction")  causes the assets of  Resources  immediately  after
              such Resources Transaction to be at least 20% less than the assets
              of Resources  immediately prior to such Resources  Transaction (as
              measured  from  the end of the  month  immediately  preceding  the
              Resources  Transaction (or in the case of a Resources  Transaction
              involving  a  series  of  transactions,   the  month   immediately
              preceding the first of such transactions)) and

          (b) as a  direct  result  of such  Resources  Transaction,  either  of
              Standard & Poor's Ratings Group or Moody's Investors Service, Inc.
              shall  downgrade its  respective  rating of Energy  Holdings below
              BBB- or Ba1 (or if either of such  ratings  immediately  preceding


                                       75
<PAGE>

              the Resources  Transaction  is lower than BBB- or Ba1, such rating
              shall  as  a  direct  result  of  such  Resources  Transaction  be
              downgraded),

then the holders of the notes shall have the right to require Energy Holdings to
repurchase  their notes,  in whole or in part, at a repayment price equal to the
greater of

      o     100% of the principal amount of the notes to be repurchased, and

      o     the sum, as determined  by the  Quotation  Agent (as defined on page
            68), of the present  values of the principal  amount of the notes to
            be  repurchased  and the  remaining  scheduled  payments of interest
            thereon from the repayment date to October 1, 2009  discounted  from
            their  respective  payment  dates  to the  date  of  repayment  on a
            semiannual  basis  (assuming  a 360-day  year  consisting  of twelve
            30-day months) at the Treasury Rate (as defined on page 68), plus 40
            basis points

plus, in either case, accrued interest on the notes to the date of repayment.

Merger or Consolidation

      The indenture  provides that Energy Holdings may not  consolidate  with or
merge with or into any other  corporation  or convey or transfer its  properties
and assets  substantially  as an entirety to any person,  unless  either  Energy
Holdings is the continuing  corporation or such corporation or person assumes by
supplemental  indenture  all  the  obligations  of  Energy  Holdings  under  the
indenture  and the debt  securities  issued under it and  immediately  after the
transaction no default shall exist. (Section 801 of the indenture).

No Personal Liability of Directors, Officers, Employees and Stockholders

      No past, present or future director,  officer,  employee,  incorporator or
stockholder  of Energy  Holdings,  as such,  shall  have any  liability  for any
obligations  of Energy  Holdings  under the notes and the  indenture  or for any
claim  based on, in  respect  of, or by reason  of,  such  obligations  or their
creation.  Each holder of notes by accepting a note waives and releases all such
liability.  The waiver and release are part of the consideration for issuance of
the notes.  The  waiver  may not be  effective  to waive  liabilities  under the
federal securities laws. (Section 113 of the indenture).

Satisfaction and Discharge, Defeasance and Covenant Defeasance

      According to the terms of the  indenture,  Energy  Holdings may  discharge
certain  obligations to holders of any series of debt securities,  including the
notes,  that have not already been delivered to the trustee for cancellation and
that  either  have  become due and payable or are by their terms due and payable
within one year, or scheduled  for  redemption  within one year, by  irrevocably
depositing with the trustee,  in trust, funds in an amount sufficient to pay the
entire indebtedness on such debt securities for principal,  and premium, if any,
and  interest,  if any,  and any  additional  amounts  with  respect to the debt
securities,  to the date of such deposit, if the debt securities have become due
and payable,  or to the maturity  date or  redemption  date, as the case may be.
(Section 401 of the indenture).

      The indenture  provides that, if the provisions of Article Fourteen of the
indenture are made  applicable  to the debt  securities of or within any series,
including the notes, and any related coupons, Energy Holdings may elect either

      (a)   to  defease  and be  discharged  from any and all  obligations  with
            respect to the debt securities and any related  coupons,  except for
            the  obligations  to  pay  additional  amounts,  if  any,  upon  the
            occurrence  of certain  events of tax,  assessment  or  governmental
            charge  with  respect to payments  on such debt  securities  and the
            obligations  to  register  the  transfer  or  exchange  of such debt
            securities  and  any  related  coupons,   to  replace  temporary  or
            mutilated, destroyed, lost or stolen debt securities and any related
            coupons,  to  maintain  an office or agency in  respect of such debt
            securities and any related  coupons,  and to hold moneys for payment
            in trust (Section 1402 of the indenture) or


                                       76
<PAGE>

      (b)   to be released  from its  obligations  under any covenant  specified
            pursuant to Section 301 with respect to such debt securities and any
            related  coupons,  and any omission to comply with such  obligations
            shall not  constitute  a default or an event of default with respect
            to such debt securities and any related coupons (Section 1403 of the
            indenture),

      in either case upon the  irrevocable  deposit by Energy  Holdings with the
trustee, in trust, of

      (1)   an amount in United States Dollars,

      (2)   Government  Obligations  (as defined below)  applicable to such debt
            securities  and coupons that  through the payment of  principal  and
            interest in  accordance  with their terms will  provide  money in an
            amount, or

      (3)   a combination of the items referred to in (1) or (2)

in an amount,  sufficient  to pay the  principal  of, and  premium,  if any, and
interest,  if any,  on the debt  securities  and any  related  coupons,  and any
mandatory  sinking  fund or analogous  payments on them,  on all  scheduled  due
dates.

      Such a trust  may only be  established  if,  among  other  things,  Energy
Holdings  has  delivered to the trustee an opinion of counsel to the effect that
the holders of such debt  securities and any related  coupons will not recognize
income,  gain or loss for United States  federal income tax purposes as a result
of such  defeasance or covenant  defeasance and will be subject to United States
Federal income tax on the same amounts, in the same manner and at the same times
as would have been the case if such  defeasance or covenant  defeasance  had not
occurred.  The opinion of counsel,  in the case of  defeasance  under clause (a)
above,  must refer to and be based upon a ruling of the Internal Revenue Service
or a change in applicable  United States federal income tax law occurring  after
the date of the indenture. (Section 1404 of the indenture).

      "Government Obligations" means securities which are

      o     direct obligations of the United States or

      o     obligations of a person controlled or supervised by and acting as an
            agency or instrumentality of the United States, the payment of which
            is unconditionally  guaranteed as a full faith and credit obligation
            by the United  States,  which are not callable or  redeemable at the
            option of the issuer of that obligation.

Government  Obligations  also include a depository  receipt  issued by a bank or
trust company as custodian with respect to any such  Government  Obligation or a
specific  payment of interest on or principal of any such Government  Obligation
held by such  custodian  for the account of the holder of a depository  receipt;
provided  that,  except as required by law, such  custodian is not authorized to
make any  deduction  from the amount  payable  to the holder of such  depository
receipt from the amount  received by the custodian in respect of the  Government
Obligation or the specific payment of interest on or principal of the Government
Obligation evidenced by such depository receipt. (Section 101 of the indenture).

      In the event Energy Holdings effects  covenant  defeasance with respect to
any debt  securities  and any  related  coupons  and those debt  securities  and
coupons are declared due and payable  because of the  occurrence of any event of
default,  other than the events of default  described  in clauses  (4) or (8) of
Section 501 of the  indenture,  with  respect to any covenant to which there has
been defeasance,  the amount of Government Obligations and funds on deposit with
the trustee will be  sufficient to pay amounts due on such debt  securities  and
coupons at the time of their stated  maturity but may not be  sufficient  to pay
amounts due on such debt securities and coupons at the time of the  acceleration
resulting from such event of default. In such case, Energy Holdings would remain
liable to make payment of such amounts due at the time of acceleration. (Section
501 of the indenture).

      If the  trustee  or any  paying  agent is  unable  to apply  any  money in
accordance with the indenture by reason of any order or judgment of any court or
governmental  authority  enjoining,  restraining or otherwise  prohibiting  such
application, then Energy Holdings' obligations under the indenture and such debt
securities and any related  coupons shall be revived and reinstated as though no
deposit had occurred pursuant to the indenture,  until such time as such trustee
or paying  agent is  permitted  to apply


                                       77
<PAGE>

all such money in accordance  with the indenture.  However,  if Energy  Holdings
makes any payment of principal of, or premium,  if any, or interest,  if any, on
any such debt security or any related coupon following the  reinstatement of its
obligations, Energy Holdings shall be subrogated to the rights of the holders of
such debt  securities  and any related  coupons to receive such payment from the
money held by such trustee or paying agent.

Amendment, Supplement and Waiver

      Energy  Holdings and the trustee may modify and amend the  indenture  with
the consent of the holders of a majority in principal  amount of all outstanding
debt  securities that are affected by the  modification  or amendment;  provided
that no modification or amendment may, without the consent of the holder of each
outstanding debt security affected by the modification or amendment, among other
things:

      o     change the stated maturity date of the principal of, or premium,  if
            any, on, or any  installment of principal of or interest on any debt
            security;

      o     reduce the principal amount of, or the rate or amount of interest in
            respect of, or any premium  payable upon the redemption of, any debt
            security;

      o     change the manner of calculating the rate of interest;

      o     change any obligation of Energy  Holdings to pay additional  amounts
            in respect of any debt security;

      o     reduce the portion of the principal of a debt  security  issued with
            the original  issue  discount or an indexed debt security that would
            be  due  and  payable  upon a  declaration  of  acceleration  of the
            maturity of the debt security or provable in bankruptcy;

      o     adversely  affect any right of repayment at the option of the holder
            of any such debt security;

      o     change  the place of  payment  of  principal  of, or any  premium or
            interest on, the debt security;

      o     impair  the  right  to  institute  suit for the  enforcement  of any
            payment on or after the stated maturity date of the debt security or
            on or  after  any  redemption  date or  repayment  date for the debt
            security;

      o     adversely affect any right to convert or exchange any debt security;

      o     reduce the percentage in principal  amount of such  outstanding debt
            securities,  the  consent of whose  holders is  required to amend or
            waive  compliance  with certain  provisions  of the  indenture or to
            waive certain defaults under the indenture;

      o     reduce the requirements for voting or quorum described below; or

      o     modify any of the preceding  requirements  or any of the  provisions
            relating  to  waiving  past  defaults  or  compliance  with  certain
            restrictive provisions, except to increase the percentage of holders
            required  to  effect   waiver  or  to  provide  that  certain  other
            provisions of the indenture cannot be modified or waived without the
            consent  of  the  holder  of  each  debt  security  affected  by the
            modification or waiver. (Section 902 of the indenture).

      Energy Holdings and the trustee may modify and amend the indenture without
the consent of any holder, for any of the following purposes:

      o     to evidence the succession of another person to Energy  Holdings and
            the assumption by any successor of the covenants of Energy  Holdings
            under the indenture and the debt securities;

      o     to add to the  covenants  of Energy  Holdings for the benefit of the
            holders of all or any  series of debt  securities  issued  under the
            indenture,  including  the  notes,  and any  related  coupons  or to
            surrender any right or power  conferred upon Energy  Holdings by the
            indenture;

      o     to add events of default  for the  benefit of the  holders of all or
            any series of debt securities, including the notes, issued under the
            indenture;


                                       78
<PAGE>

      o     to add to or change any  provisions  of the  indenture to facilitate
            the  issuance  of, or to  liberalize  the terms of, debt  securities
            issued in bearer  form or to permit or  facilitate  the  issuance of
            debt  securities  in  uncertificated  form,  provided  that any such
            actions do not adversely  affect the interests of the holders of the
            debt securities issued under the indenture or any related coupons in
            any material respect;

      o     to change or eliminate  any  provisions of the  indenture,  provided
            that any change or elimination of this nature will become  effective
            only when  there are no debt  securities  outstanding  of any series
            created prior to the change or  elimination  of the provision  which
            are entitled to the benefit of the provisions;

      o     to  secure  the debt  securities,  including  the  notes,  under the
            indenture  pursuant  to the  requirements  of  Section  1005  of the
            indenture, or otherwise;

      o     to establish the form or terms of debt  securities of any series and
            any related coupons;

      o     to evidence  and  provide for the  acceptance  of  appointment  by a
            successor  trustee or facilitate  the  administration  of the trusts
            under the indenture by more than one trustee;

      o     to cure any  ambiguity,  defect or  inconsistency  in the indenture,
            provided  such action does not  adversely  affect the  interests  of
            holders of debt securities of a series,  including the notes, issued
            under the indenture or any related coupons in any material way; or

      o     to supplement  any of the  provisions of the indenture to the extent
            necessary to permit or  facilitate  defeasance  and discharge of any
            series of debt securities issued under the indenture,  including the
            notes,  provided  that the  action  does not  adversely  affect  the
            interests  of the  holders of the debt  securities  of that  series,
            including  the notes,  and any related  coupons in any material way.
            (Section 901 of the indenture).

      In determining  whether the holders of the requisite  principal  amount of
outstanding  debt  securities  have given any  request,  demand,  authorization,
direction,  notice, consent or waiver under the indenture or whether a quorum is
present at a meeting of holders of debt securities thereunder,

      o     the principal  amount of a debt security  issued with original issue
            discount that will be deemed to be outstanding will be the amount of
            the  principal  thereof that would be due and payable as of the date
            of such  determination upon acceleration of the maturity of the debt
            security,

      o     the principal amount of an indexed debt security that may be counted
            in making the  determination  or calculation and that will be deemed
            outstanding  will be  equal  to the  principal  face  amount  of the
            indexed  debt  security  at  original  issuance,   unless  otherwise
            provided pursuant to Section 301 of the indenture, and

      o     Debt  securities  owned by Energy Holdings or any other obligor upon
            the debt  securities or any affiliate of Energy  Holdings or of such
            other obligor shall be disregarded. (Section 101 of the indenture).

      The indenture contains provisions for convening meetings of the holders of
debt  securities  of a series if debt  securities of that series are issuable in
bearer form. (Section 1501 of the indenture) A meeting may be called at any time
by the trustee,  and also, upon request, by Energy Holdings or the holders of at
least 10% in principal amount of the outstanding debt securities of that series,
in any such case upon notice given as provided in the  indenture.  (Section 1502
of the  indenture)  Except for any  consent  that must be given by the holder of
each debt security,  as described above,  any resolution  presented at a meeting
(or an adjourned  meeting duly  reconvened)  at which a quorum is present may be
adopted by the affirmative vote of the holders of a majority in principal amount
of  outstanding  debt  securities of that series;  provided,  however,  that any
resolution  with  respect  to any  request,  demand,  authorization,  direction,
notice,  consent, waiver or other action that may be made, given or taken by the
holders of a specified  percentage  which is less than a majority  in  principal
amount of  outstanding  debt  securities of a series may be adopted at a meeting
(or an adjourned  meeting duly  reconvened)  at which a quorum is present by the
affirmative vote of the holders of such specified percentage in principal amount
of the  outstanding  debt  securities of that series.  Any resolution  passed or
decision  taken at any


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<PAGE>

meeting of holders of debt  securities of a series duly held in accordance  with
the indenture  will be binding on all holders of debt  securities of that series
and any related coupons.  The quorum at any meeting called to adopt a resolution
will be persons  holding or  representing a majority in principal  amount of the
outstanding debt securities of a series; provided,  however, that, if any action
is to be taken at a meeting  with  respect to a consent  or waiver  which may be
given by the holders of not less than a specified percentage in principal amount
of  the  outstanding  debt  securities  of a  series,  the  persons  holding  or
representing  the specified  percentage in principal  amount of the  outstanding
debt  securities of that series will  constitute a quorum.  (Section 1504 of the
indenture).

      Regardless of the foregoing provisions,  if any action is to be taken at a
meeting of holders of debt  securities of a series,  including  the notes,  with
respect to any  request,  demand,  authorization,  direction,  notice,  consent,
waiver or other action that the indenture  expressly provides may be made, given
or taken by the holders of a specified  percentage  in  principal  amount of all
outstanding  debt  securities  affected  by the action or of the holders of that
series and one or more additional series:

      o     there shall be no minimum quorum requirement for that meeting and

      o     the  principal  amount of the  outstanding  debt  securities  of the
            series  that  vote  in  favor  of  request,  demand,  authorization,
            direction,  notice,  consent,  waiver or other  action will be taken
            into  account  in   determining   whether  such   request,   demand,
            authorization,  direction,  notice,  consent, waiver or other action
            has been made, given or taken under the indenture.  (Section 1504 of
            the indenture).

Additional Information

      Anyone who receives  this  prospectus  may obtain a copy of the  indenture
without charge by writing to Energy Holdings at 80 Park Plaza,  T-22, Newark, NJ
07102, Attention: Treasurer.

Reports

      Following the  consummation  of the exchange offer, to the extent required
by the SEC,  Energy  Holdings  will  file a copy of all of the  information  and
reports  referred  to in  clauses  (1) and (2)  below  with  the SEC for  public
availability   within  the  time  periods  specified  in  the  SEC's  rules  and
regulations  (unless  the SEC will  not  accept  such a  filing)  and make  such
information available to holders of the notes upon request:

      (1)  all  quarterly  and  annual  financial  information  required  to  be
contained  in a filing with the SEC on Forms 10-Q and 10-K and,  with respect to
the  annual  information  only,  a report  on the  annual  financial  statements
certified by Energy Holdings' independent auditors; and

      (2) all information of the type contained in current  reports  required to
be filed with the SEC on Form 8-K.

      The indenture  requires Energy Holdings to file the documents  referred to
in clauses  (1) and (2) above with the  trustee  within 15 days of the filing of
those  documents  with the SEC.  So long as any  notes are  outstanding,  Energy
Holdings  will  furnish to the  holders of notes the  documents  referred  to in
clauses (1) and (2) above in the manner and to the extent  required by the Trust
Indenture Act within 30 days of the filing of those documents with the SEC.

      In addition,  Energy Holdings has agreed that, for so long as any original
notes  remain  outstanding,  it will  furnish  upon  request  to  holders of the
original  notes  and  prospective  purchasers  the  information  required  to be
delivered pursuant to Rule 144A(d) (4) under the Securities Act.

Book-Entry, Delivery and Form

      The exchange  notes  initially will be represented by one or more notes in
registered, global form without interest coupons (collectively, global notes).

      Except as set forth below,  the global notes may be transferred,  in whole
and not in part,  only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the global notes may not be exchanged for notes
in certificated  form except in the limited  circumstances  described below. See
"--Exchange of Book-Entry Notes for Certificated  Notes".  Except in the limited


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<PAGE>

circumstances  described  below,  owners of  beneficial  interests in the global
notes will not be entitled to receive  physical  delivery of certificated  notes
(as defined below).

      Initially,  the trustee will act as paying agent and registrar.  The notes
may be presented for registration of transfer and exchange at the offices of the
registrar.

Depository Procedures

      The following  description  of the  operations  and  procedures of DTC are
provided solely as a matter of convenience.  These operations and procedures are
solely within the control of the respective  settlement  systems and are subject
to changes by them from time to time.  Energy  Holdings takes no  responsibility
for these operations and procedures and urges investors to contact the system or
their participants directly to discuss these matters.

      DTC has  advised  Energy  Holdings  that  DTC is a  limited-purpose  trust
company  created  to  hold  securities  for  its   participating   organizations
(collectively,  participants)  and to facilitate the clearance and settlement of
transactions  in  those  securities  between   participants  through  electronic
book-entry  changes in accounts of its  participants.  The participants  include
securities brokers and dealers (including the initial purchasers of the original
notes),  banks,  trust  companies,   clearing  corporations  and  certain  other
organizations.  Access to DTC's system is also  available to other entities such
as banks, brokers,  dealers and trust companies that clear through or maintain a
custodial  relationship  with  a  participant,  either  directly  or  indirectly
(collectively,  indirect  participants).  Persons who are not  participants  may
beneficially  own  securities  held by or on  behalf  of DTC  only  through  the
participants  or the indirect  participants.  The  ownership  interests  in, and
transfers of ownership  interests  in, each security held by or on behalf of DTC
are recorded on the records of the participants and indirect participants.

      DTC  has  also  advised  Energy  Holdings  that,  pursuant  to  procedures
established  by it, (i) upon  deposit of the global  notes,  DTC will credit the
accounts of  participants  designated by the Initial  Purchasers of the original
notes  with  portions  of the  principal  amount  of the  global  notes and (ii)
ownership  of such  interests  in the  global  notes  will be shown on,  and the
transfer of ownership thereof will be effected only through,  records maintained
by DTC  (with  respect  to the  participants)  or by the  participants  and  the
indirect  participants  (with respect to other owners of beneficial  interest in
the global notes).

