As filed with the Securities and Exchange Commission on ________, 2001
                                                    Registration No.____________

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

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   ----------

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

                                   ----------

                                 PSEG Power LLC
             (Exact name of registrant as specified in its charter)

    Delaware                         4911                      22-3663480
 (State or other               (Primary Standard            (I.R.S. Employer
  jurisdiction                    Industrial              Identification Number)
 of incorporation               Classification
 or organization)                Code Number)

                                   ----------

                                 PSEG Fossil LLC
             (Exact name of registrant as specified in its charter)

    Delaware                         4911                      22-3663481
 (State or other               (Primary Standard            (I.R.S. Employer
  jurisdiction                    Industrial              Identification Number)
 of incorporation               Classification
 or organization)                Code Number)

                                   ----------

                                PSEG Nuclear LLC
             (Exact name of registrant as specified in its charter)

    Delaware                         4911                      22-3663482
 (State or other               (Primary Standard            (I.R.S. Employer
  jurisdiction                    Industrial              Identification Number)
 of incorporation               Classification
 or organization)                Code Number)

                                   ----------

                        PSEG Energy Resources & Trade LLC
             (Exact name of registrant as specified in its charter)

    Delaware                         6221                      22-3663483
 (State or other               (Primary Standard            (I.R.S. Employer
  jurisdiction                    Industrial              Identification Number)
 of incorporation               Classification
 or organization)                Code Number)

                                   ----------

                                80 Park Plaza-T16
                            Newark, New Jersey 07102
                                 (973) 430-7000
                               http://www.pseg.com
          (Address, including zip code and telephone number, including
             area code, of Registrants' principal executive offices)

                                   ----------

                                Morton A. Plawner
                          Vice President and Treasurer
                                 PSEG Power LLC
                                80 Park Plaza-T6
                            Newark, New Jersey 07102
                                 (973) 430-7000
       (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-T5B
                                  P.O. Box 1171
                          Newark, New Jersey 07101-1171
                                 (973) 430-7000

                                   ----------


<PAGE>

      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)
-------------------------------------------------------------------------------------------------------

                                    <C>               <C>       <C>                 <C>
67/8% Senior Notes due 2006            $500,000,000      100%      $500,000,000        $125,000
-------------------------------------------------------------------------------------------------------
Guarantees of 67/8% Senior Notes
  due 2006                                  (2)           (2)            (2)              (2)
-------------------------------------------------------------------------------------------------------
73/4% Senior Notes due 2011            $800,000,000      100%      $800,000,000        $200,000
-------------------------------------------------------------------------------------------------------
Guarantees of 73/4% Senior Notes
  due 2011                                  (2)           (2)            (2)              (2)
-------------------------------------------------------------------------------------------------------
85/8% Senior Notes due 2031            $500,000,000      100%      $500,000,000        $125,000
-------------------------------------------------------------------------------------------------------
Guarantees of 85/8% Senior Notes
  due 2031                                  (2)           (2)            (2)              (2)
=======================================================================================================
</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.

(2)   No additional  consideration will be paid for the Guarantees.  Pursuant to
      Rule  457(n)  under the  Securities  Act,  no  separate  fee is payable in
      respect of the Guarantees.

      The Registrants  hereby amend this registration  statement on such date or
dates as may be  necessary  to delay its  effective  date until the  Registrants
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 September 10, 2001
PRELIMINARY PROSPECTUS
[LOGO]

                                 $1,800,000,000

                                 PSEG Power LLC

                                Offer to Exchange

                    $500,000,000 67/8% Senior Notes Due 2006
                    $800,000,000 73/4% Senior Notes Due 2011
                    $500,000,000 85/8% Senior Notes Due 2031
               Which have been registered under the Securities Act

                           For Any and All Outstanding
                    $500,000,000 67/8% Senior Notes Due 2006
                    $800,000,000 73/4% Senior Notes Due 2011
                    $500,000,000 85/8% Senior Notes Due 2031
                        Which have not been so registered

                           TERMS OF THE EXCHANGE OFFER

o     The exchange offer expires at 5:00 p.m.,  Eastern Time, on , 2001,  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     The  exchange  notes,   like  the  original  notes,   will  be  fully  and
      unconditionally  guaranteed  by PSEG Fossil LLC, PSEG Nuclear LLC and PSEG
      Energy  Resources & Trade LLC on a joint and several basis. The guarantees
      will rank equally in right of payment to all  existing  and future  senior
      unsecured indebtedness of the guarantors.

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     The  original  notes  are  listed  on  the  Luxembourg   Stock   Exchange.
      Application  will be made to list the  exchange  notes  on the  Luxembourg
      Stock  Exchange.  We do not intend to apply for  listing  of the  exchange
      notes on any other 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 ______, 2001.


<PAGE>

                                TABLE OF CONTENTS

                                                                            Page
                                                                            ----
Where to Find More Information ............................................    3
Prospectus Summary ........................................................    4
Risk Factors ..............................................................   13
Forward-Looking Statements ................................................   21
Use of Proceeds ...........................................................   22
Capitalization ............................................................   22
Selected Consolidated Financial Data
Management's Discussion and Analysis of Financial Condition
 and Results of Operations ................................................   23
Business ..................................................................   35
Management ................................................................   63
Certain Relationships and Related Transactions ............................   65
The Exchange Offer ........................................................   67
Description of the Exchange Notes .........................................   75
Federal Income Tax Considerations .........................................   94
Plan of Distribution ......................................................   97
Legal Opinions ............................................................   97
Experts ...................................................................   98
Index to Financial Statements .............................................  F-1
Independent Auditors' Report ..............................................  F-2
Consolidated Financial Statements .........................................  F-3

      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.  Unless the  context  otherwise  indicates,  all  references  to
"Power,"  "we," "us" or "our"  herein  mean PSEG  Power LLC, a Delaware  limited
liability  company,  and its  consolidated  subsidiaries.  (For periods prior to
August 21, 2000,  " Power,"  "we," "us" or "our" also  includes  the  generation
business of Public Service Electric and Gas Company.)

      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  (the  "SEC")  a  registration   statement  under  the
Securities Act of 1933 (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. These documents 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:

                          Director, Investor Relations
                            PSEG Services Corporation
                                80 Park Plaza-T6
                            Newark, New Jersey 07102
                                 (973) 430-7000


                                       3
<PAGE>

--------------------------------------------------------------------------------
                               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
                                   $1,800,000,000  principal  amount of exchange
                                   notes in three series, the $500,000,000 67/8%
                                   Senior Notes due 2006, the $800,000,000 73/4%
                                   Senior  Notes  due 2011 and the  $500,000,000
                                   85/8%    Senior    Notes   due   2031,    for
                                   $1,800,000,000  of  original  notes  of  like
                                   series.  The original  notes may be exchanged
                                   only in minimum denominations of $100,000 and
                                   integral   multiples   of  $1,000  in  excess
                                   thereof.

Issuance of the Original Notes ..  The  original  notes were  issued and sold on
                                   April 16, 2001 in a transaction not requiring
                                   registration under the Securities Act.

Registration ....................  Rights  At the time we  issued  the  original
                                   notes, we entered into a 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 Notes ....  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.   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 registration rights agreement relating
                                   to the  original  notes to  allow  you to use
                                   this  prospectus  for this purpose during the
                                   90-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".
--------------------------------------------------------------------------------


                                       4
<PAGE>

--------------------------------------------------------------------------------
                                   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.

Accrued Interest on the
  Original Notes ................  The   exchange   notes  due  2006  will  bear
                                   interest  at an  annual  rate of  67/8%,  the
                                   exchange notes due 2011 will bear interest at
                                   an  annual  rate of  73/4%  and the  exchange
                                   notes  due  2031  will  bear  interest  at an
                                   annual rate of 85/8%.  Any interest  that has
                                   accrued on any series of 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 Time,  on , 2001,  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  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  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 ..................  The  Bank  of  New  York  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
                                   registration rights agreement. Any market for
                                   original  notes that are not exchanged  could
                                   be adversely  affected by the consummation of
                                   this exchange offer.
--------------------------------------------------------------------------------


                                       5
<PAGE>

--------------------------------------------------------------------------------
                          Summary of the Exchange Notes

      This exchange offer applies to $1,800,000,000  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
will not be  entitled  to further  registration  rights  under the  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.  The  exchange  notes,  like the  original  notes,  will be fully and
unconditionally  guaranteed by our three principal operating subsidiaries,  PSEG
Fossil LLC ("Fossil"),  PSEG Nuclear LLC ("Nuclear") and PSEG Energy Resources &
Trade LLC  ("ER&T"),  on a joint and several  basis.  The  guarantees  will rank
equally  in right  of  payment  to all  existing  and  future  senior  unsecured
indebtedness of the guarantors.

Issuer                                 PSEG Power LLC

Securities Offered ..............  $500,000,000  of 67/8% Senior Notes due 2006,
                                   $800,000,000  of 73/4%  Senior Notes due 2011
                                   and  $500,000,000  of 85/8%  Senior Notes due
                                   2031  which  have been  registered  under the
                                   Securities Act.

Interest Payment Dates ..........  April  15  and   October  15  of  each  year,
                                   beginning October 15, 2001.

Maturities ......................  67/8% Senior Notes due April 15, 2006,  73/4%
                                   Senior  Notes due  April  15,  2011 and 85/8%
                                   Senior Notes due April 15, 2031.

Optional Redemption .............  We may  redeem  any or all of each  series of
                                   the  exchange  notes  at any  time at a price
                                   equal to the sum of (i) 100% of the principal
                                   amount of the exchange notes being  redeemed,
                                   (ii) a make whole  premium  and (iii)  unpaid
                                   interest  accrued  up to  and  including  the
                                   applicable  redemption date. See "Description
                                   of Exchange Notes -- Optional Redemption".

Ranking .........................  The exchange  notes will be senior  unsecured
                                   obligations,  will rank  equally  with all of
                                   our senior  unsecured  indebtedness  and will
                                   rank  senior  to our  subordinated  unsecured
                                   indebtedness.   As   of  ,   2001,   we   had
                                   outstanding  $  million  of debt  that  ranks
                                   equal with the exchange notes and, as of that
                                   date, we had no secured debt outstanding.

Guarantees ......................  Each  series of the  exchange  notes  will be
                                   fully  and   unconditionally   guaranteed  by
                                   Fossil,  Nuclear  and  ER&T  on a  joint  and
                                   several  basis.   The  guarantees  will  rank
                                   equally in right of  payment to all  existing
                                   and future senior  unsecured  indebtedness of
                                   the guarantors. We have issued a guarantee of
                                   the  obligations of ER&T,  which guarantee is
                                   subordinate to the exchange notes.

Ratings .........................  The exchange notes have been assigned ratings
                                   of "Baa1" by Moody's Investors Service, Inc.,
                                   "BBB+" by Fitch, Inc. and "BBB" by Standard &
                                   Poor's Ratings Services.

                                   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.
--------------------------------------------------------------------------------


                                       6
<PAGE>

--------------------------------------------------------------------------------
Certain Covenants ...............  The indenture  under which the original notes
                                   were,  and the exchange notes will be, issued
                                   contains  covenants  restricting  us and  the
                                   above-referenced   restricted   subsidiaries.
                                   Each  of  these  covenants  is  subject  to a
                                   number  of   important   qualifications   and
                                   exceptions.  See "Description of the Exchange
                                   Notes-- Selected Indenture  Covenants." These
                                   covenants limit our ability,  and the ability
                                   of  our  restricted  subsidiaries  to,  among
                                   other things:

                                   o     in   the   case   of   our   restricted
                                         subsidiaries,       incur       certain
                                         indebtedness;

                                   o     create liens;

                                   o     in   the   case   of   our   restricted
                                         subsidiaries, create or permit to exist
                                         dividend or payment  restrictions  with
                                         respect to us;

                                   o     sell assets; and

                                   o     engage in mergers and consolidations.

ER&T ............................  Dividends In addition, the indenture contains
                                   a covenant  requiring  one of our  restricted
                                   subsidiaries, ER&T, to pay periodic dividends
                                   or distributions to us of the excess cash not
                                   required  for its  business  operations.  See
                                   "Description   of  the   Exchange   Notes  --
                                   Selected Indenture Covenants."

Form ............................  Each  series of 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 An investment  in the exchange  notes
                                   involves   certain  risks   relating  to  our
                                   business, prospects,  financial condition and
                                   results  of  operations  and the terms of the
                                   exchange notes.  These risks are described in
                                   "Risk Factors."

                                   PSEG Power

      We are one of the largest  independent  electric  generating and wholesale
energy marketing and trading  companies in the United States.  Through our three
principal operating subsidiaries, we generate and market electricity,  capacity,
ancillary services and natural gas products on a wholesale basis. As of June 30,
2001, our generation portfolio consisted of 11,490 megawatts ("MW") of installed
capacity owned or under  contract.  Our target market,  which we refer to as the
Super  Region,  extends from Maine to the  Carolinas  and the Atlantic  Coast to
Indiana,  encompassing  37% of  the  nation's  power  consumption.  With  20% of
installed  capacity,  we are the single  largest  power  supplier in our primary
market, the Pennsylvania-New Jersey-Maryland Power Pool ("PJM"), which is one of
the nation's largest and most well-developed energy markets.

      We expect to continue  to  increase  our  generation  capacity  within our
target market, and we believe that we are favorably  positioned to do so through
site expansions,  strategic acquisitions and new generation development. We seek
to  continually  maximize  the value of our  generation  portfolio  through  the
centralized control of its operations and its integration with our trading, fuel
procurement,  marketing and risk management  expertise.  Our electric generation
portfolio  is  diversified  by  fuel  source  and  market  segment  and we  have
demonstrated expertise in natural gas procurement.

      We began operating as a deregulated energy supplier in 1999. On August 21,
2000, we acquired ownership of the electric generation  portfolio of our utility
affiliate,  Public  Service  Electric  and
--------------------------------------------------------------------------------


                                       7
<PAGE>

--------------------------------------------------------------------------------
Gas Company  ("PSE&G"),  New Jersey's  largest  public  utility.  This portfolio
included  more than 10,200  megawatts  of nuclear and fossil  capacity  which we
acquired at a cost of $239/kW. Through June 30, 2001, we:

      o     acquired 544 MW of nuclear  capacity in Pennsylvania and New Jersey;
            o acquired 380 MW of steam capacity in New York;

      o     completed  construction  and began operation of 332 MW of combustion
            turbines in New Jersey;

      o     began  construction  of 1,854 MW of  combined  cycle and  combustion
            turbine units in New Jersey;

      o     began  construction  of 2,000 MW of combined  cycle units in Indiana
            and Ohio;

      o     are in advanced development of 750 MW of combined cycle units in New
            York.

      We expect that the new generating  assets under  construction  at June 30,
2001, which will add 4,604 MW to our generation portfolio,  will be completed by
the end of the  second  quarter  of 2003.  This new  capacity  will  expand  our
generation portfolio to three contiguous reliability regions.

      As a result of New Jersey's deregulation and restructuring of the electric
power industry,  PSE&G was required by the New Jersey Board of Public  Utilities
("BPU")  to  transfer  its  generation  facilities  and  related  assets  to  an
unregulated  affiliate.  We and  our  three  principal  operating  subsidiaries,
Fossil, which operates our fossil generating facilities; Nuclear, which operates
our nuclear generating facilities; and ER&T, which conducts our wholesale energy
marketing and trading activities,  were therefore formed to own and operate what
were formerly  PSE&G's  electric  generation  assets and business.  As an Exempt
Wholesale  Generator ("EWG"),  we do not directly serve any retail customers and
we use our generation  facilities  exclusively for the production of electricity
for sale at the wholesale  level.  We have  contracted with PSE&G to provide its
energy,  capacity and ancillary  services  required to fulfill its  BPU-mandated
basic generation  service ("BGS")  obligation  through July 2002. As part of our
380 MW asset purchase from Niagara Mohawk Power  Corporation  ("NIMO"),  we have
contracted  to provide NIMO with energy and capacity at prices  consistent  with
its regulatory agreement through September 2003.

      We are a  wholly-owned  subsidiary  of  Public  Service  Enterprise  Group
Incorporated ("PSEG").  PSEG is an exempt public utility holding company and one
of the leading  providers of energy and energy  related  services in the nation.
PSEG has three  other  direct,  wholly-owned  subsidiaries:  PSE&G,  PSEG Energy
Holdings Inc. ("Energy  Holdings") and PSEG Services  Corporation  ("Services").
PSE&G is New Jersey's  largest public utility and is engaged  principally in the
transmission,  distribution  and sale of electric  energy and gas service in New
Jersey.   Energy  Holdings   participates   nationally  and  internationally  in
energy-related  lines of business through its  subsidiaries.  Services  provides
corporate  support and  managerial and  administrative  services to PSEG and its
affiliates.

Deregulation

      Since the  target  markets  in which we  operate  are  deregulated  at the
wholesale  level,  continued  deregulation  of the retail  markets  within these
regions is likely to bring new  purchasers  of  electricity  into the  wholesale
markets,  thus  increasing the volume of  transactions.  This should continue to
strengthen the efficient operation and liquidity of those markets.  Liquidity is
essential for efficiency as it provides a ready market for our generation output
and marketing and trading activities.

      We expect  that  deregulation  will  continue  in the  regions in which we
compete.  In our target market, 13 of the 19 states and the District of Columbia
have enacted restructuring  legislation,  while six of the remaining states have
either issued a regulatory order relating to restructuring or are in the process
of investigating  restructuring.  Retail  competition has already begun in 12 of
the states and the District of Columbia with two additional  states scheduled to
begin competition in 2001 and 2002. Three of the five wholesale  marketplaces in
our Super Region are operated by Independent System Operators ("ISOs"),  and the
other two markets are expected to develop similar  governance  structures in the
near future.
--------------------------------------------------------------------------------


                                       8
<PAGE>

--------------------------------------------------------------------------------
Competitive Strengths

      We  believe  that we are  well  positioned  to build  upon our  successful
history  and  existing  asset  base to  remain  one of the  largest  independent
electric  generating and wholesale energy marketing and trading companies in the
United States. Our significant competitive strengths include the following:

      o     We  have  one  of  the  largest  and  most  diversified  unregulated
            generating portfolios in PJM and the eastern United States:

            o     our assets  represent a diversified mix in terms of fuel type,
                  technology and energy market segments,  which reduces our risk
                  associated   with  market  demand  cycles  and  allows  us  to
                  participate in each segment of the dispatch curve;

            o     our assets are  strategically  located near  concentrations of
                  customers; and

            o     our base load coal and nuclear assets continue to achieve high
                  capacity factors,  while our  load-following and peaking units
                  have high equivalent availability factors.

      o     We have a wholesale  marketing and trading  function with integrated
            control of our  generating  assets,  fuel  procurement  and  trading
            activities:

            o     we seek to create the optimal mix of  financial  and  physical
                  assets, mitigating the effects of adverse movement in the fuel
                  and electricity markets;

            o     we enter  into  both  short-term  and  longer  term  bilateral
                  contracts with over 100 credit-approved counterparties; and

            o     we  provide  effective  management  of the spark  spread - the
                  difference between the cost of fuel and the price of power.

      o     We utilize a conservative  risk management  strategy to minimize our
            exposure to long-term and  short-term  market risks,  which has been
            instrumental in our ability to consistently  grow the  profitability
            of our trading operations:

            o     our corporate risk management  committee provides oversight of
                  the entire  process and reports  directly to the PSEG Board of
                  Directors;

            o     we have a corporate risk management  group  independent of our
                  trading operations that reports to the chief financial officer
                  of PSEG and  provides  independent  risk  oversight of trading
                  activity and monitors,  measures and  aggregates the financial
                  risk activities of all trading operations; and

            o     we  monitor  the  value-at-risk  associated  with our  forward
                  positions, including our generation and sales obligations on a
                  weekly  basis,  and we mark our positions to market and stress
                  test our portfolio on a daily basis.

      o     We possess extensive  experience within PJM and surrounding regions,
            which  provides us with  in-depth  knowledge  and insight  about the
            market's assets, market rules and transmission constraints.

      o     We have a management team that is comprised of seasoned  individuals
            who have long-standing experience with our generating assets, market
            conditions, labor relations, business development, commodity trading
            and risk  management.  Our management and operating  teams have, for
            the most part,  managed and controlled  our generating  assets since
            their construction.

      o     We are committed as an environmental leader:

            o     we led the industry as an advocate for integrated  power plant
                  emissions   strategy  that  would  coordinate   reductions  of
                  nitrogen oxides, sulfur dioxide, mercury, and carbon dioxide;

            o     we   implemented   the   largest   privately-funded   wetlands
                  restoration program in the U.S.;
--------------------------------------------------------------------------------


                                       9
<PAGE>

--------------------------------------------------------------------------------
            o     we  achieved a  voluntary  80%  reduction  in  nitrogen  oxide
                  emissions in our New Jersey facilities; and

            o     we were recognized by the U.S. Environmental Protection Agency
                  ("EPA") for our efforts to reduce solid and hazardous wastes.

Business Strategy

      Our  objective  is to  continue  to  profitably  build our  multi-regional
generating  and wholesale  energy  marketing and trading  company based upon our
successful formula of integrating generating asset operations with our wholesale
energy,  fuel supply,  trading and risk management  expertise.  To implement our
strategy we plan to:

      o     Maximize the value of our existing assets based upon their location,
            low cost and fuel diversity. More specifically, we plan to:

            o     continue  to  provide  for long term  power  supply  contracts
                  associated with about 75% of portfolio;

            o     benefit from the advantageous location of assets near the load
                  centers - therefore allowing us to benefit from the impacts of
                  transmission constraints; and

            o     take  advantage of the value of  possessing  assets across the
                  entire  market  spectrum  -  base  load,  load  following  and
                  peaking.

      o     Continue  the  strong  integration  between  the  operation  of  our
            generating  assets,  fuel procurement,  trading and risk management.
            More specifically, we plan to:

            o     continue to  optimize  the value of our  generating  assets by
                  coordinating  their  dispatch  with  our fuel  management  and
                  electricity and natural gas trading operations; and

            o     continue to maintain a strong control  environment through the
                  use of best  practices in risk  management  oversight for both
                  market and credit risk.

      o     Profitably  expand our asset base across the eastern United States -
            focusing both within the PJM region and in adjoining  regions.  More
            specifically, we plan to:

            o     continue to expand our existing  brownfield sites,  based upon
                  their  favorable   location  with  respect  to  load  centers,
                  priority position in the transmission  queue and existing fuel
                  supplies; and

            o     pursue a disciplined  approach to asset growth in  neighboring
                  regions  where we can bring our  expertise to bear with regard
                  to operations, market rules, trading and risk management; and

      o     Maintain our  commitment to the  environment - both by improving the
            environmental  performance  of our assets and by taking a leadership
            position  for a  uniform  set  of  stringent,  but  achievable,  air
            pollution standards for all U.S. power plants. More specifically, we
            plan to:

            o     continue  to  advocate an  integrated  power  plant  emissions
                  strategy  that  coordinates  reductions  of  nitrogen  oxides,
                  sulfur dioxide, mercury, and carbon dioxide;

            o     continue our  implementation  of the largest  privately-funded
                  wetlands restoration program in the U.S.; and

            o     achieve a 90% reduction in nitrogen oxide emissions at our New
                  Jersey facilities by 2003.
--------------------------------------------------------------------------------


                                       10
<PAGE>

                               Recent Developments

Development Activities

      In June 2001,  our Kearny Unit #12 (175 MW) in Kearny,  New Jersey,  began
commercial  operation  for  one  half  of  the  capacity.  The  unit  was  fully
operational in August 2001.

      We are in the process of obtaining  permits and approvals to authorize the
development of the Bethlehem Energy Center, a 750 MW combined-cycle  power plant
that will use natural gas as its primary fuel and low-sulfur distillate oil as a
secondary  fuel. The Bethlehem  Energy Center will be located on the site of the
400 MW Albany  Steam  Station  (which was  acquired  from  Niagara  Mohawk Power
Corporation in May 2000) and will replace that facility.  In September,  the New
York Department of Environmental Conservation issued draft air and water permits
for the project.  In addition,  the New York State Board on Electric  Generation
Siting and Environment  determined that the plant's  application  Certificate of
Environmental  Compatibility  and  Public  Need  was in  compliance  with  state
regulations.  Public  hearings on the  application  are scheduled to commence in
October.

      On August 22, 2001, construction and term loans with a group of banks were
closed for the Waterford,  Ohio ($355 million) and  Lawrenceburg,  Indiana ($445
million) projects.  The interest rate on these loans is set at LIBOR plus 1.375%
during the construction phase and 1.5% thereafter. Construction on each of these
projects has commenced.

      In June 2001, we sold 350 MW of turbine equipment.

License Renewals

      Exelon, co-owner and operator of Peach Bottom Atomic Power Station ("Peach
Bottom"),  has informed us that on July 3, 2001 an application  was submitted to
the Nuclear  Regulatory  Commission  to renew the  operating  licenses for Peach
Bottom Units 2 and 3. If approved,  the current licenses would be extended by 20
years,  to 2033 and  2034 for  Units 2 and 3  respectively.  Nuclear  Regulatory
Commission  review of the  application  is  expected to take  approximately  two
years.

      The New Jersey Department of Environmental  Protection  ("NJDEP") issued a
final New Jersey Pollutant Discharge  Eliminating System permit (Permit) for our
Salem  Generating  Station (Salem),  effective August 1, 2001,  allowing for the
continued operation of Salem with its existing cooling water system. This Permit
renews Salem's  variance from applicable  thermal water quality  standards under
Section  316(a) of the federal  Clean  Water Act  ("CWA"),  determines  that the
existing intake  structure  represents  best technology  available under Section
316(b)  of the  CWA,  requires  that  we  continue  to  implement  the  wetlands
restoration  and fish  ladder  programs  established  under the 1994  permit and
imposes requirements for additional analyses of data and studies to determine if
other  intake  technologies  are  available  for  application  at Salem that are
biologically  effective.  The  Permit  also  requires  us to  install  up to two
additional  fish ladders in New Jersey and fund an escrow  account in the amount
of $500,000 for the  construction  of  artificial  reefs by NJDEP.  The Permit's
expiration date is July 31, 2006.

      We also  reached a  settlement  with the  Delaware  Department  of Natural
Resources  and  Environmental  Control  ("DNREC")  providing  that we will  fund
additional habitat  restoration and enhancement  activities as well as fisheries
monitoring and that we and DNREC will work  cooperatively on the finalization of
other regulatory approvals required for implementation of the Permit. As part of
this agreement,  we were required to deposit  approximately $5.8 million into an
escrow account to be used for future costs related to this settlement.
--------------------------------------------------------------------------------


                                       11
<PAGE>

--------------------------------------------------------------------------------
             Summary Selected Historical Consolidated Financial Data

      The   following   table  sets  forth  our  summary   selected   historical
consolidated  financial data. The historical  consolidated  financial data as of
June 30,  2001,  and for the six months  ended June 30,  2001 and 2000 have been
derived  from our  unaudited  financial  statements  included  elsewhere in this
prospectus.  The historical  consolidated financial data as of December 31, 2000
and 1999, and for the three years ended December 31, 2000 have been derived from
our audited  financial  statements  included  elsewhere in this prospectus.  The
historical consolidated financial data as of December 31, 1998 and 1997, and for
the year ended  December  31,  1997 have been  derived  from  audited  financial
statements not included herein. The historical consolidated financial data as of
and for the  year  ended  December  31,  1996 has been  derived  from  unaudited
financial  statements  not  included  herein and, in the opinion of  management,
include all  adjustments  necessary  for a fair  presentation  of our  financial
position and results of operations for this period.  The  information  set forth
below should be read in conjunction with Management's Discussion and Analysis of
Financial  Condition  and Results of  Operations  ("MD&A") and the  Consolidated
Financial Statements and accompanying Notes to Consolidated Financial Statements
included  elsewhere in this prospectus.  Data related to periods prior to August
2000 have been derived from PSE&G's financial statements and are not necessarily
indicative of the financial  condition,  results of operations or net cash flows
that  would  have  existed  had  PSE&G's  generation-related  business  been  an
independent company during those periods.