      Investors in the global notes may hold their  interests  therein  directly
through DTC, if they are  participants  in such system,  or  indirectly  through
organizations  which are participants in such system.  All interests in a global
note may be subject to the procedures and  requirements  of DTC. Those interests
held  through  Euroclear  or Cedel may also be  subject  to the  procedures  and
requirements  of such  systems.  The laws of some states  require  that  certain
persons take physical  delivery in definitive  form of securities that they own.
Consequently,  the ability to transfer beneficial  interests in a global note to
such persons will be limited to that extent.  Because DTC can act only on behalf
of  participants,  which in turn act on  behalf  of  indirect  participants  and
certain banks, the ability of a person having  beneficial  interests in a global
note to pledge such interests to persons or entities that do not  participate in
the DTC system,  or otherwise take actions in respect of such interests,  may be
affected by the lack of a physical certificate evidencing such interests.

      Except as described below, owners of interest in the global notes will not
have notes  registered  in their names,  will not receive  physical  delivery of
notes in certificated  form and will not be considered the registered  owners or
"holders" thereof under the indenture for any purpose.

      Payments in respect of the principal of, premium,  if any, and interest on
a global note  registered  in the name of DTC or its nominee  will be payable to
DTC in its  capacity as the  registered  holder under the  Indenture.  Under the
terms of the indenture,  Energy  Holdings and the trustee will treat the persons
in whose names the notes,  including  the global  notes,  are  registered as the
owners  thereof for the purpose of receiving  such  payments and for any and all
other purposes whatsoever.  Consequently,  neither Energy Holdings,  the trustee
nor  any  agent  of  Energy  Holdings  or the  trustee  has  or  will  have  any
responsibility or liability for


                                       81
<PAGE>

      o     any  aspect  of  DTC's  records  or any  participant's  or  indirect
            participant's  records  relating to or  payments  made on account of
            beneficial   ownership   interest  in  the  global  notes,   or  for
            maintaining,  supervising  or reviewing  any of DTC's records or any
            participant's  or  indirect  participant's  records  relating to the
            beneficial ownership interests in the global notes or

      o     any other matter relating to the actions and practices of DTC or any
            of its participants or indirect participants.

      DTC has advised Energy Holdings that its current practice, upon receipt of
any payment in respect of securities such as the notes (including  principal and
interest),  is to credit the  accounts  of the  relevant  participants  with the
payment on the  payment  date,  in  amounts  proportionate  to their  respective
holdings in the principal amount of beneficial interest in the relevant security
as shown on the  records  of DTC  unless  DTC has  reason to believe it will not
receive  payment on such  payment  date.  Payments by the  participants  and the
indirect  participants  to the  beneficial  owners of notes will be  governed by
standing  instructions and customary practices and will be the responsibility of
the participants or the indirect participants and will not be the responsibility
of DTC, the trustee or Energy Holdings.  Neither Energy Holdings nor the trustee
will be liable for any delay by DTC or any of its  participants  in  identifying
the  beneficial  owners of the notes,  and Energy  Holdings  and the Trustee may
conclusively  rely on and will be protected in relying on instructions  from DTC
or its nominee for all purposes.

      Interest in the global notes are expected to be eligible to trade in DTC's
same-day funds  settlement  system and secondary market trading activity in such
interests will, therefore, settle in immediately available funds, subject in all
cases to the rules and procedures of DTC and its participants.

      DTC has advised Energy Holdings that it will take any action  permitted to
be taken by a holder of notes only at the direction of one or more  participants
to whose  account DTC has credited the interests in the global notes and only in
respect of such  portion of the  aggregate  principal  amount of the notes as to
which  such  participant  or  participants  has or have  given  such  direction.
However, if there is an event of default under the notes, DTC reserves the right
to exchange the global notes for legended  notes in  certificated  form,  and to
distribute such notes to its participants.

Exchange of Book-Entry Notes for Certificated Notes

If

      o     DTC is at any time  unwilling,  unable or  ineligible to continue as
            depository  and a successor  depository  is not  appointed by Energy
            Holdings within 90 days following notice to Energy Holdings,

      o     DTC determines, in its sole discretion, not to have any of the notes
            represented by one or more global notes, or

      o     an  event  of  default  under  the  indenture  has  occurred  and is
            continuing,

then  Energy  Holdings  will  issue  individual  notes in  certificated  form in
exchange for the relevant  global  notes.  In any such  instance,  an owner of a
beneficial  interest in a global  note will be entitled to physical  delivery of
individual notes in certificated form of like tenor and rank, equal in principal
amount to such beneficial  interest and to have such notes in certificated  form
registered in its name. In all cases,  notes in  certificated  form delivered in
exchange for any global note or beneficial  interests therein will be registered
in the  names,  and issued in any  approved  denominations,  requested  by or on
behalf of the depositary (in accordance with its customary procedures).

                        FEDERAL INCOME TAX CONSIDERATIONS

General

      The following is a summary of the material  United States  federal  income
tax consequences resulting from the exchange offer and from the ownership of the
exchange notes. It deals only with exchange notes held as capital assets and not
with  special  classes  of  noteholders,   such  as  dealers  in  securities  or
currencies, life insurance companies, tax exempt entities, and persons that hold


                                       82
<PAGE>


an exchange note in connection with an arrangement  that completely or partially
hedges the exchange note. The discussion is based upon the Internal Revenue Code
of 1986, as amended, and regulations,  rulings and judicial decisions thereunder
as of the date hereof. Such authorities may be repealed,  revoked or modified so
as to produce  federal income tax  consequences  different from those  discussed
below. The information  contained in this section has been passed upon for us by
James T. Foran, Esquire,  Associate General Counsel of PSEG. We have received an
opinion of counsel from Mr. Foran  regarding  the  material  federal  income tax
consequences of the exchange offer.


      Noteholders  tendering  their original notes or prospective  purchasers of
exchange  notes  should  consult  their own tax advisors  concerning  the United
States  federal  income  tax and any  state or local  income  or  franchise  tax
consequences in their particular  situations and any consequences under the laws
of any other taxing jurisdiction.

Consequences of Tendering Original Notes

      The  exchange of original  notes for the  exchange  notes  pursuant to the
exchange  offer will not be treated as an "exchange"  for United States  federal
income tax purposes  because the exchange notes will not be considered to differ
materially in kind or extent from the original notes. Rather, the exchange notes
received by a noteholder will be treated as a continuation of the original notes
in the hands of such  noteholder.  As a result,  there will be no United  States
federal income tax consequences to noteholders exchanging the original notes for
the exchange notes pursuant to the exchange offer.  The noteholder must continue
to include  stated  interest in income as if the exchange had not occurred.  The
adjusted basis and holding period of the exchange notes for any noteholder  will
be the same as the  adjusted  basis and holding  period of the  original  notes.
Similarly,  there would be no United States federal income tax consequences to a
holder of original notes that does not participate in the exchange offer.

United States Holders

      For purposes of this discussion, a "United States Holder" means:

      (1) a citizen or resident of the United States;

      (2) a partnership, corporation or other entity treated as a corporation or
partnership for United States federal income tax purposes,  created or organized
in or under the law of the United  States or of any State of the  United  States
including the District of Columbia;

      (3) an estate  the income of which is  subject  to United  States  federal
income tax regardless of its source;

      (4) a trust, if either:

            (a) a court  within the United  States is able to  exercise  primary
      supervision over the  administration  of the trust, and one or more United
      States persons have the authority to control all substantial  decisions of
      the trust; or

            (b) the trust was in  existence on August 20, 1996 and elected to be
      treated as a United States person at all times thereafter;

      (5) any other person that is subject to United States  federal  income tax
on  interest  income  derived  from a note  as a  result  of such  income  being
effectively  connected  with the  conduct by such  person of a trade or business
within the United States; or

      (6) certain former  citizens of the United States whose income and gain on
the exchange notes will be subject to U.S. income tax.

      Payments of Interest

      Interest on an exchange  note will be taxable to a United States Holder as
ordinary interest income at the time it is received or accrued, depending on the
noteholder's method of accounting for tax purposes.


                                       83
<PAGE>

      Disposition of an Exchange Note

      Upon the sale, exchange or retirement of an exchange note, a United States
Holder  generally  will  recognize  taxable gain or loss equal to the difference
between the amount  realized on the sale,  exchange  or  retirement  (other than
amounts  representing  accrued  and  unpaid  interest,  which will be treated as
ordinary  income) and such holder's  adjusted basis in the exchange  note.  Such
gain or loss  generally  will be long-term  capital gain or loss if the holder's
holding  period  in the  exchange  note  was  more  than one year at the time of
disposition.

      Backup Withholding and Information Reporting

      In general,  information reporting requirements will apply with respect to
non-corporate  United States Holders to payments of principal and interest on an
exchange note and the proceeds of the sale of an exchange note before  maturity.
A 31% "backup  withholding" tax will apply to such payments if the United States
Holder fails to provide an accurate taxpayer  identification number or to report
all  interest  and  dividends  required  to be shown on its  federal  income tax
returns.

Payments to United States Aliens

      As used herein,  a "United  States Alien" is a person or entity that,  for
United States  federal  income tax  purposes,  is not a United States Holder (as
defined above).

      Under current United States federal income and estate tax law:

      (1)  payments of principal  and interest on an exchange  note by us or any
paying agent to a noteholder  that is a United  States Alien will not be subject
to  withholding  of  United  States  federal  income  tax,   provided  that  the
noteholder:

            (a)  does  not  actually  or  constructively  own 10% or more of the
      combined voting power of our stock;

            (b) is not a controlled  foreign  corporation  related to us through
      stock ownership;

            (c)  is  not  a  bank  receiving   interest   described  in  Section
      881(c)(3)(A) of the Internal Revenue Code; and

            (d) provides a statement,  under  penalties of perjury (such as Form
      W-8BEN),  to us that the holder is a United  States Alien and provides its
      name and address;

      (2) a  noteholder  that is a United  States  Alien  will not be subject to
United  States  federal  income tax on gain  realized  on the sale,  exchange or
redemption of such note, unless:

            (a) the gain is effectively connected with the conduct of a trade or
      business within the United States by the United States Alien; or

            (b) in the case of a United States Alien who is a nonresident  alien
      individual and holds the exchange note as a capital asset,  such holder is
      present in the United  States for 183 or more days in the taxable year and
      certain other requirements are met; and

      (3) an exchange note will not be subject to United States  federal  estate
tax as a result of the death of a noteholder who is not a citizen or resident of
the United States at the time of death, provided that:

            (a)  such  noteholder  did not at the  time  of  death  actually  or
      constructively own 10% or more of the combined voting power of all classes
      of our stock; and,

            (b) at the time of such noteholder's death,  payments of interest on
      such  exchange  note would not have been  effectively  connected  with the
      conduct by such noteholder of a trade or business in the United States.

      United States  information  reporting  requirements and backup withholding
tax will not apply to  payments  on an  exchange  note made  outside  the United
States  by us or  any  paying  agent  (acting  in its  capacity  as  such)  to a
noteholder  that is a United States Alien  provided  that a statement  described


                                       84
<PAGE>

in(1)(c)  above has been received and neither we nor our paying agent has actual
knowledge that the payee is not a United States Alien.

      Information  reporting  requirements  and backup  withholding tax will not
apply to any payment of the  proceeds of the sale of an exchange  note  effected
outside  the  United  States by a foreign  office of a "broker"  (as  defined in
applicable Treasury regulations), provided that such broker:

      (1) is a United States Alien;

      (2) derives less than 50% of its gross income for certain periods from the
conduct of a trade or business in the United States; and

      (3) is not a controlled  foreign  corporation  as to the United  States (a
person  described in (1), (2) and (3) above being  hereinafter  referred to as a
"foreign controlled person"). Payment of the proceeds of the sale of an exchange
note effected  outside the United States by a foreign  office of any broker that
is not a foreign  controlled  person  will not be subject to backup  withholding
tax,  but will be subject to  information  reporting  requirements  unless  such
broker has  documentary  evidence in its records that the beneficial  owner is a
United  States Alien and certain  other  conditions  are met, or the  beneficial
owner otherwise establishes an exemption.

      New regulations governing backup withholding and information reporting are
generally  scheduled to become  effective for payments  made after  December 31,
2000.  Rules under these  regulations will have essentially the same substantive
effect, but will unify current certification procedures and forms.

                              PLAN OF DISTRIBUTION

      We are making the exchange  offer in reliance on the position of the staff
of the  Division  of  Corporation  Finance  of the  Sec as  defined  in  certain
interpretive letters issued to third parties in other transactions.

      Each  broker-dealer  that  receives  exchange  notes  for its own  account
pursuant  to the  exchange  offer  must  acknowledge  that  it  will  deliver  a
prospectus meeting the requirements of the Securities Act in connection with any
resale  of  such  exchange  notes.  This  prospectus,  as it may be  amended  or
supplemented  from time to time,  may be used by a  broker-dealer  in connection
with resales of exchange  notes  received in exchange  for original  notes where
such  original  notes were acquired as a result of  market-making  activities or
other trading  activities.  We have agreed that,  for a period not to exceed 180
days after the exchange offer has been completed,  we will make this prospectus,
as amended or  supplemented,  available  to any  broker-dealer  that  reasonably
requests  such  document  for use in  connection  with any such  resale.  Broker
dealers who acquired original notes directly from us may not rely on the staff's
interpretations  and must comply with the registration  and prospectus  delivery
requirements of the Securities Act,  including being named as a selling security
holder, in order to resell the original notes or the exchange notes.

      We will not  receive  any  proceeds  from any  sale of  exchange  notes by
broker-dealers.  Exchange notes received by broker-dealers for their own account
pursuant  to the  exchange  offer  may be sold  from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the exchange notes or a combination of such methods of
resale,  at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated  prices. Any such resale may be made
directly  to  purchasers  or to or through  brokers or dealers  who may  receive
compensation   in  the  form  of  commissions  or  concessions   from  any  such
broker-dealer   and/or  the   purchasers  of  any  such  exchange   notes.   Any
broker-dealer  that resells  exchange notes that were received by it for its own
account   pursuant  to  the  exchange  offer  and  any  broker  or  dealer  that
participates  in a  distribution  of such exchange  notes may be deemed to be an
"underwriter"  within the  meaning of the  Securities  Act and any profit on any
such resale of exchange notes and any commissions or concessions received by any
such persons may be deemed to be underwriting  compensation under the Securities
Act. The letter of transmittal states that by acknowledging that it will deliver
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act.


                                       85
<PAGE>

      For a period of 180 days after the exchange offer has been  completed,  we
will promptly send  additional  copies of this  prospectus  and any amendment or
supplement to this prospectus to any  broker-dealer  that requests such document
in the letter of transmittal. We have agreed to pay certain expenses incident to
the exchange  offer,  other than  commission  or  concessions  of any brokers or
dealers,  and will  indemnify the holders of the exchange  notes  (including any
broker-dealers)  against certain  liabilities,  including  liabilities under the
Securities Act.

      By acceptance of this exchange  offer,  each  broker-dealer  that receives
exchange  notes for its own account  pursuant to the exchange offer agrees that,
upon receipt of notice from Energy  Holdings of the happening of any event which
makes any statement in the prospectus untrue in any material respect or requires
the making of any  changes  in the  prospectus  in order to make the  statements
therein  not  misleading  (which  notice we agree to  deliver  promptly  to such
broker-dealer),  such  broker-dealer will suspend use of the prospectus until we
have amended or  supplemented  the  prospectus to correct such  misstatement  or
omission and have furnished copies of the amended or supplemental  prospectus to
such broker-dealer.

                                 LEGAL OPINIONS

      The validity of the notes will be passed upon for Energy Holdings by James
T.  Foran,  Esquire,  Associate  General  Counsel of PSEG or R.  Edwin  Selover,
Esquire,  Vice President and General Counsel of PSEG. The information  contained
in Federal Income Tax Considerations has been passed upon for Energy Holdings by
Mr. Foran.

                                     EXPERTS

      The  consolidated  balance sheets as of December 31, 1999 and 1998 and the
related consolidated statements of income,  stockholder's equity, and cash flows
for each of the three years in the period ended  December  31, 1999  included in
this  prospectus  have  been  audited  by  Deloitte  & Touche  LLP,  independent
auditors,  as stated in their report appearing herein,  which relies on the work
of other  auditors,  and are  included in reliance  upon the report of such firm
given upon their authority as experts in accounting and auditing.


                                       86
<PAGE>

                          INDEPENDENT AUDITORS' REPORT


To the Board of Directors of
   PSEG Energy Holdings Inc.:

      We have  audited  the  accompanying  consolidated  balance  sheets of PSEG
Energy  Holdings Inc. and its  subsidiaries  (the  "Company") as of December 31,
1999 and 1998 and the related consolidated  statements of income,  stockholder's
equity and cash flows for each of the three years in the period  ended  December
31, 1999. These consolidated  financial statements are the responsibility of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
consolidated  financial  statements  based on our  audits.  We did not audit the
financial  statements of GWF Power  Systems,  L.P. and Hanford  L.P.,  which are
accounted for by use of the equity method.  The Company's  equity  investment of
$115,431,000  and  $103,583,000 in GWF Power Systems,  L.P.'s and Hanford L.P.'s
net assets at December  31, 1999 and 1998,  respectively,  and its  $43,605,000,
$38,331,000  and  $35,880,000 in GWF Power Systems L.P.'s and Hanford L.P.'s net
income for the  respective  three years ended  December 31, 1999 are included in
the accompanying consolidated financial statements.  The financial statements of
GWF Power  Systems,  L.P. and Hanford L.P. were audited by other  auditors whose
reports have been furnished to us, and our opinion, insofar as it relates to the
amounts included for such companies, is based soley on the reports of such other
auditors.

      We conducted our audits in accordance  with  generally  accepted  auditing
standards.  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  and the  reports  of  other  auditors  provide  a
reasonable basis for our opinion.

      In our  opinion,  based on our audits and the  reports of other  auditors,
such consolidated financial statements present fairly, in all material respects,
the  financial  position of the Company at December  31, 1999 and 1998,  and the
results of its  operations  and its cash flows for the three years in the period
ended  December  31,  1999 in  conformity  with  generally  accepted  accounting
principles.

Deloitte & Touche LLP

Parsippany, New Jersey
June 14, 2000



                                      F-1
<PAGE>

                           PSEG ENERGY HOLDINGS INC.
                       CONSOLIDATED STATEMENTS OF INCOME
                             (Thousands of Dollars)

<TABLE>
<CAPTION>

                                                   Three Months Ended
                                                         March 31,               Years Ended December 31,
                                                  ---------------------     ----------------------------------
                                                    2000         1999         1999         1998         1997
                                                  --------     --------     --------     --------     --------
                                                        (unaudited)
REVENUES
  Income from joint ventures
<S>                                               <C>          <C>          <C>          <C>          <C>
    and partnerships .......................      $ 29,885     $ 27,315     $134,635     $132,257     $107,566
  Energy service revenues ..................        72,193       20,788      196,143       73,954       21,071
  Energy supply revenues ...................        37,056       29,963       85,782       81,905       77,485
  Income from capital leases ...............        36,214       25,039      111,798       75,801       65,443
  Net investment gains .....................        30,586       19,376       60,548       41,858       46,331
  Other revenues ...........................         9,273        6,192       28,867       34,509       23,694
                                                  --------     --------     --------     --------     --------
    Total Revenues .........................       215,207      128,673      617,773      440,284      341,590
                                                  --------     --------     --------     --------     --------
OPERATING EXPENSES

  Cost of energy sales .....................        33,724       29,009       81,659       80,758       76,374
  Restructure costs ........................         6,604           --           --           --           --
  Operation and maintenance ................        92,817       43,388      291,376      164,367      115,917
  Write-down of investments ................            --           --       43,971           --           --
  Depreciation and amortization ............         3,041        1,435        7,462        5,414        4,171
                                                  --------     --------     --------     --------     --------
    Total Operating Expenses ...............       136,186       73,832      424,468      250,539      196,462
                                                  --------     --------     --------     --------     --------

OPERATING INCOME ...........................        79,021       54,841      193,305      189,745      145,128
OTHER INCOME (LOSS) ........................         1,061        3,639       77,404       (1,818)         685
INTEREST EXPENSE-NET .......................        35,071       19,277       94,685       90,367       72,363
                                                  --------     --------     --------     --------     --------
INCOME BEFORE INCOME TAXES .................        45,011       39,203      176,024       97,560       73,450
                                                  --------     --------     --------     --------     --------
INCOME TAXES
  Current ..................................         3,006       14,062       11,176       (1,480)    (103,636)
  Deferred .................................        11,321         (142)      58,735       32,760      130,540
  Investment and energy tax
    credits-net ............................          (128)        (123)        (969)      (1,120)      (1,088)
                                                  --------     --------     --------     --------     --------
    Total Income Taxes .....................        14,199       13,797       68,942       30,160       25,816
MINORITY INTERESTS .........................          (220)         (67)        (917)      (1,804)        (239)
                                                  --------     --------     --------     --------     --------
NET INCOME .................................        31,032       25,473      107,999       69,204       47,873
  Preferred Stock Dividends ................         6,252        6,252       25,007       17,478          598
                                                  --------     --------     --------     --------     --------
EARNINGS AVAILABLE TO
  COMMON STOCKHOLDER .......................      $ 24,780     $ 19,221     $ 82,992     $ 51,726    $  47,275
                                                  ========     ========     ========     ========    =========

</TABLE>


See Notes to Consolidated Financial Statements.