<TABLE>
<CAPTION>
                                   For the Six
                                  Months Ended
(in millions)                       June 30,                For the Years Ended December 31,
                                  ------------      ---------------------------------------------
                                 2001     2000      2000      1999       1998      1997      1996
                                 ----     ----      ----      ----       ----      ----      ----
<S>                           <C>       <C>       <C>       <C>        <C>       <C>       <C>
Income Statement Data
Operating Revenue .........   $ 2,320   $ 2,373   $ 4,927   $ 4,494    $ 4,428   $ 2,822   $ 2,510
Operating Expenses ........     1,883     2,003     4,215     3,563      3,794     2,195     1,957
Operating Income ..........       437       370       712       931        634       627       553
Interest Expense ..........        89        43       198       112        216       223       221
Income Taxes ..............       140       136       208       291        156       101       129
Income Before Extraordinary
  Item ....................       206       198       313       516        237       195       187
Extraordinary Item (1) ....        --        --        --    (3,204)        --        --        --
Net Income (Loss) .........       206       198       313    (2,688)       237       195       187
Earnings (Loss) Available
  to PSEG .................   $   206   $   198   $   313   $(2,691)   $   232   $   186   $   184
</TABLE>

                       As of June 30,              As of December 31,
                       --------------  -----------------------------------------
                           2001        2000     1999     1998     1997     1996
                           ----        ----     ----     ----     ----     ----
Balance Sheet Data
Assets .................  $4,830      $4,530   $3,301   $8,045   $8,183   $8,405
Current Liabilities ....   1,388       1,470    1,038      762      984      838
Noncurrent Liabilities .   1,000       1,006      991    2,096    2,075    2,086
Capitalization (2) .....   2,442       2,054    1,272    5,187    5,124    5,481

<TABLE>
<CAPTION>
                         For the Six
                         Months Ended
                           June 30,           For the Years Ended December 31,
                           --------       ----------------------------------------
                         2001    2000     2000     1999     1998     1997     1996
                         ----    ----     ----     ----     ----     ----     ----
<S>    <C>             <C>      <C>      <C>      <C>      <C>      <C>      <C>
Other Data
EBITDA (3) .........   $  490   $  445   $  855   $1,155   $1,015   $  905   $  911
Capital Expenditures      741      177      479       92      265      166       75
</TABLE>

----------
(1)   Effective  April 1, 1999, we  discontinued  the application of SFAS 71 and
      recorded an  extraordinary  charge.  The  extraordinary  charge  consisted
      primarily of the write-down of our nuclear and fossil generating stations.
(2)   Includes notes payable to an affiliated company in the year 2000.
(3)   Earnings  before   Interest,   Taxes,   Depreciation   and   Amortization.
      Information  concerning  EBITDA  is  presented  here not as a  measure  of
      operating  results,  rather as a measure of ability  to service  debt.  In
      addition,  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  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

     In addition to the information contained elsewhere in this prospectus,
       prospective investors should carefully consider the risks described
       below. Each of the following factors could have a material adverse
        effect on our business, prospects, financial condition, results
                        of operations or net cash flows.

Power generation operating performance may fall below projected levels

      The risks associated with operating power  generation  facilities (each of
which could result in performance below expected capacity levels) include:

      o     performance below expected levels of output or efficiency;

      o     breakdown or failure of equipment or processes;

      o     disruptions in the transmission of electricity;

      o     labor disputes;

      o     fuel supply interruptions;

      o     limitations   which  may  be  imposed  by   environmental  or  other
            regulatory requirements;

      o     violations of permit limitations; and

      o     operator  error  or  other   catastrophic   events  such  as  fires,
            earthquakes, explosions, floods or other similar occurrences.

      Operation  below  expected  capacity  levels may result in lost  revenues,
increased   expenses,   higher  maintenance  costs  and  penalties.   Individual
facilities may be unable to meet operating and financial  obligations  resulting
in reduced cash flow.

      Although  we employ  experienced  personnel  to  maintain  and operate our
facilities and carry insurance  (including business  interruption  insurance for
our nuclear units) to mitigate the effects of certain  operating risks described
above,  we cannot  give any  assurance  that,  should  one or more of the events
described above occur, it would not significantly decrease or eliminate revenues
from operations or significantly increase the costs of operations.

      A decrease in revenues or an increase in operating costs could decrease or
eliminate  funds  available to us to make  payments on our debt,  including  the
exchange notes.

We have a limited operating history as a stand-alone power generator

      Although our generation  stations had a significant  operating  history at
the time they were acquired by us from PSE&G,  we have a very limited history of
owning and operating them on a stand-alone  basis.  In addition,  the generation
stations were  previously  operated as integrated  parts of a regulated  utility
prior to their  acquisition  by us and their output of  electricity  was sold by
PSE&G at prices  that were based upon rates set by  regulatory  authorities.  We
cannot make any assurance that the generation  stations will perform as expected
or  produce  revenues  sufficient  to meet their  cost of  operation,  necessary
capital expenditures or debt service on our indebtedness.

      Our  historical  consolidated  financial  statements  do not  allow  us to
predict with any certainty our future income because:

      o     of  our  generation  business'  limited  experience  operating  as a
            separate, competitive, non-regulated enterprise;

      o     we have been operating the generation stations for a short period of
            time on a stand-alone basis;

      o     PJM's and New York ISO's  pricing and  operating  rules have changed
            significantly in recent years; and


                                       13
<PAGE>

      o     since August 1, 1999,  commodity/fuel risk is no longer being offset
            by regulatory fuel/energy adjustment clause mechanisms.

Unavailability  of power  transmission  facilities  may  impact  our  ability to
deliver our output to customers

      We depend on transmission and  distribution  facilities owned and operated
by others to deliver the  electricity we generate and sell. If  transmission  is
disrupted,  or if transmission  capacity is inadequate,  our ability to sell and
deliver our electric  energy products may be adversely  impacted.  If a region's
power transmission  infrastructure is inadequate,  our ability to generate power
and earn revenues may be limited.

We may not be able to obtain  adequate  fuel  supplies  and  purchased  power at
attractive prices

      Prior to August 1, 1999,  our revenues and expenses  were  impacted by the
Electric  Levelized  Energy  Adjustment  Clause  ("LEAC").  LEAC  was a  utility
regulatory  rate setting  mechanism  for  compensating  the utility and electric
consumers for  unpredicted  fuel and purchased  power price  fluctuations.  LEAC
allowed for adjustments to electric rates on a periodic  basis.  In effect,  the
utility credited electric  customers for lower than predicted fuel and purchased
power prices and collected  additional  revenues  when fuel and purchased  power
prices were  higher  than  predicted.  On August 1, 1999,  LEAC was  eliminated,
introducing  an  increased  potential  for  earnings  and cash  flow  volatility
associated  with exposure to price  fluctuations in the fuel and purchased power
markets.  We are now subject to the full  effects of price  fluctuations  in the
energy markets.

      Among the factors that will influence such energy prices (all of which are
beyond our control) are:

      o     prevailing  availability  and market  prices for coal,  natural gas,
            fuel oil, enriched uranium and uranium fuel;

      o     the  extent of  additional  supplies  of  electric  energy  from our
            current   competitors   or  new  market   entrants,   including  the
            development of new generation facilities that may be able to produce
            electricity less expensively;

      o     the extent of additional supplies of electricity from an increase in
            physical  transmission  capacity into the energy markets in which we
            participate;

      o     weather conditions from time to time; and

      o     the  possibility  of a reduction in the projected  rate of growth in
            electricity  usage as a result of such factors as regional  economic
            conditions and the implementation of energy conservation programs.

      We cannot  guarantee that we will be consistently  able to obtain adequate
supplies of fuel and purchased power at attractive prices.

We may have to purchase  electricity at substantially  higher prices than we can
sell it under our BGS contract with PSE&G

      In the event that  demand  associated  with the BGS  contract  exceeds our
generation capacity, we will have to purchase wholesale power to meet this sales
commitment.  The cost of obtaining  the  electricity  needed to service the full
amount of the  contract  may exceed  the price  that we  receive  from PSE&G for
providing  that energy under the BGS  contract.  The price that we receive under
the BGS  contract  is fixed (at the  retail  tariff  rate on file with the BPU),
while electricity prices in the wholesale market can be extremely  volatile.  In
the event that we have to  purchase  electricity  to cover our BGS  commitments,
high market prices for that  purchased  electricity,  whether hedged or not, are
likely to increase our energy costs and adversely affect our earnings.

The seasonality of our business may impact cash flow

      Through July 31, 2002,  our cash flow will be primarily  influenced by the
BGS contract that we have with PSE&G. Our BGS revenues will be a function of the
terms of this  contract,  while our  associated  costs will be a function of the
variable cost of our generation asset portfolio and power purchase


                                       14
<PAGE>

opportunities  relative to the capacity and energy needs of PSE&G's BGS customer
base.  When the  capacity  and energy  output of our owned  generation  units is
insufficient to cover the needs of PSE&G's BGS load, which is more likely during
summer  months,  we will  purchase  additional  energy  and  capacity  from  the
wholesale  markets.  In  such  instances,  we  could  be  exposed  to the  price
volatility of the wholesale  markets and our cash flows may vary  throughout the
course of a year.

      After July 31, 2002,  our cash flow will largely be determined by the size
of our generation  asset portfolio  relative to our  contractual  obligations to
provide retail aggregators and other wholesale market participants  capacity and
energy. Similar to the short-term situation, we will purchase or sell additional
energy and  capacity  to/from the  wholesale  markets  when  necessary  and such
exposure may result in varying cash flows from month to month.

Upon  expiration  of the BGS  contract,  we cannot  guarantee we will be able to
replace those revenues

      PSE&G is required by the BPU to competitively  seek bids for the supply of
its  BGS  obligations  for  periods  after  July  31,  2002.  We will  have  the
opportunity  to submit a bid to continue to supply PSE&G or another load serving
entity ("LSE") in New Jersey under a new contract, or we can sell our energy and
capacity  into the spot  market,  enter into  other  bilateral  agreements  or a
combination  thereof.  Our  goal is to  realize  a  majority  of our  generation
revenues  from  bilateral  agreements.  In  addition,  we will  continue to sell
additional  energy and  capacity  into the spot  market and will  continue to be
subject  to the risks and  rewards  associated  with the  competitive  wholesale
electricity  market to the extent that the price at which we sell our energy and
capacity differs from our production or purchased power costs.

Credit, commodity and financial market risks may have an adverse impact

      The revenues  generated by the  operation of our  generation  stations are
subject to market risks that are beyond our control.  Our generation output will
either  be  used  to  satisfy  our  wholesale  contracts  or be  sold  into  the
competitive  power markets or under other bilateral  contracts.  Participants in
the competitive power markets are not guaranteed any specified rate of return on
their  capital  investments  through  recovery  of  mandated  rates  payable  by
purchasers of electricity. Therefore, with the exception of revenue generated by
the BGS contract  (which expires on July 31, 2002) and from bilateral  contracts
for the sale of  electricity  with  third-party  LSEs and power  marketers,  our
revenues and results of  operations  will be dependent  upon  prevailing  market
prices for energy, capacity and ancillary services in the markets we serve.

      Among the  factors  that will  influence  the market  prices  for  energy,
capacity and ancillary services are:

      o     the extent of additional supplies of capacity,  energy and ancillary
            services from current competitors or new market entrants,  including
            the  development  of new generation  facilities  that may be able to
            produce electricity less expensively;

      o     changes in the rules set by regulatory  authorities  with respect to
            the manner in which electricity sales will be priced;

      o     transmission congestion in PJM and/or other competitive markets;

      o     the  operation  of  nuclear  generation  plants  in  PJM  and  other
            competitive   markets  beyond  their  presently  expected  dates  of
            decommissioning;

      o     prevailing  market prices for enriched  uranium,  fuel oil, coal and
            natural gas and associated transportation costs;

      o     weather  conditions  prevailing in PJM and other competitive  market
            regions from time to time;

      o     the  possibility  of a reduction in the projected  rate of growth in
            electricity  usage as a  result  of  factors  such as  national  and
            regional economic  conditions and the implementation of conservation
            programs; and

      o     changes in regulations applicable to PJM and other ISOs.


                                       15
<PAGE>

Trading risks may have an adverse impact

      Our trading and marketing business  frequently  involves the establishment
of trading positions in the wholesale energy markets on long-term and short-term
bases.  To the  extent  that we have long  positions  in the energy  markets,  a
downturn  in the  markets  is likely to result in losses  from a decline  in the
value of such long  positions.  Conversely,  to the  extent  that we enter  into
forward sales contracts to deliver energy we do not own, or take short positions
in the energy markets, an upturn in the energy markets is likely to expose us to
losses as we  attempt  to cover our short  positions  by  acquiring  energy in a
rising market.

      In addition,  from time to time we may have a trading strategy  consisting
of  simultaneously  holding a long position and a short position,  from which we
expect  to earn a  profit  based on  changes  in the  relative  value of the two
positions.  If,  however,  the relative value of the two positions  changes in a
direction or manner we did not  anticipate,  we could realize losses from such a
paired position.

      If the strategy we utilize to hedge our  exposures to these  various risks
is not effective,  we could incur significant  losses.  Our substantial  trading
positions  can also be  adversely  affected  by the level of  volatility  in the
energy markets that, in turn,  depends on various factors,  including weather in
various  geographical areas and short-term supply and demand  imbalances,  which
cannot be predicted with any certainty.

      In addition,  we are exposed to the risk that  counterparties  that owe us
money or energy will not perform  their  obligations.  Although we have  devoted
significant resources to develop our risk management policies and procedures and
counterparty  credit requirements and expect to continue to do so in the future,
we can give no assurance that losses from our trading activities will not have a
material  adverse  effect on our  business,  prospects,  results of  operations,
financial condition, or net cash flows.

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

      Our capital and, in turn, that of our subsidiaries,  is provided by equity
contributions from PSEG,  internally-generated  cash flow,  borrowings by us and
borrowings by our  subsidiaries.  In order to ensure continued  growth,  we will
increasingly  require access to debt capital from outside  sources on acceptable
terms.

      We can give no assurances  that our current and future capital  structure,
operating  performance  or  financial  condition  will  permit us to access  the
capital markets or to obtain other financing at the times, in the amounts and on
the terms necessary or advisable for us to  successfully  carry out our business
strategy or to service our indebtedness, including the exchange notes.

Acquisition, construction and development activities may not be successful

      We may seek to acquire,  develop and  construct new energy  projects,  the
completion  of any of which  (including  the  pending  acquisition  of 298 MW of
nuclear  assets  from  Atlantic  City  Electric  Company  ("ACE")) is subject to
substantial  risk. Such activity can require us to expend  significant  sums for
preliminary engineering,  permitting,  fuel supply, resource exploration,  legal
and other expenses in preparation for  competitive  bids which we may not win or
before  it can be  established  whether  a  project  is  feasible,  economically
attractive or capable of being financed. Successful development and construction
is contingent upon, among other things,  negotiation of terms satisfactory to us
of engineering,  construction,  fuel supply and power sales contracts with other
project participants,  receipt of required  governmental  approvals and consents
and timely  implementation  of construction.  Further,  we can give no assurance
that we will obtain access to the substantial  debt and equity capital  required
to develop  and  construct  new  generation  projects or to  refinance  existing
projects.

      Our  future  growth is  dependent,  in large  part,  upon the  demand  for
significant  amounts of additional  energy and our ability to supply portions of
this demand. Even if such contracts are obtained,  we can give no assurance that
acquisition,  construction or development  efforts on any particular project, or
our efforts generally, will be successful in supplying such demand.


                                       16
<PAGE>

Government regulation affects many of our operations

      The  electric  power   generation   business  is  subject  to  substantial
regulation  and   permitting   requirements   from  federal,   state  and  local
authorities.  See  "Business  --  Regulation."  We are  required  to comply with
numerous laws and  regulations and to obtain  numerous  governmental  permits in
order to operate our generation stations.

      We believe  that we have  obtained all  material  energy-related  federal,
state and local approvals currently required to operate our generation stations.
Although not currently required, additional regulatory approvals may be required
in the future due to a change in laws and  regulations or for other reasons.  No
assurance  can be given that we will be able to obtain any  required  regulatory
approval  that we may require in the  future,  or that we will be able to obtain
any necessary  extension in obtaining any required regulatory  approvals.  If we
fail to obtain or comply with any required regulatory approvals,  there could be
a material  adverse effect on our ability to operate our generation  stations or
to sell electricity to third parties.

      PSEG has claimed an exemption  from  regulation by the SEC as a registered
holding  company under the Public Utility Holding Company Act of 1935 ("PUHCA"),
except for Section  9(a)(2)  thereof,  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.   The
subsidiaries which operate our generation stations are EWGs under PUHCA. Failure
to maintain EWG status could subject us to regulation by the SEC under PUHCA. In
addition,   actions  taken  by  PSE&G  could  cause  PSEG,   and  therefore  its
subsidiaries,  including us, to no longer be exempt from regulation under PUHCA.
If we, PSEG or any of our  subsidiaries  were to no longer be exempt from PUHCA,
we or they would be subject to additional  regulation by the SEC with respect to
financing and investing activities.

      We are subject to regulation by the Federal Energy  Regulatory  Commission
("FERC")  with  respect  to  certain  matters,  including  interstate  sales and
exchanges of electric capacity and energy.

      We  are  subject  to  pervasive   regulation  by  the  Nuclear  Regulatory
Commission  ("NRC")  with  respect to the  operation  of our nuclear  generation
stations.  Such regulation involves testing,  evaluation and modification of all
aspects  of  plant   operation   in  light  of  NRC  safety  and   environmental
requirements.  Continuous  demonstrations  to the NRC that plant operations meet
applicable requirements are also required. The NRC has the ultimate authority to
determine whether any nuclear generation unit may operate.

      We can give no assurance that existing  regulations will not be revised or
reinterpreted,  that new laws and  regulations  will not be  adopted  or  become
applicable  to us or any of our  generation  stations or that future  changes in
laws and regulations will not have a detrimental effect on our business.

Environmental regulation significantly impacts our operations

      We  are  required  to  comply  with  numerous  statutes,  regulations  and
ordinances  relating to the safety and health of employees  and the public,  the
protection of the  environment  and land use. These  statutes,  regulations  and
ordinances are constantly  changing.  While we believe that we have obtained all
material  environmental-related  approvals required as of the date hereof to own
and operate our facilities or that such approvals have been applied for and will
be issued in a timely manner, we may incur significant  additional costs because
of  compliance  with these  requirements.  Failure to comply with  environmental
statutes,  regulations  and  ordinances  could  have a  material  effect  on us,
including  potential civil or criminal  liability and the imposition of clean-up
liens  or  fines  and  expenditures  of  funds  to  bring  our  facilities  into
compliance.

      Regulatory approval for the construction of new facilities is a costly and
time-consuming process. Intricate and rapidly changing environmental regulations
may require major  expenditures  for  permitting,  thereby  creating the risk of
expensive  delays or  material  impairment  of project  value if these  projects
cannot  function  as planned due to changing  regulatory  requirements  or local
opposition.


                                       17
<PAGE>

      We can give no assurance that we will be able to:

      o     obtain all required environmental  approvals that we do not yet have
            or that may be required in the future;

      o     obtain  any  necessary   modifications  to  existing   environmental
            approvals; or

      o     maintain   compliance  with  all  applicable   environmental   laws,
            regulations and approvals.

      Delay in  obtaining  or failure to obtain and  maintain  in full force and
effect any such  environmental  approvals,  or delay or  failure to satisfy  any
applicable environmental regulatory requirements,  could prevent construction of
new facilities, operation of our existing facilities or sale of energy therefrom
or could result in significant additional cost to us.

We are  subject  to more  stringent  environmental  regulation  than many of our
competitors

      Most of our  facilities  are  located  in the State of New  Jersey and are
subject to both federal and state pollution control  requirements.  New Jersey's
environmental  programs are generally considered to be particularly stringent in
comparison to similar programs in other states.  As such, there may be instances
where the  facilities  located in New Jersey are subject to more  stringent  and
therefore more costly pollution control requirements than competitive facilities
in other states.

We are responsible for pre-existing  environmental  liabilities of the assets we
acquired

      In  acquiring  the  generation   stations  from  PSE&G,   we  assumed  all
environmental liabilities associated with the generation stations, regardless of
when  such  liabilities  arose  and  whether  known or  unknown,  and  agreed to
indemnify PSE&G for these liabilities. Our contract to purchase the Albany Steam
Station required our assumption of on-site environmental liabilities.

The indenture restricts our ability to enter into certain transactions

      The  indenture  restricts  our ability  and the ability of our  Restricted
Subsidiaries  (as defined below under  "Description of the Exchange  Notes") to,
among other things:

      o     in  the  case  of  our   Restricted   Subsidiaries,   incur  certain
            indebtedness;

      o     create liens;

      o     in the case of our  Restricted  Subsidiaries,  create  or  permit to
            exist dividend or payment restrictions with respect to us;

      o     sell assets; and

      o     engage in mergers and consolidations.

      These  restrictions  may limit our ability to finance  future  operations,
respond  to  changing  business  and  economic  conditions,  secure  any  needed
additional financing and engage in opportunistic transactions.  See "Description
of the Exchange Notes -- Selected Indenture Covenants."

Insurance coverage may not be sufficient

      We have insurance for our generation stations, including all-risk property
damage  insurance,  commercial  general public liability  insurance,  boiler and
machinery  coverage,  nuclear liability and, for our nuclear units,  replacement
power and business  interruption  insurance in amounts and with deductibles that
we consider  appropriate.  We can give no assurance that such insurance coverage
will be available in the future on  commercially  reasonable  terms nor that the
insurance  proceeds  received  for  any  loss  of or  any  damage  to any of the
generation stations will be sufficient to permit us to continue to make payments
on our debt, including the exchange notes.

We are subject to substantial competition

      The United  States  electric  utility  industry is currently  experiencing
increasing  competitive  pressures as a result of state and federal deregulation
legislation and related regulatory  initiatives,  consumer


                                       18
<PAGE>

demands, distributed generation, technological advances, greater availability of
natural gas and other  factors.  Pursuant to the National  Energy  Policy Act of
1992,  FERC has effected  certain  regulatory  changes to increase access to the
nationwide  transmission grid by utility and non-utility  purchasers and sellers
of electricity in order to create more  competition in wholesale  power markets.
Many states are  implementing  or  considering  methods to introduce and promote
retail competition. Thirteen of the nineteen states and the District of Columbia
in our target  markets have enacted  restructuring  legislation  and twelve have
opened their  retail  energy  markets to  competition.  Furthermore,  six of the
remaining states have issued a regulatory  order or are otherwise  investigating
restructuring. In addition, proposals have been introduced in Congress to repeal
the Public Utility Regulatory Policy Act ("PURPA") and PUHCA which would further
impact the markets in which we operate.

      We are  subject  to  substantial  competition.  Deregulation  may not only
continue to accelerate  the current trend toward  consolidation  among  domestic
utilities,   but  may   also   continue   to   result   in  the   splitting   of
vertically-integrated  utilities  into  separate  generation,  transmission  and
distribution  businesses.  We face competition from independent power producers,
numerous  well-capitalized  investment and finance company  affiliates of banks,
large energy  marketing  companies,  utilities and  industrial  companies.  As a
result, additional significant competitors have become active in the independent
power industry and the potential for excess  capacity  exists in portions of our
target market.

The electric utility industry is undergoing substantial change

      The  electric  utility  industry  in the State of New  Jersey,  across the
country and around the world is undergoing major  transformations.  We, PSEG and
PSE&G are affected by many issues that are common to the electric  industry such
as:

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

      o     energy sales retention and growth;

      o     the  need  to  reduce   operating  and  capital  costs  and  operate
            efficiently in a competitive environment;

      o     revenue stability and growth;

      o     nuclear operations and decommissioning;

      o     increased   capital   investments   attributable  to   environmental
            regulations;

      o     managing wholesale energy trading operations;

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

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

      o     exposure to market price fluctuations and volatility;

      o     fair competition and affiliate transactions;

      o     accounting changes resulting from deregulation; and

      o     debt and equity market concerns associated with these issues.

Changes in technology may make our power generation assets less competitive

      A key element of our  business  plan is that  generating  power at central
power  plants  produces  electricity  at  relatively  low cost.  There are other
technologies that produce electricity,  most notably fuel cells,  microturbines,
windmills  and  photovoltaic  (solar)  cells.  It is possible  that  advances in
technology will reduce the cost of alternative methods of producing  electricity
to a level  that is  competitive  with  that of most  central  station  electric
production.  If this were to happen,  our market  share  could be eroded and the
value of our power plants could be significantly impaired. Changes in technology
could also alter the  channels  through  which  retail  electric  customers  buy
electricity, thereby affecting our financial results.


                                       19
<PAGE>

We are subject to control by PSEG

      Our sole limited liability company member,  PSEG, controls the election of
our  directors  and all other  matters  submitted  for member  approval  and has
control over our management and affairs.  In circumstances  involving a conflict
of  interest  between  PSEG,  as the  sole  member,  on the  one  hand,  and our
creditors,  on the other,  we can give no assurance that PSEG would not exercise
its power to control us in a manner that would  benefit PSEG to the detriment of
our creditors, including the holders of the exchange 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.

There is no public market for the exchange notes

      Although the application  for listing on the Luxembourg  Stock Exchange of
the  exchange  notes has been  made,  we do not intend to list any series of the
exchange  notes  on any  U.S.  securities  exchange.  We can  give no  assurance
concerning the liquidity of any market that may develop for the exchange  notes,
the  ability of any  investor to sell the  exchange  notes or the price at which
investors would be able to sell their exchange notes.

Fraudulent  transfer statutes and similar limitations may limit your rights as a
noteholder

      Each of our Restricted  Subsidiaries will guarantee our obligations on the
exchange notes (each a "Subsidiary Guaranty").  See "Description of the Exchange
Notes -- Guaranty of Senior Notes."

      Under federal and state fraudulent  transfer laws, a court could find that
the  Subsidiary  Guaranty  provided by a  Restricted  Subsidiary  constituted  a
fraudulent  conveyance by that  Restricted  Subsidiary.  To do so, a court would
typically have to find that, at the time the Subsidiary Guaranty was issued, the
relevant Restricted Subsidiary:

      o     issued  the  Subsidiary  Guaranty  with  the  intent  of  hindering,
            delaying or defrauding our current or future creditors; or

      o     (a) received less than fair  consideration or reasonably  equivalent
            value for incurring the  indebtedness  represented by its Subsidiary
            Guaranty; and (b) either (x) was insolvent or was rendered insolvent
            by  reason  of the  issuance  of the  Subsidiary  Guaranty,  (y) was
            engaged,  or about to engage, in a business or transaction for which
            its assets were  unreasonably  small or (z)  intended  to incur,  or
            believed or should have  believed it would  incur,  debts beyond its
            ability to pay as such debts mature.

Many of the foregoing terms are defined in or interpreted under those fraudulent
transfer statutes.

      Different  jurisdictions  define  "insolvency"  differently.  However,  an
entity  generally  would be  considered  insolvent  at the time it incurred  any
particular  obligation  if (1) its  liabilities  exceeded its assets,  at a fair
valuation,  or (2) the  present  saleable  value of its  assets is less than the
amount required to pay its total existing debts and  liabilities  (including any
probable liability related to contingent liabilities) as they become absolute or
matured.  We cannot  assure you of the  standard a court would apply in order to
determine  whether any Restricted  Subsidiary was "insolvent" as of the date the
applicable  Subsidiary  Guaranty was issued, or that regardless of the method of
valuation,  a court would not determine,  regardless of whether such  Restricted
Subsidiary  was insolvent on the date the Subsidiary  Guaranty was issued,  that
the payments constituted fraudulent transfers on another ground.

      If a court were to make any such finding, it could:

      o     avoid  all or a  portion  of the  relevant  Restricted  Subsidiary's
            obligations on the Subsidiary Guarantees;

      o     subordinate the relevant Restricted Subsidiary's  obligations on the
            Subsidiary  Guarantees to obligations owed to its other existing and
            future  creditors,  entitling  those  creditors  to be  paid in full
            before any  payment  is made on the  relevant  Subsidiary  Guaranty;
            and/or

      o     take other actions  detrimental to you,  including  invalidating the
            relevant Subsidiary Guaranty.


                                       20
<PAGE>

      In that  event,  we cannot  assure you that you would  receive any payment
under the Subsidiary Guaranty of the relevant Restricted Subsidiary.

If you fail to exchange  original  notes,  they will 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.

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.

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

      This prospectus includes  "forward-looking  statements" within the meaning
of the Private Securities  Litigation Reform Act of 1995. All statements,  other
than  statements of historical  facts,  included in this prospectus that address
activities,  events or  developments  that we expect or  anticipate  will or may
occur in the future,  including such matters as our projections,  future capital
expenditures, business strategy, competitive strengths, goals, expansion, market
and industry  developments and the growth of our businesses and operations,  are
forward-looking  statements.  These  statements  are  based on  assumptions  and
analyses made by us in light of our  experience and our perception of historical
trends,  current  conditions and expected  future  developments as well as other
factors we believe are  appropriate  under the  circumstances.  However,  actual
results  and  developments  may  differ  materially  from our  expectations  and
predictions due to a number of risks and uncertainties, many of which are beyond
our control. These risks and uncertainties include:

      o     the   significant   considerations   and  risks  discussed  in  this
            prospectus;

      o     general and local economic, market or business conditions;

      o     demand (or lack  thereof) for  electricity,  capacity and  ancillary
            services in the markets served by our generation units;

      o     increasing competition from other companies;

      o     the acquisition and development opportunities (or lack thereof) that
            may be presented to and pursued by us;

      o     changes in laws or regulations that are applicable to us;

      o     environmental constraints on construction and operation;

      o     the rapidly changing market for energy products; and

      o     access to capital.


                                       21
<PAGE>

      Consequently,   all  of  the  forward-looking   statements  made  in  this
prospectus are qualified by these cautionary statements and we cannot assure you
that the results or developments  anticipated by us will be realized or, even if
realized,  will  have  the  expected  consequences  to or  effects  on us or our
business prospects, financial condition or results of operations. You should not
place  undue  reliance  on  these  forward-looking  statements  in  making  your
investment  decision.  We expressly  disclaim any  obligation or  undertaking to
release publicly any updates or revisions to these forward-looking statements to
reflect events or circumstances  that occur or arise or are anticipated to occur
or arise after the date hereof. In making an investment  decision  regarding the
exchange notes, we are not making,  and you should not infer, any representation
about  the  likely   existence  of  any  particular   future  set  of  facts  or
circumstances.

                                USE OF PROCEEDS

      The exchange  offer is intended to satisfy some of our  obligations  under
the 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 to repay
the $1.620  billion  demand notes  payable to PSEG which enabled us to repay the
note we issued  to PSE&G  for the  purchase  of the  generation  units and other
assets we acquired from PSE&G and for other  general  company  purposes.  $1.084
billion of these demand notes carried a per annum  interest rate of 14.23%.  The
balance carried a commercial paper rate.

                                 CAPITALIZATION

      The following table sets forth our historical consolidated  capitalization
as of June 30, 2001 and as of December 31, 2000 which reflects  equity and loans
from PSEG used to repay our promissory note to PSE&G.

                                                As of 6/30/01     As of 12/31/00
                                                -------------     --------------
                                                         (in millions)
Notes Payable-due to Affiliates ..............    $    --             $ 2,786
Long-term Debt:
 67/8% Senior Notes due 2006 .................        498                  --
 73/4% Senior Notes due 2011 .................        798                  --
 85/8% Senior Notes due 2031 .................        495                  --
                                                  -------             -------
 Total Debt ..................................    $ 1,791             $ 2,786
                                                  -------             -------
Total Common Equity(1) .......................      1,637                 254
Basis Adjustment .............................       (986)               (986)
                                                  -------             -------
Total Capitalization .........................    $ 2,442             $ 2,054
                                                  =======             =======

----------
(1)   We are a limited  liability  company  of which  PSEG is the sole owner and
      member.


                                       22
<PAGE>

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

Corporate Structure

      We are a  wholly-owned  subsidiary of PSEG formed in June 1999 to acquire,
own and operate the electric  generation-related assets of PSE&G pursuant to the
Final  Order  issued  by the  BPU  under  the  New  Jersey  Energy  Master  Plan
Proceedings.  We, in turn, have three principal  direct  wholly-owned  operating
subsidiaries:  Fossil, which operates our fossil generation facilities; Nuclear,
which operates our nuclear generation  facilities;  and ER&T, which conducts our
wholesale    marketing   and   trading    activities.    We   acquired   PSE&G's
generation-related  assets on August 21,  2000.  Through  our  subsidiaries,  we
provide energy and capacity to PSE&G under the BGS contract and market and trade
electricity,  capacity and  ancillary  services  throughout  the eastern  United
States.   In  addition,   we  provide   corporate  support  and  managerial  and
administrative  services to our  subsidiaries  and are responsible for financing
their operations. We also have a finance company subsidiary,  PSEG Power Capital
Investment Co. ("Power Capital"), which provides certain financing for our other
subsidiaries.

Overview and Future Outlook

      We currently  operate as an  independent  power  generation  and wholesale
marketing and trading company in the eastern United States. As of June 30, 2001,
we owned 11,490 MW of generation  capacity.  (This total includes the generation
capacity (298 MW) related to our pending  acquisition of ACE's share of co-owned
nuclear generation facilities.) We derive our revenue and cash flows principally
from the sale of electricity, capacity and ancillary services.

      The regulatory structure that has historically governed the electric power
industry in the United States and in many of the states is in transition. Recent
federal and state  legislative and regulatory  initiatives have been designed to
promote  competition in the electric power  industry.  Deregulation  is underway
throughout  the  United  States  and is at a  relatively  advanced  stage in the
Northeast,  where  certain of the markets in which we compete are  located.  The
resulting restructuring of energy markets provides us with new opportunities and
exposes us to new risks.

      In August 1999, as part of New Jersey's  deregulation and restructuring of
its  electric  power  industry,  the BPU issued its Final Order in PSE&G's  rate
unbundling,  stranded costs and restructuring  proceedings which directed, among
other things,  the sale by PSE&G of its generation  related property,  plant and
equipment and all associated  rights and liabilities to a separate,  unregulated
affiliate.  In October and November  1999,  appeals were filed  challenging  the
validity of this order and the BPU's related financing order. In April 2000, the
Appellate Division of the New Jersey Superior Court unanimously affirmed the BPU
orders.  In May 2000, the  appellants  requested the New Jersey Supreme Court to
review certain aspects of the Appellate Division decision and, in July 2000, the
New Jersey Supreme Court granted the requests of the New Jersey  Business User's
Coalition and of the New Jersey  Ratepayer  Advocate (the "RPA"),  while denying
the request of Co-Steel  Raritan  ("Co-Steel"),  an individual  PSE&G industrial
customer. On December 6, 2000, the New Jersey Supreme Court issued a final order
affirming the judgment of the Appellate Division. The New Jersey Supreme Court's
written opinion in this matter was issued on May 18, 2001.

      On March 6, 2001,  Co-Steel  filed a Petition for Writ of Certiorari  (the
"Petition")  with the United States Supreme Court seeking  limited review of the
New  Jersey  Supreme  Court   decision,   the  granting  of  which  is  entirely
discretionary  with the Court.  Briefs in  opposition  to the Petition have been
filed. The outcome of this petition cannot be predicted.

      Prior to the execution of PSE&G's  transfer of its generation  business to
us, we and PSE&G  obtained all  necessary  regulatory  approvals.  On August 21,
2000, PSE&G transferred its electric  generation  facilities and wholesale power
contracts to us and our  subsidiaries  in exchange for a promissory note from us
to PSE&G in an amount equal to the total  purchase price of $2.786  billion.  We
settled the  promissory  note on January 31, 2001 with funds provided by PSEG in
the form of loans and equity at which time the transferred  assets were released
from the lien of PSE&G's first and refunding mortgage.


                                       23
<PAGE>

      Prior to the issuance of the Final Order,  substantially all of the output
of PSE&G's electric  generation assets was sold to PSE&G's retail customers.  To
ensure that  PSE&G's  retail  customers  who choose not to select or who are not
otherwise  served by a different  supplier  continue to receive energy services,
the Final Order also requires PSE&G to provide BGS through July 31, 2002.  PSE&G
has entered into a contract with us to supply the energy, capacity and ancillary
services required to meet this obligation. As a result, since August 1, 1999, we
have been selling  substantially all of our output to PSE&G and will continue to
do so until July 31, 2002.

      Under the BGS contract,  we charge the BGS retail tariff rate on file with
the BPU. In addition,  PSE&G pays us a price  stability  charge to compensate us
for  ensuring  the  reliability  of BGS service and  assuming  the risk of price
volatility.  The price stability charge is equal to the full amount collected by
PSE&G  for its  unsecuritized  generation-related  stranded  costs  per  billing
period.  The Final Order also  provides  that rate  reductions of up to 13.9% be
phased  in by PSE&G to its  retail  customers  through  August  1,  2002.  These
reductions are reflected in the Market  Transition  Charge ("MTC") revenue of up
to $540 million,  net of tax, that we are entitled to receive from PSE&G through
July 31, 2003.

      To the  extent  that we are  unable to  generate  the energy or supply the
capacity to meet our BGS contract  obligations,  we will be required to purchase
necessary energy and capacity in the competitive  wholesale  electricity market.
During the term of the BGS  contract,  to the  extent  that we are  required  to
purchase energy and/or capacity in the competitive wholesale electricity markets
or generate  energy to meet our  obligations  to supply power to PSE&G under the
BGS contract,  earnings or cash flow may be negatively impacted if market prices
or costs  approach or exceed the BGS contract  rate.  We attempt to mitigate the
risks  associated  with our  long-term  contracts  through the use of derivative
financial instruments that conform to our comprehensive risk management policy.

      PSE&G is required to issue a request for  proposals  ("RFP") for supply of
its BGS obligation for the period  beginning August 1, 2002. We can submit a bid
to renew the BGS  contract in response to PSE&G's RFP, or we can sell our energy
and capacity into the spot market,  enter into other  bilateral  agreements or a
combination  thereof.  Our  goal is to  realize  a  majority  of our  generation
revenues  from  bilateral  agreements.  In  addition,  we will  continue to sell
additional  energy and  capacity  into the spot  market and will  continue to be
subject  to the risks and  rewards  associated  with the  competitive  wholesale
electricity  market to the extent that the price at which we sell our energy and
capacity differs from our production or purchased power costs.

      Our financial  position,  results of operations and net cash flows will be
significantly  impacted by: our ability to  successfully  manage  production and
purchased  power  costs;  sell energy and  capacity  at  favorable  prices;  and
effectively  control  our  centralized  generation,   fuel  procurement,   power
purchases and wholesale energy marketing and trading operations.

      We  currently  sell  approximately  5% of the output  from our  generation
facilities  to  customers in the  competitive  wholesale  (spot)  market and the
remaining 95% under longer-term contracts.  Within the spot market, we sell into
the energy, capacity and ancillary services markets.  Ancillary services include
operating reserves and area regulation. Through ER&T, we are active in the spot,
forward and futures markets  throughout the  surrounding  region.  However,  our
trading  revenue  is  currently  earned  primarily  within  PJM,  which  in 2000
comprised nearly 85% of our trading activity.

      By centrally  managing our portfolio of generation  assets, we are able to
take advantage of synergies and market knowledge to maximize our  profitability.
Fossil and Nuclear sell all of their  generation  output to ER&T which centrally
controls all of our wholly-owned  generation assets, fossil fuel procurement and
power  purchases  and provides a  competitive  wholesale  energy  marketing  and
trading function that actively participates in all aspects of the markets in the
Super Region.  This central  management  provides us the opportunity to optimize
the mix of  financial  and  physical  assets and mitigate the effects of adverse
movements in the fuel and electricity markets.

      We  participate  primarily in the PJM market,  where the pricing of energy
was recently  modified.  Prior to April 1999, the price of energy was based upon
the  variable  cost  of  production.  As of  April  1,  1999,  FERC  lifted  the
requirement  that limited the bid prices for electric energy offered for sale in
the


                                       24
<PAGE>

PJM market to the variable cost of producing such energy. However,  transmission
constraints  have and will continue to affect  energy  pricing in PJM. All power
providers are now paid the  locational  marginal price ("LMP") set through power
providers'  bids. The LMP will be higher in congested  areas  reflecting the bid
prices of the  higher  cost  units  that are  dispatched  to supply  demand  and
alleviate the transmission constraint. Under most circumstances,  these bids are
capped at $1,000  per  megawatt  hour.  In the event that  available  generation
within  PJM is  insufficient  to satisfy  demand,  PJM may  institute  emergency
purchases from adjoining regions for which there is no price cap.

      With a majority  of our  generation  assets  located  in the most  densely
populated and demand  intensive  areas of PJM, and positioned in close proximity
to areas of the  transmission  grid that  typically  experience  congestion,  we
receive premium prices when transmission congestion occurs. Our fully integrated
generation and wholesale marketing and trading  organization employs proprietary
simulation  tools and  state-of-the  art trading floor  technology in an ongoing
effort to anticipate  grid  congestion  and ensure  timely  response to emerging
demand requirements and their resulting pricing opportunities.

      As an unregulated  company, we are now exposed to the risk associated with
fuel and  purchased  power price  changes.  Prior to August 1, 1999,  all of our
fuel,  fuel  related  costs,  purchased  power costs and other  expenses  flowed
through  the LEAC.  The LEAC  mechanism  compensated  either the  utility or its
electric  consumers for unpredicted fuel and purchased power price  fluctuations
by allowing for adjustments to future  electric rates on a periodic  basis.  Any
underrecoveries  or  overrecoveries  of fuel costs were deferred and included in
expense  in the period in which they were  reflected  in rates.  As of August 1,
1999, the LEAC was eliminated.

      To the extent that the following  discussion reports on business conducted
under full monopoly regulation of the generation business, it must be understood
that such business has evolved due to the  deregulation  of that business.  Past
results are not an indication of future business prospects or financial results.

Results of Operations

      The discussion of Results of Operations  herein has been developed using a
number of assumptions  to separate our  operations  from those of our affiliate,
PSE&G,  which previously  operated together as a vertically  integrated  utility
company.  See  Note 1.  Organization,  Basis  of  Presentation  and  Summary  of
Significant  Accounting Policies of Notes to Consolidated  Financial  Statements
for a discussion of these assumptions and the methodologies  used to prepare our
financial statements.

      As a line of business  within PSE&G,  we were subject to regulation by the
BPU and FERC. As a result,  we prepared our  financial  statements in accordance
with the requirements of Statement of Financial  Accounting  Standards  ("SFAS")
71,  "Accounting  for the Effects of Certain Types of  Regulation"  ("SFAS 71"),
which differed in certain respects from generally accepted accounting principles
("GAAP")  for  non-regulated  businesses.  See  Note 1.  Organization,  Basis of
Presentation  and  Summary  of  Significant  Accounting  Policies  of  Notes  to
Consolidated Financial Statements for a further discussion.

      As a result of the  BPU's  orders  issued  under the  Energy  Master  Plan
Proceedings,  we concluded that we no longer met the requirements of SFAS 71 for
the electric generation business.  As a result, in 1999, an extraordinary charge
to earnings of $3.204  billion,  net of tax,  was  recorded  which  reflects the
impairment of electric  generation-related  assets calculated in accordance with
SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be  Disposed  Of" ("SFAS  121").  In  addition  to the  impairment  of
electric  generation  stations,  the  extraordinary  charge consisted of various
accounting  adjustments to reflect the absence of cost of service  regulation in
the electric  generation  portion of the business in the future. The adjustments
related primarily to materials and supplies, general plant items and liabilities
for certain contractual and environmental obligations.

      Prior to  August  1,  1999,  revenue  was  calculated  by  unbundling  the
generation  component of revenue from  PSE&G's  historical  bundled rate for the
generation,   transmission   and   distribution   of  energy   and   adding  any
generation-related revenues, such as wholesale activities that include ancillary
services, trading and capacity sales. Subsequent to August 1, 1999, revenues are
being earned from


                                       25
<PAGE>

the BGS  contract  with PSE&G,  wholesale  energy  sales,  sales of capacity and
ancillary  services and energy trading  revenues.  During the three years ending
July 31,  2002,  we will provide  energy to supply  PSE&G's BGS  obligations  as
determined  by the BPU's Final Order.  With the opening of retail  choice in New
Jersey,  customer electricity demands upon PSE&G are changing.  This affects the
amount of  generation  capacity  required to meet PSE&G's BGS  obligations  and,
based upon this  demand,  the  sources of our  revenue  stream and net cash flow
could change from generation  capacity to meet the BGS contracts to sales to the
wholesale market.

      Energy  costs  consist  primarily  of the costs  associated  with  burning
nuclear fuel, gas, oil and coal to generate energy,  as well as energy purchases
from the wholesale  marketplace.  Deregulation of the energy market could impact
our energy costs in several ways. In the event that demand from the BGS contract
exceeds  our  capacity,  we will have to purchase  wholesale  power to meet this
sales commitment.  High purchase prices in the wholesale market,  whether hedged
or not, could increase energy costs and affect earnings and net cash flow.

      Prior to August 1, 1999,  fuel revenue and expense flowed through the LEAC
mechanism.  Variances in base fuel revenues and expenses  offset and thus had no
direct  effect on  earnings.  On August 1, 1999,  the LEAC was  eliminated  as a
result of the Energy  Master Plan  Proceedings.  This has  increased the risk of
earnings  volatility  since we now bear the full risks and rewards of changes in
generation fuel costs and  replacement  power costs.  See Note 1.  Organization,
Basis of Presentation and Summary of Significant Accounting Policies of Notes to
Consolidated Financial Statements.

      Modification  of energy pricing in PJM from variable cost of production to
LMP, the capping of power  providers'  bids at $1,000 per megawatt  hour ("mWh")
(see  "Business  -- Products and Services -- Energy") and the absence of caps in
situations involving emergency purchases, may also have a material impact on our
financial  condition,  results of operations or net cash flows. For a discussion
of market risks, see "-- Qualitative and Quantitative  Disclosures  About Market
Risk", below.

      With an increasingly  competitive energy market, the composition and level
of  Operation  and  Maintenance  expense is likely to change.  Historically,  to
separate the Operation and Maintenance expense of the generation-related portion
of the  PSE&G's  business,  expenses  were  either  specifically  identified  by
function  and  reported   accordingly  or  various   allocations  were  used  to
disaggregate  common  expenses.  It should be noted  that some  allocations  and
assumptions  might  not  hold  true  in  the  future  in a  deregulated  market.
Additionally,  under a revised  capitalization  policy,  we will only capitalize
costs  that  increase  the  capacity  or extend the life of an  existing  asset,
represent a newly  acquired or  constructed  asset or  replacement  of a retired
asset.

      Prior to April 1, 1999, we had certain  regulatory  assets  resulting from
the use of a level  of  depreciation  expense  in the  ratemaking  process  that
differs from the amount that is recorded under GAAP for non-regulated companies.
Effective  April 1,  1999,  we  changed  our  depreciation  policy to  calculate
depreciation  consistent  with new asset lives  determined  by our policy rather
than using  depreciation  rates  prescribed by the BPU in rate  proceedings (see
Note  1.  Organization,   Basis  of  Presentation  and  Summary  of  Significant
Accounting Policies of Notes to Consolidated Financial Statements).

Results of  Operations -- For the Six Months Ended June 30, 2001 compared to the
Six Months Ended June 30, 2000

Operating Revenues

      Generation

      Generation  Revenues  increased $89 million or 8% for the six months ended
June 30, 2001 from the  comparable  period in 2000,  primarily  due to increased
load served under the BGS contract with PSE&G.  This increased load results from
customers  returning to PSE&G from TPS as wholesale market prices have typically
exceeded fixed BGS rates.  As of June 30, 2001,  TPS were serving  approximately
1.5% of the customer load traditionally  served by PSE&G as compared to the June
30, 2000 level of 8%. Also contributing to the increase for the six months ended
June 30,  2001,  was a $17 million gain on a sale of a fixed asset at the Kearny
Generation Station and output from new operating  generation


                                       26
<PAGE>

projects  placed in  service  subsequent  to the first  quarter  of 2000.  These
increases  were  partially  offset by reduced MTC  revenues of $28 million  from
PSE&G as a result of an additional 2% rate reduction  PSE&G gave to customers as
part of its deregulation plan, effective on February 7, 2001.

      Trading

      Trading  revenues  decreased  $142 million or 11% for the six months ended
June 30, 2001 from the comparable  period in 2000, due to lower trading  volumes
resulting from increased market volatility. However, as these decreased revenues
were more than offset by decreased  trading  costs  (discussed  below in Trading
Costs),  trading  margins  increased from $43 million to $78 million for the six
month period ended June 30, 2001.

Operating Expenses

      Energy Costs

      Energy  Costs  increased  $44 million or 13% for the six months ended June
30, 2001 from the  comparable  period in 2000,  primarily due to increased  load
served  under the BGS  contract  and higher  fuel  costs for  fossil  generation
resulting from higher natural gas prices, partially offset by increased low-cost
nuclear generation compared to last year.

      Trading Costs

      Trading Costs  decreased $177 million or 14% for the six months ended June
30, 2001 from the  comparable  period in 2000,  primarily  due to lower  trading
volumes resulting from increased market volatility.

      Operation and Maintenance

      Operation  and  Maintenance  expense  increased  $24 million or 7% for six
months ended June 30, 2001,  primarily due to planned  outage work in the second
quarter of 2001 and higher  expenses  relating to projects  going into operation
subsequent to the first quarter of 2000.

      Depreciation and Amortization

      Depreciation and Amortization expense decreased $13 million or 19% for the
six months ended June 30, 2001 from the comparable  period in 2000. The decrease
was  primarily  due to a  reduction  in the accrual  for the  estimated  cost of
removal of certain generating stations.

      Interest Expense

      Interest  Expense  increased  $46 million or 107% for the six months ended
June 30,  2001  from the  comparable  period  in 2000.  Prior to the  generation
business transfer in August 2000, our Interest Expense was calculated based upon
an allocation  methodology  that charged us with  financing  costs from PSE&G in
proportion to the generation  business'  share of total net property,  plant and
equipment,  materials and supplies and deferred  income  taxes.  The increase in
Interest  Expense  resulted from our $2.786  billion 14.23%  promissory  note to
PSE&G to finance  the  acquisition  of the  generation  business.  This loan was
repaid on January  31,  2001 and was  replaced  on an interim  basis by a $1.084
billion  14.23% loan and a $536  million  7.11% loan from  January 2001 to April
2001.  These loans were repaid with the proceeds from the issuance of our Senior
Notes. For the six months ended June 30, 2001,  Interest Expense relating to the
interim financing discussed above was $40 million.

Results of  Operations  -- For the Year Ended  December 31, 2000 compared to the
Year Ended December 31, 1999

      Excluding  the  extraordinary  charge,  our  earnings  for the year  ended
December 31, 2000 decreased $200 million from the comparable  1999 period.  This
decrease  primarily  resulted  from the effects of the 5% rate  reduction  which
commenced on August 1, 1999 and a $115 million  reduction in MTC revenues  which
resulted primarily from an $88 million charge to net income in the third quarter
of


                                       27
<PAGE>

2000 for the cumulative effect of estimated collections in excess of the allowed
unsecuritized  stranded  costs from August 1, 1999 through  September  30, 2000.
Also  contributing to this decrease was higher interest expense  associated with
the $2.786 billion promissory note to PSE&G.

Operating Revenues

      Generation

      Generation  revenues  decreased  $449  million  or 17% for the year  ended
December 31, 2000 from the  comparable  period in 1999  primarily  due to the 5%
rate reduction,  which decreased  revenues by approximately $120 million, a $115
million  deferral of MTC revenues and reduced retail demand as PSE&G lost retail
customers to third party suppliers ("TPS") which amounted to approximately  $182
million.

      Trading

      Trading revenues increased $882 million or 48% for the year ended December
31, 2000 from the comparable  period in 1999 primarily due to increased  trading
volumes. These increased revenues were largely offset by the related increase in
trading costs discussed below.

Operating Expenses

      Energy Costs

      Energy Costs decreased $112 million or 13% for the year ended December 31,
2000 from the  comparable  1999 period due to lower  prices for power  purchases
beginning in August 1999 and lower  generation  costs that were a result of high
capacity  factors of our  nuclear  units.  Prior to August  1999,  Energy  Costs
included amounts paid under various  non-utility  generation  ("NUG")  contracts
which are above market  prices.  Beginning in August 1999,  PSE&G  purchases the
energy and capacity  under these NUG contracts and sells the energy and capacity
to us at market prices.

      Trading Costs

      Trading Costs  increased  $847 million or 47% for the year ended  December
31, 2000 from the comparable  1999 period  primarily due to higher trading costs
associated with increased trading volumes.

      Depreciation and Amortization

      Depreciation and Amortization expense decreased $88 million or 39% for the
year ended December 31, 2000 from the comparable  1999 period.  The decrease was
primarily  due to lower net book value  balances  of PSE&G's  generation-related
assets  that were  reduced  as of April 1,  1999 as a result  of the  impairment
recorded pursuant to SFAS 121.

      Interest Expense

      Interest Expense  increased $86 million or 77% for the year ended December
31, 2000 from the comparable 1999 period. As discussed previously,  prior to the
generation business transfer in August 2000, our Interest Expense was calculated
based upon an allocation  methodology  that charged us with financing from PSE&G
in proportion to our share of total net property, plant and equipment. Following
the transfer of the generation  business in August 2000, we paid interest on our
$2.786 billion promissory note to PSE&G at an annual rate of 14.23%.

Results of  Operations  -- For the Year Ended  December 31, 1999 compared to the
Year Ended December 31, 1998

      Excluding the extraordinary charge of $3.204 billion, our earnings for the
year ended December 31, 1999  increased  $281 million from the  comparable  1998
period.  This growth primarily  resulted from a rise in sales of electricity due
to increased  demand from PSE&G's  retail  customers  resulting  from  favorable
weather  conditions  in 1999 and  economic  factors in New  Jersey  and  profits
realized   from   wholesale   energy   activities.    In   addition,    although
generation-related  depreciation  expense  was lower for


                                       28
<PAGE>

a  portion  of 1999 as a  result  of the SFAS 121  impairment  write-down,  this
reduction was partially  offset by changes in  depreciation  and  capitalization
policies stemming from the  discontinuation of SFAS 71. The increase in earnings
was  also  partially  offset  by the 5%  rate  reduction,  coupled  with  higher
operating and maintenance  expenses,  including  higher  wholesale energy costs,
than those incurred in 1998. See "--  Qualitative and  Quantitative  Disclosures
About Market Risk", below.

Operating Revenues

      Generation

      Generation  revenues  increased  $101  million  or 4% for the  year  ended
December 31, 1999 from the  comparable  1998 period.  The increase was primarily
due to increased  sales of  electricity  under the BGS contract due to favorable
weather  conditions in 1999 and economic factors in New Jersey.  These increases
were  partially  offset by the 5% rate reduction  beginning  August 1, 1999 that
decreased revenues by approximately $80 million.

      Trading

      Trading  revenues  decreased $35 million or 2% for the year ended December
31,  1999 from the  comparable  1998 period  resulting  from  decreased  trading
volumes.