                                      F-2
<PAGE>

                            PSEG ENERGY HOLDINGS INC.
                           CONSOLIDATED BALANCE SHEETS
                                     ASSETS
                             (Thousands of Dollars)

<TABLE>
<CAPTION>
                                                                                          December 31,
                                                                  March 31,        ---------------------------
                                                                    2000              1999             1998
                                                                 ----------        ----------       ----------
                                                                (unaudited)

CURRENT ASSETS
<S>                                                               <C>               <C>                <C>
  Cash and temporary cash investments .....................       $  21,580         $  43,306          $ 8,962
  Accounts Receivable:
    Trade (less allowance for doubtful accounts of
      $5,281, $5,228 and $6,091 respectively) .............         146,175           105,542           47,923
    Other .................................................          37,437            27,222           13,094
    Affiliated companies ..................................           6,628             4,099            7,557
  Assets held for sale ....................................          35,815            35,700               --
  Notes receivable ........................................          14,408            11,845               --
  Inventory ...............................................           1,434             2,036            1,656
  Restricted cash .........................................           5,198             4,910            3,756
  Prepayments .............................................           4,747             5,321            8,554
                                                                 ----------        ----------       ----------
      Total Current Assets ................................         273,422           239,981           91,502
                                                                 ----------        ----------       ----------

PROPERTY AND EQUIPMENT
  Real estate (net of valuation allowances of
    $21,547, $21,547 and $10,318, respectively) ...........          89,082            34,261           53,844
  Property and equipment ..................................          52,295            44,726           25,753
  Accumulated depreciation and amortization ...............         (42,130)          (33,125)         (20,459)
                                                                 ----------        ----------       ----------
      Property and Equipment - net ........................          99,247            45,862           59,138
                                                                 ----------        ----------       ----------

INVESTMENTS
  Capital leases - net ....................................       1,827,350         1,758,714        1,388,871
  Corporate joint ventures ................................       1,492,797         1,427,997          874,286
  Partnership interests ...................................         484,866           493,201          602,710
  Other investments .......................................          68,564            73,343           97,948
                                                                 ----------        ----------       ----------
      Total Investments ...................................       3,873,577         3,753,255        2,963,815
                                                                 ----------        ----------       ----------
OTHER ASSETS ..............................................          78,088            75,287           54,075
                                                                 ----------        ----------       ----------
      TOTAL ASSETS ........................................      $4,324,334        $4,114,385       $3,168,530
                                                                 ==========        ==========       ==========
</TABLE>


See Notes to Consolidated Financial Statements.


                                      F-3
<PAGE>


                            PSEG ENERGY HOLDINGS INC.
                           CONSOLIDATED BALANCE SHEETS
                      LIABILITIES AND STOCKHOLDER'S EQUITY
                             (Thousands of Dollars)

<TABLE>
<CAPTION>
                                                                                          December 31,
                                                                  March 31,        ---------------------------
                                                                    2000              1999             1998
                                                                 ----------        ----------       ----------
                                                                (unaudited)
CURRENT LIABILITIES
Accounts Payable:
<S>                                                               <C>               <C>              <C>
    Trade ................................................        $  47,321         $  41,289        $  26,879
    Interest .............................................           49,256            20,320            8,497
    Other ................................................           42,503            43,051           41,546
  Notes payable ..........................................          130,419           351,000          206,000
  Other current liabilities ..............................           12,634            10,925            3,886
  Current portion of long-term debt ......................          174,748           174,856          317,725
                                                                 ----------        ----------       ----------
      Total Current Liabilities ..........................          456,881           641,441          604,533
                                                                 ----------        ----------       ----------
LONG-TERM DEBT ...........................................        1,500,584         1,175,332          443,948
                                                                 ----------        ----------       ----------
DEFFERRED TAXES AND OTHER LIABILITIES
  Deferred income taxes ..................................          902,729           887,463          846,302
  Deferred investment and energy tax credits .............            8,935             8,935            9,394
  Other long-term liabilities ............................           28,824            24,941           20,686
                                                                 ----------        ----------       ----------
      Total Deferred Taxes and Other Liabilities .........          940,488           921,339          876,382
                                                                 ----------        ----------       ----------

COMMITMENTS AND CONTINGENCIES ............................               --                --               --

MINORITY INTERESTS .......................................            1,189             1,408            1,338
                                                                 ----------        ----------       ----------
STOCKHOLDER'S EQUITY
  Common stock ...........................................              100               100              100
  Preferred stock ........................................          509,200           509,200          509,200
  Additional paid-in capital .............................          789,608           789,608          579,070
  Retained earnings ......................................          298,819           276,182          196,974
  Accumulated other comprehensive loss ...................         (172,535)         (200,225)         (43,015)
                                                                 ----------        ----------       ----------
      Total Stockholder's Equity .........................        1,425,192         1,374,865         1,242,329
                                                                 ----------        ----------       ----------
TOTAL LIABILITIES AND
  STOCKHOLDER'S EQUITY ...................................       $4,324,334        $4,114,385       $3,168,530
                                                                 ==========        ==========       ==========
</TABLE>


See Notes to Consolidated Financial Statements.


                                      F-4
<PAGE>

                            PSEG ENERGY HOLDINGS INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Thousands of Dollars)

<TABLE>
<CAPTION>
                                              Three Months Ended March 31,     Years Ended December 31,
                                              ----------------------------  ---------------------------------
                                                   2000         1999         1999        1998          1997
                                                  -------      -------      -------     -------       -------
                                                (unaudited)

<S>                                             <C>          <C>          <C>          <C>          <C>

CASH FLOWS FROM OPERATING
  ACTIVITIES
  Net income ................................   $  31,032    $  25,473    $ 107,999    $  69,204    $  47,873
                                                ---------    ---------    ---------    ---------    ---------
  Adjustments to reconcile net income to
   net cash provided by operating activities:
    Depreciation and amortization ...........       6,273        3,627       18,340       28,106       13,782
    Deferred income taxes (other than
      leases) ...............................       8,052        7,912      (31,717)      (9,588)       6,204
    Income from leasing activities ..........     (18,711)     (13,943)       6,420      (19,726)      68,061
    Investment distributions ................      12,494        3,112      134,079       88,592       82,028
    Equity income from partnerships .........     (10,568)     (10,067)     (53,084)     (41,410)     (33,290)
    Net gains on investments ................     (30,542)     (17,937)     (72,520)     (44,867)     (29,861)
    Restructure costs .......................       6,604           --           --           --           --
    Other ...................................       2,299       (3,967)      (2,769)       1,851         (587)
    (Increase) decrease in accounts
      receivable ............................     (79,408)     (15,149)     (33,114)      16,064      (27,107)
    (Increase) decrease in prepayments ......      (1,049)         880        4,830         (414)        (611)
    Decrease (increase) in inventory ........         602        1,656         (380)      (1,656)          --
    Increase (decrease) in accounts
      payable ...............................      36,108       21,540       (9,801)     (36,202)       4,571
    Increase (decrease) in taxes payable ....       1,311       (1,020)       8,748        1,427         (438)
    Increase (decrease) in interest payable .      28,936       13,580       15,448       (1,275)       5,314
    (Decrease) increase in other current
      liabilities ...........................          --           --          (83)       2,674        1,118
                                                ---------    ---------    ---------    ---------    ---------
  Net Cash (Used In) Provided By Operating
    Activities ..............................      (6,567)      15,697       92,396       52,780      137,057
                                                ---------    ---------    ---------    ---------    ---------
CASH FLOWS FROM INVESTING ACTIVITIES
    Increase in partnerships and joint
      ventures ..............................       3,382      (23,995)    (725,352)     (89,242)    (844,443)
    Investments in capital leases ...........     (74,350)      (1,043)    (378,390)    (253,417)    (156,006)
    Proceeds from sales of capital leases ...       8,456           --      125,512       71,253       22,883
    Additions to property and equipment .....      (2,583)      (1,130)      (9,472)      (9,865)      (6,166)
    Proceeds from sales of real estate and
      equity investments ....................        (509)      (1,605)      71,431      145,449          269
    Additions to deferred project costs .....         638       (2,179)      (6,604)     (17,401)     (12,364)
    Acquisitions, net of  cash acquired .....     (13,052)      (9,043)     (48,546)      (8,056)          --
    Return of capital from partnerships .....          --           --       11,480        5,183          325
    Reductions of (additions to) other assets       3,207        9,559         (431)      (4,037)      (2,922)
                                                ---------    ---------    ---------    ---------    ---------
  Net Cash Used In Investing Activities .....     (74,811)     (29,436)    (960,372)    (160,133)    (998,424)
                                                ---------    ---------    ---------    ---------    ---------
CASH FLOWS FROM FINANCING ACTIVITIES
    Proceeds from additional paid-in capital           --           --      199,700           --           --
    Proceeds from sale of preferred stock ...          --           --           --      509,200       75,000
    Redemption of preferred stock ...........          --           --           --      (75,000)          --
    Dividends paid ..........................      (8,395)      (6,252)     (28,791)     (18,076)          --
    Repayment of borrowings .................    (230,080)    (228,000)    (249,826)    (310,991)    (124,500)
    Proceeds from borrowings ................     300,000      252,000      992,432           --      774,013
    Other ...................................      (1,873)      (1,260)     (11,195)          --       (1,681)
                                                ---------    ---------    ---------    ---------    ---------
  Net Cash Provided By Financing Activities .      59,652       16,488      902,320      105,133      722,832
                                                ---------    ---------    ---------    ---------    ---------
Net (Decrease) Increase In Cash And
  Temporary Cash Investments ................     (21,726)       2,749       34,344       (2,220)    (138,535)
                                                ---------    ---------    ---------    ---------    ---------
Cash And Temporary Cash Investments,
  Beginning Of Year .........................      43,306        8,962        8,962       11,182      149,717
                                                ---------    ---------    ---------    ---------    ---------
Cash And Temporary Cash Investments,
  End Of Year ...............................   $  21,580    $  11,711    $  43,306    $   8,962    $  11,182
                                                =========    =========    =========    =========    =========
SUPPLEMENTAL DISCLOSURE OF
 CASH FLOW INFORMATION
Cash paid (received) for:
  Interest expense ..........................   $     (90)   $   5,101    $  64,414    $  83,334    $  59,206
                                                =========    =========    =========    =========    =========
  Income taxes ..............................   $      88    $   4,628    $   9,136    $   7,396    $(129,310)
                                                =========    =========    =========    =========    =========
NON-CASH INVESTING AND FINANCING
  ACTIVITIES
Issuance of PSEG stock for companies
  acquired ..................................   $      --    $      --    $  10,871    $      --    $      --
Debt assumed with companies acquired ........   $   9,304    $     880    $  11,475    $      --    $      --

</TABLE>


See Notes to Consolidated Financial Statements.


                                      F-5
<PAGE>

                            PSEG ENERGY HOLDINGS INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
                             (Thousands of Dollars)
<TABLE>
<CAPTION>
                                                                                                   Accumulated
                                                                       Additional                     Other
                                            Common      Preferred       Paid-in       Retained    Comprehensive
                                             Stock        Stock         Capital       Earnings    Income (Loss)      Total
                                           --------    -----------    -----------   -----------    -----------    -----------
<S>                                        <C>         <C>            <C>           <C>            <C>            <C>

Balance as of January 1, 1997 ..........   $    100    $        --    $   579,070   $    97,973    $        --    $   677,143
                                           --------    -----------    -----------   -----------    -----------    -----------
  Net income ...........................         --             --             --        47,873             --         47,873
  Other comprehensive income (loss),
    net of tax:
    Foreign currency translation
      adjustment (net of tax
      of $1,613) .......................         --             --             --            --        (14,519)       (14,519)
                                           --------    -----------    -----------   -----------    -----------    -----------
  Other comprehensive income (loss) ....         --             --             --        47,873        (14,519)        33,354
                                           --------    -----------    -----------   -----------    -----------    -----------
  Issuance of cumulative
    preferred stock ....................         --         75,000             --            --             --         75,000
  Preferred stock dividends ............         --             --             --          (598)            --           (598)
                                           --------    -----------    -----------   -----------    -----------    -----------
Balance as of December 31, 1997 ........   $    100    $    75,000    $   579,070   $   145,248    $   (14,519)   $   784,899
                                           --------    -----------    -----------   -----------    -----------    -----------
  Net income ...........................         --             --             --        69,204             --         69,204
  Other comprehensive income (loss),
    net of tax:
    Foreign currency translation
      adjustment (net of tax
      of $3,166) .......................         --             --             --            --        (28,496)       (28,496)
                                           --------    -----------    -----------   -----------    -----------    -----------
  Other comprehensive income (loss) ....         --             --             --        69,204        (28,496)        40,708
                                           --------    -----------    -----------   -----------    -----------    -----------
  Issuance of cumulative
    preferred stock ....................         --        509,200             --            --             --        509,200
  Redemption of preferred stock ........         --        (75,000)            --            --             --        (75,000)
  Preferred stock dividends ............         --             --             --       (17,478)            --        (17,478)
                                           --------    -----------    -----------   -----------    -----------    -----------
Balance as of December 31, 1998 ........        100        509,200        579,070       196,974        (43,015)     1,242,329
                                           --------    -----------    -----------   -----------    -----------    -----------
  Net income ...........................         --             --             --       107,999             --        107,999
  Other comprehensive income (loss),
    net of tax:
    Foreign currency translation
      adjustment (net of tax
      of $17,449) ......................         --             --             --            --       (157,038)      (157,038)
    Net unrealized loss on marketable
      securities(net of tax of $93) ....       (172)          (172)
                                           --------    -----------    -----------   -----------    -----------    -----------
  Other comprehensive income (loss) ....         --             --             --       107,999       (157,210)       (49,211)
                                           --------    -----------    -----------   -----------    -----------    -----------
  Additional paid-in capital ...........         --             --        210,538            --             --        210,538
  Preferred stock dividends ............    (25,007)       (25,007)
  Common stock dividends ...............         --             --             --        (3,784)            --         (3,784)
                                           --------    -----------    -----------   -----------    -----------    -----------
Balance as of December 31, 1999 ........        100        509,200        789,608       276,182       (200,225)     1,374,865
                                           --------    -----------    -----------   -----------    -----------    -----------
  Net income ...........................         --             --             --        31,032             --         31,032
  Other comprehensive income (loss),
    net of tax:
    Foreign currency translation
      adjustment (net of tax
      of $3,093) .......................         --             --             --            --         27,835         27,835
    Net unrealized loss on marketable
      securities(net of tax of $78) ....       (145)          (145)
                                           --------    -----------    -----------   -----------    -----------    -----------
  Other comprehensive income (loss) ....         --             --             --        31,032         27,690         58,722
                                           --------    -----------    -----------   -----------    -----------    -----------
  Additional paid-in capital ...........         --             --             --            --             --             --
  Preferred stock dividends ............     (6,252)        (6,252)
  Common stock dividends ...............         --             --             --        (2,143)            --         (2,143)
                                           --------    -----------    -----------   -----------    -----------    -----------
Balance as of March 31, 2000 (unaudited)   $    100    $   509,200    $   789,608   $   298,819    $  (172,535)   $ 1,425,192
                                           ========    ===========    ===========   ===========    ===========    ===========

</TABLE>


See Notes to Consolidated Financial Statements.


                                      F-6
<PAGE>

                           PSEG ENERGY HOLDINGS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1. ORGANIZATION

      PSEG Energy Holdings Inc. (Energy Holdings), a wholly-owned  subsidiary of
Public  Service  Enterprise  Group  Incorporated  (PSEG),  is the parent of PSEG
Global Inc.  (Global),  which invests and  participates  in the  development and
operation  of projects  in the  generation  and  distribution  of energy,  which
include  cogeneration and independent  power production  facilities and electric
distribution companies;  PSEG Resources Inc. (Resources),  which primarily makes
investments  in  assets  that can  provide  funds for  future  growth as well as
provide incremental earnings for Energy Holdings;  PSEG Energy Technologies Inc.
(Energy Technologies),  which provides energy-related services to industrial and
commercial  customers;   Enterprise  Group  Development  Corporation  (EGDC),  a
non-residential   real  estate  property  management   business;   PSEG  Capital
Corporation  (PSEG  Capital),  which  serves as a  financing  vehicle for Energy
Holdings' subsidiaries,  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 our financing vehicle on the basis
of our consolidated  financial  position.  EGDC has been conducting a controlled
exit from the real estate business since 1993.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      Consolidation

      The  consolidated  financial  statements  include  the  accounts of Energy
Holdings and all direct and indirect subsidiaries in which Energy Holdings has a
controlling  interest.  All significant  intercompany  accounts and transactions
have been eliminated in consolidation.

      Cash and Temporary Cash Investments

      Energy Holdings classifies cash and investments,  with maturities of three
months or less, as cash and temporary cash investments.

      Property and Equipment


      The estimated  useful lives for purposes of computing  depreciation,  on a
straight-line  basis are from 3 to 12 years for  furniture  and equipment and 20
years for buildings.  Equipment used by Public  Service  Conservation  Resources
Corporation  (PSCRC),  a  wholly-owned  subsidiary  of Energy  Technologies,  is
depreciated  on a straight  line basis  over 10 to 15 years and is  included  in
Operations and  Maintenance  expense in the  Consolidated  Statements of Income.
Maintenance and repairs are expensed when incurred.


      Impairment of long-lived assets


      Statement  of  Financial  Accounting  Standards  No.  121 (SFAS No.  121),
Accounting for the Impairment of Long-Lived  Assets and for Long-Lived Assets to
be Disposed Of, requires that long-lived assets and certain intangible assets be
reviewed for impairment  whenever  events or changes in  circumstances  indicate
that the carrying  amount of an asset may not be  recoverable.  If  undiscounted
expected  future cash flows are less than the  carrying  value of the asset,  an
impairment loss is to be recognized based on the fair value of the asset.


      The application of SFAS No. 121 relates primarily to long-lived generation
assets of our  affiliates  from which  equity in earnings is  recognized  in our
consolidated  statements of income.  Should an impairment  loss be recognized at
one of our  affiliates,  our  prorata  share of the  loss  after  taxes  will be
reflected in our consolidated  statements of income.  For the three months ended
March 31, 2000  (unaudited) and the three years ended December 31, 1999, no such
impairment  losses  were  recognized   against  the  long-lived  assets  of  our
affiliates.

      Capital Leases

      Resources leases property and equipment,  through leveraged  leases,  with
terms ranging from 8 to 45 years.  The lease  investments  are recorded on a net
basis by summing the lease rents  receivable  over the lease term and adding the
residual  value,  if any,  less any  unearned  income and  deferred  taxes to be
recognized  over  the  lease  term.   Leveraged   leases  are  recorded  net  of
non-recourse debt.


                                      F-7
<PAGE>

                           PSEG ENERGY HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


      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.  Initial  direct costs are deferred and  amortized  using the interest
method over the lease period.