Operating Expenses

      Energy Costs

      Energy Costs decreased $114 million or 12% for the year ended December 31,
1999,  from the comparable  1998 period due to lower prices for power  purchases
beginning in August 1999 relating to the NUG contracts discussed above.

      Trading Costs

      Trading Costs  decreased $54 million or 3% for the year ended December 31,
1999 from the  comparable  1998 period  primarily due to lower costs  associated
with decreased trading volumes.

      Operation and Maintenance

      Operation and  Maintenance  expense  increased $105 million or 18% for the
year ended December 31, 1999 from the comparable  1998 period.  The increase was
primarily  due to a  change  in the  capitalization  policy  for the  generation
business  that  resulted in a $57  million  increase  in 1999 to  Operation  and
Maintenance expense. Also contributing to the increase were higher costs related
to wholesale  power  activities  and higher  material  and outside  services and
information  technology costs, including costs related to Year 2000 readiness in
1999 and increased PJM restructuring expenses.

      Depreciation and Amortization

      Depreciation  and Amortization  expense  decreased $157 million or 41% for
the year ended December 31, 1999 from the comparable 1998 period.  The decreases
were due to lower net book value  balances  of our  assets.  This  decrease  was
partially  offset by higher  depreciation  rates  being  used in 1999 due to the
change in  depreciation  policy.  Despite  the higher  depreciation  rates,  the
decrease in expense will be ongoing due to the reduced asset balances.

      Interest Expense

      Interest Expense decreased $104 million or 48% for the year ended December
31, 1999 from the comparable 1998 period  primarily due to a reduced  allocation
percentage.  Our Interest Expense for these periods was calculated based upon an
allocation  methodology  that charged us with financing from PSE&G in proportion
to our  share  of  total  net  property,  plant  and  equipment.  The  decreased
allocation  percentage  resulted  from  the  lower  net  book  value  due to the
impairment writedown in the second quarter of 1999.


                                       29
<PAGE>

Liquidity and Capital Resources

      As directed by the BPU's Final  Order,  on August 21,  2000,  we purchased
PSE&G's generation property,  plant and equipment for $2.443 billion and we also
purchased the other generation-related  assets and liabilities for $343 million,
their net book value at the date of purchase.

      Operating Activities

      Cash generated from  operations is expected to provide the major source of
funds for our operating  needs. Our primary customer until July 31, 2002 will be
PSE&G under the BGS  contract.  Prior to the Final  Order and the BGS  contract,
cash  generated  from  operations  was  based on rate  regulated  cost  recovery
pursuant to BPU ratemaking.

      Investing Activities

      Our purchase of the generation-related  assets of PSE&G are being financed
on a permanent  basis  through the senior notes  (including  the exchange  notes
covered  by  this  prospectus)  and  equity   contributions  from  PSEG.  Future
development or purchases of generation assets will be subject to periodic review
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 economic trends.
The anticipated  sources of funds for such growth  opportunities  are additional
equity   contributions  from  PSEG,  cash  flow  from  operations  and  external
financings.

      Financing Activities

      As previously  discussed,  we purchased the  generation-related  assets of
PSE&G on August 21, 2000. The purchase was financed through a promissory note of
$2.786  billion to PSE&G.  The  promissory  note was settled on January 31, 2001
with funds received from PSEG as equity and  intercompany  loans. In April 2001,
we issued  $1.8  billion of our senior  notes,  the  proceeds of which were used
primarily to replace our interim  financing  from PSEG.  It is expected that our
future capital needs will be funded with cash generated from  operations and may
be supplemented with external  financings,  equity infusions from PSEG and other
project financing alternatives as dictated by our growth strategy. Any inability
to obtain required  additional external capital at reasonable interest rates may
affect our financial condition, results of operations and net cash flows.

      Capital  resources  and  investment  requirements  may be  affected by the
requirements  of  the  1992  Focused  Audit  of  PSEG's  non-utility  businesses
("Focused  Audit"),  and by the final  outcome of the BPU's  Energy  Master Plan
Proceedings, including the Affiliate Relationships Standards. As a result of the
Focused Audit, the BPU approved a plan that,  among other things,  provides that
PSEG  will  not  permit  its  non-utility  investments  to  exceed  20%  of  its
consolidated assets without prior notice to the BPU.

      As a result of the final  outcome of the  proceedings  and the  accounting
impacts resulting from the deregulation of the generation of electricity and the
unbundling  of the utility  business in New Jersey,  we do 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 believe
that  modifications  will be  required.  The Final Order  addressed  the Focused
Audit, noting that PSEG's  non-regulated assets would likely exceed 20% of total
PSEG assets once the  generation  assets were sold to us and  directed  PSE&G to
file a petition with the BPU to maintain the existing  regulatory  parameters or
to propose  modifications  to the  Focused  Audit  order.  The Final  Order also
recognized that, due to significant  changes in the industry and, in particular,
PSEG's corporate  structure as a result of the Final Order,  modifications to or
relief from the Focused Audit might be warranted. In March 2000, PSE&G 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.

      The BPU is expected to continue to provide regulatory  oversight to ensure
that there is no harm to utility ratepayers from PSEG's non-utility investments.
PSEG believes  that these issues will be  satisfactorily  resolved,  although no
assurance can be given.  In addition,  if we or PSEG were no longer to be exempt
under the Public Utility Holding  Company Act ("PUHCA"),  we would be subject to
additional  regulation  by the SEC  with  respect  to  financing  and  investing
activities, including the amount


                                       30
<PAGE>

and  type  of  non-utility   investments.   Inability  to  achieve  satisfactory
resolution  of these  matters  could  impact  our and our  subsidiaries'  future
relative size and financing activities and,  accordingly,  our future prospects.
Consequently,  this  could  have a  material  adverse  impact  on our  financial
condition,  results of operations or net cash flows.  We do not believe that our
ability to service our debt,  including the exchange notes, would be impaired in
such circumstances, although no assurance can be given.

      On March 15, 2000,  the BPU issued a written order,  Affiliate  Relations,
Fair  Competition and Accounting  Standards and Related  Reporting  Requirements
("Affiliate  Standards"),  that  applies only to PSE&G and its  affiliates  that
offer competitive  retail services in New Jersey.  PSE&G filed a compliance plan
with the BPU on June 15, 2000  describing its internal  policy and procedures to
ensure  compliance  with  such  Affiliate  Standards.  Since  we  do  not  offer
competitive  retail services in New Jersey,  the standards do not apply and are,
therefore, not expected to have any material impact on our operations.  However,
the Energy  Competition  Act requires  that the BPU conduct an audit of PSEG and
its  affiliates.  The  audit  commenced  July 2000 and a final  report  from the
auditors  was  submitted  to the  BPU in  October  2000.  We do not  expect  the
recommendations  of the audit to  materially  impact our  operations,  financial
condition,  results of operations or net cash flows,  although no assurances can
be given.

Capital Requirements

      We expect that the majority of our construction  and capital  requirements
over the next five years will come from  internally  generated  funds,  with the
balance to be provided by the  issuance  of debt and equity  contributions  from
PSEG. Our capital needs will be dictated by our strategy to become a profitable,
growth-oriented  supplier in the wholesale power market.  We will size our fleet
of generation assets to take advantage of market opportunities, while seeking to
increase its value and manage commodity price risk through our wholesale trading
activity.  Growth will be driven by expanding  both the  portfolio of generation
assets and trading volume, including expanding into regional trading markets. To
accomplish  this,  we will  require cash  generated  from  operations,  external
financings and equity contributions from PSEG.

      We  have  substantial  commitments  as part  of our  ongoing  construction
programs. These programs are continuously reviewed and periodically revised as a
result of changes in  economic  conditions,  revised  load  forecasts,  business
strategies,   site  changes,  cost  escalations  under  construction  contracts,
requirements  of  regulatory  authorities  and  laws  and our  ability  to raise
necessary capital.

      For the six months ended June 30, 2001, we had net plant additions of $741
million,  excluding capitalized interest.  For the years ended December 31, 2000
and  1999,  we had  net  plant  additions  of  $479  million  and  $92  million,
respectively,  excluding Allowance for Funds Used During Construction (AFDC) and
capitalized interest.

      Construction   expenditures   were   related  to  our   acquisitions   and
improvements  in our existing  power  plants.  Our  projected  construction  and
investment  expenditures are approximately $1.4 billion in 2001, $1.1 billion in
2002,  $830 million in 2003 and range from $250 million to $300 million per year
for 2004 and 2005 (which  includes an aggregate of $1.2 billion  associated with
the Waterford, Ohio and Lawrenceburg, Indiana projects through 2003).

      In September 2000, we announced that we had assumed  responsibility of two
Midwest generation projects then being developed by PSEG Global Inc. ("Global"),
an affiliate  and a  subsidiary  of Energy  Holdings,  and will be the sole PSEG
subsidiary  responsible  for future  generation  projects and development in the
United  States.  The two  projects  (the  Waterford  and  Lawrenceburg  projects
discussed  under  "Business  -- The  Company")  will have a combined  generation
capacity of 2,000 MW.

      Also in 2000,  we installed  four new  combustion  turbines at  Burlington
Generation Station and two new combustion turbines at Linden Generation Station,
adding 168 MW and 164 MW, respectively,  of electric generating  capacity,  at a
cost of  approximately  $155  million.  The new  combustion  turbines  were  all
operational  as of July 2000. We also  announced that we will construct a 500 MW
natural gas-fired, combined cycle electric generation plant at Bergen Generation
Station at a cost of approximately $290 million with completion expected in June
2002. We are also  constructing an 1,186 MW combined cycle  generation  plant at
Linden for  approximately  $590 million expected to be completed in May 2003 and
are installing 168 MW of peaking units at Kearny for an approximate cost of $100
million.


                                       31
<PAGE>

      On  May  16,  2000,  we  purchased,   through  an  indirect   wholly-owned
subsidiary,  PSEG  Power New York,  Inc.,  a 380 MW oil and  gas-fired  electric
generation station in Albany, New York (the "Albany Steam Station") from Niagara
Mohawk Power  Corporation  ("NIMO") for $49.9 million.  Under a transition power
contract in place through  September  2003, we will sell  electricity to NIMO at
prices consistent with those established in NIMO's regulatory agreement with the
New York Public  Service  Commission.  The  acquisition  of Albany Steam Station
provides us with entry into the New York ISO. Under the terms of the acquisition
agreement,  NIMO could also receive up to an  additional $9 million if we choose
to pursue redevelopment of the Albany Steam Station.

      In September 1999, we announced that we had signed an agreement to acquire
all of Conectiv's  interests in the Salem Nuclear  Generation  Station ("Salem")
and the  Hope  Creek  Nuclear  Generation  Station  ("Hope  Creek")  and half of
Conectiv's  interest in the Peach Bottom Atomic Power Station ("Peach  Bottom"),
totaling 544 MW for an aggregate  purchase  price of $15.4  million plus the net
book value of nuclear fuel at closing.  In December  2000,  our  acquisition  of
Delmarva's  portion of  Conectiv's  interests in Salem  (7.41%) and Peach Bottom
(7.51%, split equally between us and Exelon Generation LLC ("Exelon"), the other
co-owner of the plants) was completed.  For further information and a discussion
of the  wholesale  transaction  confirmation  letter  agreements  between us and
Conectiv,  see  Note 7.  Commitments  and  Contingent  Liabilities  of  Notes to
Consolidated Financial Statements.

External Financings

      The changes in the utility  industry are  attracting  increased  attention
from bond rating agencies which regularly assess business and financial matters,
including how utility  companies are  addressing  the  increasingly  competitive
environment.  Given the changes in the  industry,  attention and scrutiny of our
competitive strategies by rating agencies will likely continue. These changes in
the competitive  environment could affect the bond ratings,  cost of capital and
the market prices of securities issued by utilities and generation companies.

      On April 16,  2001,  in a private  placement,  we issued  $500  million of
6.875%  Senior  Notes due 2006,  $800 million of 7.75% Senior Notes due 2011 and
$500 million 8.625% Senior Notes due 2031. The net proceeds from the sale of the
senior notes were used  primarily  for the  repayment  of loans from PSEG.  This
prospectus  relates to an exchange offer for these senior notes.  Each series of
senior notes received  investment grade ratings from Moody's Investors  Service,
Fitch, Inc. and Standard & Poor's Rating Services.

      We also have  various  lines of credit  extended  by banks to support  the
issuance  of letters  of credit.  As of June 30,  2001,  letters of credit  were
issued in the amount of approximately $90 million.

      Our short term financing needs will be met using PSEG's  commercial  paper
program or lines of credit. PSEG has an $850 million commercial paper program to
provide  funds  for  general  corporate  purposes.  On June 30,  2001,  PSEG had
commercial  paper of $521  million  outstanding.  To provide  liquidity  for its
commercial  paper program,  PSEG has a $570 million  revolving  credit  facility
expiring in March 2002 and a $280 million  revolving credit facility expiring in
March  2005.  These  agreements  are  with a group  of  banks  and  provide  for
borrowings with maturities of up to one year. As of June 30, 2001, there were no
borrowings outstanding under these facilities.

      PSE&G Fuel Corporation ("Fuelco"),  which was a subsidiary of PSE&G, had a
$125 million  commercial paper program to finance a 42.49% share of Peach Bottom
nuclear  fuel.  This  commercial  paper  program was supported by a $125 million
revolving  credit facility with a group of banks. As a result of the transfer of
generation assets from PSE&G to us, the Fuelco commercial paper program has been
discontinued.  All commercial paper outstanding under this program was paid down
on August 21, 2000. The credit  facility  supporting this program was terminated
on September 11, 2000.

      The  availability  and cost of external  capital  could be affected by our
performance as well as by the  performance of our  subsidiaries  and affiliates.
This could include the degree of structural  or  regulatory  separation  between
PSE&G and its  non-utility  affiliates  and the  potential  impact of  affiliate
ratings  on our  consolidated  credit  quality.  Additionally,  compliance  with
applicable  financial  covenants will depend upon our future financial  position
and levels of earnings  and net cash  flows,  as to which no  assurances  can be
given.


                                       32
<PAGE>

      Over the next several years, we will be required to refinance our maturing
debt and to raise additional debt and equity financing for growth. Any inability
to obtain required  additional external capital or to extend or replace maturing
debt and/or  existing  agreements at current  levels and at reasonable  interest
rates may affect our  financial  condition,  results of  operations  or net cash
flows.

Qualitative and Quantitative Disclosures About Market Risk

      The risk inherent in our market risk sensitive  instruments  and positions
is the  potential  loss  arising  from  adverse  changes  in  commodity  prices,
pollution credits, equity security prices and interest rates as discussed below.
Our policy is to use  derivatives  to manage risk  consistent  with our business
plans and prudent practices.  PSEG has a Risk Management  Committee comprised of
executive  officers  and  reporting  to the Audit  Committee  of PSEG's Board of
Directors  that  utilizes  an  independent  risk  oversight  function  to ensure
compliance with corporate policies and prudent risk management practices.

      We are  exposed  to  credit  losses  in the  event of  non-performance  or
non-payment by counterparties. We also have a credit management process which is
used to assess,  monitor and  mitigate  counterparty  exposure.  In the event of
non-performance or non-payment by a major counterparty,  there may be a material
adverse  impact on our  financial  condition,  results of operations or net cash
flows.

      Commodity-Related Instruments

      The  availability   and  price  of  energy   commodities  are  subject  to
fluctuations from factors such as weather,  environmental  policies,  changes in
supply and demand,  state and federal  regulatory  policies and other events. To
reduce  price  risk  caused by market  fluctuations,  we enter  into  derivative
contracts,   including  forwards,  futures,  swaps  and  options  with  approved
counterparties, to hedge our anticipated demand. These contracts, in conjunction
with  owned  electric  generation  capacity,  are  designed  to cover  estimated
electric customer commitments.

      We use a  value-at-risk  ("VAR")  model to assess the  market  risk of our
commodity  business.  This model includes fixed price sales  commitments,  owned
generation,   native  load   requirements,   physical  contracts  and  financial
derivative  instruments.  VAR  represents  the  potential  gains or  losses  for
instruments or portfolios due to changes in market factors, for a specified time
period and confidence  level.  PSEG estimates VAR across its commodity  business
using a model with historical volatilities and correlations.

      The measured VAR using a variance/co-variance  model with a 95% confidence
level and assuming a one-week time horizon as of June 30, 2001 was approximately
$7 million and as of December 31, 2000 was approximately  $19 million,  compared
to the December 31, 1999 level of $3 million.  Our  calculated VAR represents an
estimate of the  potential  change in the value of our portfolio of physical and
financial derivate  instruments.  These estimates,  however, are not necessarily
indicative  of actual  results,  which may  differ  due to the fact that  actual
market rate fluctuations may differ from forecasted  fluctuations and due to the
fact that the  portfolio  of hedging  instruments  may change  over the  holding
period.

      In the first  quarter of 2000,  the  measured  VAR  fluctuated  between $3
million and $10 million.  The first  quarter,  compared to the rest of the year,
was  characterized  by low price  volatility.  Starting in the second quarter of
2000 several  different  factors caused the VAR to fluctuate  above $10 million,
reaching a peak of $21.2  million in December  2000,  which  exceeded  our alert
limit of $16.5 million.  The first was the inclusion into the VAR calculation of
some additional non-trading exposures,  such as fuel for generation and emission
allowances  held in  inventory.  The  second and most  important  factor was the
capacity,  power and natural gas price  volatilities,  which  continued  to rise
throughout  the  balance  of the year.  Finally,  since we are in the  commodity
business,  we face  seasonal  increases  in our power,  capacity and natural gas
exposures,  which  cause the VAR to peak in the  summer  and in the  winter.  In
February  2001,  prices and  volatilities  decreased and the VAR moved below the
alert limit.

      As discussed in Results of  Operations,  our  wholesale  power  activities
positively  impacted our results of operations each year, since its inception in
1997. Certain other generators and power marketers have experienced  significant
losses in their wholesale power operations during that period. These losses were
primarily  attributable to extreme market volatility,  counterparty defaults and
unavailability of generation.


                                       33
<PAGE>

      Given the  absence of a PJM price cap in  situations  involving  emergency
purchases and the potential for plant outages,  extreme price  movements,  which
have occurred,  could have a material adverse impact on our financial condition,
results of operations and net cash flows.

      Nuclear Decommissioning Trust Funds

      Contributions  made  into the  Nuclear  Decommissioning  Trust  Funds  are
invested  in debt and  equity  securities.  These  marketable  debt  and  equity
securities  had a market value of $723 million at June 30, 2001.  The  potential
change in fair value  resulting from a hypothetical  10% change in quoted market
prices of these  securities  amounts to  approximately  $72  million.  Gains and
losses on the Nuclear  Decommissioning  Trust Funds do not affect earnings. As a
result of the Energy Master Plan Proceedings,  the recovery of these investments
will be continued  as part of the societal  benefits  charge  ("SBC")  levied by
PSE&G on its customers. PSE&G will continue to collect this $29.6 million charge
and remit it to us.

      With the purchase of Delmarva's  interests in Salem and Peach  Bottom,  we
received a transfer of $49.7 million  representing  its Nuclear  Decommissioning
Trust Funds related to those stations.

Accounting Matters

      For a discussion of Emerging Issues Task Force ("EITF") 99-19,  "Reporting
Revenue Gross as a Principal  versus Net as an Agent" ("EITF  99-19"),  SFAS No.
133, Accounting for Derivative  Instruments and Hedging Activities,  as amended,
("SFAS 133") and related Derivative  Implementation  Group ("DIG") issues,  SFAS
No. 141, "Business  Combinations" ("SFAS 141"), SFAS No. 142 "Goodwill and Other
Intangible  Assets"  ("SFAS  142")  and  SFAS No.  143,  "Accounting  for  Asset
Retirement Obligations ("SFAS 143"), see Note 3. Accounting Matters, and Note 5.
Financial  Instruments and Risk Management,  of Notes to Consolidated  Financial
Statements.

Site Restorations and Other Environmental Costs

      For discussion of potential environmental and other remediation costs, see
Note  7.  Commitments  and  Contingent  Liabilities  of  Notes  to  Consolidated
Financial Statements.


                                       34
<PAGE>

                                    Business

The Company

      We are one of the largest  independent  electric  generating and wholesale
energy marketing and trading  companies in the United States.  Through our three
principal operating subsidiaries, we generate and market electricity,  capacity,
ancillary services and natural gas products on a wholesale basis. Our generation
portfolio  consists of 11,490 MW of installed  capacity owned or under contract.
Our target market, which we refer to as the Super Region,  extends from Maine to
the  Carolinas  and the  Atlantic  Coast  to  Indiana,  encompassing  37% of the
nation's power consumption.  With 20% of installed  capacity,  we are the single
largest power supplier in our primary market,  PJM, which is one of the nation's
largest and  well-developed  energy  markets.  We are and each of the Subsidiary
Guarantors is a limited  liability  company  established in Delaware on June 16,
1999 and have our  principal  place of business at 80 Park  Plaza,  Newark,  New
Jersey 07102.

      We expect to continue to increase  our  generation  capacity in our target
market,  and we believe that we are  favorably  positioned to do so through site
expansions,  strategic acquisitions and new generation  development.  We seek to
continually   maximize  the  value  of  our  generation  portfolio  through  the
centralized control of its operations and its integration with our trading, fuel
procurement,  marketing and risk management  expertise.  Our electric generation
portfolio  is  diversified  by  fuel  source  and  market  segment  and we  have
demonstrated expertise in natural gas procurement.

      We began operating as a deregulated energy supplier in 1999. On August 21,
2000, we acquired ownership of the electric generation  portfolio of our utility
affiliate,  PSE&G, New Jersey's largest public utility.  This portfolio included
more than 10,200 megawatts of nuclear and fossil capacity which we acquired at a
cost of $239/kW. Through June 30, 2001, we:

      o     acquired 544 MW of nuclear capacity in Pennsylvania and New Jersey;

      o     acquired 380 MW of steam capacity in New York;

      o     completed  construction  and began operation of 332 MW of combustion
            turbines in New Jersey;

      o     began construction of:

            o     1,854 MW of combined cycle and combustion turbine units in New
                  Jersey;

            o     1,150 MW of combined cycle units in Indiana; and

            o     850 MW combined cycle units in Ohio; and

      o     are in advanced development of 750 MW of combined cycle units in New
            York.

      We expect that the new generating  assets  currently  under  construction,
which will add 4,604 MW to our  generation  portfolio,  will be completed by the
end of the second quarter of 2003.  This new capacity will expand our generation
portfolio to three contiguous reliability regions.

      As a result of New Jersey's deregulation and restructuring of the electric
power  industry,  PSE&G  was  required  by the BPU to  transfer  its  generation
facilities  and related  assets to an  unregulated  affiliate.  We and our three
principal operating  subsidiaries,  Fossil, which operates our fossil generating
facilities; Nuclear, which operates our nuclear generating facilities; and ER&T,
which  conducts our  wholesale  energy  marketing and trading  activities,  were
therefore  formed  to own  and  operate  what  were  formerly  PSE&G's  electric
generation  assets and business.  As an EWG, we do not directly serve any retail
customers and we use our generation facilities exclusively for the production of
electricity  for sale at the wholesale  level.  We have contracted with PSE&G to
provide its energy,  capacity  and  ancillary  services  required to fulfill its
BPU-mandated  BGS  obligation  through  July  2002.  As part of our 380 MW asset
purchase from NIMO, we have  contracted to provide NIMO with energy and capacity
at prices consistent with its regulatory agreement through September 2003.


                                       35
<PAGE>

      We are a wholly-owned subsidiary of PSEG which is an exempt public utility
holding  company and one of the leading  providers of energy and energy  related
services in the nation. PSEG has three other direct,  wholly-owned subsidiaries:
PSE&G,  Energy  Holdings  and  Services.  PSE&G is New Jersey's  largest  public
utility and is engaged principally in the transmission, distribution and sale of
electric  energy and gas service in New  Jersey.  Energy  Holdings  participates
nationally and  internationally in energy-related  lines of business through its
subsidiaries.   Services   provides   corporate   support  and   managerial  and
administrative services to PSEG and its affiliates.

                                THE SUPER REGION

[Chart omitted]

Industry Overview

      The regulatory structure that has historically governed the electric power
industry  in the  United  States  is in  transition.  Recent  federal  and state
legislative and regulatory initiatives have been designed to promote competition
in the electric power industry (see "Competition" and "Energy  Markets").  These
initiatives  have  led  to  statutorily  mandated  unbundling  of  the  services
traditionally  provided by vertically integrated  utilities,  such as PSE&G, and
the rapid growth of independent  generation,  energy  trading and marketing.  In
addition,  new technology and interest in self-generation  and cogeneration have
provided  end-users with alternative  sources and supplies of energy.  Companies
that have been engaged in providing generation,  transmission,  distribution and
ancillary  services are responding to the challenges and opportunities  embodied
in these  changes.  The  challenges  of open market  competition,  together with
legislative and regulatory  initiatives,  are driving many utilities  across the
country to divest all or part of their  generation  assets.  Other utilities and
independent  companies are acquiring generation assets and/or transferring their
generation  assets to independent  affiliates to seize the  opportunities in the
wholesale  power  market.  The  independent  companies  are  also  launching  or
enhancing  their wholesale  energy trading  operations to add value to their own
generation asset portfolios.


                                       36
<PAGE>

Deregulation

      Since the  target  markets  in which we  operate  are  deregulated  at the
wholesale  level,  continued  deregulation  of the retail  markets  within these
regions is likely to bring new  purchasers  of  electricity  into the  wholesale
markets,  thus  increasing the volume of  transactions.  This should continue to
strengthen the efficient operation and liquidity of those markets.  Liquidity is
essential for efficiency as it provides a ready market for our generation output
and marketing and trading activities.

      We believe  that  deregulation  will  continue  in the regions in which we
compete.  In our target market, 13 of the 19 states and the District of Columbia
have enacted restructuring  legislation,  while six of the remaining states have
either issued a regulatory order relating to restructuring or are in the process
of investigating  restructuring.  Retail  competition has already begun in 12 of
the states and the District of Columbia with two additional  states scheduled to
begin competition in 2001 and 2002. Three of the five wholesale  marketplaces in
our Super Region are operated by ISOs, and the other two markets are expected to
develop similar governance structures in the near future.

Competitive Strengths

      We  believe  that we are  well  positioned  to build  upon our  successful
history  and  existing  asset  base to  remain  one of the  largest  independent
electric  generating and wholesale energy marketing and trading companies in the
Unites States. Our significant competitive strengths include the following:

      Scale and  Diversity  of  Assets.  With  11,490 MW of  installed  capacity
(including the pending  acquisition  from ACE) and 58 generation  units, we have
one of the largest and most diversified unregulated generation portfolios in PJM
and the Eastern  United  States.  Our  portfolio  of  generation  assets is well
diversified  by fuel type (42% Gas, 29% Nuclear,  18% Coal, 9% Oil and 2% Pumped
Storage) and technology  (35% Steam,  29% Nuclear,  26% Combustion  Turbine,  8%
Combined Cycle and 2% Pumped  Storage).  Our portfolio is also well  distributed
among the three energy market  segments:  base load (36% of our total capacity),
load  following  (36% of our  total  capacity)  and  peaking  (28% of our  total
capacity).  Generation units are typically  characterized as serving one or more
of these  market  segments  based  upon their  size,  operating  capability  and
performance.  The scale and  diversity  of our  portfolio  provides  us with the
flexibility  to offer a wide  variety of products and services to the market and
to mitigate the risks  associated  with fuel price  volatility and market demand
cycles.

      Favorable Location of Assets. Many of our assets are strategically located
within densely populated and demand intensive  regions in PJM. In addition,  the
majority  of our fossil  generation  stations  are  concentrated  in the heavily
industrialized  and  populated  northeast  quadrant  of New Jersey  where we can
capitalize on a well-developed fuel supply infrastructure.

      Quality of Assets. Our portfolio  consists of 52 fossil-fueled  units, one
pumped  storage  hydroelectric  unit and five nuclear  power  generation  units.
According to station operating statistics, our base load fossil units, which are
coal  units,  achieved  an average  capacity  factor of 82.4% in 2000 versus the
latest available  (1998) industry average for coal units of 69% (source:  Energy
Information  Administration  ("EIA")). From 1996 to 2000, the performance of our
load  following  units  has  improved  significantly.   The  average  equivalent
availability factor (the percentage of time that a unit is available to operate)
("EAF") for these units was 89% in 2000, up from 81% in 1996. By comparison, our
peer group has performed at an average EAF of approximately 83% between 1996 and
1999 (the latest year for which peer group data is available).  In addition, our
peaking  units had an average EAF ranging  from 81% to 87% between 1996 and 2000
which compares favorably to the average EAF for our peer group which ranged from
79% to 84% between 1996 and 1999.

      Our portfolio also includes nuclear assets that are performing at or above
industry  standards.  According to station  operating  statistics  for 2000, the
average  capacity  factor for our  nuclear  units was 87.6%,  as compared to the
latest available (1999) US industry average of 86.8% (source:  NEI). Our nuclear
units have also benefited from  substantial  investments.  From 1994 to 1999, we
spent approximately $2.3 billion to maintain or enhance the operating efficiency
and performance of our nuclear units.


                                       37
<PAGE>

      Integrated  Generation and Wholesale  Marketing and Trading Functions.  In
addition to our fleet of generation  assets,  we have an  established  wholesale
energy marketing and trading operation with significant technical  capabilities,
market expertise and a  state-of-the-art  trading floor.  This group,  which has
been in operation since 1997 and has been  continuously  profitable and growing,
centrally  controls all of our  wholly-owned  generation  assets and fossil fuel
procurement  and provides a competitive  wholesale  marketing,  trading and risk
management  function  that  actively  participates  in all aspects of the energy
markets.  While we trade  with over 100  credit-approved  counterparties  in the
spot, forward and futures markets throughout the surrounding regions, nearly 85%
of our  trading  activity  during  2000 was within  PJM,  currently  our primary
marketplace and the location of most of our generation  assets.  The integration
of our generation  operations,  fossil fuel procurement and wholesale marketing,
trading and risk management capabilities enables us to obtain the optimal mix of
financial and physical  assets and mitigate the effects of adverse  movements in
the fuel and electricity  markets.  We also provide effective  management of the
spark spread which is the  difference  between the cost of fuel and the price of
electricity.

      Conservative  Risk  Management  Framework.  We  have  developed  our  risk
management  framework  from  the  Group of  Thirty  recommendations,  which  are
considered best practices for the use of derivative instruments.  We established
a Risk Management Committee ("RMC") that reports to the PSEG Board of Directors.
On a monthly  basis,  we report  our risk  exposure  using  VAR  related  to our
electricity  and natural gas exposures.  PSEG's Board of Directors  approved our
corporate financial risk management policy that empowers the RMC to manage risk,
and set an overall corporate limit for VAR. The RMC sets risk VAR limits,  alert
limits and  portfolio  loss limits for us.  These  limits are  contained  in the
procedures  and  guidelines  that detail the actions for  implementation  of our
corporate  policy.  The Chief Financial  Officer ("CFO") of PSEG chairs the RMC.
The RMC formally meets  quarterly to discuss risk matters,  but is also convened
on demand  when  more  immediate  risk  issues  arise.  We also  established  an
independent  corporate risk management group that reports to the CFO of PSEG and
to the RMC. The  corporate  risk  management  group is charged  with  measuring,
monitoring  and reporting  both market and credit risk.  Our VAR is computed and
reported weekly using a 95% confidence  level and one-week  holding  period.  We
also mark all positions to market daily. Our portfolio is stress tested daily by
ER&T and  monthly by our  corporate  risk group.  These  stress  tests  identify
potential risks to our portfolio of non-normal events.

      We also have a credit policy,  which defines our control  environment  for
credit.  Prior to  engaging  in any  transactions  with a new  counterparty,  we
perform a thorough analysis of the  creditworthiness  of that counterparty.  The
corporate risk management group also participates in approving credit limits for
counterparties  with whom we trade.  If  necessary,  we will request  additional
security from the  counterparty,  which could take the form of a parent guaranty
or letter of credit. Once approved,  we monitor the exposure to the counterparty
using current net receivables and mark-to-market gains. Counterparties exceeding
their  credit  limit and  unapproved  counterparties  are placed on a restricted
list,  which  precludes our traders from  transacting  with them.  Violations of
credit policies are reported to the RMC.

      In-Depth Knowledge of the Region. Our extensive  experience within PJM and
surrounding  regions  provides us with in-depth  knowledge and insight about the
market  rules,  assets  and  transmission  constraints  within  the  region.  In
addition,  our  continuous  involvement in the formation and operation of PJM as
the first  centrally  dispatched  energy market in the United States provides us
with a  significant  competitive  advantage  in this  market and in  surrounding
regions as these regions move towards similar market structures.

      Continuity of Experienced Management.  Our management team is comprised of
seasoned  individuals with substantial  industry  experience within our targeted
regions.  In  addition  to their  understanding  of our  existing  portfolio  of
generation assets,  local market conditions and labor relations,  our management
includes  individuals  with:  proven  success  in  the  generation   development
business; risk management expertise; substantial influence in the development of
centralized  electricity  markets;  and diverse  experience in related  business
areas of transmission, distribution and retail customer service. This experience
provides us with an in-depth  knowledge and insight  about the market's  assets,
market rules and transmission constraints. We believe our management team has an
exceptionally


                                       38
<PAGE>

strong skill set in these areas because, unlike many of our competitors, we have
operated all of our generation assets (other than the Albany Steam Station which
was acquired in May 2000) since their original construction.

      Environmental  Leadership.  We have led the  industry as an advocate for a
comprehensive  system of uniform  national  standards  that would  substantially
reduce power plant emissions of nitrogen oxide,  sulfur dioxide and mercury.  We
also advocate for the start of prudent action toward  addressing  carbon dioxide
emissions  related  to global  warming.  We are a  founding  member of the Clean
Energy Group, a coalition of progressive  energy  companies that is working with
the U.S. Congress, the environmental  community and state and federal regulators
to  establish  a  common  sense  program  to  improve  the  environment  without
compromising fuel diversity or the reliability and affordability of the nation's
electric  energy  supply.  To set the  standard,  we have  reduced  emissions of
nitrogen oxides by 80% and are currently pursuing additional  reductions through
the installation of additional emissions controls at our coal-fired power plants
and are  investing in new,  state-of-the-art  facilities.  Further,  we were the
first to commit to -- and achieve -- stabilization  of carbon dioxide  emissions
at 1990 levels by the year 2000.

Business Strategy

      Our  objective  is to  continue  to  profitably  build our  multi-regional
generating  and wholesale  energy  marketing and trading  company based upon our
successful formula of integrating generating asset operations with our wholesale
energy,  fuel supply,  trading and risk management  expertise.  To implement our
strategy we plan to:

      Maintain a Stable Stream of Revenues and Cash Flow.  Our principal  source
of revenue is the sale of energy  through  long-term  contracts and, to a lesser
extent,  into the spot  market.  Through  July 31,  2002,  we have an  exclusive
full-requirements  contract  to  supply  PSE&G  with the  energy,  capacity  and
ancillary services needed to fulfill its BGS obligations.  In addition,  we have
several other contracts to supply LSEs. We anticipate that  approximately 75% of
our  generation  output  will  continue to be  dedicated  to  supplying  similar
long-term  (typically 2-3 years)  contracts  with LSEs.  The  relatively  stable
energy revenues from such contracts are supported primarily by the output of our
base load generation  units.  Base load units are  characterized  by large size,
high efficiency and low fuel and other operating costs and, therefore,  have the
opportunity  to supply  power  economically  in most  energy  market  conditions
throughout  the year. We will continue to maximize the energy output of our base
load units through ongoing  improvement  programs  designed to upgrade capacity,
shorten unit outages and enhance reliability.

      Realize the Value of Possessing  Assets Across the Entire Market Spectrum.
In addition to energy sales,  we have  historically  produced  revenues and cash
flows   through  the  sale  of  products   and   services   other  than  energy.
Energy-related  products and services  consist  primarily of capacity  sales and
ancillary services.

      (i) Capacity Sales. In order to ensure that there is sufficient generation
capacity  available  to meet peak  demand,  in PJM,  LSEs are required to secure
enough capacity to meet the projected demand of their retail customers,  plus an
additional amount as a reserve margin. As an owner of generation  plants, we are
able to sell "capacity" to LSEs or other wholesale  market  participants to meet
this need. Subject to certain exceptions,  a contract for capacity commits us to
make a generation  unit  available so that it can be dispatched if its output is
needed to satisfy  total  system  demand.  If the unit is  actually  dispatched,
compensation  for the resulting energy output is settled in the energy market in
a separate  transaction.  Capacity  sales are supported by all of our generation
units  and  contribute  additional  cash  flows.  Since the  operating  expenses
associated with providing capacity from our load following and peaking units are
very low  relative  to the  price of  energy in the  market,  this  market is an
attractive  source of profits  for us.  Hence,  we will  continue  to serve this
market  by  ensuring  maximum   availability   through   continual   reliability
improvements.

      (ii) Ancillary Services. In order to assure safe and reliable transmission
system  performance,  the PJM ISO  established a market for ancillary  services,
many of which are provided by generation units. These ancillary services,  which
include area regulation service and operating reserves,  permit the ISO to place
certain  units under its direct  control and ensure that other units are able to
provide  electricity


                                       39
<PAGE>

within a certain time frame when their output is needed. Area regulation service
allows  the ISO to  control  the  output of a unit to match  fluctuating  system
demand.  Operating  reserves  allow the ISO to compensate  for sudden changes in
supply or  unforeseen  increases in demand that can occur due to  generation  or
transmission  line problems or imbalances  between  forecasted demand and actual
load.  Generally,  this  results in those  units  running at reduced or, in some
cases,  minimum  levels of  output.  We will  continue  to  participate  in this
attractive  market,  particularly  when  prices  for these  services  adequately
compensate  us for  the  opportunity  cost  of  forgone  energy  sales  and  for
associated  wear on  equipment.  Ancillary  services  are  supported by our load
following  and peaking  units.  We will also continue to optimize the balance of
ancillary services and energy sales to maximize profit opportunities.

      Continue to Reduce  Costs.  In order to increase  margins,  we continue to
concentrate on effective cost  management.  Over the last several years, we have
streamlined  our  operations  by  instituting  flexible job  specifications  and
creating  mobile  work  teams.  This has  allowed  us to  seasonally  reposition
operating  personnel  in  order  to  optimize  unit  profits  as  energy  demand
fluctuations   occur.  These  improvements  also  allow  us  to  add  additional
generation capacity at our existing sites without large increases in the size of
associated  workforces.  The  implementation of an enterprise  resource planning
system throughout our organization has also helped us to identify cost reduction
opportunities  and  manage  individual  cost  centers  which  should  result  in
continued  savings over the next several  years.  Since January 1, 2000, we have
utilized  Services  to provide us with  corporate  support  and  managerial  and
administrative services, which we believe has lowered our corporate expenses. In
addition, we expect that effective inventory management, strategic alliances and
economies of scale  resulting from the growth of our generation  asset portfolio
will help to further reduce costs.

      Capitalize  on  Favorable  Location  of  Assets.  Many of our  assets  are
strategically  located within densely  populated and demand intensive regions in
PJM.  In  addition,   the  majority  of  our  fossil  generating   stations  are
concentrated in the heavily  industrialized and populated  northeast quadrant of
New  Jersey  where  we  will   capitalize  on  a   well-developed   fuel  supply
infrastructure.

      Capitalize on Additional Energy Revenue  Opportunities  through Integrated
Generation,  Marketing  and Trading  Functions.  Our load  following and peaking
units allow us to capture additional energy revenue  opportunities.  In contrast
to the larger and more efficient base load units, peaking units have lower fixed
costs and relatively  higher  operating costs (mainly fuel  expenses).  The cost
profile of load  following  units  bridges the gap between base load and peaking
units. As a result of these characteristics, some load following and all peaking
units operate less frequently under most market conditions. However, the smaller
size and  operating  flexibility  of peaking  units in  particular  allows us to
respond  quickly  when  energy  prices  are high.  To  sustain  our  ability  to
capitalize on these additional energy revenue opportunities, we will continue to
improve the reliability and operational  flexibility of these units and, through
coordination with our wholesale energy marketing and trading  operation,  ensure
that the units will be available  during likely  periods of high energy  prices.
Our  wholesale  energy  marketing  and trading  operation  actively  manages the
dispatch of our generation units to optimize the overall portfolio of generation
and trading based on market  opportunities.  By centralizing the dispatch of our
assets with fuel  management  and  electricity  trading,  we have the ability to
create  additional  revenue  opportunities  in the  marketplace and extract full
value from our existing contracts.

      Maintain Prudent Risk Management Policies.  We seek to limit the financial
exposure  associated with market risk,  credit risk and operational  risk of our
portfolio  of  generation  assets and  contracts  through a  comprehensive  risk
management  organization.  Our  team  of  marketing  and  trading  professionals
utilizes its in-depth knowledge of the markets,  assets and complex rules in the
regions  in which we  operate  to  maintain  the  optimal  mix of  physical  and
financial  assets  and to  maximize  the value of our  portfolio.  Sophisticated
systems employed by our wholesale energy marketing and trading operation monitor
market  exposure,  credit  exposure  and  VAR  of  the  entire  portfolio.  This
information provides our marketing and trading,  risk management and back office
personnel with the up-to-date  information necessary to manage both our physical
and financial  assets.  In addition,  we are subject to oversight by the RMC, an
oversight  committee  that is  independent  of the  trading  operation  and that
reports directly to PSEG's Board of Directors,  whose goal is to actively manage
the  financial   risk  exposure   associated   with  the  operations  of  PSEG's
subsidiaries.  We will  continue to maintain a strong  control  environment  and
continue to watch for evolution of best practices.


                                       40
<PAGE>

      Pursue Site Expansion Opportunities in PJM. We are favorably positioned to
pursue growth  opportunities  through expansion of our installed capacity within
PJM.  We expect to utilize  our  significant  development  experience  to expand
capacity at our existing  locations that are connected to  transmission  systems
through  existing  interconnections  and are located  adjacent  to existing  gas
transmission pipelines.  Given these advantages,  we believe site expansion will
result in  significantly  lower  associated  costs and more  timely  receipt  of
required  licenses and regulatory  approvals  than  greenfield  development.  In
addition,  at many of our existing sites,  we have been awarded  favorable queue
positions  that provide us with  priority  rights to use  existing  transmission
capability for delivering  the power output of our planned  generation  capacity
expansion projects.

      Pursue Attractive Growth Opportunities in the Super Region. We also expect
to grow by acquiring,  in whole or in part,  existing  fossil plants and forming
partnerships  with independent  power producers within the Super Region. We plan
to concentrate on attractive  opportunities and employ a disciplined approach to
growth. For example, in May 2000, we acquired the Albany Steam Station, a 380 MW
generation  station which is well located  within the New York market and offers
significant expansion potential.  In addition, in December 2000, we acquired 246
MW of jointly  owned  nuclear  assets from  Delmarva  at Peach  Bottom and Salem
nuclear  stations  and we are under  contract  to acquire  ACE's 298 MW share of
Peach Bottom, Salem and Hope Creek.

      We are  expanding  our PJM asset base with the addition of combined  cycle
units at Bergen (500 MW) and Linden (1,186 MW) and peaking units equaling 168 MW
in the period 2001-2003.  We are currently developing two planned combined cycle
plants in the East Central Area Reliability Council ("ECAR"), an 850 MW plant in
Waterford, Ohio and a 1,150 MW plant in Lawrenceburg, Indiana. As we continue to
acquire  generation  capacity in the region,  we intend to utilize our wholesale
marketing,  trading and risk management capabilities,  together with our growing
asset base,  to expand our  wholesale  marketing  and trading  volume in PJM and
other markets.

      Maintain Our Commitment to the Environment.  We will continue to seek ways
for  improving  our  performance  and  continue  to  advocate  a uniform  set of
stringent but achievable air pollution standards for all U.S. power plants. This
includes our goal of achieving a 90%  reduction of nitrogen  oxide  emissions in
our New Jersey facilities.

Products and Services

      Wholesale energy markets  increasingly  consist of centralized power pools
run by ISOs. The ISO is responsible for maintaining system reliability, ensuring
the competitiveness and efficiency of the market,  establishing various products
to be  offered  for sale in the market and  managing  the spot  market for those
products.  Three  primary  products  traded  in these  markets  include  energy,
capacity  and  ancillary  services.  While  the  following  descriptions  relate
specifically  to products and services  offered in PJM,  our  principal  market,
similar  products  and services  exist in most of the other  markets in which we
actively participate.

      Energy

      Electrical  energy is  produced  by  generation  plants and is  ultimately
delivered to customers  for use in lighting,  heating and air  conditioning  and
operation of other electrical equipment.  Energy is our principal product and is
priced on a usage basis,  typically in cents per thousand  Watt-hours ("kWh") or
dollars per million Watt-hours ("mWh").

      In a bid-based  energy market such as PJM,  owners of power plants specify
prices at which they are  prepared to generate and sell energy for the next day.
Plant  operators   generally  establish  hourly  bid  prices  at  a  level  that
approximates the marginal cost of generating energy from each individual unit at
that plant.  Marginal  costs  consist of fuel  costs,  variable  operations  and
maintenance  costs and other variable costs  including air emission  allowances.
Within  PJM,  bid prices  are  typically  capped at $1,000  per mWh,  unless all
available  generation  within the PJM control  area is  insufficient  to satisfy
demand.  Under  this  condition,  PJM may  institute  emergency  purchases  from
adjoining regions that are not subject to a price cap.


                                       41
<PAGE>

      The bid price for each  plant is  submitted  to the ISO.  Based  upon bids
received,  the ISO  instructs  the units as to when they are to generate  power,
generally  calling on the  lowest  cost units  first.  Typically,  progressively
higher bid units are called on (also referred to as "dispatched"),  up until the
point that the entire  system  demand for power (known as the system  "load") is
satisfied.  The bid price of the last unit dispatched by the ISO establishes the
energy  market-clearing  price,  known as the locational  marginal price ("LMP")
within  PJM.  All  units  that are  dispatched  are paid the LMP for each mWh of
energy produced,  regardless of their specific bid prices.  Since bids generally
approximate  the marginal cost of  production,  units with lower  marginal costs
generally run more hours over the course of a year and generate higher operating
profits than units with relatively higher marginal costs.

      At times, however, the transmission system becomes constrained when one or
more parts of the transmission grid are at their full capability. During periods
of transmission congestion,  it is not possible to dispatch units in merit order
without violating transmission reliability standards.  Under such circumstances,
the ISO will  dispatch  higher cost  generation  out of merit  order  within the
congested  area and  power  suppliers  will be paid a LMP that is  higher in the
congested areas reflecting the price bids of those higher-cost generation units.

      In addition to bidding into the market, owners of power plants sell energy
on a wholesale  basis under  contract to power  marketers  and to LSEs,  such as
investor-owned  and municipal  utilities,  and  aggregators who resell energy to
retail consumers. Our BGS contract with PSE&G is an example of such a contract.

      Capacity

      Capacity,  as a product that is distinct  from energy,  is a commitment to
the ISO that a given unit will be available for dispatch if it is needed to meet
system demand.  Capacity is typically  priced in dollars per MW for a given sale
period (e.g., mW-day or mW-year).  Capacity generally refers to the power output
rating of a  generation  plant,  measured on an  instantaneous  basis.  Thus,  a
generation plant that can produce 20 mWh of energy in one hour is said to have a
capacity of 20 million Watts ("MW").

      The PJM and New York ISOs maintain a separate  capacity  market as a means
of ensuring  power  reliability  and  managing  the energy  market.  Each LSE is
required  to  secure  enough  capacity  to meet the peak  demand  of its  retail
customers,  plus an additional  amount as a reserve margin.  This reserve margin
attempts  to  ensure  that   unpredicted  peak  demand  increases  or  equipment
unavailability  does not cause a major  system or market  disruption.  Owners of
generation  plants can sell their capacity to LSEs or to other wholesale  market
participants  for resale.  Subject to certain  characteristics,  a contract  for
capacity  only  commits the  provider to make a generation  unit  available  for
dispatch by the ISO if it is needed.  Should the unit  actually be dispatched by
the ISO, compensation for the resulting energy produced is settled in the energy
market.

      Buyers and sellers may either negotiate bilateral contracts or rely upon a
bid-based  system.  The primary function of the bid-based  capacity market is to
facilitate capacity  transactions where the capacity bid price of buyers and the
offer price of sellers are matched through an ISO-sponsored auction process.

      Ancillary Services

      Ancillary   services   constitute   another  category  of   energy-related
activities  supplied by generation unit owners to the ISO. The ISO requires such
services to ensure the safe and reliable operation of the bulk power system. The
market for  ancillary  services  exists solely on a wholesale  level.  Owners of
generation units may bid units into the ancillary  services market and, in turn,
receive  compensatory  payment from the ISO. The ISO recovers the cost of paying
generators   for  ancillary   services   through   charges   imposed  on  market
participants.  The two principal  ancillary services in which we participate are
area regulation and operating reserves.  We will continue to participate in this
attractive  market,  particularly  when  prices  for these  services  adequately
compensate  us for  the  opportunity  cost  of  forgone  energy  sales  and  for
associated  wear on equipment.  We will also continue to optimize the balance of
ancillary services and energy sales to maximize profit opportunities.


                                       42
<PAGE>

      Area regulation  service entails allowing the ISO to control the output of
a unit to match  the  constantly  fluctuating  system  demand.  Generally,  this
results  in the  unit  operating  at less  than  full  output.  The ISO pays the
provider  of  area  regulation  services  a rate  which  compensates  it for the
opportunity  cost of operating at less than full output (i.e.,  the market price
of energy  which could have been  produced  and sold during this period) plus an
incentive amount to compensate for any additional equipment wear.

      Operating  reserves  allow the ISO to  compensate  for  sudden  changes in
supply or unforeseen  increases in demand that occur when there is a sudden loss
of a large  generation  unit, a problem with a  transmission  line or a mismatch
between  forecast and actual load. By operating steam units that otherwise would
not be  dispatched,  and  synchronizing  combustion  turbines  to the bulk power
system,  generators  are able to provide  these  ancillary  services to the ISO.
Synchronizing a combustion  turbine to the system  involves  starting a unit and
adjusting  it so that the ISO can quickly  bring the unit up to full power if it
is needed.  Once the unit is synchronized,  it is spinning at normal  rotational
speed but does not generate  electric output until directed to do so by the ISO.
The ISO pays generators  operating reserve payments that reflect their bid price
for providing these services.

Energy Markets

      In the Eastern  United  States,  there are three  centralized  electricity
markets now being operated by ISO organizations:  PJM (operated by the PJM ISO),
New York  (operated  by the New York ISO) and New England  (operated  by ISO New
England).  In addition to our involvement in the formation and ongoing operation
of all three organizations, we actively trade in their wholesale markets. We are
also active in other major  electricity  markets in the  midwestern and southern
United States,  principally in the Virginia Carolina Reliability Group ("VACAR")
area and the ECAR area. Although these markets are not yet centrally  dispatched
or operated by an ISO,  they do have  wholesale  markets in which we are able to
actively participate.

      Together,  these markets  define a Super Region which spans part or all of
19 states  plus the  District of  Columbia.  With  approximately  300,000 MWs of
installed  capacity,  the Super Region constitutes over 37% of the total load in
the United States  (Resource Data  International  PowerDAT  Database) and serves
approximately  40% of the  total  U.S.  population  (U.S.  Census  Bureau,  1999
estimates).

      Our centralized  asset base within PJM and our extensive  knowledge of the
surrounding  markets provide us with an advantage in the markets  throughout the
Super  Region.  The majority of our  generation  assets are located  within PJM,
which is the  geographic  center of the Super  Region.  While  nearly 85% of our
trading activity during 2000 was within PJM, the central concentration of assets
allows us to  effectively  trade in the broader Super  Region.  As other markets
continue to evolve,  we will use our  centralized  asset base within PJM and our
regional knowledge and experience to pursue expansion opportunities and increase
trading volume throughout the Super Region.

      In addition,  the markets of the Super Region are  relatively  advanced in
terms of  restructuring  which has  created an area with  relatively  liquid and
active wholesale trading markets.  Three of the five markets are operated by ISO
organizations and the other two markets (ECAR and VACAR) are expected to develop
similar governance  structures within the near future.  Thirteen of the nineteen
states  within the Super  Region  and the  District  of  Columbia  have  enacted
restructuring legislation,  while six of the remaining states have either issued
a  regulatory  order on  restructuring  or are in the  process of  investigating
restructuring (source: EIA).  Furthermore,  retail competition has already begun
in twelve of the states and the  District of  Columbia  with an  additional  one
state scheduled to begin competition by 2002.

      The following  table sets forth certain  characteristics  of each of these
markets.  Installed  capacity and peak demand data were obtained from the NERC's
2000 Electric Supply and Demand Database.


                                       43
<PAGE>

                                                      Approximate    2000 Summer
 Super Region                        Relevant       2000 Installed   Peak Demand
    Markets     Market Operator  States/Districts    Capacity (MW)      (MW)
  -----------   --------------     -------------    ---------------  -----------
      PJM           PJM ISO        PA, NJ, MD,         57,828          51,206
                                   DE, VA and
                                    Wash D.C.

   New York      New York ISO           NY             34,699          30,200

 New England    ISO New England     CT, MA, ME,        25,619          23,250
                                  NH, RI, and VT

     ECAR             N/A          IN, KY, MD,         107,287         97,557
                                     MI, OH,
                                 PA, VA and WV

     VACAR            N/A           NC, SC,VA          55,653          53,441
                                     and WV

      PJM

      The PJM ISO conducts the largest  centrally  dispatched  energy  market in
North America with over 200 market  participants and 540 generation  sources. It
serves nearly 9% of the total U.S.  population.  As part of the restructuring of
the energy markets within PJM, some investor-owned utilities have divested their
generation assets. As of December 31, 2000,  approximately  14,000 MW, or 24% of
the total  installed  capacity  within PJM, had been sold or was awaiting  final
regulatory approval for sale.

      Peak  demand  in PJM is  forecasted  to grow at a rate  of 1.5%  per  year
through 2010, while energy supply is also expected to increase at an annual rate
of 1.5%  (NERC  2000  Electric  Supply  and  Demand  Database).  There  has been
significant merchant plant activity in the region. Over 5,700 MW of new capacity
is expected to come online in PJM between January 1, 2001 and December 31, 2003.
Plans for development of approximately 17,000 MW of additional new capacity have
been reported.

      There  are a number  of  factors  that  distinguish  PJM from the state of
California,  where  electric  industry  deregulation  has  received  significant
attention in recent months.  We believe these factors  significantly  reduce the
likelihood  of us  experiencing  the types of  problems  encountered  by various
utilities and power generators in California.  The most prominent  difference is
the extent to which there is adequate  generation capacity to meet demand in the
region. In 1999, PJM's reserve margin (installed  capacity less peak demand) was
15%,  which is  considerably  higher  than that of  California's  where  reserve
margins have slipped below 6%. In PJM, reserve margins are required of all LSEs,
whereas in California,  no such  requirements  exist.  The two markets have also
operated differently. Initially, California utilities were required to buy their
energy in the day-ahead,  or spot, market.  While longer-term  forward contracts
have been permitted more recently,  the initial rules resulted in utilities with
considerable  price risk. In contrast,  in PJM utilities  have been permitted to
lock in prices  through  long-term  contracts  and to mitigate  risk with use of
other hedging instruments. Finally, California is considerably more dependent on
gas-fired generation and hydro (51% and 26%, respectively). In contrast, PJM has
a more  diverse  fuel mix,  including  a  substantial  base of coal and  nuclear
generators, whose cost structures have remained more stable.