      Investments in Corporate Joint Ventures and Partnerships

      Global and  Resources  currently  own  interests  of 50% or less in active
joint ventures and  partnerships.  These investments are accounted for under the
equity method of accounting  where  significant  influence over joint venture or
partnership  operating and  management  decisions  exist.  The pro-rata share of
income is recorded in the Income from joint  ventures and  partnerships  line of
the income statement with a corresponding  increase in the investment  amount on
the consolidated  balance sheets.  Cash distributions are recorded as reductions
to the investment balance on the consolidated balance sheets. For investments in
which  significant  influence  does not exist,  the cost method of accounting is
applied.   Interest  is  capitalized  on  investments  during  construction  and
development of qualifying assets. The capitalized interest is amortized over the
operating  lives of the  projects  upon the date of  commercial  operation.  The
amount of  interest  capitalized  was  $4,017,000,  $8,484,000,  $1,181,000  and
$5,065,000 for the three months ended March 31, 2000  (unaudited)  and the years
ended December 31, 1999, 1998 and 1997, respectively.

      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 the Company's invested liquid position
in such  securities.  Changes in fair value are recorded in Net investment gains
in the Consolidated Statements of Income.


      Income Taxes


      Energy Holdings and its domestic  subsidiaries file a consolidated Federal
income tax return with PSEG.  Energy Holdings and its subsidiaries  have entered
into tax allocation  agreements with PSEG which provide that Energy Holdings and
its  subsidiaries  will record their tax  liabilities as though they were filing
separate returns and will record tax benefits to the extent that PSEG is able to
receive  those  benefits.  Deferred  income taxes are provided for the temporary
differences between book and taxable income, resulting primarily from the use of
revenue recognition under the equity method of accounting for book purposes,  as
well as the use of accelerated depreciation for tax purposes and the recognition
of fair value accounting for book purposes. Energy Holdings defers and amortizes
investment and energy tax credits over the lives of the related  properties.  We
are pursuing a permanent  reinvestment  strategy  with regard to foreign  income
related to  investments  made by Global.  As such,  taxes on foreign  income are
accrued at a significantly  reduced rate than the Federal statutory rate of 35%.
Should the foreign  income be remitted as dividends,  the company may be subject
to additional United States taxes, net of allowable foreign tax credits.

      Public  Service  Electric and Gas Company,  a  wholly-owned  subsidiary of
PSEG,  is an  operating  public  utility  providing  electric and gas service in
certain areas in the State of New Jersey and is subject to regulation by the New
Jersey Board of Public Utilities  (BPU). In a case affecting  another utility in
which Public Service  Electric and Gas Company was not a party, the BPU approved
an order treating certain consolidated tax savings generated after June 30, 1990
by that  utility's  nonutility  affiliates as a reduction of that utility's rate
base. In 1992, the BPU issued an order resolving Public Service Electric and Gas
Company's  1992 base rate  proceeding  without  separate  quantification  of the
consolidated  tax issue.  Such order did not  provide  final  resolution  of the
consolidated  tax issue for any subsequent  base rate filing.  The issue of PSEG
sharing the benefits of  consolidated  tax savings with Public Service  Electric
and Gas Company or its  ratepayers was addressed by the BPU in its July 28, 1995
letter which informed Public Service  Electric and Gas Company that the issue of
consolidated  tax savings  can be  discussed  in the  context of Public  Service
Electric and Gas Company's  next base rate case or plan for


                                      F-8
<PAGE>

                           PSEG ENERGY HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


an alternate  form of  regulation.  Energy  Holdings is not able to predict what
action,  if any, the BPU may take  concerning  consolidation  of tax benefits in
future  rate  proceedings.   An  unfavorable  resolution  may  adversely  impact
Resources' investment strategy.

      Use of Derivative Financial Instruments

      Energy Holdings' market risk sensitive instruments and positions relate to
potential  losses  arising  from adverse  changes in interest  rates and foreign
currency exchange rates. Energy Holdings' policy is to use derivatives to manage
these risks consistent with its business plans and prudent practices.

      Gains and losses on hedges of existing  assets or liabilities are included
in the  carrying  amounts of those  assets and  liabilities  and are  ultimately
recognized in income as part of those carrying amounts. Gains and losses related
to qualifying  hedges of firm  commitments are deferred and recognized in income
when  the  hedged  transaction  occurs.  (See  Notes 8.  Long-Term  Debt and 13.
Financial Instruments and Risk Management for additional information.)

      Foreign Currency

      Energy Holdings' financial statements are prepared using the United States
Dollar as the  reporting  currency.  For  foreign  operations  whose  functional
currency  is deemed  to be the local  (foreign)  currency,  asset and  liability
accounts are translated into United States Dollars at current exchange rates and
revenues and expenses are translated at average exchange rates prevailing during
the period.  Translation gains and losses (net of applicable deferred taxes) are
not included in determining  net income but are reported in other  comprehensive
income (See the Consolidated Statements of Stockholder's Equity).

      Gains and losses on transactions  denominated in a currency other than the
functional currency are included in the results of operations as incurred. Gains
and  losses on foreign  currency  transactions,  which  operate as a hedge of an
identifiable  foreign  currency  commitment,  a  hedge  of  a  foreign  currency
investment  position,  or when the  entities  involved in the  transactions  are
consolidated  or  accounted  for by the  equity  method  and  settlement  of the
transaction  is not  expected in the  foreseeable  future are  included in other
comprehensive income.

      Net Investment Gains or Losses


      Resources holds a beneficial  partnership interest in two leveraged buyout
funds which hold  publicly  traded  securities.  Investment  gains or losses are
recognized  in income as the value of securities  in the funds  fluctuate.  When
securities are sold from the funds and cash is distributed, such gains or losses
become realized. The investments in leveraged buyout funds represent investments
in marketable  securities  that are  accounted for using fair value  accounting.
Resources  also  recognizes  investment  gains or losses  when  leveraged  lease
interests  are sold at an amount  either  greater or less than the book carrying
amount,  respectively.  Losses are also recognized if management determines that
there has been  immediate  decline in the market value of a property  subject to
leveraged  lease or a change in the  assumption of the residual  value  expected
upon lease  termination.  Increases in market  value of leased  property are not
recognized  in the  financial  statements.  Investment  gains or losses are also
recognized  upon sale of partnership  interests at amounts  greater than or less
than the carrying value, respectively.


      Energy Service Revenues

      Energy  Technologies'  revenues  from  fixed  price  and  other  long-term
construction contracts are recognized on the percentage-of-completion  method of
accounting  determined by the ratio of costs incurred to management's  estimates
of final total  anticipated  costs.  Revenues  from  cost-plus-fee  and time and
material  contracts  are  recognized on the basis of costs  incurred  during the
period plus the fee earned, measured by the cost-to-cost method and are included
in Energy service  revenues in the


                                      F-9
<PAGE>

                           PSEG ENERGY HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


consolidated  statements of income.  Contract costs include all direct labor and
benefits, material purchased for or installed in the project,  subcontract costs
and allocations of indirect  construction costs. As contracts extend over one or
more years, revisions in cost and profit estimates during the course of the work
are  reflected  in the  accounting  period in which the facts that  require  the
revisions become known.  Amounts representing  contract change orders,  customer
approved  claims or other items are  included  in revenue  only when they can be
reasonably  estimated and  realization is probable.  When it is indicated that a
contract will result in an ultimate  loss,  the entire loss is recognized in the
financial statements during the period in which such loss becomes known.

      Energy Supply

      Energy  Technologies  records  revenues  from the sale of natural  gas and
electricity  to customers.  These sales are recorded in energy supply revenue in
the  consolidated  statements of income and related supply costs are recorded in
cost of energy sales.  Energy  Technologies may receive different  quantities of
gas and electricity from suppliers than the volumes sold to its customers.  This
results in imbalance  receivables and payables to the local distribution company
which  delivers the gas and  electricity  to the customer.  Such  imbalances are
valued  at the  lower  of cost  or  market  and  accounted  for on the  first-in
first-out  basis and are  included  in  accounts  receivable-other  or  accounts
payable-other on the balance sheets.

      Energy  Technologies  enters into long-term  fixed price natural gas sales
contracts.   Energy  Technologies  also  enters  into  long-term  transportation
agreements as required to serve such contracts. The costs of transportation vary
based upon  seasonality.  In order to properly  match  revenues  with  expenses,
Energy  Technologies  records  transportation  costs  related to the fixed price
contracts based on average unit  transportation  costs. (See Note 18. Subsequent
Events for a discussion of Energy  Technologies'  change in strategy  related to
the gas and electric commodity business.)

Deferred Project Costs

      Global  capitalizes  all direct  external and  incremental  internal costs
related to project development once a project reaches certain milestones.  These
milestones are used to assess the  probability of success for the project.  Once
the project reaches  financial  closing,  Global  transfers the deferred project
balance 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 on the  consolidated
balance sheets are shown in Other Assets.

      Deferred Debt Issuance Costs

      Deferred  debt issuance  costs are amortized  over the term of the related
indebtedness using the interest method.

      Use of Estimates

      The process of preparing financial statements in conformity with generally
accepted  accounting  principles  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.


                                      F-10
<PAGE>

                           PSEG ENERGY HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


NOTE 3. CAPITAL LEASES

      Resources' net investment in leveraged leases is composed of the following
elements:

<TABLE>
<CAPTION>
                                                                                       December 31,
                                                         March 31,           ---------------------------------
                                                           2000                  1999                1998
                                                       --------------        -------------      --------------
                                                         (unaudited)

<S>                                                    <C>                  <C>                 <C>
Lease rents receivable .............................   $2,744,565,000       $2,643,447,000      $1,924,212,000
Estimated residual value of leased assets ..........      634,760,000          653,596,000         658,066,000
                                                       --------------        -------------      --------------
                                                        3,379,325,000        3,297,043,000       2,582,278,000
Less - unearned and deferred income ................    1,558,580,000        1,538,329,000       1,193,407,000
                                                       --------------        -------------      --------------
Investment in leveraged leases .....................    1,820,745,000        1,758,714,000       1,388,871,000
Less - deferred taxes arising from leveraged
  leases ...........................................      854,553,000          843,810,000         731,109,000
                                                       --------------        -------------      --------------
Net investment in leveraged leases .................   $  966,192,000        $ 914,904,000      $  657,762,000
                                                       ==============        =============      ==============
</TABLE>

      Resources' pre-tax income and income tax effects related to investments in
leveraged leases are as follows:

<TABLE>
<CAPTION>
                                    Three Months Ended
                                        March 31,
                                  ---------------------
                                  2000             1999             1999             1998             1997
                                  ----             ----             ----             ----             ----
                                       (unaudited)

<S>                          <C>              <C>              <C>              <C>              <C>
Pre-tax income ...........   $  36,214,000    $  25,039,000    $ 111,798,000    $  75,801,000    $  65,443,000
                             =============    =============    =============    =============    =============
Income tax effect of
 pretax income ...........   $  12,956,000    $   8,923,000    $  40,852,000    $  27,038,000    $  23,535,000
Amortization of investment
 tax credits .............   $    (128,000)   $    (124,000)   $    (510,000)   $    (850,000)   $    (604,000)
</TABLE>

      Resources' leases property and equipment,  through leveraged leases,  with
terms ranging from 8 to 45 years.  The types of property  placed under leveraged
leases consisted of:

                                        March 31, 2000         December 31,
                                        --------------    ----------------------
                                         (unaudited)        1999          1998
                                                          --------      --------
      Energy-related ................         75%            72%           64%
      Aircraft ......................         11%            11%           18%
      Real Estate ...................          9%            11%           12%
      Commuter rail cars ............          4%             5%            5%
      Industrial ....................          1%             1%            1%

      Resources' initial investment in leveraged leases represents approximately
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 1999,  Resources  negotiated the early  termination of three  leveraged
leases and received cash proceeds of $126,000,000  and recognized a pre-tax gain
of $23,000,000. This was recorded in Net investment gains.

      In 1998,  Resources  restated two  leveraged  lease  investments  due to a
permanent  decline  in the  market  value of  properties  subject  to the master
leases, and accrued lease rents that management  determined were  uncollectible.
As a result of this  restatement,  a  $17,090,000  charge  was  recorded  to Net
investment  gains and a  $9,123,000  charge was  recorded to Income from capital
leases on the Consolidated Statements of Income.


                                      F-11
<PAGE>

                           PSEG ENERGY HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


NOTE 4.  INVESTMENTS IN CORPORATE JOINT VENTURES AND PARTNERSHIPS

      Global

      Global's  investments include domestic  qualifying  facilities (QFs) under
the Public Utility  Regulatory  Policies Act of 1978,  foreign exempt  wholesale
generators  (EWGs)  under the 1992  amendments  to the  Public  Utility  Holding
Company Act of 1935 and foreign utility companies (FUCOs).  Global's investments
are generally  financed  through debt that is  non-recourse to Global and Energy
Holdings.  Global's  investments in QF projects have been  undertaken with other
participants because Global, together with other utility affiliates, may not own
more than 50% of a QF subsequent to its in-service date. Projects involving EWGs
are not restricted to a 50% investment limitation.  Global's share of income and
cash flow distribution  percentages  currently range from 4.78% to 50%. Interest
is earned on loans made to various projects. Such loans earned rates of interest
ranging from 7.5% to 15% during 1999 and 1998.

      In 1999, Global and a partner acquired 90.23% of Chilquinta Energia, S.A.,
a  distribution  company  providing  electric  and gas  service to more than one
million  customers in Chile and Peru.  In January  2000,  Global and its partner
completed  the  purchase  of an  additional  9.75% of the  shares of  Chilquinta
Energia, S.A., increasing their total holdings to 99.98%.  Global's 50% share of
the  acquisition  was  funded  with  approximately  $268,000,000  of equity  and
$160,000,000 of debt that is non-recourse to Global and to us.

      In 1999,  Global and a partner  closed on a tender  offer for  outstanding
publicly  traded  shares of Luz del Sur, a Peruvian  distribution  company.  The
number of shares tendered constitutes 22.5% of the shares of Luz del Sur. At the
time of the  tender,  Global and its  partner  already  owned 37% of Luz del Sur
which  was  acquired  in June  1999 as part  of the  acquisition  of  Chilquinta
Energia,  S.A.  discussed  below.  The tender was offered  exclusively  in Peru.
Global and its partner  also  purchased  an  additional  25% of Luz del Sur upon
closing  of the tender  offer.  Global's  investment  in  connection  with these
transactions was approximately $108,000,000.

      In 1999,  Global  sold its 50%  partnership  interest  in the  Newark  Bay
Cogeneration  Facility,  a 137MW gas-fired  combined-cycle  plant in Newark, New
Jersey.  Global  recognized a pre-tax  gain of  approximately  $69,000,000  as a
result of this transaction. This was recorded in Other income/(loss).


      As part of a comprehensive  review of assets and  development  activities,
Global recognized a $43,971,000 write-down in the third quarter of 1999, related
to equity investments in generation  facilities in California and in development
companies in the Philippines and Thailand.


      In  California,  Global  owns a 50%  equity  interest  in  six  generating
facilities  totaling  130 MWs  known as GWF and Hanford.  The  facilities  began
operations  between  1989 and 1991.  Power is sold to a utility  under a pricing
structure  that  provided  for fixed  rate  energy  prices for the first 10 year
period coupled with capacity  payments over the entire power  purchase  contract
terms which range from 20 to 30 years.  In the 11th year of the  contracts,  the
energy component of the price is based on Short Run Avoided Cost (SRAC) which is
a formula  based  pricing  mechanism  that takes into  account the cost of fuel,
plant  efficiency  and other  factors.  This price is  correlated to market pool
prices on the California power exchange.  The market prices and correspondingly,
the SRAC  prices,  are driven by many  factors  including,  but not  limited to,
demand,  availability of generation supply and cost of the supply. Market prices
are most volatile during the summer when high temperatures cause a higher demand
for power often  increasing the cost. In 1999, as part of a review of all equity
investments,  Global  assessed the carrying value of GWF and Hanford taking into
account the future cash flows  expected from these  investments  after review of
the most  current  SRAC prices  which were  significantly  lower than fixed rate
energy  prices paid in the first 10 years.  Global  determined  that there was a
permanent loss in value of its equity investment and recognized a pre-tax charge
to income of  $31,100,000  in  accordance  with APB 18,  "The  Equity  Method of
Accounting for Investments in Common Stock".


                                      F-12
<PAGE>


                           PSEG ENERGY HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


      Interests  in the two power  development  companies  in  Thailand  and the
Philippines were acquired in 1997 for a total cost of approximately $22,000,000.
The  Asian  financial  crisis,  which  began  in  1997,  significantly  impacted
development  prospects in the region having an impact on the financial condition
of the companies which consistently recognized losses over the reported periods.
In the third quarter of 1999,  management  made a decision to cease providing an
operating and financial commitment to the development ventures. A pre-tax charge
to income of $7,800,000 was recognized to write-off the equity investment in the
development  company in Thailand.  Global sold its investment  later in the year
for $5,000.  A pre-tax  charge to income of $5,000,000  was recognized to reduce
the value of  Global's  equity  investment  in the  development  company  in the
Philippines to the remaining cash and land value of approximately $3,000,000.

      In 1998,  Global  exercised a put option  related to its 50% interest in a
natural gas fired generation station in Colombia and in effect sold its interest
back to the partner for approximately $55,000,000.


      Also in 1998,  Global sold its 50% interest in two  domestic  cogeneration
plants for approximately  $82,000,000.  The net gain on the disposition of these
assets was  approximately  $1,948,000  and is recorded in Other income (loss) in
the Consolidated Statements of Income.


      As of December 31, 1999, Global's portfolio consisted of investments in 36
cogeneration or independent power projects  (including 17 under  construction or
advanced  development)  which range in gross  production  capacities  from 15 to
1,000 megawatts (MWs) of electricity,  and 6 electric distribution companies. As
of December 31, 1999 and 1998,  Global's net investment and share of project MWs
by region were as follows:

                                  1999           MW           1998        MW
                             --------------     -----    --------------   ---
Generation
North America .........      $  208,040,000     1,292    $  185,203,000   367
Latin America .........          90,784,000       502        20,914,000   128
Asia Pacific ..........          89,629,000       161        79,380,000   150
EAMS(1) ...............          86,996,000       832        14,038,000    66
Distribution
Latin America .........       1,159,051,000       N/A       759,954,000   N/A
                             --------------     -----    --------------   ---
Total Investment ......      $1,634,500,000     2,787    $1,059,489,000   711
                             ==============     =====    ==============   ===

----------
(1) Europe, Africa, Middle East and India.

      Investments in net assets of affiliated  companies accounted for under the
equity  method  of  accounting  by  Global   amounted  to   $1,629,237,000   and
$1,053,909,000  at December  31, 1999 and 1998,  respectively.  During the three
years ended December 31, 1999, 1998 and 1997, the amount of dividends from these
investments were $81,794,000, $91,752,000 and $39,591,000,  respectively. Energy
Holdings' after tax share of  undistributed  earnings of affiliates  included in
consolidated  retained earnings was approximately  $31,000,000,  $14,000,000 and
$22,000,000, respectively for the years ended December 31, 1999, 1998 and 1997.


                                      F-13
<PAGE>


                           PSEG ENERGY HOLDINGS, INC.