      New York

      The New York ISO officially began operations as the market coordinator for
New York in November 1999. The New York ISO is now  responsible for managing the
power pool and for  administering  the energy  marketplace.  Through 2010,  peak
demand within the New York market is expected to grow at approximately  0.9% per
year  (NERC  2000  Electric  Supply  and  Demand  Database).   As  part  of  the
restructuring of New York's utility industry,  the New York State Public Service
Commission  has ordered  investor-owned  utilities  to divest  their  generation
assets.  As of  December  31,  2000,  generation  units with  capacity  totaling
approximately  18,000 MW,  representing  approximately  53% of the State's total


                                       44
<PAGE>

capacity,  had been sold or were awaiting final regulatory  approval for sale to
new  market  participants.  These  sales are  helping  to  create a more  active
wholesale  energy market,  similar to the market in PJM. It is anticipated  that
reserve  capacity  margins  in New York  will be  insufficient  to meet the NPCC
criterion of a one-day in ten years loss-of-load expectation. Excluding New York
City and Long Island, approximately 2,700 MW of new capacity is expected to come
online in New York between  January 1, 2001 and  December  31,  2003.  Plans for
development  of  approximately  16,000 MW of  additional  new capacity have been
announced.

      New England

      ISO New England was  established on July 1, 1997 and  immediately  assumed
responsibility  for managing the New England Power Pool which covers the six New
England states and has over 130 members  operating 330 generation units. In June
1999, ISO New England also began administering the restructured wholesale energy
market. As in PJM and New York, the restructuring of the utility industry in New
England has also resulted in  divestiture of generation  assets.  As of December
31, 2000, generation units of investor-owned utilities with approximately 17,500
MW  of  capacity,   representing  approximately  69%  of  the  total  generation
capability  in New England,  either had been sold to new owners or were awaiting
final  regulatory  approval for sale. As in New York, these sales are increasing
trading  activity  in  the  wholesale  markets.  Approximately  8,700  MW of new
capacity is expected to come online in New England  between  January 1, 2001 and
December  31,  2003.  Plans  for  development  of  approximately  16,000  MWs of
additional new capacity have been announced.

      ECAR

      The ECAR region is made up of Ohio,  Indiana,  most of  Michigan  and West
Virginia and parts of Virginia, Kentucky, Maryland and Pennsylvania.  Unlike the
ISO-operated  markets, ECAR does not have a centrally managed energy market or a
regional open access  transmission  tariff.  Instead,  within ECAR, each utility
operates  its own  control  area  that,  collectively,  forms an  interconnected
electrical  system  covering eight states and 29 major  utilities.  However,  it
appears  likely that federal  initiatives  (see "Federal Laws and  Regulations")
will result in the creation of an ISO organization  within or including the ECAR
region within several years that will likely  increase  trading  activity within
the  region.  At  present,   the  demand  in  the  ECAR  region  is  growing  at
approximately   1.7%   annually.   Projections   indicate   potential   capacity
deficiencies by 2005 (NERC  Reliability  Assessment  2000-2009).  To serve these
loads,  the region will likely have to rely on  supplemental  resources  to meet
peak summer demand.  Approximately  6,500 MW of new capacity is expected to come
online  in ECAR  between  January  1,  2001 and  December  31,  2003.  Plans for
development  of  approximately  44,000 MWs of additional  new capacity have been
announced.

      VACAR

      VACAR encompasses a portion of West Virginia,  most of Virginia and all of
North and South  Carolina.  Like ECAR,  VACAR does not have a centrally  managed
competitive  electricity  market  but,  instead,  is an  interconnected  grid of
individual  utility  control  areas.  Although it has not yet  committed  to the
establishment of an ISO or other open access,  non-discriminatory  organization,
VACAR is expected to move in that direction in the next several years which will
likely increase  trading  activity within the region.  Due to their proximity to
our generation assets, we are primarily focused on West Virginia and Virginia in
Northern  VACAR.  Approximately  3,200 MW of new  capacity  is  expected to come
online  in VACAR  between  January  1, 2001 and  December  31,  2003.  Plans for
development  of  approximately  7,000 MW of  additional  new capacity  have been
announced.

      FERC Regional Transmission Organization Orders

      In a series of orders issued in July, FERC called for the creation of four
large regional  transmission  organizations  ("RTOs") to facilitate  competitive
regional  markets in the U.S.  FERC rejected  several  smaller RTO proposals and
directed  transmission  owners  and  ISOs to  combine  into  much  larger  RTOs,
dramatically altering their proposed geographic size and configuration.


                                       45
<PAGE>

      In the Northeast region,  FERC  conditionally  approved a PJM RTO proposal
(subject to several modifications and compliance filings) and rejected alternate
proposals  advanced by the New York ISO and ISO New England.  FERC directed that
the  three  existing  ISOs for PJM,  New  York and New  England,  as well as the
systems  involved in PJM West,  form a single  Northeast  RTO, based on the "PJM
platform".  FERC  directed  that the parties in the region  engage in  mediation
(with FERC  oversight) to prepare a proposal and timetable for the merger of the
ISOs  into  a  single  RTO.  At  the  end  of a  45-day  mediation  period,  the
Administrative Law Judge assigned to the matter will submit a report to FERC.

      In the Southeast region, FERC rejected a separate RTO proposal made by the
Southern  Companies and another  submitted  jointly by Entergy and the Southwest
Power Pool. FERC directed that a single Southeast RTO be created, using the Grid
South  platform.  As in the  Northeast,  FERC directed the Southeast  parties to
engage in mediation under supervision of an Administrative Law Judge.

      Lower-cost generation should benefit from having better access to a larger
regional  market.  While specific  impacts on us are uncertain  because specific
rules will not be known for some time, we generally  expect that the elimination
of seams issues and the creation of a single  wholesale  market in the Northeast
will have a positive impact on our competitive position.

Generation Assets

      As of June 30, 2001,  our  portfolio  of  generation  assets  consisted of
11,490 MW of  installed  capacity.  Of this total,  approximately  11,110 MW are
located  within  PJM,  which  equates to  approximately  20% of PJM's  installed
capacity as of that date.  These  assets are well  diversified  in terms of fuel
type, technology and energy market segment. The portfolio's diversity represents
a balance that helps to mitigate risks associated with fuel price volatility and
market demand cycles.  The following charts provide a breakdown of our installed
generation assets by market segments, fuel type and technology.

[Chart omitted]

      Distribution Among Market Segments

      There  are  generally  three  energy  market  segments:  base  load,  load
following  (also  referred to as mid-merit)  and peaking.  Generation  units are
typically  characterized  as serving one or more of these markets based on their
operating  capability and  performance.  On a capacity  basis,  our portfolio of
generation assets consists of 36% base load, 36% load following and 28% peaking.
This balanced  distribution  among market  segments  reduces our risk associated
with market  demand  cycles and allows us to  participate  in the market at each
segment of the dispatch curve.

      Base Load Units:  Base load units are the largest and most efficient units
that we operate.  These units are typically  greater than 500 MW in capacity and
are  characterized  by high  construction  (capital)  costs,  high  fixed  costs
(primarily labor) and low operating costs (primarily fuel).  Operating costs are
low due to the  combination  of high  efficiency and the use of coal and nuclear
fuels,  which are generally  lower in cost per unit of output relative to oil or
natural gas. Base load units are the primary  source of our energy  revenues and
the capacity of these units supports revenues from capacity sales.


                                       46
<PAGE>

      Because of their size and operating characteristics,  base load plants are
most  suited to run for long  periods at maximum  output.  Performance  of these
units is  generally  measured by  "capacity  factor," or the ratio of the actual
output  of the  unit to the  theoretical  maximum  output  of the unit if it ran
continuously  over a given  period.  Base load  units tend to be  profitable  to
operate in most energy market  conditions  throughout  the year and,  therefore,
typically have capacity factors above 60%. During 2000, our base load fossil and
nuclear  units   achieved   average   capacity   factors  of  82.4%  and  87.6%,
respectively.

      Load Following Units:  Load following units are smaller and more flexible,
but somewhat less efficient than base load units.  They generally  range in size
from 100 MW to 500 MW. The construction costs of these units are typically lower
than that of base load plants,  but the  operating  costs are higher per unit of
output due to lower  efficiency  and/or the use of higher cost fuels such as oil
and natural gas. Load  following  units are designed to operate less  frequently
than base load units (i.e.,  during those periods when system demand exceeds the
base load  capacity of the  system)  and,  therefore,  typically  have  capacity
factors that range from 20% to 60%. These units generally  support revenues from
capacity sales and area regulation, as well as energy revenues during periods of
higher energy prices.

      Due to the less frequent  operation of load  following  units  relative to
base load units, a more relevant  measure of performance for these units is EAF,
the percentage of time a unit is available to operate  during the year,  whether
or not it  actually  operates.  In 2000,  the  weighted  average EAF of our load
following units was 89%.

      Peaking Units:  Peaking units,  which normally have capacities of 10 MW to
100 MW, represent the smallest and most flexible units in our fleet. The capital
costs  and fixed  costs of these  units are low  relative  to base load  plants.
Peaking units are the least efficient plants in our portfolio and utilize higher
cost fuels such as oil and natural gas. As a result, operating costs per unit of
output tend to be much higher  than that of base load  units.  For this  reason,
peaking  units are operated  during times of peak demand and derive the majority
of their  revenues from  capacity and ancillary  services  sales.  However,  the
operating  flexibility and rapid startup  characteristics  of these units enable
them to capture energy revenues during periods of high energy prices,  which may
occur during times of peak demand or as a result of transmission congestion.  As
with load following  units, the relevant measure of performance is EAF. In 2000,
the weighted average EAF of our peaking units was 87%.

      One  special  class  of  peaking  unit   technology   is  pumped   storage
hydroelectric. These units utilize electric power during low cost periods (e.g.,
early morning  hours when demand is generally  low) to pump water to an elevated
reservoir. When energy prices are high, the water is allowed to flow through the
turbine to operate the generators and the resulting energy output is sold to the
market. We are the co-owner of one pumped storage facility.

      Diversity of Fuel Types and Technologies

      Our portfolio  consists of generation assets that are powered by a variety
of fuel types. Coal, natural gas and oil power our 14 fossil generation stations
and our ownership  interest in these stations  represent a total of 7,873 MW, or
69% of our current installed  capacity.  We also have an ownership interest in a
pumped storage hydroelectric station, which adds additional diversity and 200 MW
to our generation fleet. We have ownership  interests in five nuclear units that
are currently  licensed to operate for 40 years,  with the first unit's  license
expiring  in August  2013.  Our share of the  nuclear  units in which we have an
ownership  interest  represents a current net capacity of 3,417 MW that accounts
for 29% of our current installed  capacity.  This includes a recent  transaction
wherein we contracted to purchase  Conectiv's  ownership interests in the Salem,
Hope Creek and Peach Bottom units,  increasing our respective ownership share of
those units to 57.4%, 100.0% and 50.0% (a total of 544 MW). The Delmarva portion
of that  transaction  (246 MW) was closed in December 2000. The ACE portion (298
MW) awaits regulatory approval.

      Our  portfolio  is  also  diverse  in  terms  of  generation  technologies
employed.  The range of fossil-fueled  technologies  includes conventional steam
units,  combined cycle units and  combustion  turbine  units.  In addition,  our
nuclear and pumped storage  hydroelectric  generation  units represent  entirely
different generation  technologies that serve as a strategic complement to those
of the fossil fleet.


                                       47
<PAGE>

      Power Production Breakdown

      The  following  figure  shows our  output by energy  source in the  twelve
months ended June 30, 2001 relative to installed capacity.  Our coal and nuclear
fueled units,  represent 18% and 29%,  respectively,  of our installed capacity,
yet accounted for 28% and 63%, respectively,  of our total energy output for the
period. In contrast,  our gas, oil and pumped storage load following and peaking
units,  which represent 53% of our installed  capacity,  accounted for 9% of our
total energy output for the period.

                        Energy and Capacity by Fuel Type

[Chart omitted]

      The following  table provides  summary  profiles of our fossil and nuclear
generation stations and the units that comprise them:

<TABLE>
<CAPTION>
 Generation                Unit         Primary                    Total Capacity    Owned
   Station       Unit #  Type(1)       Fuel Type   Plant Mission(2)     (MW)      Capacity (MW)  Plant Operator
 -----------     ------    -----       ---------     -------------  ------------  -------------   -------------
<S>                <C>      <C>         <C>            <C>              <C>            <C>           <C>
Conemaugh          1&2      ST          Coal           Base Load        1,700          382           Reliant
                    3       IC           Oil            Peaking          11             2

 Keystone          1&2      ST          Coal           Base Load        1,700          388           Reliant
                    3       IC           Oil            Peaking          11             3

 Albany            1-4      ST         Gas/Oil      Load Following       380           380            Power

 Hudson            1&2      ST        Coal/Gas      Load Following       991           991            Power
                    3       CT           Oil            Peaking          129           129

 Kearny            7&8      ST           Oil        Load Following       300           300            Power
                    9       CT           Gas            Peaking          21            21
                  10-12     CT         Gas/Oil          Peaking          443           443

Linden             1&2      ST           Oil        Load Following       430           430            Power
                    3       CT           Gas            Peaking          21            21
                   5-8      CT         Gas/Oil          Peaking          316           316

 Mercer            1&2      ST        Coal/Gas      Load Following       648           648            Power
                    3       CT           Oil            Peaking          129           129

 Sewaren           1-4      ST         Gas/Oil      Load Following       453           453            Power
                    6       CT           Oil            Peaking          129           129

 Bergen             1       CC           Gas        Load Following       675           675            Power
                    3       CT           Gas            Peaking          21            21
</TABLE>

                                       48
<PAGE>

<TABLE>
<CAPTION>
 Generation                Unit         Primary                    Total Capacity    Owned
   Station       Unit #  Type(1)       Fuel Type   Plant Mission(2)     (MW)      Capacity (MW)  Plant Operator
 -----------     ------    -----       ---------     -------------  ------------  -------------   -------------
<S>                <C>      <C>         <C>            <C>              <C>            <C>           <C>
 Burlington        10       CC           Gas        Load Following       245           245            Power
                 1,2 8,     CT           Oil            Peaking          561           561
                  9&11      CT

 Bayonne           1&2      CT           Oil            Peaking          42            42             Power

 Edison            1-3      CT         Gas/Oil          Peaking          504           504            Power

 Essex            9-12      CT         Gas/Oil          Peaking          617           617            Power

 National Park      1       CT           Oil            Peaking          21            21             Power

 Yards Creek        1       PS     Pumped Storage       Peaking          400           200             GPU

 Salem             1&2      NU         Nuclear         Base Load        2,223        1,2813           Power
                    3       CT           Oil            Peaking          38            22

 Hope Creek         1       NU         Nuclear         Base Load        1,042        1,0423           Power

 Peach Bottom      2&3      NU         Nuclear         Base Load        2,186        1,0943          Exelon
</TABLE>

----------
1     ST = Steam; CC = Combined Cycle;  CT = Combustion  Turbine;  IC = Internal
      Combustion; PS = Pumped Storage; NU = Nuclear
2     We   classify   certain   units  based  upon  their   historic   operating
      characteristics.
3     Includes ACE's ownership interests under contract.

      As  of  June  30,  2001,  we  had  4,604  MW  of  generation  capacity  in
construction or advanced development as shown in the following table:

                                              Total    Principal
Name and Location and                       Capacity     Fuel
Expected Completion Date                      (MW)       Used        Missions
------------------------                    --------   ---------     --------
Single Cycle:

  Kearny, NJ Unit 121                          168      Gas/Oil       Peaking
  Waterford (Phase I), Ohio (June 2002)        500        Gas     Load Following
Combined Cycle:

  Bergen, Ridgefield, NJ (June 2002)           500        Gas     Load Following
  Lawrenceburg, Indiana (May 2003)           1,150        Gas     Load Following
  Waterford (Phase II), Ohio (May 2003)        350        Gas     Load Following
  Linden, NJ (June 2003)                     1,186        Gas     Load Following

  Bethlehem, NY (June 2004)                    750      Gas/Oil   Load Following
                                             -----
    Total Construction or Advanced
      Development                            4,604
                                             =====

----------
1     This unit commenced full commercial operation on August 1, 2001.

Development/Growth Plans

      We believe that we are well  positioned  to grow by acquiring  new plants,
developing  greenfield  and  brownfield  sites  and  forming  partnerships  with
independent power producers. We plan to concentrate on attractive  opportunities
and employ a disciplined approach to growth. We are expanding our PJM asset base
with the addition of combined  cycle units at Bergen (500 MW) and Linden  (1,186
MW) and peaking units equaling 168 MW in the period 2001-2003.  In addition,  we
are currently  developing  two combined cycle plants in ECAR, an 850 MW plant in
Waterford, Ohio and a 1,150 MW plant in


                                       49
<PAGE>

Lawrenceburg,  Indiana.  As we  continue to acquire  generation  capacity in the
Super  Region,  we will  utilize  our  wholesale  marketing,  trading  and  risk
management  capabilities,  together  with our growing  asset base, to expand our
wholesale marketing and trading volume in PJM and other markets.

Energy Marketing and Trading

      We have been  engaged in energy  trading and  marketing  operations  for a
number of years. We utilize our significant industry expertise and capability to
provide  comprehensive  energy portfolio and risk management services to achieve
the greatest overall return on our portfolio of assets.  During each of the last
three  years,  we  completed  wholesale  transactions  relating to more than 100
million mWh of electricity  annually with trading  partners in the Super Region.
In the future,  we expect to continue to  successfully  participate in the Super
Region to further enhance the value of our assets.

      We  engage in  physical  and  financial  transactions  in the  electricity
wholesale  markets and execute an overall risk  management  strategy to mitigate
the  effects  of  adverse  movements  in the fuel and  electricity  markets.  In
addition to bidding the output of our  generation  assets into the day-ahead PJM
energy market, we actively trade energy,  capacity,  fixed transmission  rights,
fuel and emission  allowances in the spot, forward and futures markets primarily
within  PJM,  but also  throughout  the Super  Region.  We are also  involved in
financial   transactions  that  include  swaps,   options  and  futures  in  the
electricity markets.

      In addition to participating in each of the major  electricity  supply and
capacity markets in the Super Region,  we also market and trade a broad spectrum
of other energy and energy-related  products.  These products include coal, oil,
natural gas, sulfur dioxide and nitrous oxide emissions allowances and financial
instruments  including  fixed  transmission  rights.  Our  marketing and trading
activity for these  products  extends  throughout the United States and involves
physical and financially settled transactions, futures, options, swaps and basis
contracts.

      We perform stress tests to identify risks in the portfolio that may not be
apparent in normal market  conditions.  ER&T's risk  management  group  performs
stress tests on a daily basis to test market  positions  against  adverse  price
movements and to identify potential risks in its entire portfolio. The corporate
risk  group also  performs  independent  stress  tests on a weekly  basis  using
standardized  scenarios  and on a monthly  basis using data that will attempt to
identify  weaknesses  in the  portfolio.  The  corporate  risk group reports the
results of these stress tests to the RMC.

      We have developed a hedging and overall risk management  strategy to limit
our risk exposure and to track our positions in the wholesale  markets.  Hedging
is used as the primary method for protecting  against adverse price fluctuations
and  involves  taking a  position  in a  related  financial  instrument  that is
designed to offset the risk associated with the original  position.  We only use
hedging  instruments  that  correspond  to the  generation,  purchase or sale of
electricity and the purchase or sale of fuel.

      Our corporate  financial risk management  policy,  developed in 1997, uses
the Group of Thirty recommendations, which are considered best practices for the
prudent  use of  derivatives.  The  policy  was  approved  by the PSEG  Board of
Directors  and  empowers  an  executive-level  RMC chaired by the CFO of PSEG to
monitor,  measure and mitigate risk taking  activities  of the company.  The RMC
created an  independent  corporate  risk  group to manage  the daily  activities
related to risk  measurement  and  monitoring.  Our corporate risk group,  which
functionally  reports  directly  to the  CFO of  PSEG,  monitors,  measures  and
aggregates  the financial risk of all trading  operations.  The RMC sets overall
commodity  portfolio risk limits,  and specific  trading limits for each trading
area, to ensure that risk  parameters are not exceeded.  Specifically,  we use a
VAR model that  measures the  potential  gains or losses that could be sustained
due to changes in market  factors.  Based on this model,  VAR limits for certain
time periods are established to limit our exposure. Currently, the VAR limit for
ER&T is set at $25 million with a $16.5 million  alert level.  In the event that
the alert level is reached, the portfolio is examined and the root causes of the
change in the value of the portfolio are assessed.


                                       50
<PAGE>

      As previously discussed,  on December 20, 2000, our portfolio exceeded the
alert limit of $16.5 million in VAR. The RMC convened to discuss the reasons for
the  increase in the VAR,  which were  increasing  natural  gas and  electricity
prices  and  the  corresponding  volatility  in the  commodity  prices.  The RMC
determined  that no  immediate  action  should  be  taken  by ER&T  but that the
corporate risk management group would report VAR levels twice in a week and more
frequently,  if necessary to monitor the portfolio. In February 2001, prices and
volatilities decreased and the VAR moved below the alert limit.

      To further enhance  trading  activity,  we have a comprehensive  portfolio
management system. Traders trade from one consolidated portfolio and we maintain
a  trading  "book"  that is  continuously  marked  to  market.  All  trades  are
immediately  entered  into  the  portfolio   management  system,  where  trading
managers,  the risk manager and the corporate  risk group review and monitor the
status of the portfolio and evaluate the VAR of the forward positions.

      Each trading  counterparty  must pass a thorough  credit  analysis  before
being approved as a trading partner.  The credit analysis results in an internal
credit rating with a credit line that is closely monitored. Credit enhancements,
including guarantees,  performance bonds,  prepayment and letters of credit, may
also be  required  and are  actively  managed.  New trading  counterparties  are
approved on a regular  basis and  performance  of existing  trading  partners is
monitored.  Counterparties  can  be  removed  from  the  approved  list  due  to
deteriorating business conditions or as our evaluation of our risk changes.

      One  example  of how we intend  to  maximize  the value of our  generation
portfolio is  effective  management  of the "spark  spread",  or the  difference
between the cost of fuel and the price of power. This "spark spread"  represents
the  margin we are able to realize  on the sale of each unit of  electricity  we
generate. By using our trading expertise,  we can enhance our revenues by taking
advantage of the volatility inherent in the "spark spread". For example, through
ER&T we may enter into a "forward  sale" in which we (a) contract to deliver our
electricity  to a purchaser  at a future date at a fixed price and (b)  contract
for the delivery of the amount of fuel we will require to fulfill our contracted
electricity  delivery  requirements at a fixed price. By entering into a forward
sale,  we reduce our level of risk by  locking in the margin we receive  for the
electricity we generate. In addition, if the market price of fuel rises relative
to the  market  price of  electricity,  we are  able to sell  the  fuel  that we
previously  contracted to buy and purchase  electricity from the market to cover
our obligation to deliver electricity.  Through these transactions, we realize a
profit on the sale of the fuel we had contracted to purchase in the future while
also ensuring that we do not leave an unhedged  trading position by covering our
obligation  to supply power in the future  through the  purchase of  replacement
power. On a daily basis, we are currently arbitraging the spark spread for about
1,200 MW of gas-fired  generation  assets. As the overall scale and diversity of
our portfolio  continues to grow,  to the extent that we experience  reduced BGS
requirements  as  a  result  of  PSE&G's  customer   attrition,   the  level  of
transactions  that we can engage in will  increase,  creating the  potential for
additional value creation.

      Our team of  marketing  and trading  professionals  utilizes  its in-depth
knowledge  of the  markets,  assets and complex  rules in the region in which we
operate to maintain  the optimal mix of  physical  and  financial  assets and to
maximize the value of our  portfolio.  All marketing and trading  activities are
performed by a staff of experts with experience in commodity trading,  financial
institutions  and  the  electric  industry.  A  fully  integrated  "back-office"
operation performs contract management,  scheduling,  billing,  cash management,
credit analysis and monitoring, and regulatory and legal support functions.

Fuel Management

      Our diverse  generation  portfolio  of nuclear,  fossil and  hydroelectric
facilities  utilizes  several  different  types of fuels  in the  production  of
electricity.  Coal and uranium  are the  primary  fuels for the base load units,
while natural gas is the primary fuel for the majority of the load following and
peaking units. The remainder of the load following and peaking units run on fuel
oil. Natural gas and fuel oil are also used as alternate fuels for some coal and
gas fired units, respectively.  Approximately 5,269 MW, or 46% of our generation
portfolio has dual fuel capability.


                                       51
<PAGE>

      Our wholesale  marketing and trading  operation manages the procurement of
all fossil  fuels (coal,  oil and natural  gas) for the  operation of our fossil
generation stations. By integrating fuel procurement,  control of our generation
units and  responsibility  for wholesale energy supply and trade, we are able to
more  effectively  hedge our  positions  in the  market  and take  advantage  of
arbitrage  opportunities that are present across the full spectrum of the energy
and emissions markets.  This represents another facet of our wholesale marketing
and  trading  operation's   integration  with  our  generation  operations  that
substantially benefits our profitability.

      We are  actively  managing  our fuel  supply to lower  transportation  and
commodity  costs and improve fuel quality.  Our efforts  involve  leveraging our
size as a buyer, improving our transfer and handling capabilities and purchasing
from a more  diverse  range of  suppliers  from  around the world.  We have also
expanded off-site storage to leverage  purchasing power and to support arbitrage
transaction opportunities.

      Coal

      Coal is the  primary  fuel for seven of our base  load and load  following
steam turbine units:  Hudson 2, Mercer 1 and 2, Keystone 1 and 2 and Conemaugh 1
and 2. Coal is purchased through spot market transactions, as well as annual and
medium-term  contracts from numerous suppliers,  primarily in Northern,  Central
and Southern  Appalachia.  Coal is  delivered to our New Jersey units  through a
combination of rail and barge  movements and to our  Pennsylvania  units by rail
and truck.

      Natural Gas

      Natural gas is the  primary  fuel for the bulk of our load  following  and
peaking fleet, including the combined cycle units at Bergen and Burlington,  the
load  following  steam  turbine  units at  Albany,  Hudson and  Sewaren  and the
combustion turbine peaking units at Bergen,  Burlington,  Edison,  Essex, Kearny
and Linden.  Natural gas is also the alternate fuel for the primarily coal-fired
units at Hudson and Mercer. Natural gas is delivered to stations via pipeline to
all sites with  gas-fired  units and is purchased via supplier  contracts and in
the spot market.

      Fuel Oil

      No.  2  (Kerosene)  and No. 6 Oil are  used as  primary  fuels by two load
following steam units and nine combustion turbine peaking units. No. 2 and No. 6
Oil are also used as alternate fuels by several load following and peaking units
that have dual-fuel  capability and burn natural gas as their primary fuel. Fuel
deliveries to sites with oil-fired units are made by truck,  barge, or pipeline.
Fuel oil for all oil-fired units is purchased on the spot market.

      Uranium

      Uranium  is the fuel for our five  nuclear  units.  The supply of fuel for
these base load units  involves the mining of uranium ore that is processed  and
fabricated  into fuel  assemblies.  We have  several  long-term  contracts  with
uranium ore processors to meet the currently  projected  requirements  for Salem
and Hope Creek  stations.  Exelon,  the operator of the Peach Bottom units,  has
similar contracts to satisfy the fuel  requirements of Peach Bottom.  Currently,
there is an  adequate  supply of nuclear  fuel for  Salem,  Hope Creek and Peach
Bottom.