             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:

<TABLE>
<CAPTION>
                                                            Foreign             Domestic              Total
                                                          -----------         -------------         ----------
                                                                         (Thousands of Dollars)

<S>                                                       <C>                    <C>                <C>
December 31, 1999
Condensed Income Statement Information
Revenue .............................................     $ 1,177,469            $ 423,651          $1,601,120
Gross Profit ........................................         408,280              264,980             673,260
Minority Interest ...................................         (22,808)                 (79)            (22,887)
Net Income ..........................................         110,198              154,705             264,903

Condensed Balance Sheet Information
Assets:
 Current Assets .....................................         509,463              121,934             631,397
 Property, Plant & Equipment ........................       2,494,261              794,385           3,288,646
 Other Assets .......................................       1,529,643               86,990           1,616,633
                                                          -----------            ---------          ----------
Total Assets ........................................       4,533,367            1,003,309           5,536,676

Liabilities:
 Current Liabilities ................................         563,412              114,327             677,739
 Debt* ..............................................         564,333              460,817           1,025,150
 Other Non Current Liabilities ......................         505,917               23,608             529,525
 Minority Interest ..................................         231,990                  490             232,480
                                                          -----------            ---------          ----------
Total Liabilities ...................................       1,865,652              599,242           2,464,894

Equity ..............................................       2,667,715              404,067           3,071,782
                                                          -----------            ---------          ----------
Total Liabilities & Equity ..........................       4,533,367            1,003,309           5,536,676
</TABLE>


                                      F-14
<PAGE>


                           PSEG ENERGY HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


<TABLE>
<CAPTION>
                                                            Foreign             Domestic              Total
                                                          -----------         -------------         ----------
                                                                         (Thousands of Dollars)

<S>                                                       <C>                    <C>                <C>
December 31, 1998
Condensed Income Statement Information
Revenue ...............................................    $1,123,169            $ 441,228          $1,564,397
Gross Profit ..........................................       587,241              276,724             863,965
Minority Interest .....................................        (2,474)                 (55)             (2,529)
Net Income ............................................       173,603              139,199             312,802
Condensed Balance Sheet Information

Assets:
 Current Assets .......................................       333,071              129,428             462,499
 Property, Plant & Equipment ..........................     1,780,266              705,602           2,485,868
 Other Assets .........................................     1,224,915              111,972           1,336,887
                                                           ----------            ---------          ----------
Total Assets ..........................................     3,338,252              947,002           4,285,254
Liabilities:

 Current Liabilities ..................................       440,915               95,483             536,398
 Debt* ................................................       166,329              463,002             629,331
 Other Non Current Liabilities ........................       502,742               30,679             533,421
 Minority Interest ....................................        29,157                  442              29,599
                                                           ----------            ---------          ----------
Total Liabilities .....................................     1,139,143              589,606           1,728,749

Equity ................................................     2,199,109              357,396           2,556,505
                                                           ----------            ---------          ----------
Total Liabilities & Equity ............................     3,338,252              947,002           4,285,254


December 31, 1997
Condensed Income Statement Information
Revenue                                                     $ 572,695            $ 462,042          $1,034,737
Gross Profit                                                  283,459              272,949             556,408
Minority Interest                                              (1,498)                 (39)             (1,537)
Net Income                                                     76,153              127,761             203,914
(*)Debt is non-recourse to Global and Energy Holdings.
</TABLE>

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

      Global's  investments in the following  companies comprised 93% and 97% of
Global's   total   investment   balance  as  of  December  31,  1999  and  1998,
respectively,   and  comprised  95%  of  Global's  total  equity  earnings  from
partnerships/joint ventures for the years ended December 31, 1999 and 1998.


                                      F-15
<PAGE>


                           PSEG ENERGY HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


      Summarized results of operations and financial position and the respective
ownership interests of these companies are presented below:

<TABLE>
<CAPTION>
                                                      %
                                                  Ownership           1999             1998            1997
                                                  ---------        ---------        ---------        ----------
                                                                              (Thousands of Dollars)

<S>                                                   <C>          <C>              <C>               <C>
Investments

FOREIGN
RGE - Brazil (A) ...............................      31%
Condensed Income Statement Information
Revenue ........................................                   $ 432,777        $ 600,752         $ 263,245
Gross Profit ...................................                     147,676          443,626           204,008
Net Income .....................................                      29,057          112,406            48,423

Condensed Balance Sheet Information
Assets:
 Current Assets ................................                      68,328          104,940
 Property, Plant & Equipment ...................                     585,160          815,371
 Other Assets (C) ..............................                     594,793          896,310
                                                                   ---------        ---------
Total Assets ...................................                   1,248,281        1,816,621

Liabilities:
 Current Liabilities ...........................                     120,831          130,667
 Debt (D) ......................................                      86,877           80,254
 Other Non Current Liabilities .................                     291,169          465,848
                                                                   ---------        ---------
Total Liabilities ..............................                     498,877          676,769

Equity .........................................                     749,404        1,139,852
                                                                   ---------        ---------
Total Liabilities & Equity .....................                   1,248,281        1,816,621

EDEN/EDES (Combined) - Argentina (A)                  30%
Condensed Income Statement Information
Revenue ........................................                   $ 258,528        $ 285,018         $ 166,596
Gross Profit ...................................                      71,954           78,036            42,391
Net Income .....................................                      36,702           35,927            15,895

Condensed Balance Sheet Information
Assets:
 Current Assets ................................                     101,531          134,419
 Property, Plant & Equipment ...................                     457,018          431,415
 Other Assets (C) ..............................                     205,548          213,849
                                                                   ---------        ---------
Total Assets ...................................                     764,097          779,683

Liabilities:
 Current Liabilities ...........................                     156,024          168,925
 Other Non Current Liabilities .................                      11,056           10,444
                                                                   ---------        ---------
Total Liabilities ..............................                     167,080          179,369

Equity .........................................                     597,017          600,314
                                                                   ---------        ---------
Total Liabilities & Equity .....................                     764,097          779,683
</TABLE>


                                      F-16
<PAGE>



                           PSEG ENERGY HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

<TABLE>
<CAPTION>
                                                      %
                                                  Ownership           1999             1998            1997
                                                  ---------        ---------        ---------        ----------
                                                                              (Thousands of Dollars)

<S>                                                   <C>          <C>              <C>               <C>
Investments (Continued)

EDELAP - Argentina (A) .........................      30%
Condensed Income Statement Information
Revenue ........................................                   $  98,058        $  95,402            $   --
Gross Profit ...................................                      30,710           21,154                --
Net Income .....................................                      12,529            7,101                --

Condensed Balance Sheet Information
Assets:
 Current Assets ................................                      34,077           28,721
 Property, Plant & Equipment ...................                     339,220          327,283

 Other Assets ..................................                       5,738            3,209

                                                                   ---------        ---------
Total Liabilities & Equity .....................                     379,035          359,213

Liabilities:
 Current Liabilities ...........................                      59,944           64,674
 Debt (D) ......................................                      40,000           20,000
 Other Non Current Liabilities .................                      17,173           12,334
                                                                   ---------        ---------
Total Liabilities ..............................                     117,117           97,008

Equity .........................................                     261,918          262,205
                                                                   ---------        ---------
Total Liabilities & Equity .....................                     379,035          359,213

Parana - Argentina (B) .........................      33%

Condensed Income Statement Information
Revenue ........................................                   $      --        $      --            $   --
Gross Profit ...................................                          --               --                --
Net Income (Loss) ..............................                         (82)              --                --

Condensed Balance Sheet Information
Assets:
 Current Assets ................................                      14,909               --
 Property, Plant & Equipment ...................                      41,324               --

 Other Assets ..................................                       6,278               --

                                                                   ---------        ---------
Total Assets ...................................                      62,511               --

Liabilities:
 Current Liabilities ...........................                       6,027               --

 Debt ..........................................                          --               --

 Other Non Current Liabilities .................                          --               --
                                                                   ---------        ---------
Total Liabilities ..............................                       6,027               --

Equity .........................................                      56,484               --
                                                                   ---------        ---------
Total Liabilities & Equity .....................                      62,511               --
</TABLE>


                                      F-17
<PAGE>



                           PSEG ENERGY HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

<TABLE>
<CAPTION>
                                                      %
                                                  Ownership           1999             1998            1997
                                                  ---------        ---------        ---------        ----------
                                                                              (Thousands of Dollars)

<S>                                                   <C>          <C>              <C>               <C>
Investments (Continued)

Central Termica San Nicolas - Argentina (B) ....      19%

Condensed Income Statement Information
Revenue ........................................                    $128,363         $131,614          $134,942
Gross Profit ...................................                      30,438           37,425            36,059
Minority Interest ..............................                      (1,736)          (1,640)           (1,421)
Net Income (Loss) ..............................                      12,560           11,850            10,417

Condensed Balance Sheet Information
Assets:
 Current Assets ................................                      32,919           33,127
 Property, Plant & Equipment ...................                     134,470          139,547

 Other Assets ..................................                       9,752            9,034

                                                                   ---------        ---------
Total Assets ...................................                     177,141          181,708

Liabilities:
 Current Liabilities ...........................                      60,372           53,980
 Debt (D) ......................................                          --           24,000
 Other Non Current Liabilities .................                       7,691            8,946
 Minority Interest .............................                      12,814           11,078
                                                                   ---------        ---------
Total Liabilities ..............................                      80,877           98,004

Equity .........................................                      96,264           83,704
                                                                   ---------        ---------
Total Liabilities & Equity .....................                     177,141          181,708

POC - Peru (A) (E) (H) .........................      50%
Condensed Income Statement Information
Revenue ........................................                   $   6,562        $      --            $   --
Gross Profit ...................................                       6,562               --                --
Net Income .....................................                       6,029               --                --

Condensed Balance Sheet Information
Assets:
 Current Assets ................................                      12,023               --
 Property, Plant & Equipment ...................                          --               --
 Other Assets (C) ..............................                     202,559               --
                                                                   ---------        ---------
Total Assets ...................................                     214,582               --

Liabilities:
 Current Liabilities ...........................                          --               --

 Debt ..........................................                          --               --

 Other Non Current Liabilities .................                          --               --

Total Liabilities ..............................                          --               --

Equity .........................................                     214,582               --
                                                                   ---------        ---------
Total Liabilities & Equity .....................                     214,582               --
</TABLE>


                                      F-18
<PAGE>

                           PSEG ENERGY HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

<TABLE>
<CAPTION>
                                                      %
                                                  Ownership           1999             1998            1997
                                                  ---------        ---------        ---------        ----------
                                                                              (Thousands of Dollars)

<S>                                                   <C>          <C>              <C>               <C>
Investments (Continued)

Inversiones - Chile (A) (F) (H) ................      50%
Condensed Income Statement Information
Revenue ........................................                   $ 238,040        $      --            $   --
Gross Profit ...................................                     113,371               --                --
Minority Interest ..............................                     (19,795)              --                --
Net Income .....................................                      11,559               --                --

Condensed Balance Sheet Information
Assets:
 Current Assets ................................                     194,877               --
 Property, Plant & Equipment ...................                     740,302               --
 Other Assets (C) ..............................                     370,173               --
                                                                   ---------
Total Assets ...................................                   1,305,352               --

Liabilities:
 Current Liabilities ...........................                     130,787               --
 Debt (D) ......................................                     367,956               --
 Other Non Current Liabilities .................                     149,073               --
 Minority Interest .............................                     199,343               --
                                                                   ---------
Total Liabilities ..............................                     847,159               --

Equity .........................................                     458,193               --
                                                                   ---------
Total Liabilities & Equity .....................                   1,305,352               --

Turboven - Venezuela (B) .......................      50%
Condensed Income Statement Information
Revenue ........................................                   $      --        $      --            $   --
Gross Profit ...................................                          --               --                --
Net Income (Loss) ..............................                          --               --                --

Condensed Balance Sheet Information
Assets:
 Current Assets ................................                      13,061               --
 Property, Plant & Equipment ...................                      64,337               --

 Other Assets ..................................                      24,882               --

                                                                   ---------        ---------
Total Assets ...................................                     102,280               --

Liabilities:

 Current Liabilities ...........................                       7,417               --

 Debt ..........................................                          --               --

 Other Non Current Liabilities .................                      19,886               --
                                                                   ---------        ---------
Total Liabilities ..............................                      27,303               --

Equity .........................................                      74,977               --

                                                                   ---------        ---------
Total Liabilities & Equity .....................                     102,280               --
</TABLE>


                                      F-19
<PAGE>

                           PSEG ENERGY HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

<TABLE>
<CAPTION>
                                                      %
                                                  Ownership           1999             1998            1997
                                                  ---------        ---------        ---------        ----------
                                                                              (Thousands of Dollars)

<S>                                                   <C>          <C>              <C>               <C>
Investments (Continued)

MPC - China (B) ................................      50%
Condensed Income Statement Information
Revenue ........................................                    $ 15,141         $ 10,383           $ 7,912
Gross Profit ...................................                       7,569            7,000             4,996
Minority Interest ..............................                      (1,277)            (834)              (77)
Net Income .....................................                       1,844            6,319             7,999

Condensed Balance Sheet Information
Assets:
 Current Assets ................................                      37,738           31,864
 Property, Plant & Equipment ...................                     132,430           66,650

 Other Assets ..................................                     109,920          102,513

                                                                   ---------        ---------
Total Assets ...................................                     280,088          201,027

Liabilities:
 Current Liabilities ...........................                      22,010           22,669
 Debt (D) ......................................                      69,500           42,075
 Other Non Current Liabilities .................                       9,869            5,170
 Minority Interest .............................                      19,833           18,079
                                                                   ---------        ---------
Total Liabilities ..............................                     121,212           87,993

Equity .........................................                     158,876          113,034
                                                                   ---------        ---------
Total Liabilities & Equity .....................                     280,088          201,027

DOMESTIC
GWF Power Systems Company Inc. (B) .............      50%
Condensed Income Statement Information
Revenue ........................................                     $ 2,023          $ 1,941           $ 1,869
Gross Profit ...................................                       1,593            1,720             1,818
Net Income .....................................                         950            1,026             1,219

Condensed Balance Sheet Information
Assets:
 Current Assets ................................                         980              518
 Property, Plant & Equipment ...................                          --              261

 Other Assets ..................................                      15,132           17,981

                                                                   ---------        ---------
Total Assets ...................................                      16,112           18,760

Liabilities:
 Current Liabilities ...........................                         594              690
 Other Non Current Liabilities .................                       3,958            4,109
                                                                   ---------        ---------
Total Liabilities ..............................                       4,552            4,799

Equity .........................................                      11,560           13,961
                                                                   ---------        ---------
Total Liabilities & Equity .....................                      16,112           18,760
</TABLE>


                                      F-20
<PAGE>

                           PSEG ENERGY HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

<TABLE>
<CAPTION>
                                                      %
                                                  Ownership           1999             1998            1997
                                                  ---------        ---------        ---------        ----------
                                                                              (Thousands of Dollars)

<S>                                                   <C>          <C>              <C>               <C>
Investments (Continued)

GWF Power Systems, L.P. (B) ....................      50%
Condensed Income Statement Information
Revenue ........................................                   $ 114,359        $ 118,796         $ 118,477
Gross Profit ...................................                      88,640           91,147            87,963
Net Income .....................................                      70,436           64,386            57,827

Condensed Balance Sheet Information
Assets:
 Current Assets ................................                      43,223           41,893
 Property, Plant & Equipment ...................                     204,106          211,543

 Other Assets ..................................                       7,534           14,415

                                                                   ---------        ---------
Total Assets ...................................                     254,863          267,851

Liabilities:
 Current Liabilities ...........................                      14,542           43,338
 Debt (D) ......................................                      24,540           35,540
 Other Non Current Liabilities .................                         284            1,920
                                                                   ---------        ---------
Total Liabilities ..............................                      39,366           80,798

Equity .........................................                     215,497          187,053
                                                                   ---------        ---------
Total Liabilities & Equity .....................                     254,863          267,851


Hanford L.P. (B) ...............................      50%
Condensed Income Statement Information
Revenue ........................................                    $ 30,443         $ 29,628          $ 30,159
Gross Profit ...................................                      20,974           19,392            20,423
Net Income .....................................                      14,779           12,398            12,963

Condensed Balance Sheet Information
Assets:
 Current Assets ................................                      13,784           13,486
 Property, Plant & Equipment ...................                      51,795           56,769

 Other Assets ..................................                         131              322

                                                                   ---------        ---------
Total Assets ...................................                      65,710           70,577

Liabilities:
 Current Liabilities ...........................                       7,224            8,096
 Debt (D) ......................................                       2,293            8,441
 Other Non Current Liabilities .................                          --               26
                                                                   ---------        ---------
Total Liabilities ..............................                       9,517           16,563

Equity .........................................                      56,193           54,014
                                                                   ---------        ---------
Total Liabilities & Equity .....................                      65,710           70,577
</TABLE>


                                      F-21
<PAGE>

                           PSEG ENERGY HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

<TABLE>
<CAPTION>
                                                      %
                                                  Ownership           1999             1998            1997
                                                  ---------        ---------        ---------        ----------
                                                                              (Thousands of Dollars)

<S>                                                   <C>          <C>              <C>               <C>
Investments (Continued)

Eagle Point - (B) ..............................      50%
Condensed Income Statement Information
Revenue ........................................                   $ 130,561        $ 124,531         $ 125,770
Gross Profit ...................................                      67,629           64,413            61,455
Net Income .....................................                      43,380           39,100            34,708
Condensed Balance Sheet Information
Assets:
 Current Assets ................................                      32,216           28,042
 Property, Plant & Equipment ...................                     125,647          129,883

 Other Assets ..................................                       3,137            3,609

                                                                   ---------        ---------
Total Assets ...................................                     161,000          161,534


Liabilities:
 Current Liabilities ...........................                      25,324           22,957
 Debt (D) ......................................                      75,675           90,525
                                                                   ---------        ---------
Total Liabilities ..............................                     100,999          113,482

Equity .........................................                      60,001           48,052
                                                                   ---------        ---------
Total Liabilities & Equity .....................                     161,000          161,534

Kalaeloa (B) (G) ...............................      49%
Condensed Income Statement Information
Revenue ........................................                    $ 90,925         $ 84,957          $ 99,459
Gross Profit ...................................                      47,305           46,751            47,641
Minority Interest ..............................                         (79)             (55)              (39)
Net Income (Loss) ..............................                       7,811            5,446             3,943

Condensed Balance Sheet Information
Assets:
 Current Assets ................................                      15,453           12,624
 Property, Plant & Equipment ...................                     171,555          173,490

 Other Assets ..................................                      59,835           61,424

                                                                   ---------        ---------
Total Assets ...................................                     246,843          247,538

Liabilities:
 Current Liabilities ...........................                       9,094            7,596
 Debt (D) ......................................                     185,735          192,776
 Other Non Current Liabilities .................                          --            4,840
 Minority Interest .............................                         490              442
                                                                   ---------        ---------
Total Liabilities ..............................                     195,319          205,654

Equity .........................................                      51,524           41,884
                                                                   ---------        ---------
Total Liabilities & Equity .....................                     246,843          247,538
</TABLE>


                                      F-22
<PAGE>

                           PSEG ENERGY HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

<TABLE>
<CAPTION>
                                                      %
                                                  Ownership           1999             1998            1997
                                                  ---------        ---------        ---------        ----------
                                                                              (Thousands of Dollars)

<S>                                                   <C>          <C>              <C>               <C>
Investments (Continued)

Texas Independent Energy, L.P. (B) .............      50%
Condensed Income Statement Information
Revenue ........................................                   $     174        $      --            $   --
Gross Profit ...................................                         174               --                --
Minority Interest ..............................                          --               --                --
Net Income (Loss) ..............................                      (1,237)              --                --

Condensed Balance Sheet Information
Assets:
 Current Assets ................................                       1,449               --
 Property, Plant & Equipment ...................                     210,592               --

 Other Assets ..................................                          --               --

                                                                   ---------        ---------
Total Assets ...................................                     212,041               --

Liabilities:
 Current Liabilities ...........................                      52,853               --
 Debt (D) ......................................                     158,582               --
 Other Non Current Liabilities .................                          --               --
 Minority Interest .............................                          --               --
                                                                   ---------        ---------
Total Liabilities ..............................                     211,435               --

Equity .........................................                         606               --
                                                                   ---------        ---------
Total Liabilities & Equity .....................                     212,041               --
</TABLE>

(A)   Distribution Assets.
(B)   Generation Assets.
(C)   Other Assets is primarily goodwill.
(D)   Long-Term Debt is non-recourse to Global and Energy Holdings.
(E)   The 1999  results of  operations  of POC-Peru  represents  the period from
      September 15, 1999 (the date of formation) through December 31, 1999.
(F)   The 1999 results of operations of  Inversiones  represents the period from
      June 9, 1999 (the date of formation ) through December 31, 1999.
(G)   Global  acquired  an  additional  1.0%  general  partnership  interest  in
      Kalaeloa in April 2000.
(H)   Global and its partner own 99.98% of Chilquinta  Energia,  S.A. and 85% of
      Luz  del  Sur  through  their  joint  and  equal  ownership  interests  in
      Inversiones-Chile and POC-Peru.