      Our nuclear fuel supply strategy has also emphasized the reduction of fuel
costs. Through global sourcing, renegotiated contracts and improved fuel design,
we  have  reduced  our  nuclear  fuel  costs  (for  Salem  and  Hope  Creek)  by
approximately  $0.06 per kWh since 1997 when fuel  costs were $0.58 per kWh.  We
are  continuing  to focus on  reducing  these costs below $0.48 per kWh by 2002,
which would place our fuel costs within the top quartile of fuel cost  efficient
U.S. nuclear plants.


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<PAGE>

Customers

      Current Customers

      PSE&G, pursuant to the BGS contract,  will be the primary customer for our
generation  business  through July 31, 2002.  PSE&G,  under the terms of the BPU
Final Order,  will provide basic  generation  service to all retail customers in
its service  area that either do not choose to buy their power from  alternative
suppliers or are not being served by their  alternative  energy supplier for any
reason.  As of December 31, 2000, PSE&G provided  service to  approximately  1.9
million  electric  customers.  For the year ended  December 31,  2000,  electric
operating revenues  associated with this customer base aggregated  approximately
$1.8 billion. PSE&G's peak load during the summer of 2000 was 9,369 MW.

      PSE&G will pay us the full amount charged to BGS customers,  or the retail
tariff rate on file at the BPU, less any sales and use taxes. In addition, PSE&G
will  pay  us a  price  stability  charge  to  compensate  us for  ensuring  the
reliability  of BGS service and removing from PSE&G price  volatility  risk. The
charge will be equal to the full amount collected by PSE&G for its unsecuritized
generation stranded costs per billing period.

      In addition to the BGS contract, we will continue to supply four municipal
and electric  cooperative  customers and one public utility a total of 489 MW of
capacity,  including some other obligations,  such as energy, under the terms of
existing contracts for the remaining one to five years of those contracts.

      Wholesale  energy and related product  trading have been growing  business
opportunities throughout the Super Region over the last ten years and we and our
predecessors and affiliates have been in the forefront as an active participant.
Trading  relationships  have been  developed  with most of the  larger  and more
successful  power  marketers  and  existing  trading   relationships  have  been
strengthened with the region's utilities.  More recently, new relationships have
developed with companies  that are focused on  aggregating  retail  customers in
states  that  have  restructured.  We  currently  have over 100  active  trading
counterparties,  which have passed a rigorous  credit  analysis and  contracting
process.  These  include  investor  owned  utilities,   retail  aggregators  and
marketers.

      Potential New Customers

      Customer growth will come from the many opportunities that are a result of
regulatory  changes  providing open access to new markets and the opportunity to
offer many  wholesale  energy and related  products in new  innovative  delivery
methods.  Many of these new customers are subsidiaries of existing  energy-based
companies  that  meet our  contract  and  credit  requirements  and  which  have
established trading  relationships with us. Other new customers are newly formed
companies that are looking for  opportunities  in the new energy markets and are
able to meet our contract and credit  requirements.  During the remainder of the
BGS contract  period  ending July 31,  2002,  we will market  excess  generation
capacity as PSE&G's  retail  market is expected to  moderately  erode during the
outset of retail  competition.  We currently  have  several  contracts to supply
retail  aggregators and, following the completion of the BGS contract period, we
anticipate  that the  majority  of our  generation  output  will  continue to be
dedicated to supplying similar long-term contracts.

Insurance

      We carry insurance  coverage  consistent with companies engaged in similar
commercial  operation with similar  properties.  Our insurance coverage includes
risk  insurance  as well  as  commercial  general  public  liability  insurance,
covering  liabilities  to third  parties for bodily  injury and property  damage
resulting from our operations;  automobile liability  insurance,  for all owned,
non-owned and hired vehicles,  covering  liabilities to third parties for bodily
injury and  property  damage,  and all risk  property  insurance,  covering  the
replacement  value of all real and  personal  property,  including  coverage for
boiler and machinery  breakdowns  and  earthquake  and flood damage,  subject to
certain  sublimits.  We also maintain  substantial  excess  liability  insurance
coverage above the established  primary limits for commercial  general liability
and automobile  liability  insurance.  Limits and  deductibles are comparable to
those carried by other  electric  generation  companies of similar  size.  For a
discussion of liability and other  insurance  related to our nuclear  generation
facilities,  see Note 7.  Commitments  and  Contingent  Liabilities  of Notes to
Consolidated Financial Statements.


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<PAGE>

Competition

      The  National  Energy  Policy Act of 1992  ("Energy  Policy Act") (see "--
Regulation -- Federal Laws and Regulations") laid the groundwork for competition
in the wholesale  electricity  markets in the United  States.  This  legislation
expanded  the  FERC's  authority  to  order  electric  utilities  to open  their
transmission  systems to allow  third-party  suppliers to transmit,  or "wheel,"
electricity  over their lines.  In 1996,  FERC issued an order that  resulted in
expanded  open access to  transmission  lines,  providing  eligible  third-party
wholesale marketers  comparable  transmission access. These actions have enabled
power  marketers,  independent  power  producers,  EWGs and utilities to compete
actively  in  wholesale  markets,  consumers  to have the right to choose  their
energy suppliers and competition to set the price of the generation component of
electricity bills in deregulated areas.

      During the last several years,  additional legislation has been introduced
to further  encourage  competition  at the retail  level  (often  referred to as
customer  choice  or  retail  access).  While no  legislative  proposal  has yet
coalesced at the federal level,  it is expected that efforts to restructure  the
nation's  electricity  industry,  encourage  competition  and  greater  industry
flexibility  and allow retail  customer  choice will continue.  At present,  the
timing and effect of federal restructuring  legislation cannot be predicted with
any degree of  certainty.  Nevertheless,  an  increasing  number of states  have
enacted  legislation  to open  their  markets  to  customer  choice  and  retail
competition.  As a result,  the highly regulated market structure of the past is
giving way to one where  electricity  consumers  have the right to choose  their
electricity  supplier  and  competition  is setting the price of the  generation
component of electricity bills.

      In the regions  where we are the most  active,  most  states have  already
begun the process of  restructuring  their  electricity  markets.  Retail  power
markets  opened to competition  in New York,  Massachusetts  and Rhode Island in
1998.  Pennsylvania  began  opening its markets in January  1999.  New  Jersey's
electricity  market opened to full  competition late in 1999, while Delaware and
Michigan  markets  began phasing in  competition  at virtually the same time. In
2000,   Connecticut   (January),   Maine  (March)  and  Maryland   (July)  began
competition.  Ohio and the District of Columbia  began opening to competition in
January  2001.  New  Hampshire  and Virginia are  scheduled to begin  phasing in
competition in 2001 and 2002.

      As markets  continue to evolve,  several types of competitors have or will
emerge  in the  markets  in  which we  participate.  These  competitors  include
independent power producers with or without trading capabilities,  other utility
affiliates that have formed generation and/or trading  affiliates,  aggregators,
wholesale power marketers or some combination  thereof.  These participants will
compete with one another buying and selling in wholesale  power pools,  entering
into bilateral contracts and/or selling to aggregated retail customers.

      We expect to compete as a large, diverse supplier of wholesale electricity
and related  products and services.  In this market segment,  defined to include
large  companies  with fully  integrated  trading and generation  functions,  we
anticipate that our primary competitors will include companies like Enron Corp.,
Duke Energy Corporation, Mirant Corp. and Exelon Corp. While these companies are
formidable  competitors,  we believe that our asset size and location,  regional
market  knowledge and  integrated  functions  will provide us with a competitive
edge in our selected markets.

Properties

      In  addition  to our  generation  assets,  we own or lease  several  other
properties  associated with our business activities.  We sublease  approximately
70,000  square  feet of  office  space  in an  office  tower  and  other  office
facilities in Newark, New Jersey. We also lease approximately 19,600 square feet
of space in the Hadley Road Training Center in South Plainfield, New Jersey from
PSE&G.  This  space is used  for  fossil  system  maintenance,  procurement  and
materials management staffs.

      Through a  subsidiary,  we own a 50.0%  interest in about  20,000 acres of
restored  wetlands and  conservation  facilities in the Delaware  Estuary.  This
subsidiary was formed to acquire and own lands and other conservation facilities
required  to  satisfy  the  condition  of the  New  Jersey  Pollutant  Discharge
Elimination  System ("NJPDES")  permit issued for the Salem Generating  Station.
These  lands and


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<PAGE>

conservation  facilities  are the only  assets of The  Francis
Corporation,  our wholly-owned subsidiary.  We also own several other facilities
including the on-site Nuclear Administration and Processing Center buildings.

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

Employees and Labor Relations

      As of December 31, 2000, we had a total of 3,124 employees,  of whom 1,154
were  dedicated  to Fossil,  1,835 to  Nuclear,  60 to ER&T and 75 in  corporate
functions. Collective bargaining agreements, which expire on April 30, 2002, are
in place with three union groups,  representing  1,662 employees (802 employees,
or  approximately  69%  of  the  workforce  in  Fossil  and  860  employees,  or
approximately  47% of the workforce in Nuclear).  In the last 15 years,  we have
not experienced any labor problems resulting in significant work stoppage and we
believe that we maintain satisfactory relationships with our employees.

Legal Proceedings

      We are involved in the following  environmental  related matters involving
governmental  authorities.  Based  on  current  information,  we do  not  expect
expenditures  for any such site,  individually  or all such current sites in the
aggregate,  to have a material effect on their financial  condition,  results of
operations and net cash flows.

      (1)   Claim made in 1985 by U.S.  Department of the Interior  under CERCLA
            with  respect  to  the  Pennsylvania   Avenue  and  Fountain  Avenue
            municipal  landfills in Brooklyn,  New York,  for damages to natural
            resources. The U.S. Government alleges damages of approximately $200
            million.  To our  knowledge  there has been no action on this matter
            since 1988.

      (2)   Duane Marine Salvage  Corporation  Superfund Site is in Perth Amboy,
            Middlesex  County,  New  Jersey.  We were  named  as one of  several
            potentially    responsible   parties   ("PRPs")   with   regard   to
            contamination of this site.

      (3)   Various Spill Act directives were issued by NJDEP to PRPs, including
            us with respect to the PJP Landfill in Jersey City,  Hudson  County,
            New Jersey,  ordering payment of costs associated with operating and
            maintenance  expenses,  interim  remedial  measures  and a  Remedial
            Investigation  and  Feasibility  Study  ("RI/FS")  in  excess of $25
            million.  The directives also sought  reimbursement  of NJDEP's past
            and  future  oversight  costs and the costs of any  future  remedial
            action.

      (4)   In 1991,  the NJDEP issued  Directive and Notice to Insurers  Number
            Two ("Directive  Two") to 24 Insurers and 52 Respondents,  including
            PSE&G,  in connection with an  investigation  and remediation of the
            Global Landfill Site in Old Bridge Township,  Middlesex County,  New
            Jersey  seeking  recovery  of  past  and  anticipated  future  NJDEP
            response costs ($37 million).  We and other  participating PRPs have
            agreed  with  NJDEP to a  partial  settlement  of such  costs and to
            perform the remedial design and remedial action.  In 1996, 13 of the
            Directive Two  Respondents,  including  PSE&G,  filed a contribution
            action  pursuant to CERCLA and the Spill Act  against  approximately
            190  parties  seeking  contribution  for an  equitable  share of all
            liability  for  response  costs  incurred  and  to  be  incurred  in
            connection  with the site.  In  September  1997,  the NJDEP issued a
            Superfund record of decision with estimated cost of $3.7 million.

      (5)   The NJDEP assumed control of a former  petroleum  products  blending
            and mixing operation and waste oil recycling  facility in Elizabeth,
            Union  County,  New  Jersey  (Borne  Chemical  Co.  site) and issued
            various  directives  to a number of entities  including us requiring
            performance of


                                       55
<PAGE>

            various remedial actions including: establishment of security at the
            site;  removal and off-site disposal of containerized  wastes at the
            site; and conduct of a remedial investigation of the site. Our nexus
            to the site is based upon the shipment of certain  waste oils to the
            site for  recycling.  We and certain of the other  entities named in
            NJDEP  directives  are members of a PRP group that have been working
            together to satisfy  NJDEP  requirements  including:  funding of the
            site  security  program;  containerized  waste  removal;  and a site
            remedial investigation program.

Regulation

      Energy Regulatory Matters

      We generate,  sell and transmit  electric power under the  jurisdiction of
several federal  agencies.  We are subject to regulation by FERC with respect to
the  interstate  sale  and  exchange  of  electric  capacity  and  energy.   The
construction  and  operation  of nuclear  generation  facilities  are subject to
comprehensive  regulation by the NRC. Such  regulation may include our providing
parental  guarantees to Nuclear for the broad financial  assurances  required by
the NRC. In addition, the Federal Emergency Management Agency is responsible for
the  review,  in  conjunction  with the NRC,  of certain  aspects  of  emergency
planning relating to the operation of nuclear plants.

      We are also subject to the  regulation by the EPA, the U.S.  Department of
Transportation  ("USDOT") and the U.S. Department of Energy ("DOE") with respect
to the construction and operation of our generation stations.

      Federal Laws and Regulations

      FERC Order 888 ("Order No. 888"). The Energy Policy Act eased restrictions
on independent power producers ("IPPs") in an effort to increase  competition in
the wholesale electric  generation market.  Order No. 888, issued in April 1996,
required all public utilities that own, control or operate electric transmission
lines to offer  nondiscriminatory  open  access to their  transmission  systems.
Intra-pool transactions for power pools were also required to be conducted under
a  nondiscriminatory,  pool-wide open access  tariff.  FERC Orders No. 888-A and
888-B clarified and largely reaffirmed the legal and policy bases on which Order
No. 888 was grounded and also provided a process for recovery of stranded  costs
from  wholesale  customers.  While Order 888 has been  significant in opening up
competition in the electric power industry,  it is not directly applicable to us
because we do not operate an electric transmission system.

      Federal  Power  Act  ("FPA").  The FPA  gives  FERC  exclusive  ratemaking
jurisdiction  over the wholesale  marketing and  transmission  of electricity in
interstate  commerce.  All public utilities under FERC jurisdiction are required
to file rate schedules with FERC prior to commencing with wholesale marketing or
transmission. Because we will be selling power into the wholesale market, we are
considered a public utility under the FPA. We have filed, and FERC has accepted,
a rate  schedule  that grants us  authority  to sell  electricity,  capacity and
ancillary services at market-based rates.

      Public  Utility  Holding  Company Act  ("PUHCA").  PUHCA provides that any
corporation,  partnership or other entity or organized group that owns, controls
or holds power to vote 10% or more of the  outstanding  voting  securities  of a
"public  utility  company" or a company that is a "holding  company" of a public
utility company is subject to pervasive  regulation  under PUHCA as a registered
holding company, unless an exemption is established or an order is issued by the
SEC declaring it not to be a holding company. Registered holding companies under
PUHCA are  required to limit their  utility  operations  to a single  integrated
utility system and to divest any other  operations not  functionally  related to
the operation of the utility system. In addition,  a public utility company that
is a  subsidiary  of a  registered  holding  company  under  PUHCA is subject to
financial  and  organizational  regulation,  including the  requirement  for SEC
approval of certain of its  financing  transactions.  However,  under the Energy
Policy Act, a company  engaged  exclusively  in the  business  of owning  and/or
operating  facilities used for the generation of electric energy exclusively for
sale at wholesale  may be exempted  from


                                       56
<PAGE>

PUHCA  regulation  as an EWG.  With the  exception of a section  relating to the
acquisition of 5% or more of the voting securities of an electric or gas utility
company,  PSEG and we have each claimed exemptions from regulation by the SEC as
a registered  holding  company  under  PUHCA.  Fossil and Nuclear have also been
designated as EWGs under PUHCA.

      State Regulatory Bodies

      Neither PSEG nor we are subject to direct  regulation by the BPU. However,
because of PSEG's ownership of PSE&G, the BPU may potentially  assert regulation
with respect to certain transfers of control and reporting requirements. The BPU
may also impose  certain  requirements  with respect to  affiliate  transactions
between PSE&G and PSEG and/or PSEG's non-regulated  subsidiaries,  including us.
The BPU Order  authorizing  the  transfer  of  PSE&G's  generation  assets to us
requires  that,  should any of those assets be sold to a third party within five
years from August 24, 1999,  any gains on such sale would have to be shared on a
50/50 basis with PSE&G's retail customers.

      As  a  participant   in  the   ownership  of   generation   facilities  in
Pennsylvania,  we are subject to regulation  by the PPUC in limited  respects in
regard to such facilities.

      We are  also  subject  to the  rules  and  regulations  of the New  Jersey
Department   of   Environmental   Protection   ("NJDEP")   and   Department   of
Transportation  ("NJDOT") with respect to the  construction and operation of our
generation stations.

      State Laws and Regulations

      New Jersey Energy Master Plan  Proceedings and Related  Orders.  Following
the enactment of the New Jersey  Electric  Discount and Energy  Competition  Act
("Energy Competition Act"), the BPU rendered its Final Order relating to PSE&G's
rate unbundling,  stranded costs and restructuring proceedings providing,  among
other  things,  for the  transfer  to an  affiliate  of all of PSE&G's  electric
generation  facilities,  plant and  equipment  for $2.443  billion and all other
related property,  including materials,  supplies and fuel at the net book value
thereof, together with associated rights and liabilities.  Pursuant to the Final
Order, we acquired all of PSE&G's electric  generation  facilities and wholesale
power  contracts  on August 21, 2000 in  exchange  for a  promissory  note in an
amount  equal to the  purchase  price.  Such note was repaid,  and the  acquired
assets were released from the lien of PSE&G's First and Refunding  Mortgage,  on
January 31, 2001.

      The Energy  Competition  Act,  the BPU's  Final  Order and the related BPU
proceedings,  referred to as the Energy Master Plan Proceedings,  opened the New
Jersey energy markets to competition by allowing all New Jersey retail  electric
and gas customers to select their suppliers.

      Securitization  Filing and Finance Order. Also in the Final Order, the BPU
concluded  that PSE&G  should  recover up to $2.94  billion  (net of tax) of its
generation-related stranded costs, through securitization of $2.4 billion and an
opportunity  to recover  up to $540  million  (net of tax) of its  unsecuritized
generation-related stranded costs on a net present value basis. The $540 million
is subject to recovery by various means, including an explicit market transition
charge,  the MTC.  Following the issuance of the Final Order, the BPU issued its
order  approving  PSE&G's  petition  relating  to  the  proposed  securitization
transaction  ("Finance  Order")  which  authorized,   among  other  things,  the
imposition of a non-bypassable  transition bond charge on PSE&G's customers; the
sale of PSE&G's property right in such charge to a  bankruptcy-remote  financing
entity;  the issuance  and sale of $2.525  billion of  transition  bonds by such
entity as  consideration  for such property  right,  including an estimated $125
million of  transaction  costs;  and the  application by PSE&G of the transition
bond proceeds to retire outstanding debt and/or equity.

      PSE&G Transition Funding LLC, a wholly-owned  subsidiary of PSE&G,  issued
such transition bonds on January 31, 2001.


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<PAGE>

      Basic Generation Service. Under the BPU Final Order, PSE&G is obligated to
provide basic generation service to customers who do not choose another electric
supplier or who,  for any  reason,  are not being  supplied by another  electric
supplier.  PSE&G has  contracted  with us to provide  the  energy  and  capacity
necessary to meet its BGS and Off-Tariff  Rate Agreements  ("OTRA")  obligations
through July 31, 2002.  The Final Order  prohibits  PSE&G and us from  promoting
such service as a competitive  alternative  to other  electricity  suppliers and
marketers.  BGS will be competitively  bid for the year beginning August 1, 2002
and annually thereafter.  Any payments to PSE&G resulting from BGS being bid out
will be credited to the deferred  societal benefit costs balance for purposes of
establishing  its societal  benefit clause rate for the year beginning August 1,
2003,  and may not be  retained  by  PSE&G  or  otherwise  utilized  to  recover
unsecuritized generation-related stranded costs.

      Affiliate  Standards.   In  February  2000,  the  BPU  approved  affiliate
standards and fair competition  standards which apply to transactions  between a
public utility and its affiliates which provide, or offer,  competitive services
to retail customers in New Jersey.  These regulations are set to expire in March
2002 and,  at that time,  will be subject to BPU review and public  comment.  As
currently formulated, these standards have limited applicability to transactions
between us and PSE&G since we do not serve retail customers in New Jersey.

      Environmental Regulatory Matters

      Federal,  regional, state and local authorities regulate the environmental
impacts of our  operations.  Areas of  regulation  include  air  quality,  water
quality,  site  remediation,  land use,  waste  disposal,  aesthetics  and other
matters.  Generators of hazardous substances  potentially face joint and several
liability,  without  regard to fault,  when they fail to manage these  materials
properly  and when  they are  required  to clean  up  property  affected  by the
production and discharge of such substances.

      Compliance  with  environmental  requirements  has caused us to modify the
day-to-day  operations  of our  facilities,  to  participate  in the  cleanup of
various  properties that have been  contaminated  and to modify,  supplement and
replace   existing   equipment   and   facilities.   During  2000,  we  expended
approximately  $9.0  million for  capital  related  expenditures  to improve the
environment  and comply with  environmental-related  laws and  regulations.  Our
estimates are that we will expend  approximately  $15.0, $24.0 and $12.0 million
in the years 2001 through 2003,  respectively,  for such purposes.  Such amounts
are included in estimates of construction  expenditures  (see "MD&A -- Liquidity
and Capital Resources").

      Air Pollution Control.  Federal,  state and local air pollution laws (such
as the Federal  Clean Air Act ("CAA") and the New Jersey Air  Pollution  Control
Act), and the regulations implementing those laws, require controls of emissions
from sources of air pollution,  as well as record keeping,  reporting and permit
requirements.  Our approximate 23% ownership  interest in Conemaugh and Keystone
subjects us to state regulation in Pennsylvania  governing  compliance with, and
maintenance of, air quality  standards in Pennsylvania.  Our ownership of Albany
Steam Station subjects us to similar regulation in New York.

      To reduce emissions of sulfur dioxide ("SO2"), the CAA sets a cap on total
SO2 emissions from affected units and allocates SO2 "allowances" (each allowance
authorizes  the  emission of one ton of SO2) to those  units.  Generation  units
needing to cover  emissions  above their  allocations  can buy  allowances  from
sources that have excess allowances.  Similarly, to reduce emissions of nitrogen
oxides ("NOx"),  which contribute to the formation of smog,  Northeastern states
and the  District  of  Columbia  have set a cap on total  emissions  of NOx from
affected units,  and allocated NOx allowances  (with each allowance  authorizing
the emission of one ton of NOx) to those units. The NOx allowances can be bought
and sold  through a  regional  trading  program  similar  to the  trading of SO2
allowances. In 2003, the cap will be reduced to limit NOx emissions further.

      To comply with the SO2 and NOx requirements, affected units may choose one
or more strategies,  including  installing air pollution  control  technologies,
changing  or  limiting  operations,   changing  fuels  or  obtaining  additional
allowances.  At  this  time,  we do not  expect  that  we  will  incur  material
expenditures


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<PAGE>

to continue  complying  with the SO2 program.  Our current  analysis leads us to
believe that the potential  costs for purchasing  additional NOx allowances will
also not be material  through  December 31, 2002.  In 2003,  when the NOx cap is
reduced, the cost of complying with the cap may increase significantly.  Whether
the cost will  increase  or decrease  will depend upon  whether we will be a net
purchaser  or seller of NOx  allowances.  The extent of any increase or decrease
will depend  upon a number of factors  that may  increase or decrease  total NOx
emissions from affected units,  thus increasing or decreasing demand for a fixed
supply of allowances. We have been implementing measures to reduce NOx emissions
at several of our units, which will reduce the cost of purchasing allowances.

      In 1998,  EPA  issued  regulations  (commonly  known  as the  "SIP  Call")
requiring  the 22  states  in the  eastern  half of the  United  States  to make
significant  NOx  emission  reductions  by 2003 and to  subsequently  cap  these
emissions.  The NOx reduction  requirements  are  consistent  with  requirements
already  in place in New  Jersey,  New  York and  Pennsylvania  and thus are not
likely to have an additional  impact on nor change the capacity  available  from
our  facilities.  On March 3, 2000,  a federal  court  upheld  nearly all of the
provisions of the SIP Call, regulations.

      In December  1999,  the EPA  proposed to approve  plans by several  states
(including  New Jersey and certain  other  Northern  states) to attain the ozone
National  Ambient Air Quality  Standards.  That  approval is contingent on these
states  implementing  new programs to further reduce  emissions of  smog-forming
chemicals  (including NOx). The affected  Northeastern  states have committed to
make these  reductions,  and by October 1, 2001, must select measures that could
affect   the   operation   of  our   electric   generation   units   and   other
generation-related   equipment.   Measures  currently  under  consideration  may
increase demand for NOx allowances and, thus, increase their prices.

      EPA  adopted  a new air  quality  standard  in 1997 for  fine  particulate
matter.  To attain the fine  particulate  matter  standard,  states may  require
further reductions in NOx and SO2. However, under the time schedule announced by
EPA  when  the new  standard  was  adopted,  non-attainment  areas  will  not be
designated  until 2002 and control  measures to meet this  standard  will not be
identified until 2005. The timing of these actions is uncertain due to a federal
court decision that  overturned the new standard.  That decision was appealed to
the United States Supreme Court,  which, in a recent decision,  upheld the EPA's
new standards for fine  particulate  matter.  Additionally,  similar NOx and SO2
reductions  may be required to satisfy  requirements  of an EPA rule  protecting
visibility in 156 of the nation's  scenic areas,  including  some areas near our
facilities.

      Under  the CAA,  states  must  require  each  major  facility  to obtain a
facility-wide operating permit.  Operating permits for certain of our facilities
may require  changes to  facility  operations  or  technology,  installation  of
additional  air pollution  controls and  performance of  supplemental  emissions
monitoring.  Capital  costs of  complying  with  these and  other air  pollution
control  requirements  through 2004 are included in our estimate of construction
expenditures (see Capital Requirements of MD&A).

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

      The EPA and NJDEP  issued a demand in March 2000 under  section 114 of the
CAA requiring information to assess whether projects completed since 1978 at the
Hudson  and Mercer  coal  burning  units were  implemented  in  accordance  with
applicable PSD/New Source Review  regulations.  We completed our response to the
section 114  information  request in November 2000.  Based upon the  information
provided  to the  EPA it is  likely  that  the EPA  will  seek  to  enforce  the
requirements of the New Source Review program at Hudson 2 and Mercer 1 and 2. We
are  currently  in  discussions  with the EPA and NJDEP to resolve  the  matter.
However,  it is uncertain  whether  these  discussions  will be  successful  and
capital costs of compliance could approximate $300 million.


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<PAGE>

      Subsequent  to December 31, 2000,  EPA  indicated  that it is  considering
enforcement  action  under its PSD rules  relating to the  construction  that is
currently  in  progress  for Bergen 2,  scheduled  for  operation  in 2002.  EPA
maintained that PSD requirements  are applicable to Bergen 2, thereby  requiring
us to obtain a permit prior to the commencement of construction.  To obtain such
a permit,  an applicant  must  demonstrate  that the addition of the  additional
emission source will not cause significant  deterioration of the air shed in the
vicinity of the plant. The time required to obtain such a permit is estimated at
6-12 months.  We  vigorously  dispute that PSD  requirements  are  applicable to
Bergen 2, and we are continuing construction.  NJDEP has informally indicated it
agrees with our  position,  but has also advised that the ultimate  authority to
decide PSD  applicability  resides with EPA.  Discussions to resolve this matter
are underway with EPA and NJDEP. At June 30, 2001, we had expended approximately
$179 million in the construction of Bergen 2.