      Resources

      Resources has limited  partnership  investments  in two  leveraged  buyout
funds, an ethylene production  facility, a clean air facility and solar electric
generating  systems.  Resources'  total  investment in limited  partnerships was
$292,095,000,  $279,286,000  and  $383,284,000  at March 31,  2000  (unaudited),
December 31, 1999 and 1998, respectively.

      Included in the amounts  above are limited  partnership  interests  in two
leveraged buyout funds that hold publicly traded  securities,  which are managed
by KKR Associates L.P. The book value of the investment in the leveraged  buyout
funds was  $256,262,000,  $230,104,000  and  $305,657,000  as of March 31,  2000
(unaudited),  December  31,  1999 and 1998,  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  $83,908,000,  $84,400,000  and  $84,594,000  as  of  March  31,  2000
(unaudited), December 31, 1999 and 1998, respectively. Borden is in the consumer
products industry.

      Resources  applies fair value accounting to investments in the funds where
publicly  traded  market prices are available as described in Note 2. Summary of
Significant Accounting Policies.  Approximately


                                      F-23
<PAGE>


                           PSEG ENERGY HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


$157,196,000,   $130,546,000  and  $204,303,000  represent  the  fair  value  of
Resources' share of the publicly traded  securities in the funds as of March 31,
2000 (unaudited), December 31, 1999 and 1998, respectively.

      In 1999, Resources,  through its investment in the leveraged buyout funds,
received cash distributions of approximately  $99,000,000 resulting in a pre-tax
gain of  approximately  $35,000,000  from the  fund's  sale of a portion  of its
equity interests. This is recorded in Net investment gains.

      EGDC

      As of December  31, 1999 and 1998,  EGDC has  partnership  investments  of
$19,673,000 and  $29,288,000,  respectively in developed  commercial real estate
and in land held for  development.  EGDC has been  conducting a controlled  exit
from the real estate  business  since  1993.  In 1997,  EGDC  recorded a pre-tax
charge  of  approximately  $10,318,000  to write  down to net  realizable  value
certain  properties in its portfolio held for sale. In 1999, a pre-tax charge of
approximately  $11,229,000  was also  recorded for one  property  held for sale.
These  amounts  are  recorded  in  operations  and  maintenance.  EGDC  has been
conducting a controlled exit from the real estate  business.  As such, gains and
losses from property sales are considered to be in the normal course of business
of EGDC.

NOTE 5. FOREIGN OPERATIONS

      As  of  December  31,  1999,  Global  has  approximately   $1,443,581,000,
including deferred project costs, of international  investments ($167,714,000 in
construction)  in projects  that  generate or  distribute  energy  primarily  in
Brazil, Argentina,  Chile, Peru, Italy and China. Global is expected to continue
to  make  international  investments.  Where  possible,  Global  structures  its
investments to manage the risk  associated with project  development,  including
foreign currency devaluation and fluctuations.

      Net foreign currency devaluations, caused primarily by the Brazilian Real,
have reduced  Stockholder's Equity by the net of tax amounts of $200,053,000 and
$43,015,000  as of December 31, 1999 and 1998,  respectively  (see  Consolidated
Statements of Stockholder's Equity).

      In January 1999,  Brazil  abandoned its managed  devaluation  strategy and
allowed the Real to float against other currencies. As of December 31, 1999, the
Real had  devalued  approximately  33% against the United  States  Dollar  since
January 1, 1999.  For the year  ended  December  31,  1999 the  devaluation  has
resulted in a charge of $145,783,000 to other  comprehensive  income, a separate
component  of  Stockholder's  Equity.  Energy  Holdings  cannot  predict to what
extent, if any, further devaluation may occur, and therefore, cannot predict the
impact of potential  devaluation  of currencies on Energy  Holdings'  results of
operations, financial condition and net cash flows.

      Energy Holdings' foreign investments were comprised of leveraged leases in
aircraft, utility facilities and commuter rail cars, a note receivable, electric
distribution  facilities,   exempt  wholesale  generators  and  foreign  utility
companies.  Foreign revenues and foreign assets,  as a percent of total revenues
and total assets, is as follows:

<TABLE>
<CAPTION>
                                                                                     December 31,
                                          March 31,     ----------------------------------------------------------------------
                                            2000         %        1999        %          1998         %          1997       %
                                            ----        ---       ----       ---         ----        ---         ----      ---
                                         (unaudited)
<S>                                     <C>                   <C>                    <C>                    <C>
Income from capital
 leases ............................    $ 27,246,000          $ 88,757,000           $ 58,518,000           $ 33,943,000
Income from joint
 ventures ..........................      19,317,000            52,601,000             46,617,000             13,949,000
Interest and dividends .............         101,000               407,000                411,000                404,000
Operator/Management
 fees ..............................       1,421,000             7,227,000              3,676,000              2,820,000
                                      --------------        --------------         --------------         --------------
Total foreign revenues .............    $ 48,085,000   22%  $  148,992,000   24%   $  109,222,000   25%     $ 51,116,000   15%
                                      --------------        --------------         --------------         --------------
Foreign assets (A) .................  $2,551,074,000   59%  $2,420,277,000   59%   $1,602,790,000   51%   $1,327,828,000   44%
                                      ==============        ==============         ==============         ==============
</TABLE>

(A)  Amount  is  net of  pre-tax  foreign  currency  translation  adjustment  of
     $191,353,000,  $222,281,000,  $47,794,000  and  $16,132,000 as of March 31,
     2000 (unaudited) and December 31, 1999, 1998 and 1997, respectively.


                                      F-24
<PAGE>


                           PSEG ENERGY HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


      IPE Energia (IPE), a wholly-owned  subsidiary of Global,  whose functional
currency is the United States Dollar,  had non-recourse  debt of $89,089,000 and
$119,418,000  as of  March  31,  2000  and 1999  (unaudited),  respectively  and
90,075,000 and $122,834,000 as of December 31, 1999 and 1998,  respectively (see
Note 8. Long-Term Debt),  denominated in Brazilian Reals,  which is indexed to a
basket of currencies  including United States Dollars.  As a result, the debt is
subject to foreign  currency  exchange  rate risk due to the effect of  exchange
rate movements between the indexed foreign currencies and the Brazilian Real and
between the Brazilian Real and the United States  Dollar.  Exchange rate changes
ultimately  impact the debt level  outstanding in the  denominated  currency and
result in foreign currency  transaction  gains or losses,  which are included in
net income.  The net foreign currency  transaction  gains (losses) for the three
months ended March 31, 2000 and 1999 (unaudited) were $1,187,000 and $3,344,000,
respectively,  and for the years ended  December  31,  1999,  1998 and 1997 were
$3,083,000,  $(3,031,000) and $685,000,  respectively, and are recorded in Other
Income (Loss) in the Consolidated Statements of Income.

NOTE 6. INCOME TAXES

      A reconciliation  of income taxes calculated at the Federal statutory rate
of 35% of income before income taxes and the income tax provision is as follows:

<TABLE>
<CAPTION>
                                                             1999                 1998                1997
                                                         ------------         ------------        ------------
<S>                                                      <C>                  <C>                 <C>
Federal income tax expense at statutory rate .........   $ 61,608,000         $ 34,146,000        $ 25,708,000
State income taxes, net of Federal income
  tax benefit ........................................     15,782,000            4,470,000           3,110,000
Amortization of investment and energy
  tax credits ........................................       (807,000)          (1,105,000)         (1,251,000)
Dividends received deduction .........................       (807,000)            (755,000)           (651,000)
Tax effect of tax benefit transfer expense ...........        192,000              878,000             505,000
Tax effects attributable to foreign operations .......     (7,204,000)          (1,120,000)            (68,000)
Tax credits ..........................................             --           (6,923,000)                 --
Other ................................................        178,000              569,000          (1,537,000)
                                                         ------------         ------------        ------------
Income tax expense ...................................   $ 68,942,000         $ 30,160,000        $ 25,816,000
                                                         ============         ============        ============
</TABLE>

      The following is an analysis of Deferred Income Taxes:

<TABLE>
<CAPTION>
                                                                                 1999                1998
                                                                              ------------        ------------
<S>                                                                           <C>                 <C>
Assets - non-current:
   Development expenses                                                       $ 16,074,000        $ 14,786,000
   Foreign currency translation                                                 22,228,000           4,779,000
   Bad debt reserve                                                              5,578,000           5,456,000
   Other                                                                         7,847,000           7,371,000
                                                                              ------------        ------------
Total Assets                                                                    51,727,000          32,392,000
                                                                              ============        ============
Liabilities - non-current:
   Leasing activities                                                          796,570,000         702,258,000
   Partnership activities                                                      117,593,000         154,411,000
   Income from foreign operations                                                6,200,000           3,008,000
   State income tax deferrals                                                   18,827,000          19,017,000
                                                                              ------------        ------------
Total Liabilities                                                              939,190,000         878,694,000
                                                                              ------------        ------------
Net Liabilities                                                               $887,463,000        $846,302,000
                                                                              ============        ============
</TABLE>

      As of December 31, 1999 and 1998,  the amount due PSEG for Federal  income
tax was $754,000 and $159,000, respectively.


                                      F-25
<PAGE>


                           PSEG ENERGY HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


NOTE 7.  NOTES PAYABLE

      In May 1999,  Energy  Holdings  closed on two  separate  senior  revolving
credit facilities, with a syndicate of banks, a $165,000,000,  364 day revolving
credit  facility and a  $495,000,000,  five year revolving  credit and letter of
credit facility. These facilities,  totaling $660,000,000 replaced Funding's two
revolving credit and reimbursement agreements of $300,000,000 and $150,000,000.

      As of March 31, 2000 and 1999 (unaudited), and December 31, 1999 and 1998,
borrowings  outstanding  under the revolving credit and reimbusement  agreements
were $125,000,000,  $123,000,000,  $351,000,000 and $206,000,000,  respectively.
The effective  interest  rates on the revolving  credit  facility  borrowings at
March 31, 2000 and 1999 (unaudited), and December 31, 1999 and 1998, were 7.06%,
7.75%,  6.67% and 6.70%,  respectively,  plus related costs.The interest expense
incurred related to short-term  borrowings amounted to $4,405,000 and $2,835,000
as of March  31,  2000  and 1999  (unaudited),  respectively,  and  $11,242,000,
$8,060,000 and $9,826,000 as of December 31, 1999, 1998 and 1997,  respectively.
Due to the short-term  nature of this debt and the related  interest rates,  the
recorded  amounts are a  reasonable  estimate of fair value as of March 31, 2000
and 1999 (unaudited), and December 31, 1999 and 1998.


                                      F-26
<PAGE>


                           PSEG ENERGY HOLDINGS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 8.  LONG-TERM DEBT

      Long-Term Debt was comprised of the following:

<TABLE>
<CAPTION>
                                                            March 31,          December 31,
                                                           ----------    --------------------------
                                                 Year Due     2000           1999            1998
                                                ---------  ----------    -----------      ---------
                                                           (unaudited)
                                                                  (Thousands of Dollars)
<S>                                                <C>     <C>           <C>              <C>
Energy Holdings
Senior Notes
9.125% ....................................        2004    $  300,000    $        --      $      --
10.00% ....................................        2009       400,000        400,000             --
Net unamortized discount ..................                     5,259)        (4,914)            --
                                                           ----------    -----------      ---------
Total long-term debt of Energy Holdings ...                   694,741        395,086             --
                                                           ----------    -----------      ---------
PSEG Capital
Medium-Term Notes (MTNs) (A)
8.95% - 9.93% .............................        1999            --             --        155,000
6.54% .....................................        2000        78,000         78,000         78,000
6.73% - 6.74% .............................        2001       170,000        170,000        135,000
6.80% - 7.00% .............................        2002       130,000        130,000        130,000
6.25% .....................................        2003       252,000        252,000             --
                                                           ----------    -----------      ---------
Principal amount outstanding ..............                   630,000        630,000        498,000
Amounts due in one year ...................                   (77,956)       (77,937)      (154,973)
Net unamortized discount ..................                    (1,668)        (1,857)        (1,195)
                                                           ----------    -----------      ---------
Total long-term debt of PSEG Capital ......                   550,376        550,206        341,832
                                                           ----------    -----------      ---------
Funding
Senior Notes
7.58% - Series G ..........................        1999            --             --         45,000
                                                           ----------    -----------      ---------
Principal amount outstanding ..............                        --             --         45,000
Amounts due in one year ...................                        --             --        (45,000)
                                                           ----------    -----------      ---------
Total long-term debt of Funding ...........                        --             --             --
                                                           ----------    -----------      ---------
Global
Non-recourse Debt
7.721% - Bank Loan ........................        1999            --             --         87,044
11.08% - 13.73% - Bank Loan ...............        2000        96,591         96,919             --
 9.04% - 13.73% - Bank Loan ...............        2001       125,699        126,027             --
 9.42% - 13.73% - Bank Loan ...............        2002        44,696         45,025        122,834
 9.42% - Bank Loan ........................        2003        28,995         28,995             --
 9.42% - Bank Loan ........................        2004        20,003         20,003             --
14.00% - Minority Interest Loan ...........        2027         9,990          9,990          9,990
                                                           ----------    -----------      ---------
Principal amount outstanding ..............                   325,974        326,959        219,868
Amounts due in one year ...................                    96,591        (96,919)      (117,752)
                                                           ----------    -----------      ---------
Total long-term debt of Global ............                   229,383        230,040        102,116
                                                           ----------    -----------      ---------
Resources
8.60% - Bank Loan .........................   2001-2019        24,529             --             --
                                                           ----------    -----------      ---------
Total long-term debt of Resources .........                    24,529             --             --
Energy Technologies
7.73% - Bank Loan .........................   2001-2004         1,210             --             --
9.75% - Bank Loan .........................   2001-2005           546             --             --
                                                           ----------    -----------      ---------
Principal amount outstanding ..............                     1,756             --             --
Amounts due in one year ...................                       201             --             --
                                                           ----------    -----------      ---------
Total long-term debt of Energy Technologies                     1,555             --             --
                                                           ----------    -----------      ---------
Total long-term debt ......................                $1,500,584    $ 1,175,332      $ 443,948
                                                           ==========    ===========      =========
</TABLE>

      (A) PSEG  Capital's MTN program  permits  borrowings  up to  $750,000,000.
Effective  January 31, 1995, PSEG Capital  determined that it will not have more
than $650,000,000 of debt outstanding at any time (See Note 14.  Commitments and
Contingencies).


                                      F-27
<PAGE>


                           PSEG ENERGY HOLDINGS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

      Based on the borrowing  rates  currently  available to Energy Holdings for
debt with  similar  terms and  remaining  maturities,  the fair  value of Energy
Holdings' long-term debt was as follows:

                                 March 31,          December 31,
                                 --------      ----------------------
                                   2000          1999          1998
                                 --------      --------      --------
                                (unaudited)
                                         (Thousands of Dollars)
Senior Notes-- Energy Holdings   $710,226      $407,592      $     --
MTNs-- PSEG Capital ..........    610,070       611,889       503,830
Senior Notes-- Funding .......         --            --        45,000
Non-recourse debt - Global ...    325,974       326,959       219,868
Bank Loan-- Resources ........     24,529            --            --

      The fair  value of our  Senior  Notes  and  Medium-term  notes is based on
information  obtained quarterly from market sources with extensive  knowledge of
prices at which the notes are trading.

      Substantially all non-recourse debt is floating rate that is reset several
times during the year to various  market  indices.  As such,  book  approximates
market value.

      Annual Principal Requirements

      The scheduled  principal  maturities  during the years following March 31,
2000 (unaudited) are as follows:

<TABLE>
<CAPTION>
                         Energy           PSEG                                              Energy
                        Holdings         Capital            Global         Resources     Technologies          Total
                    --------------   --------------   --------------   --------------   --------------   --------------
<S>                 <C>              <C>              <C>              <C>              <C>              <C>
2000............    $           --   $   78,000,000   $   96,591,000   $      203,000   $           --   $  174,794,000
2001............                --      170,000,000      125,699,000          857,000          412,000      296,968,000
2002............                --      130,000,000       44,696,000          934,000          413,000      176,043,000
2003............                --      252,000,000       28,995,000        1,017,000          411,000      282,423,000
Thereafter......       700,000,000               --       29,993,000       21,518,000          520,000      752,031,000
                    --------------   --------------   --------------   --------------   --------------   --------------
                    $  700,000,000   $  630,000,000   $  325,974,000   $   24,529,000   $    1,756,000   $1,682,259,000
                    ==============   ==============   ==============   ==============   ==============   ==============
</TABLE>

      Senior Notes-- Energy Holdings

      In October 1999, Energy Holdings issued $400 million of 10.0% Senior Notes
due October 2009.  The proceeds  were used for the repayment of short-term  debt
outstanding  under revolving credit  facilities.  Borrowings under the revolving
credit  facilities  were used to finance  investments and  acquisitions  and for
general corporate purposes. Interest expense incurred during the year related to
such borrowings amounted to $9,222,000.

      In February  2000,  Energy  Holdings  issued $300  million of 91/8% Senior
Notes due 2004.  The net proceeds  from the sale were used for the  repayment of
short-term debt outstanding under our revolving credit facilities.

      Bank Loan -- BNDES

      In October 1997, IPE and The National Economic and Social Development Bank
(BNDES),  entered  into a credit  agreement  (the BNDES Loan)  which  matures on
November 15, 2002. The loan proceeds are  denominated  in Brazilian  Reals which
are indexed to a basket of currencies,  including U.S.  dollars.  In total,  IPE
received the U.S. dollar  equivalent of  approximately  $135,580,000,  which was
used to partially finance the Company's acquisition of RGE in 1997. The balances
were  $90,074,000  million and  $122,835,000  million for  December 31, 1999 and
1998, respectively.


                                      F-28
<PAGE>

                           PSEG ENERGY HOLDINGS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

      Under the terms of the BNDES Loan, the outstanding principal is reset on a
daily basis  based on  exchange  rate  movements  between  the  indexed  foreign
currencies  and the Brazilian  Real and between the Brazilian  Real and the U.S.
dollar.  The loan balance is subject to a base variable interest rate plus 4.5%.
The variable  interest rate reflects the BNDES borrowing rate and is adjusted on
a quarterly  basis.  The interest  rate in effect as of as of March 31, 2000 and
1999  (unaudited)  was 13.84% and 13.01%,  respectively,  and as of December 31,
1999 and 1998 was 13.73% and  13.23%,  respectively.  Interest  expense  for the
three  months  ended  March 31, 2000 and 1999  (unaudited)  was  $3,090,000  and
$3,840,000, respectively, and during 1999 and 1998 was approximately $14,946,000
and  $17,246,000,  respectively.  Both principal and interest are payable over a
five  year  period in nine  equal  installments,  beginning  in  November  1998.
However,  Energy Holdings cannot predict the amount,  if any, of such additional
funding requirements (See Note 5. Foreign Operations).

      Bank Loan -- ING

      In  May  1997,  PSEG  Americas   Operating  Company  (PSEG  Americas),   a
wholly-owned  subsidiary  of  Global  and ING Bank and ING  Capital  Corporation
(collectively, ING), as lender and as agent for a consortium of lenders, entered
into a credit agreement for  approximately  $87,044,000 which matured on May 30,
1999 (1997 ING  Agreement).  The loan proceeds  were used to partially  fund the
acquisition of EDEN/EDES in Argentina.  In June 1999, PSEG Americas entered into
a new  credit  agreement  with  ING  for  approximately  $66,894,000  (1999  ING
Agreement). Interest is payable quarterly and accrues at LIBOR plus 6%. Interest
expense incurred during 1999, 1998 and 1997 related to such borrowings  amounted
to $7,356,000, $7,042,000 and $4,003,000, respectively.

      Under the terms of the ING  Agreements,  PSEG  Americas  must  maintain an
interest reserve for a minimum amount equal to six months of projected  interest
payments.  Additionally,  a receipts  account must be maintained  into which all
revenues and other payments are  deposited.  Both accounts are  administered  by
U.S.  Trust  Company  of New  York  and  are  restricted  as to  their  use  and
disbursements  in accordance  with the provisions of the ING  Agreements.  As of
December 31, 1999, restricted cash of $4,100,000 and $75,000 was included in the
interest reserve and receipts accounts,  respectively.  As of December 31, 1999,
restricted  cash  also  included  $550,000  held on  deposit  with  ING  Capital
Corporation and $185,000 held in trust with Banco de la Provincia,  an Argentine
banking institution.  As of December 31, 1998, restricted cash of $3,387,000 and
$369,000  was  included  in  the   interest   reserve  and  receipts   accounts,
respectively.

      In June 1997, PSEG Americas  entered into an interest rate swap agreement,
which effectively converted a portion of the floating rate obligations under the
1997 ING Agreement into fixed rate obligations.  The interest differential to be
received or paid under the interest  rate swap  agreement  is recorded  over the
life of the agreement as an adjustment to interest expense.  The swap terminated
on May 28, 1999, when the 1997 ING Agreement expired. PSEG Americas entered into
a new  interest  rate  swap in  conjunction  with the 1999  ING  Agreement.  The
notional amounts and interest rates associated with the swaps are as follows:

                                 1999                1998
                             -----------         ------------
Notional Amount...........   $33,447,000         $43,522,000
Pay Rate..................         5.79%               6.65%
Average Receive Rate......         5.23%               5.68%
Year End Receive Rate.....         6.09%               5.13%


                                      F-29
<PAGE>

                           PSEG ENERGY HOLDINGS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

      Bank Loan -- Chase Manhattan Bank

      In June 1999, PSEG Global Funding II L.L.C., a wholly-owned  subsidiary of
Global and Chase  Manhattan  Bank,  as lender and as agent for a  consortium  of
lenders,  entered into a  $160,000,000  non-recourse  debt  financing  under the
following  terms:  Tranche A for $85,000,000  maturing June 9, 2001 at a rate of
LIBOR plus 3.25%;  and Tranche B for  $75,000,000  maturing by June 9, 2004,  in
increasing  percentages  every six months commencing on the 24th month following
the  closing  date  (June  9,  1999) at a rate of LIBOR  plus  3.625%.  The loan
proceeds were used to partially fund the acquisition of Chilquinta  Energia S.A.
in Chile.  Interest  expense  incurred  during 1999  related to such  borrowings
amounted to $7,881,000.

      Minority Interest Loan

      PSEG Americas  also entered into a $9,990,000  minority  shareholder  loan
(Shareholder Loan) in May 1997, which matures on May 29, 2027. The loan proceeds
were used to partially fund the acquisition of EDEN/EDES in Argentina in 1997 by
PSEG Americas  (see Note 5.  Investments  in  Partnerships  and Corporate  Joint
Ventures).  Amounts  borrowed  under  the  Shareholder  Loan are  unsecured  and
subordinated to amounts borrowed under the ING Agreement.

      In accordance with the Shareholder  Loan, the principal is due in one lump
sum on the maturity date. Interest accrues at 14% and is payable  semi-annually.
However,  failure to pay interest does not  constitute an event of default,  but
results in an increase in the principal amount due upon maturity.  In 1999, 1998
and 1997,  interest  expense  related  to such  borrowings  totaled  $1,418,000,
$1,418,000 and $839,000, respectively.

NOTE 9.  STOCKHOLDER'S EQUITY

      Common Stock

   Energy  Holdings had 100 shares of no-par common stock issued and outstanding
as of  December  31,  1999 and 1998,  all of which  was held by PSEG.  The total
authorized amount as of December 31, 1999 and 1998 was 1,000,000 shares.

      Preferred Stock

      Energy Holdings has authorized  1,000,000  shares of preferred  stock. The
issuance of preferred stock is as follows:

<TABLE>
<CAPTION>
                                                                Number
                                                 Par value        of         December 31,
Date              Description                    per share      shares           1999
-----             -----------                    ----------     ------       ------------
<S>               <C>                            <C>              <C>        <C>
January 1998...   5.01% Cumulative               $500,000         435        $217,500,000
June 1998......   4.80% Series B Cumulative      $100,000       1,467         146,700,000
July 1998......   4.875% Series C Cumulative     $100,000       1,450         145,000,000
                                                                             ------------
                   Total                                                     $509,200,000
                                                                             ============
</TABLE>

   During 1999 and 1998, Energy Holdings paid preferred  dividends from retained
earnings of $25,007,000 and $18,076,000 to PSEG.

   A portion of the proceeds from the 5.01% Cumulative  Preferred Stock was used
to retire the $75,000,000 of 4.10% Cumulative Preferred Stock issued in 1997.

      Additional Paid-in Capital

      In June 1999, PSEG invested approximately $200,000,000 of equity in Energy
Holdings to pay down short term debt. No capital  contributions  were made by or
returned to PSEG during 1998.


                                      F-30
<PAGE>

                          PSEG ENERGY HOLDINGS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

      On January 1, 1999, PSEG contributed its equity  investment in the capital
stock of PSCRC,  formerly a wholly-owned  subsidiary of Public Service  Electric
and Gas Company, through Energy Holdings into Energy Technologies. The aggregate
book value of the stock contributed was $57,000,000.  Energy Holdings' financial
statements have been restated for 1998 to show the effect of this acquisition in
accordance with the accounting for business  combinations  of transfers  between
companies  under common  control,  and is  reflected  in the opening  balance of
Additional Paid-in Capital for 1998.

      Dividends on Common Stock

      Energy  Holdings paid  $3,784,000 in dividends on its common stock to PSEG
in 1999.  No dividends on its common stock were paid by Energy  Holdings to PSEG
in 1998.

      Subscription Agreement

      Global and PSEG have entered into a subscription agreement (the Agreement)
pursuant to which a  subscription  was  outstanding  as of December 31, 1999 for
PSEG to purchase up to 333 shares of Global's  capital stock at a purchase price
of $10,000 per share,  or an aggregate  purchase price of $3,330,000.  Excluding
financial  obligations which have been recorded,  funded or otherwise fulfilled,
the remaining obligations under existing subscription  agreements as of December
31, 1999 were  approximately  $3,330,000.  The Agreement  supports the financial
obligation  of Global  relative to a specific  project.  In December  1996,  the
investment  value of this  project  was  reduced to zero.  In  addition,  Global
recorded a $3,330,000 provision for the aforementioned financial obligation. The
Agreement  has been  assigned  to an outside  party who has the right to require
PSEG to perform thereunder and make direct payments to the assignee in the event
of default (See Note 14. Commitments and Contingencies).

NOTE 10.  RELATED PARTY TRANSACTIONS

      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 $12,007,000,  $8,653,000 and $12,072,000 were included in Revenues -
Other  Revenues  in the  Consolidated  Statements  of Income for the years ended
December 31, 1999, 1998 and 1997, respectively.

      Income from Partnerships

      Approximately  90% of the  electricity  generated by the Eagle Point Power
Plant,  a 50% owned  equity  investment  of  Global,  is sold to Public  Service
Electric and Gas Company under a 25-year power purchase contract  terminating in
May 2016.  Global's share of partnership  revenues  received from Public Service
Electric  an  Gas  represented   approximately   $55,000,000,   $54,000,000  and
$48,000,000 for the years December 31, 1999, 1998 and 1997, respectively.

      Administrative Costs

      Public Service Electric and Gas Company provides and bills  administrative
services  to Energy  Holdings  on a  monthly  basis.  These  costs  amounted  to
approximately $10,715,000,  $13,146,000 and $13,023,000 for 1999, 1998 and 1997,
respectively.  In addition,  Energy Holdings was billed administrative overheads
of $2,170,000,  $2,554,000  and  $2,524,000 by PSEG during 1999,  1998 and 1997,
respectively.

      Employees of Energy Holdings and its  subsidiaries  are  participants in a
non-contributory  pension plan  administered by Public Service  Electric and Gas
Company and costs related to such employees are billed on a monthly basis.  Such
costs amounted to approximately $2,426,000,  $3,622,000,  and $3,442,000 for the
years ended December 31, 1999, 1998 and 1997, respectively.


                                      F-31
<PAGE>

                          PSEG ENERGY HOLDINGS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 11.  OTHER INCOME(LOSS)

      Other income (loss) is comprised of the following:

<TABLE>
<CAPTION>


                                                  March 31,   March 31,                 December 31,
                                                 --------    --------        ---------------------------------
                                                   2000        1999          1999           1998         1997
                                                   ----        -----         -----          -----        -----
                                               (unaudited)                        (Thousands of Dollars)
<S>                                              <C>          <C>          <C>            <C>            <C>
Net gain on sale of investments............      $ (126)      $   --       $68,972(1)     $ 1,948(2)     $ --
Foreign currency gain (loss)...............       1,187        3,344         3,083         (3,031)        685
Other......................................          --          295         5,349           (735)         --
                                                 ------       ------       -------        -------        ----
         Total.............................      $1,061       $3,639       $77,404        $(1,818)       $685
                                                 ======       ======       =======        =======        ====
</TABLE>


(1)   Primarily the sale of the Newark Bay Cogeneration Facility by Global.

(2)   Primarily the sale of interests in four generating stations by Global.



NOTE 12.  MINIMUM LEASE PAYMENTS

Energy  Holdings  and its  subsidiaries  lease  administrative  office space and
equipment under operating  leases,  which expire prior to the end of 2003. Total
future minimum lease payments as of December 31, 1999 are:

            2000 ....................................    $ 5,944,000
            2001 ....................................      5,912,000
            2002 ....................................      5,605,000
            2003 ....................................      3,989,000
            2004 ....................................      2,595,000
                                                         ------------
            Total minimum lease payments ............    $24,045,000
                                                         ============

      Rent  expense  for  1999,  1998  and 1997  was  approximately  $7,306,000,
$5,971,000 and $4,808,000, respectively.

NOTE 13.  FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

      Energy  Holdings'  operations  give rise to exposure to market  risks from
changes in natural  gas  prices,  interest  rates,  foreign  exchange  rates and
security prices of investments  recorded at fair value.  Energy Holdings' policy
is to use  derivatives  for the purpose of managing  market risk consistent with
its business plans and prudent practices. Energy Holdings does not hold or issue
financial instruments for trading purposes.

      The notional amounts of derivatives do not represent  amounts exchanged by
the parties  and,  thus,  are not a measure of the  exposure of Energy  Holdings
through its use of derivatives.  The amounts  exchanged,  under the terms of the
derivatives,  are  calculated  on the  basis  of the  notional  amounts.  Energy
Holdings  limits  its  exposure  to  credit-related   losses  in  the  event  of
nonperformance by  counterparties  by limiting its  counterparties to those with
high credit ratings.

      Hedging

      In order to limit  Energy  Technologies'  exposure  to price  fluctuations
related to fixed price sales commitments,  Energy Technologies,  pursuant to its
internal  trading  policy,  may not have an outstanding  net balance of unhedged
fixed price sales  commitments  in excess of levels  established  by


                                      F-32
<PAGE>
                          PSEG ENERGY HOLDINGS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

management.  Energy  Technologies  purchases  futures  contracts  in addition to
physical purchase commitments, to ensure compliance with the trading policy. The
futures   contracts   are  accounted  for  as  hedges  for  book  purposes  and,
accordingly, gains and losses are deferred until the related sales are made.

      During 1999 and 1998, Energy  Technologies  entered into futures contracts
to buy natural gas related to fixed  price sales  commitments.  Such  contracts,
together with physical purchase contracts,  hedged  approximately 64% and 90% of
Energy  Technologies'  fixed price sales  commitments  at December  31, 1999 and
1998, respectively. Energy Technologies had a net deferred unrealized hedge loss
of $(550,000) and $(5,160,000) at those respective dates.

      During  1999 and  1998,  Energy  Technologies  entered  into  fixed  price
electricity sales commitments.  Physical purchase contracts hedged approximately
85% and 63% of such fixed price sales commitments at December 31, 1999 and 1998,
respectively.  Energy  Technologies had a net deferred  unrealized hedge gain of
$414,000 at December 31, 1999 and had no unrealized  position  related to hedges
of electric sales of December 31, 1998.

      Resources has investments in equity securities and partnerships,  in which
Resources is a limited  partner,  which invest in equity  securities.  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 market  prices of the  underlying  securities.  Fair
value  is  determined  by  adjusting  the  market  value of the  securities  for
liquidation and market  volatility  factors,  where  appropriate.  The aggregate
amount of such  investments  which have available  market prices at December 31,
1999, and 1998 was $130,546,000 and  $204,303,000,  respectively.  The portfolio
has exposure to market  price risk.  As such,  a  sensitivity  analysis has been
prepared to estimate  Energy  Holdings'  exposure to market  volatility of these
investments.  The potential  change in fair value  resulting from a hypothetical
10% change in quoted market prices of these investments  amounted to $11,000,000
and $17,000,000 at December 31, 1999 and 1998, respectively.

NOTE 14.  COMMITMENTS AND CONTINGENCIES

      Energy Holdings, Global and/or PSEG have guaranteed certain obligations of
Global's affiliates,  including the successful completion,  performance or other
obligations  related  to  certain  of the  projects  in an  aggregate  amount of
approximately  $341,165,000  as of December 31, 1999. A  substantial  portion of
such  guarantees is eliminated upon successful  completion,  performance  and/or
refinancing  of  construction  debt  with  non-recourse  project  term  debt.  A
subscription  agreement  for PSEG to purchase  Global's  capital  stock  secures
$3,330,000 of such obligations (See Note 9.

Stockholder's Equity).

     Global has been advised by Turboven  that  litigation  has been  instituted
against it by a subsidiary of CA de Administracion y Fomento Electrico (CADAFE),
a Venezuelan  state-owned  electricity  company.  CADAFE alleges that Turboven's
operation of the Cagua plant interferes with its installations and that Turboven
does not meet certain  Venezuelan legal  requirements.  On February 4, 2000, the
Superior  Court in  Maracay,  Venezuela  issued an  injunction  prohibiting  the
start-up  of the  Cagua  plant.  Global  believes  Turboven  has met  all  legal
requirements  for operation of Cagua.  Global is advised by Turboven that it has
appealed  this  decision  and will  vigorously  defend its right to operate such
facility.  The appeal of this decision is pending before the First Court for the
Litigation  of  Administrative  Matters of  Venezuela.  A final  court  decision
preventing  operation  of Cagua would likely also affect  Turboven's  ability to
operate Maracay and its planned  development of the Valencia  project.  Global's
total  indirect  investment  to date in the  Cagua  and  Maracay  facilities  is
approximately $42,730,000. Turboven, and consequently Global, cannot predict the
outcome of this matter. (See Note 18. Subsequent Events -- Unaudited).

      In May 1993,  following a 1992 audit of Energy  Holdings,  which concluded
that Energy Holdings' businesses had not harmed PSEG's  wholly-owned,  operating
public  utility  subsidiary,  Public Service  Electric and Gas Company,  the BPU
accepted a Focused Audit  Implementation Plan in which PSEG


                                      F-33
<PAGE>

                          PSEG ENERGY HOLDINGS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

agreed,  among other things,  that it will not permit Energy Holdings assets, as
defined in the agreement, to exceed 20% of its consolidated assets without prior
notice to the BPU, and that debt supported by a support  agreement  between PSEG
and PSEG  Capital will be limited to  $750,000,000,  with a good faith effort to
eliminate such support within six to ten years. Effective January 31, 1995, PSEG
Capital  determined  that  it will  not  have  more  than  $650,000,000  of debt
outstanding  at any time. At March 31, 2000  (unaudited),  December 31, 1999 and
1998,   Energy  Holdings'  assets   represented  23%,  22%  and  18%  of  PSEG's
consolidated  assets  and PSEG  Capital's  debt  outstanding  was  $630,000,000,
$630,000,000 and  $498,000,000,  respectively.  Notice that the asset percentage
exceeded 20% was made to the BPUin July 1999. We do not expect there will be any
adverse effect to the financial  statements of Energy  Holdings,  as a result of
the assets exceeding 20%.

NOTE 15.  PENSION AND OTHER POSTRETIREMENT BENEFIT AND SAVINGS  PLANS

      Employees of Energy Holdings and its  subsidiaries  are  participants in a
non-contributory  pension plan  administered by Public Service  Electric and Gas
Company.  See Note 10. Related Party  Transactions for Energy Holdings'  pension
costs for the years 1999, 1998, and 1997.

      In addition,  Public Service Electric and Gas Company sponsors two defined
contribution  plans.  Represented  employees of Energy Holdings are eligible for
participation in the Public Service Electric and Gas Company's  Employee Savings
Plan while all other employees of Energy Holdings are eligible for participation
in the Public Service Electric and Gas Company's  Tax-Deferred Savings Plan. The
two principal  defined  contribution  plans are sponsored  401(k) plans to which
eligible  employees  may  contribute up to 25% of their  compensation.  Employee
contributions up to 8% for all employees are matched with employer contributions
of  cash or PSEG  common  stock  equal  to 50% of such  employee  contributions.
Employer  contributions  in excess of 6% and up to 8% are made in shares of PSEG
common stock for all employees.  Public Service  Electric and Gas Company billed
Energy Holdings for its portion of employer  contributions.  The amount expensed
for the matching  provision of the plans was approximately  $750,000,  $803,000,
and $573,000 in 1999, 1998, and 1997, respectively.

NOTE 16.  FINANCIAL INFORMATION BY BUSINESS SEGMENTS

      Basis of Organization

      The  reportable  segments  disclosed  herein  were  determined  based on a
variety of factors  including the way management  organizes the segments  within
Energy Holdings for making operating decisions and assessing performance.

      Global

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

      Resources

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

      Energy Technologies

       Energy Technologies  receives revenues from energy sales and a variety of
energy related  services to industrial and commercial  customers to reduce costs
and improve related energy efficiencies.


                                      F-34
<PAGE>

                          PSEG ENERGY HOLDINGS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

      Other Activities

      Other  Activities  include  amounts  applicable  to Energy  Holdings  (the
       parent), EGDC and intercompany  eliminations.  Information related to the
       segments of Energy Holdings' business is detailed below:

<TABLE>
<CAPTION>
                                                                     Energy        Other       Consolidated
                                           Global     Resources   Technologies  Activities (A)     Total
                                        ----------   ----------  ------------------------------------------
                                                                  (Thousands of Dollars)
<S>                                     <C>          <C>          <C>           <C>             <C>

Three Months Ended March 31, 2000
   (unaudited):
   Total Revenues ...................   $   38,193   $   65,631   $  110,375    $    1,008      $  215,207
   Depreciation and Amortization(B)..          256          929        1,802            54           3,041
   Interest Expense-- Net ...........       16,339       17,766          384           582          35,071
   Income Taxes .....................        1,495       15,787       (2,592)         (491)         14,199
   Net income from equity
     investments(C) .................       32,456        2,979          234            90          35,759
   Income Before Income Taxes .......       10,152       44,748       (8,486)       (1,403)         45,011
   EBIT(D) ..........................       26,491       62,514       (8,102)         (821)         80,082
   Segment Net Income (Loss)
     available for Common Stock .....   $    4,266   $   27,320   $   (5,894)   $     (912)     $   24,780
                                        ==========   ==========   ==========    ==========      ==========
As of March 31, 2000 (unaudited):
   Total Assets .....................   $1,774,056   $2,194,172   $  300,092    $   56,014      $4,324,334
   Investments in equity method
      affiliates ....................   $1,669,345   $  292,095   $       --    $   10,050      $1,971,490
                                        ==========   ==========   ==========    ==========      ==========
Three Months Ended March 31, 1999
   (unaudited):
   Total Revenues ...................   $   27,712   $   46,239   $   54,793    $      (71)     $  128,673
   Depreciation and Amortization(B)..          318          330          740            47           1,435
   Interest Expense-- Net ...........        8,097       11,235           --           (55)         19,277
   Income Taxes .....................        3,299       11,326         (732)          (96)         13,797
   Net income from equity
     investments(C) .................       26,078        1,720           --            --          27,798
   Income Before Income Taxes .......        9,753       32,405       (2,682)         (273)         39,203
   EBIT(D) ..........................       17,850       43,640       (2,682)         (328)         58,480
   Segment Net Income (Loss)
     available for Common Stock .....   $    1,910   $   19,438   $   (1,950)   $     (177)     $   19,221
                                        ==========   ==========   ==========    ==========      ==========
As of March 31, 1999 (unaudited):
   Total Assets .....................   $1,022,360   $1,832,753   $  191,320    $   41,852      $3,088,285
   Investments in equity method
      affiliates ....................   $  945,516   $  400,799   $       --    $   34,223      $1,380,538
                                        ==========   ==========   ==========    ==========      ==========

For the Year Ended December 31, 1999:
   Total Revenues ...................   $  141,505   $  178,939   $  297,046    $      283      $  617,773
   Depreciation and Amortization(B)..        1,058        1,321        4,888           195           7,462
   Interest Expense-- Net ...........       48,115       46,061          252           257          94,685
   Income Taxes .....................       23,562       49,937       (2,020)       (2,537)         68,942
   Net income from equity
     investments(C) .................      128,926       77,573           --           171         206,670
   Income Before Income Taxes .......       69,143      122,688       (8,558)       (7,249)        176,024
   EBIT(D) ..........................      117,258      168,749       (8,306)       (6,992)        270,709
   Segment Net Income (Loss)
     available for Common Stock .....   $   28,056   $   66,186   $   (6,538)   $   (4,712)     $   82,992
                                        ==========   ==========   ==========    ==========      ==========
As of December 31, 1999:
   Total Assets .....................   $1,715,497   $2,095,688   $  251,883    $   51,317      $4,114,385
   Investments in equity method
      affiliates ....................   $1,628,264   $  279,286   $       --    $   10,035      $1,917,585
                                        ==========   ==========   ==========    ==========      ==========

</TABLE>


                                      F-35
<PAGE>

                          PSEG ENERGY HOLDINGS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

<TABLE>
<CAPTION>

                                                                     Energy       Other        Consolidated
                                          Global      Resources   Technologies  Activities (A)    Total
                                        ----------   ----------   ----------    ----------      ----------
                                                                 (Thousands of Dollars)
<S>                                     <C>          <C>          <C>           <C>             <C>
For the Year Ended December 31, 1998:
   Total Revenues ...................   $  123,935   $  145,115   $  170,840    $      394      $  440,284
   Depreciation and Amortization(B)..        1,416        1,612        2,138           248           5,414
   Interest Expense-- Net ...........       40,672       48,727            0           968          90,367
   Income Taxes .....................       12,296       26,624       (5,193)       (3,567)         30,160
   Net income from equity
     investments(C) .................      113,900       34,537           --           297         148,734
   Income Before Income Taxes .......       31,246       86,364      (16,364)       (3,686)         97,560
   EBIT(D) ..........................       71,918      135,091      (16,364)       (2,718)        187,927
   Segment Net Income (Loss)
     available for Common Stock .....   $    7,477   $   55,523   $  (11,171)   $     (103)     $   51,726
                                        ==========   ==========   ==========    ==========      ==========
As of December 31, 1998:
   Total Assets .....................   $1,124,160   $1,809,295   $  196,610    $   38,465      $3,168,530
   Investments in equity method
      affiliates ....................   $1,058,688   $  383,284   $       --    $   34,223      $1,476,195
                                        ==========   ==========   ==========    ==========      ==========
For the Year Ended December 31, 1997:
   Total Revenues ...................   $   90,886   $  144,334   $  104,076    $    2,294      $  341,590
   Depreciation and Amortization(B)..        1,597        1,327          960           287           4,171
   Interest Expense-- Net ...........       21,926       45,921        2,846         1,670          72,363
   Income Taxes .....................       10,276       28,998       (9,783)       (3,675)         25,816
   Net income from equity
     investments(C) .................       77,986       48,929           --           165         127,080
   Income Before Income Taxes .......       23,794       88,140      (27,984)      (10,500)         73,450
   EBIT(D) ..........................       45,720      134,061      (25,138)       (8,830)        145,813
   Segment Net Income (Loss)
     available for Common Stock .....   $   13,733   $   59,142   $  (18,201)   $   (7,399)     $   47,275
                                        ==========   ==========   ==========    ==========      ==========
As of December 31, 1997:
   Total Assets .....................   $1,169,948   $1,616,122   $  177,361    $   59,525      $3,022,956
   Investments in equity method
      affiliates ....................   $1,118,642   $  407,166   $       --    $   33,841      $1,559,649
                                        ==========   ==========   ==========    ==========      ==========

</TABLE>

(A)   Other  Activities  include  amounts  applicable  to Energy  Holdings  (the
      parent), EGDC and intercompany eliminations.


(B)   Includes amounts reported in the Depreciation and amortization line of the
      Consolidated Statements of Income.  Depreciation and amortization of PSCRC
      is included in Operations and Maintenance  expense as indicated in Note 2.
      Summary of Significant Accounting Policies.


(C)   Net income  from  equity  investments  is  included  in Income  from joint
      ventures and  partnerships  and Net investment  gains in the  Consolidated
      Statements of Income.


(D)   EBIT is defined as Income before income taxes and interest expense.


      Geographic Information for Energy Holdings is disclosed below.

<TABLE>
<CAPTION>
                                                Revenues(1)
                      ----------------------------------------------------------------
                      Three Months Ended March 31,       Years Ended December 31,
                      ---------------------------  -----------------------------------
                         2000         1999           1999        1998          1997
                       --------    ---------       --------     --------     ---------
                           (unaudited)
                                           (Thousands of Dollars)
<S>                    <C>          <C>            <C>          <C>          <C>
United States ....     $167,123     $101,709       $468,780     $331,062     $290,474
Foreign Countries:
   Argentina .....        4,864        5,470         16,820       16,407        7,464
   Brazil ........        5,916        1,902         19,664       30,669        3,500
   Chile and Peru         8,692           --         18,047           --           --
   Netherlands ...       20,448       13,071         64,521       38,718       19,716
   Other .........         8164        6,521         29,941       23,428       20,436
                       --------     --------       --------     --------     --------
Total Foreign ....       48,084       26,964        148,993      109,222       51,116
                       --------     --------       --------     --------     --------
      Total ......     $215,207     $128,673       $617,773     $440,284     $341,590
                       ========     ========       ========     ========     ========
</TABLE>

(1)   Revenues  are  attributed  to  countries  based  on the  locations  of the
      investments.


                                      F-36
<PAGE>

                          PSEG ENERGY HOLDINGS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

<TABLE>
<CAPTION>
                                               Identifiable Assets
                                   -------------------------------------------
                                     March 31,              December 31,
                                   ----------        -------------------------
                                       2000             1999          1998
                                   ----------        ----------    -----------
                                   unaudited)
                                             (Thousands of Dollars)
<S>                                <C>               <C>           <C>
United States ..................   $1,773,260        $1,694,108    $1,565,740
Foreign Countries:
   Argentina ...................      361,678           356,286       306,724
   Brazil(1) ...................      352,328           330,453       480,411
   Chile and Peru ..............      542,549           519,840            --
   Netherlands .................      696,890           622,634       399,655
   Other .......................      597,629           591,064       416,000
                                   ----------        ----------    ----------
   Total Foreign ...............    2,551,074         2,420,277     1,602,790
                                   ----------        ----------    -----------
      Total  ...................   $4,324,334        $4,114,385    $3,168,530
                                   ==========        ==========    ===========
</TABLE>

(1)   Amount  is net of  foreign  pre-tax  currency  translation  adjustment  of
      $188,806,000  and  $43,022,000 for the periods ended December 31, 1999 and
      1998, respectively.


NOTE 17.  ACCOUNTING MATTERS

      In June 1998,  the  Financial  Accounting  Standards  Board (FASB)  issued
Statement of  Financial  Accounting  Standard  (SFAS) No. 133,  "Accounting  for
Derivative  Instruments and Hedging Activities" (SFAS 133), as amended, which is
effective for financial  statements for all fiscal quarters beginning January 1,
2001.  SFAS 133  establishes  accounting and reporting  standards for derivative
instruments and hedging activities. It requires an entity to recognize as assets
or  liabilities  on the balance  sheet at fair value.  Derivatives  that are not
hedges must be adjusted  to fair value  through  income.  If a  derivative  is a
hedge, changes in the fair value of the derivative will either be offset against
the change in fair  value of the  hedged  asset,  liability  or firm  commitment
through earnings or be recognized in other comprehensive income until the hedged
item is  recognized  in  earnings,  depending  on the nature of the  hedge.  The
ineffective  portion of a derivative's  change in fair value will be immediately
recognized in earnings.

      The Company is currently evaluating the impact of SFAS 133.

Note 18. Subsequent Events

      Energy Holdings

      In February 2000,  Energy  Holdings  issued  $300,000,000  of 91/8% Senior
Notes due February  2004. The proceeds were used for the repayment of short-term
debt.

      Also in February 2000, Energy Holdings closed on a $190,000,000  letter of
credit facility to support a future equity investment in a generation project in
Texas.


      In February 2000, Energy Technologies  entered into a business arrangement
with  Enermetrix.com  to provide an  Internet-based  auction  exchange that will
allow customers an alternative  method in purchasing their energy  requirements.
As  a  result  of  this  new  strategic  direction,   Energy  Technologies  will
discontinue the business of buying and selling gas and  electricity.  A plan for
reorganization  of the  commodity  function was created and reviewed with Energy
Holdings  management in February 2000.  This plan included  specific  activities
which needed to be accomplished  to discontinue the commodity  purchase and sale
function,  and included the termination of approximately 75 employees as well as
the write-off of deferred commodity  transportation  costs and computer hardware
and software  which  supported  the  commodity  business.  A charge to income of
$6,600,000  was recorded in the quarter  ended March 31,  2000.  Of this amount,
approximately $2,000,000 related to employee severance costs,



                                      F-37
<PAGE>

                          PSEG ENERGY HOLDINGS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


$1,600,000  related to the  write-off  of  deferred  transportation  costs,  and
$3,000,000 related to the write-off of computer hardware and software. Execution
of the plan began  immediately  and continued  into the second  quarter of 2000.
Employees were severed from service in April 2000.


      In January 2000,  Resources  reclassified  its investment in a real estate
leveraged  lease to an  operating  lease.  The  reclassification  was due to the
unpredictability  of future rent  collection.  The leveraged lease investment of
$30,609,000 was reclassified to real estate, totaling approximately $55,697,000.
Additionally,  Resources balance sheet now reflects non-recourse  long-term debt
of $24,529,000  and other  liabilities of $559,000.  Resources  receives  rental
income from this property which is recorded in Other revenues  effective January
2000.



      On May 17,  2000,  the First Court for the  Litigation  of  Administrative
Matters of Venezuela  issued an order lifting an  injunction  that was issued on
February 4, 2000 by the Superior  Court in Maracay,  Venezuela  prohibiting  the
start-up of the Cagua plant by  Turboven,  an entity 50% owned by Global that is
constructing up to three generation  facilities in Venezuela.  The order lifting
the injunction rejected arguments made by a subsidiary of CA de Administracion y
Fomento  Electrico  (CADAFE),  a  Venezuelan  state-owned  electricity  company,
alleging  that  Turboven's  operation  of the Cagua  plant  interferes  with its
installations  and  that  Turboven  does  not  meet  certain   Venezuelan  legal
requirements.  The period for appeal has expired.  On May 24, 2000,  CADAFE, its
subsidiary  and Turboven  entered into an agreement to coordinate the operations
and maintenance of their respective installations. Any final decision preventing
operation of Cagua would likely also have affected Turboven's ability to operate
its power generating facility at Maracay,  Venezuela and its planned development
of a power generating facility at Valencia,  Venezuela.  Global's total indirect
investment  to  date  in the  Cagua  and  Maracay  facilities  is  approximately
$43,000,000.  The Maracay and Cagua  facilities  are  currently  in testing with
commercial operations expected in June and July, respectively.


                                      F-38
<PAGE>

                                     Part II
                     Information not required in Prospectus

Item 20. Indemnification of Directors and Officers

      Article 6 of Energy  Holdings'  Certificate of  Incorporation  provides as
follows:

      To the full  extent  from time to time  permitted  by law,  directors  and
officers of the corporation shall not be personally liable to the corporation or
its  shareholders  for damages for breach of any duty owed to the corporation or
its  shareholders.  No amendment  or repeal of this  provision  shall  adversely
affect  any right or  protection  of a director  of  officer of the  corporation
existing at the time of such amendment or repeal.

      Section 24 of Energy Holdings' By-laws provides as follows:

      The  corporation  shall  indemnify  to the full  extent  from time to time
permitted  by law any person  made,  or  threatened  to be made,  a party to any
pending, threatened or completed civil, criminal,  administrative or arbitrative
action,  suit  or  proceeding  and  any  appeal  therein  (and  any  inquiry  or
investigation which could lead to such action, suit or proceedings) by reason of
the fact that he is or was a director, officer or employee of the corporation or
serves or served any other enterprise as a director,  officer or employee at the
request of the  corporation.  Such right of  indemnification  shall inure to the
benefit of the legal representative of any such person.

      The directors and officers of Energy  Holdings are insured under  policies
of insurance,  within the limits and subject to the limitations of the policies,
against claims made against them for acts in the discharge of their duties,  and
Energy Holdings is insured to the extent that it is required or permitted by law
to indemnify  the  directors  and officers for such loss.  The premiums for such
insurance are paid by Energy Holdings. Item 21. Exhibits and Financial Statement
Schedules

(a)  Exhibits.

Exhibit
Number                        Description
-------                       ----------
 3.1    --   Certificate of Incorporation, as amended.*

 3.2    --   By-Laws.*

 4.1    --   Indenture  dated October 8, 1999 between Energy Holdings and First
             Union National Bank.*

 4.2    --   Exchange and Registration Rights Agreement dated October 8, 1999
             between Energy Holdings and the purchasers named in Schedule I of
             the purchase agreement.*

 4.3    --   Form of Exchange Note.*


 5      --   Opinion of James T. Foran, Esquire.

 8      --   Opinion of James T. Foran, Esquire regarding tax matters.

 12     --   Statement  regarding computation of ratios of earnings.*

 21     --   Subsidiaries of the Registrant.*

 23.1   --   Consent of James T. Foran,  Esquire  (contained in Exhibits 5
             and 8).

 23.2   --   Consent of Independent Accountants.

 23.3   --   Consent of Independent Accountants.

 23.4   --   Consent of Independent Accountants.

 24     --   Power of Attorney.*

 25     --   Statement  of  Eligibility  of Trustee on Form T-1.*

 27     --   Financial  Data Schedule.*

 99.1   --   Form of Letter of  Transmittal.*

 99.2   --   Form of Notice of Guaranteed  Delivery.*

 99.3   --   Report of Independent Accountants.

 99.4   --   Report of Independent Accountants.

----------
*  Previously filed.



                                      II-1
<PAGE>

 Item 22. Undertakings

      Insofar as  indemnification  for liabilities  arising under the Securities
Act may be  permitted to  directors,  officers  and  controlling  persons of the
registrant pursuant to the foregoing  provisions,  or otherwise,  the registrant
has been advised that in the opinion of the Securities  and Exchange  Commission
such  indemnification  is against  public policy as expressed in the Act and is,
therefore  unenforceable.  In the event that a claim for indemnification against
such liabilities  (other than the payment by the registrant of expenses incurred
or paid by a director,  officer or  controlling  person of the registrant in the
successful  defense of any  action,  suit or  proceeding)  is  asserted  by such
director,  officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been  settled by  controlling  precedent,  submit to a court of  appropriate
jurisdiction the question whether such  indemnification  by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

      The undersigned  registrant  hereby  undertakes to file an application for
the  purpose  of  determining  the  eligibility  of the  trustee  to  act  under
subsection (a) of Section 310 of the Trust  Indenture Act in accordance with the
rules and regulations  prescribed by the Commission  under Section  305(b)(2) of
the Act.

      The undersigned registrant hereby undertakes (a):

      1.    To file,  during any period in which offers or sales are being made,
            a post-effective amendment to this registration statement:

            (i)   To include any prospectus  required  bySection 10(a)(3) of the
                  Securities Act.

            (ii)  To reflect in the prospectus any facts or events arising after
                  the effective date of the registration  statement (or the most
                  recent post-effective  amendment thereof) which,  individually
                  or in the  aggregate,  represent a  fundamental  change in the
                  information set forth in the registration statement.

            (iii) To include any material  information  with respect to the plan
                  of distribution  not previously  disclosed in the registration
                  statement or any material  change in such  information  in the
                  registration statement; provided, however, that the registrant
                  need  not  file a  post-effective  amendment  to  include  the
                  information required to be included by subsection (a)(1)(i) or
                  (a)(l)(ii)  if  such  information  is  contained  in  periodic
                  reports  filed by the  registrant  pursuant  to  Section 13 or
                  Section  15(d)  of  the  Securities   Exchange  Act  that  are
                  incorporated by reference in the registration statement.

      2.    That,  for the  purpose  of  determining  any  liability  under  the
            Securities Act, each such  post-effective  amendment shall be deemed
            to  be a new  registration  statement  relating  to  the  securities
            offered  therein,  and the offering of such  securities at that time
            shall be deemed to be the initial bona fide offering thereof.

      3.    To remove from  registration by means of a post-effective  amendment
            any of the securities  being  registered  which remain unsold at the
            termination of the offering.


                                      II-2
<PAGE>

                                   SIGNATURES


      Pursuant  to  the   requirements  of  the  Securities  Act  of  1933,  the
registrant,  PSEG Energy Holdings Inc., certifies that it has reasonable grounds
to believe it meets all of the  requirements for filing on Form S-4 and has duly
caused this  Amendment No. 2 to the  Registration  Statement to be signed on its
behalf by the  undersigned,  thereunto duly  authorized,  in the City of Newark,
State of New Jersey, on this 26th day of June, 2000.


                                    PSEG ENERGY HOLDINGS INC.

                                    By:   /s/ ROBERT J. DOUGHERTY
                                       ----------------------------------
                                              Robert J. Dougherty, Jr
                                       President and Chief Operating Officer


                                      II-3
<PAGE>

      Pursuant  to  the  requirements  of  the  Securities  Act  of  1933,  this
Registration  Statement  has  been  signed  by  the  following  persons  in  the
capacities and on the dates indicated.

<TABLE>
<CAPTION>

                 Signature                        Title                                Date
                 ---------                        ----                                 ----

<S>                                               <C>                             <C>
           /s/ E. James Ferland                   Principal Executive             June 26, 2000
-----------------------------------------         Officer and Director
             E. James Ferland

          /s/ Bruce E. Walenczyk                  Principal Financial Officer     June 26, 2000
------------------------------------------
            Bruce E. Walenczyk

           /s/ Derek M. DiRisio                   Principal Accounting Officer    June 26, 2000
------------------------------------------
             Derek M. DiRisio
</TABLE>

      This  Registration  Statement has also been signed by Bruce E.  Walenczyk,
Attorney-in-Fact, on behalf of the following Directors on June 26, 2000.

                  Frank Cassidy
                  Robert J. Dougherty
                  Robert C. Murray
                  R. Edwin Selover

                                           By:    /s/ BRUCE E. WALENCZYK
                                                --------------------------------
                                                    Bruce E. Walenczyk
                                                     Attorney-in-Fact


                                      II-4
<PAGE>

                                  Exhibit Index

Exhibit
Number                        Description
-------                       ----------
 3.1    --   Certificate of Incorporation, as amended.*

 3.2    --   By-Laws.*

 4.1    --   Indenture  dated October 8, 1999 between Energy Holdings and First
             Union National Bank.*

 4.2    --   Exchange and Registration Rights Agreement dated October 8, 1999
             between Energy Holdings and the purchasers named in Schedule I of
             the purchase agreement.*

 4.3    --   Form of Exchange Note.*


 5      --   Opinion of James T. Foran, Esquire.

 8      --   Opinion of James T. Foran, Esquire regarding tax matters.

 12     --   Statement  regarding computation of ratios of earnings.*

 21     --   Subsidiaries of the Registrant.*

 23.1   --   Consent of James T. Foran,  Esquire  (contained in Exhibits 5
             and 8).

 23.2   --   Consent of Independent Accountants.

 23.3   --   Consent of Independent Accountants.

 23.4   --   Consent of Independent Accountants.

 24     --   Power of Attorney.*

 25     --   Statement  of  Eligibility  of Trustee on Form T-1.*

 27     --   Financial  Data Schedule.*

 99.1   --   Form of Letter of  Transmittal.*

 99.2   --   Form of Notice of Guaranteed Delivery.*

 99.3   --   Report of Independent Accountants.

 99.4   --   Report of Independent Accountants.

----------
  * Previously filed.