      Water Pollution Control. The Federal Water Pollution Control Act ("FWPCA")
authorizes  the  imposition  of  technology  and  water-quality  based  effluent
limitations to regulate the discharge of pollutants  into surface waters through
the  issuance of  National  Pollutant  Discharge  Elimination  System  ("NPDES")
permits.  The New Jersey Water Pollution Control Act ("NJWPCA") and implementing
regulations  were adopted to regulate  discharges to New Jersey's surface waters
and ground waters through the New Jersey Pollutant Discharge  Elimination System
("NJPDES") permits.  EPA has delegated to New Jersey authority to administer the
NPDES  program  through  the  NJWPCA  and  to  implement  regulations  with  EPA
oversight. The NJDEP administers the NPDES/NJPDES permit program. Certain of our
facilities are directly  regulated by NJPDES permits issued by NJDEP pursuant to
FWPCA and the NJWPCA.  In addition,  Pennsylvania  also has a state PDES program
that impacts the operation of our jointly owned Keystone and Conemaugh plants.

      The NJPDES permit renewal  application for our Hudson  Station,  is in the
process of being reviewed by the NJDEP.  As part of that renewal,  the NJDEP has
requested  updated  information  in part,  to  address  issues  identified  by a
consultant  hired by NJDEP.  The consultant  recommended  that Hudson Station be
retrofitted  to operate with closed  cycle  cooling to address  alleged  adverse
impacts associated with the thermal discharge and intake structure.  We proposed
certain modifications to the intake structure and submitted these demonstrations
to  NJDEP  in  the  fourth  quarter  of  1998.   While  we  believe  that  these
demonstrations  address  the issues  identified  by the NJDEP's  consultant  and
provide an adequate basis for favorable  determinations  under the FWPCA without
the imposition of closed cycle cooling,  it is impossible to predict the outcome
of the agency's review at the present time. We presently  estimate that the cost
of  retrofitting  Hudson  Station to  operate  with  closed  cycle  cooling,  if
required,  would be approximately  $100 million.  Such amount is not included in
our estimate of construction  expenditures  (see Liquidity and Capital Resources
of MD&A).

      NJDEP has advised us that it is reviewing a renewal application for Mercer
Station, and in connection with that renewal, will be reexamining the effects of
Mercer  Station's  cooling  water  system  pursuant to FWPCA.  We are  preparing
updated  demonstrations  to the NJDEP. It is not possible to predict the outcome
of such review.

      On June 29, 2001,  the NJDEP issued a renewal  permit (the "2001  Permit")
for Salem, with an effective date of August 1, 2001,  allowing for the continued
operation  of Salem with its existing  cooling  water  system.  This 2001 Permit
renews Salem's  variance from applicable  thermal water quality  standards under
Section  316(a) of the federal  Clean  Water Act  ("CWA"),  determines  that the
existing intake  structure  represents  best technology  available under Section
316(b)  of the  CWA,  requires  that  we  continue  to  implement  the  wetlands
restoration  and fish ladder  programs  established  under the prior  Permit and
imposes requirements for additional analyses of data and studies to determine if
other  intake  technologies  are  available  for  application  at Salem that are
biologically  effective.  The 2001 Permit also  requires us to install up to two
additional fish ladders in New Jersey and fund a $500,000 escrow account for the
construction of artificial  reefs by NJDEP.  The 2001 Permit expires on July 31,
2006.

      We have also reached a settlement with the Delaware  Department of Natural
Resources and  Environmental  Control (the "DNREC")  providing that we will fund
additional habitat  restoration and enhancement  activities as well as fisheries
monitoring and that we and DNREC will work  cooperatively


                                       60
<PAGE>

on the finalization of other regulatory approvals required for implementation of
the 2001 Permit.  As part of this  agreement,  we deposited  approximately  $5.8
million  into an escrow  account  to be used for  future  costs  related to this
settlement.

      If the NJDEP or the EPA were to  impose a  requirement  at Salem,  Hudson,
Mercer or any other of our  generation  stations  that closed  cycle  cooling be
implemented,  or that material operating  restrictions be imposed, the continued
operation  of the  station  would need to be  reassessed.  We  believe  that the
current  operations  of our  stations  are in  compliance  with  FWPCA  and will
vigorously  pursue our  applications  to continue  operations of our  generation
stations with present cooling water intake  structures.  The EPA, as a result of
litigation by  environmental  groups,  is conducting a rulemaking  under the CWA
that may result in the  establishment of regulatory  guidance on material issues
with respect to  permitting  decisions,  such as guidance on  determinations  of
adverse environmental impacts and best technology available.  The rulemaking may
impact  NJDEP   determinations  with  respect  to  our  pending  permit  renewal
applications.

      The Delaware River Basin  Commission  (the "DRBC") issued a Revised Docket
for Salem in 1995 ("Revised  Docket") approving a modification to the 1970 Salem
Docket that approved the  construction  and  operation of the station's  cooling
water system and the continued  operation of the station's  cooling water system
for an additional five years. The Revised Docket provided that the authorization
would expire  September 27, 2000 absent review of the Docket on or before August
31, 1999 and renewal by the DRBC. We filed a preliminary  information submission
with DRBC during April 1999 and the DRBC  commenced  its review of the matter in
the second quarter of 1999. The DRBC modified the Revised Docket to provide that
it shall  remain in effect  until  December 29, 2001 (six months after the NJDEP
acts on our  application  for renewal of Salem's NJPDES  Permit),  or at a later
date   established  by  the  DRBC.   The  matter  is  currently   scheduled  for
consideration  by DRBC on September  13, 2001.  We cannot  predict the timing or
outcome of this matter.

      While it is impossible to predict the timing and/or  outcome of the review
of these  applications  in respect of the  Hudson,  Mercer and Salem  Generation
Stations,  an unfavorable  determination could have a material adverse effect on
PSEG's and our financial position, results of operations and net cash flows.

      Control of Hazardous Substances.  Certain Federal and state laws authorize
the  EPA and the  NJDEP,  among  other  agencies,  to  issue  orders  and  bring
enforcement  actions  to compel  responsible  parties  to  investigate  and take
remedial  actions  at any site  that is  determined  to  present  an  actual  or
potential  threat to human  health or the  environment  because  of an actual or
threatened release of one or more hazardous substances. Because of the nature of
our business, various by-products and substances are or were produced or handled
which contain  constituents  classified as hazardous.  For a discussion of these
hazardous waste issues, see Note 7. Commitments and Contingent  Liabilities,  of
Notes to Consolidated Financial Statements.

      Other  liabilities  associated  with  environmental   remediation  include
natural   resource   damages.   The   Comprehensive    Environmental   Response,
Compensation,  and  Liability  Act of 1980  ("CERCLA")  and the New Jersey Spill
Compensation and Control Act ("Spill Act") authorize  Federal and state trustees
for natural  resources to assess "damages" against persons who have discharged a
hazardous  substance,  which  discharge  resulted  in  an  "injury"  to  natural
resources.  Until  recently,  the state  trustee in New Jersey,  NJDEP,  has not
aggressively  pursued  natural  resource  damages.  In 1997,  the NJDEP  adopted
changes to the technical requirements for site remediation pursuant to the Spill
Act.  Among these changes was a new provision  requiring all persons  conducting
remediation to  characterize  "injuries" to natural  resources.  Further,  these
changes  required  persons to address  those  injuries  through  restoration  or
damages.  The New Jersey  program is still  developing  and we cannot assess the
magnitude of the potential impact of this regulatory change.  Although currently
not estimable, costs associated with these requirements could be material.

      A  preliminary  review of  possible  mercury  contamination  at the Kearny
Station,  concluded that an additional study and investigations are required. In
1996,  we entered  into an  agreement  with NJDEP for the  Kearny  Station  that
required  a Remedial  Investigation  ("RI") of the site to be  conducted.  An RI


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<PAGE>

Report was submitted to the NJDEP in September  1997 and is currently  under its
technical review.  As currently issued,  the RI Report found that the mercury at
the site is stable and  immobile  and should be addressed at the time the Kearny
Station is retired.

      The EPA has  determined  that a six mile  stretch of the Passaic  River in
Newark,  New Jersey is a  "facility"  within the  meaning of that term under the
CERCLA and that, to date, at least thirteen  corporations,  including  PSE&G and
us,  may be  potentially  liable for  performing  required  remedial  actions to
address potential  environmental  pollution at the Passaic River "facility." Our
Essex Station is within the Passaic  River  "facility".  We cannot  predict what
action,  if any,  the EPA or any third party may take against us with respect to
these  matters,  or in such  event,  what costs we may incur to address any such
claims. However, such costs may be material.

      The  EPA  conducted  an  inspection  of  Spill   Prevention   Control  and
Countermeasure  ("SPCC")  Plan  compliance  at three of our electric  generation
facilities  in 1997.  The EPA  identified  certain  procedural  and  substantive
deficiencies in the SPCC Plans for these sites.  We have submitted  revised SPCC
Plans to the EPA for  these  sites  and are  currently  working  with the EPA to
finalize these SPCC Plans.  In 1998, we evaluated SPCC Plan compliance at all of
our electric generation  facilities and identified  deficiencies.  The necessary
upgrades  are now in  progress  of being  made.  It is  anticipated  that  these
upgrades will take several years to complete.

      Nuclear Fuel Disposal. After spent fuel is removed from a nuclear reactor,
it is  placed in  temporary  storage  for  cooling  in a spent  fuel pool at the
nuclear  station site.  Under the Nuclear Waste Policy Act of 1982 ("NWPA"),  as
amended, the Federal government has entered into contracts with the operators of
nuclear power plants for  transportation and ultimate disposal of the spent fuel
and the nuclear plant  operators  were required to contribute to a Nuclear Waste
Fund  at a rate  of one  mil per  kWh of  nuclear  generation,  subject  to such
escalation  as may be  required  to assure  full cost  recovery  by the  Federal
government.  These  costs are  being  recovered  through  the BGS  contract.  In
addition,  a one-time  payment  was made to the DOE for  permanently  discharged
spent fuels  irradiated  prior to 1983.  Payments  made to the DOE for  disposal
costs are based on nuclear  generation  and are  included in Energy Costs in the
Consolidated Statements of Income.

      Under the NWPA,  DOE was required to begin taking  possession of all spent
nuclear fuel  generated by Power's  nuclear  units for disposal by no later than
1998. DOE  construction of a permanent  disposal  facility has not begun and DOE
has  announced  that it does not expect a facility to be available  earlier than
2010.  Exelon  has  advised  us that it had  signed  an  agreement  with the DOE
applicable  to Peach Bottom under which  Exelon  would be  reimbursed  for costs
resulting  from the DOE's delay in accepting  spent nuclear fuel.  The agreement
allows  Exelon to reduce the charges  paid to the Nuclear  Waste Fund to reflect
costs reasonably  incurred due to the DOE's delay. Past and future  expenditures
associated with Peach Bottom's  recently  completed on-site dry storage facility
would be eligible for this  reduction in future DOE fees. On November 22, 2000 a
group of eight  nuclear  plant  operators  filed a petition  against  DOE in the
Eleventh  Circuit  U.S.  Court of Appeals  seeking  to set aside the  receipt of
credits  out of the  Nuclear  Waste  Fund,  as  stipulated  in the Peach  Bottom
agreement.  No assurances can be given as to any damage recovery or the ultimate
availability of a disposal facility.

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

      Low Level Radioactive Waste ("LLRW"). As a by-product of their operations,
nuclear  generation  units produce LLRW.  Such wastes include  paper,  plastics,
protective  clothing,  water  purification  materials and other materials.  LLRW
materials are accumulated on site and disposed of at licensed


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<PAGE>

permanent  disposal  facilities.  On July 1, 2000, New Jersey,  Connecticut  and
South Carolina formed the Atlantic  Compact.  This arrangement  gives New Jersey
nuclear generators, including us, continued access to the Barnwell LLRW disposal
facility which is owned by South Carolina.  We believe that the formation of the
Atlantic  Compact  will provide for  adequate  LLRW  disposal for Salem and Hope
Creek through the end of their current  licenses,  although no assurances can be
given. Both we and Exelon have on-site LLRW storage facilities for Peach Bottom,
Salem  and Hope  Creek  which  have the  capacity  for at  least  five  years of
temporary storage for each facility.

                                   MANAGEMENT

      PSEG is the sole member of our limited liability company and, as such, has
the  power to  control  the  election  of our board of  directors  and all other
matters  submitted for member  approval and has control over our  management and
affairs.  Currently,  all of our  directors  are  officers  and  employees of or
consultants to PSEG or one of its subsidiaries.

      Our  executive  officers and members of our board of  directors  and their
ages as of June 30, 2001 are as follows:

         Name              Age                    Position
         -----             ---                     -------
Executive Officers
E. James Ferland           59    Chairman of the Board and Chief Executive
                                 Officer
Frank Cassidy              54    President, Chief Operating Officer and Director
Thomas R. Smith            41    Executive Vice President-- Operations and
                                 Development
Harold W. Keiser           58    President and Chief Nuclear Officer of Nuclear
Steven R. Teitelman        53    President of ER&T

Elbert C. Simpson          52    Senior Vice President-- Chief Administrative
                                 Officer of Nuclear
Harold W. Borden, Jr.      57    Vice President and General Counsel
Patricia A. Rado           59    Vice President and Controller
Morton A. Plawner          54    Vice President and Treasurer
                                 Directors
Robert E. Busch            54    President, PSEG Services Corporation
Robert J. Dougherty, Jr.   49    President, PSEG Energy Holdings Inc.
Robert C. Murray           55    Consultant-- PSEG
Thomas M. O'Flynn          41    Executive Vice President and Chief Financial
                                 Officer-- PSEG
R. Edwin Selover           55    Vice President and General Counsel-- PSEG
Michael J. Thomson         42    President, PSEG Global Inc.


      Mr. Ferland has been Chairman of the Board and Chief Executive  Officer of
Power since its  formation.  He has been  Chairman of the Board,  President  and
Chief Executive Officer of Public Service  Enterprise Group  Incorporated  since
July 1986,  Chairman  of the Board and Chief  Executive  Officer of PSEG  Energy
Holdings  Inc.  since June 1989 and  Chairman  of the Board and Chief  Executive
Officer of Public Service Electric and Gas Company since September 1991.

      Mr. Cassidy has been President,  Chief Operating Officer and a director of
Power  since its  formation.  He is also a member of the board of  directors  of
Fossil,  Nuclear and ER&T. He served as President and Chief Operating Officer of
PSEG Energy  Technologies  Inc. from November 1996 to July 1999. Mr. Cassidy was
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.


                                       63
<PAGE>

      Mr. Smith has been Executive Vice President -- Operations and  Development
of Power since  October  2000.  He also serves as  President  of Fossil and is a
member  of the board of  directors  of  Fossil,  Nuclear  and ER&T.  He had been
Executive  Vice President and Chief  Operating  Officer of PSEG Global Inc. from
January 2000. Prior to that, he was President of PSEG Americas,  a subsidiary of
Global,  from  November  1996.  Before that,  he was Senior Vice  President  and
Regional Executive for Latin America for the International Generating Company.

      Mr. Keiser has been President and Chief Nuclear  Officer and a director of
PSEG  Nuclear  LLC  since  its  formation.  He is also a member  of the board of
directors  of Fossil and ER&T.  He was Chief  Nuclear  Officer and  President --
Nuclear  Business Unit of Public Service  Electric and Gas Company from May 1998
to July 1999. Prior to that time, he was Executive Vice President of the Nuclear
Business Unit of Public Service  Electric and Gas Company.  From October 1997 to
January 1998, he was a private consultant to the electric  industry.  From March
1996 to October 1997, Mr. Keiser was Vice President and Chief Nuclear  Operating
Officer of Commonwealth Edison Company. From December 1995 to March 1996, he was
Vice President,  Pressurized Water Reactor of Commonwealth Edison Company.  From
April 1993 to December  1995,  Mr. Keiser was Executive Vice President and Chief
Operating Officer of Entergy Operations Incorporated.

      Mr.  Teitelman  has  been  President  and a  director  of ER&T  since  its
formation.  He is also a member of the board of directors of Fossil and Nuclear.
He had been Vice  President  --  Energy  Resources  and Trade of Public  Service
Electric and Gas Company from  September  1997 to July 1999.  From 1993 to 1997,
Mr. Teitelman was the President of Penn Resources Inc., an energy consulting and
project  development  company.  From 1987 to 1993,  he was the President of Penn
International  Trading Co., a subsidiary of Marubeni  Corporation.  Penn Trading
was an international petroleum products trading company and a clearing member of
the New York Mercantile Exchange.

      Mr. Simpson has been Senior Vice President -- Chief Administrative Officer
of PSEG Nuclear LLC since its  formation.  Mr. Simpson was Senior Vice President
-- Nuclear Engineering of Public Service Electric and Gas Company from June 1995
to July 1999.  From 1993 to 1995,  Mr.  Simpson  was Vice  President  of Nuclear
Support for Arizona Public Service  Company,  which operates the three unit Palo
Verde Nuclear  Generating  Station.  From 1990 to 1993, he was Vice President of
Nuclear Engineering for all three Palo Verde Units.

      Mr. Borden has been Vice President and General  Counsel of Power since its
formation and is also General  Counsel of Fossil,  Nuclear and ER&T.  Mr. Borden
had been Vice President -- Law of Public  Service  Electric and Gas Company from
April 1995 to July 1999.

      Ms.  Rado has been  Vice  President  and  Controller  of Power  since  its
formation. She is also Controller of Fossil, Nuclear and ER&T. Ms. Rado has been
Vice  President and  Controller of Public  Service  Enterprise  Group and Public
Service Electric and Gas Company since April 1993.

      Mr.  Plawner  has been Vice  President  and  Treasurer  of Power since its
formation.  He is also  Treasurer of Fossil,  Nuclear and ER&T.  Mr. Plawner has
been  Treasurer  of  Public  Service  Enterprise  Group and Vice  President  and
Treasurer  of Public  Service  Electric and Gas Company  since  January 1, 1998.
Prior to that,  Mr.  Plawner  had been  General  Manager  --  Property  and Risk
Management  of Public  Service  Electric  and Gas  Company  since  1994 and Risk
Manager since 1989.

      Mr. Busch has been a director of Power since  December  2000.  He has been
President  of PSEG  Services  Corporation  since  April  2001  and  Senior  Vice
President and Chief Financial Officer of Public Service Electric and Gas Company
since  March  1998.  From 1997,  he was the  National  Director of the Hay Group
Utility Consulting  Practice.  From 1996 to 1997, he was a Senior Consultant for
Cambridge  Energy Research  Associates.  Prior to that time, he was President of
the Energy Resources Group of Northeast Utilities.

      Mr.  Dougherty  has been a director of Power since its  formation.  He has
been President and Chief  Operating  Officer of PSEG Energy  Holdings Inc. since
January 1997. Prior to that, Mr. Dougherty was president of Enterprise  Ventures
and Services Corporation.


                                       64
<PAGE>

      Mr.  Murray  has been a director  of Power  since its  formation.  He is a
consultant to Public Service  Enterprise  Group  Incorporated  and had been Vice
President  and Chief  Financial  Officer  of  Public  Service  Enterprise  Group
Incorporated  from January 1992 through June 2001. Mr. Murray was Executive Vice
President -- Finance of Public  Service  Electric and Gas Company from June 1997
to June 2000. Mr. Murray was Senior Vice President and Chief  Financial  Officer
of Public Service Electric and Gas Company from January 1992 to June 1997.

      Mr.  O'Flynn  has been a director  of Power  since July 2001.  He has been
Executive Vice President  Finance and Chief Financial  Officer of Public Service
Enterprise  Group  Incorporated  since July 1, 2001.  From  December 1997 to May
2001, Mr. O'Flynn was a Managing  Director of Morgan  Stanley's Global Power and
Utility  Investment  Banking Division Group.  From January 1994 through December
1997, he was a Principal of Morgan Stanley's Global Power and Utility Investment
Banking Division Group.

      Mr. Selover has been a director of Power since its formation.  He has been
Vice  President and General  Counsel of Public  Service  Enterprise  Group since
April 1988. Mr. Selover has also been Senior Vice President and General  Counsel
of Public Service Electric and Gas Company since January 1988.

      Mr.  Thomson has been a director of Power since  January 2000. He has been
President and Chief  Executive  Officer of PSEG Global Inc.  since January 1997.
Prior to that time he was  Senior  Vice  President,  from July  1993,  and Chief
Operating Officer, from February 1994, of PSEG Global Inc.

                 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Transfer of Assets

      Pursuant to the BPU Final Order in the Energy Master Plan Proceedings (see
"Business  --  Regulation  --  Energy  Regulatory  Matters  --  State  Laws  and
Regulations -- New Jersey Energy Master Plan  Proceedings and Related  Orders"),
we acquired all of PSE&G's existing  generation  related assets. We acquired all
land (except that Nuclear  acquired the land associated with nuclear  generation
stations), as well as PSE&G's interests in the Merrill Creek reservoir facility.
Such transfer was at  full-value,  consistent  with the BPU's  determination  of
PSE&G's recoverable stranded costs. Other  generation-related  assets, including
materials, supplies, fuel and land, were transferred at book value.

      PSE&G transferred to Fossil all of the fossil generation assets, equipment
and associated  assets  (excluding  land),  including PSE&G's interests in those
assets in which it has a partial ownership. In addition, PSE&G's interest in the
Yards Creek pumped-storage facility was also transferred to Fossil.

      All of PSE&G's nuclear generation assets, equipment and associated assets,
including  those  assets  in  which  PSE&G  only  has  partial  ownership,  were
transferred from PSE&G to Nuclear. In addition, all land associated with nuclear
generation was transferred to Nuclear.

      In December 2000, we purchased from Global two Midwest generation projects
with a combined projected generation capacity of 2,000 MW.

Power Purchase Agreements

      Fossil, Nuclear, ER&T and PSE&G are parties to several wholesale contracts
that govern the transactions  between and among them. Power Purchase  Agreements
("PPAs")  between ER&T and each of Fossil and Nuclear  stipulate  that ER&T will
purchase all capacity and energy from their respective  facilities.  ER&T is our
sole marketer of energy and energy services.  ER&T purchases all of the capacity
and energy from Fossil and Nuclear  facilities and is responsible  for marketing
that power on a portfolio  basis  together with power that it may acquire in the
open  market.  Fossil and  Nuclear  are  responsible  for  supplying  energy and
ancillary  services as arranged by ER&T.  The pricing  under these  contracts is
designed  to provide  for the  recovery of  Fossil's  and  Nuclear's  respective
operating  costs.  ER&T reimburses  Fossil and Nuclear for all costs incurred in
operating  and  maintaining  the  generation   units.  ER&T  also  arranges  for
acquisition  of the fuel  supply  for  Fossil's  plants.  In  addition,  ER&T is
obligated  through the BGS Contract with PSE&G (see  "Business -- Customers") to
fully supply the  requirements of PSE&G's  aggregate retail load for a period of
three years that began on July 31, 1999.


                                       65
<PAGE>

Services Agreement

      Traditionally,  the fossil,  trading and nuclear  business  units of PSE&G
relied on its corporate  offices and other business units,  such as transmission
and  distribution,  to provide various  services.  Generally,  transmission  and
distribution  business  units  provided  more  technical  services,   while  the
corporate offices of PSE&G performed administrative and general functions,  such
as accounting  and human  resources.  We continue to need many of these services
and rely on our  affiliates  (PSE&G and  Services) to provide them in accordance
with Affiliate  Standards and FERC  requirements  (See "-- Statement of Policy &
Code of Conduct" below).

      We have  signed a service  agreement  with our  affiliate,  Services,  for
administrative  services.  This contract  generally  articulates  the terms upon
which services are provided.

      The interconnection  agreements between PSE&G and Fossil and Nuclear serve
as the foundation for services to be provided with respect to  transmission  and
distribution.

Tax Sharing Agreement

      We are a single member limited  liability  company,  wholly-owned by PSEG.
PSEG  files a  consolidated  Federal  income  tax  return  with  its  affiliated
companies.  A tax  allocation  agreement  exists between PSEG and us and between
PSEG and each of our subsidiaries.  The general operation of these agreements is
that the  subsidiary  company will compute its taxable  income on a  stand-alone
basis. If the result is a net tax liability,  such amount shall be paid to PSEG.
If there are net  operating  losses  and/or tax credits,  the  subsidiary  shall
receive payment for the tax savings from PSEG to the extent that PSEG is able to
utilize those benefits.

Statement of Policy & Code of Conduct

      We  abide  by the  standards  imposed  by FERC  Order  889  governing  the
relationship  and  transactions  between  wholesale  power  marketers  and their
affiliate transmission organizations.  These standards of conduct were developed
to ensure  that  trading  and  transmission  organizations  function as entirely
separate  business  units.  Prior to our  formation,  the  standards  applied to
PSE&G's trading and  transmission  departments.  Our  relationship  with PSE&G's
transmission organization is subject to the same standards.

      In addition,  we and PSE&G have agreed to a standard of conduct as part of
FERC's approval under the FPA Sections 203 and 205. Such standards  provide that
employees will operate separately and that all market information shared between
employees  will be  simultaneously  disclosed to the public.  In  addition,  the
standards provide that the price of all sales of non-power goods and services by
PSE&G to us will be at the higher of cost or market price and that such sales by
us to PSE&G will be at market price or below.

      The BPU has  adopted  standards  governing  the  relationship  between all
regulated New Jersey  electric and gas utilities,  including  PSE&G,  and all of
their respective  affiliates providing  competitive services to retail customers
in New Jersey (see "Business -- Regulation -- Energy Regulatory Matters -- State
Laws and Regulations -- New Jersey Energy Master Plan and Related Orders.")


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<PAGE>

                               THE EXCHANGE OFFER

Purpose of the Exchange Offer

      In connection  with the sale of the original  notes, we and the subsidiary
guarantors  entered  into a  registration  rights  agreement  with  the  initial
purchasers.  Under  the  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 of each series are the same as the terms
of the  corresponding  series of 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 the exchange offer has not
been consummated within the period specified in the original notes, the interest
rate on the original notes will increase by 0.50% per annum,  until the exchange
offer is consummated.

      Upon completion of the exchange offer,  holders of original notes will not
be entitled to any further  registration  rights under the  registration  rights
agreement, except under limited circumstances. See "Risk Factors -- Consequences
of failure to exchange  original notes" and "Description of the 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 of each series.

      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
$1,800,000,000  aggregate principal amount of exchange notes in three series for
a like aggregate  principal amount of original notes of the same series 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  $1,800,000,000  of  exchange  notes  in  exchange  for a  like
principal  amount of outstanding  original notes of the same series 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 minimum
denominations  of $100,000 and integral  multiples of $1,000 in excess  thereof.
The  exchange  offer is not  conditioned  upon any minimum  principal  amount of
original notes being tendered. As of the date of this prospectus, $1,800,000,000
aggregate  principal  amount  of  the  original  notes  ($500,000,000  aggregate
principal  amount of the 67/8%  Senior  Notes due 2006,  $800,000,000  aggregate
principal amount of the 73/4% Senior Notes due 2011 and  $500,000,000  aggregate
principal amount of the 85/8% Senior Notes due 2031) 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


                                       67
<PAGE>

of the indenture,  but will not be entitled to any further  registration  rights
under the registration rights agreement, except under limited circumstances. See
"Risk  Factors  --  Consequences  of  failure to  exchange  original  notes" and
"Description  of the 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 we nor our Board of Directors make 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  Time,  on , 2001.
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  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
of each series 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:


                                       68
<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 we 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.


                                       69
<PAGE>

      If less than all of the  original  notes of each  series are  tendered,  a
tendering  holder  should  fill in the amount of  original  notes of such series
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


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<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 of the corresponding series, 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


                                       71
<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 ours,

   -  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  registration
rights agreement,  we have agreed that 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 for a period not  exceeding 90 days
after the expiration date. However, a participating


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<PAGE>

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 ours 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 us 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  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
and series 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 we, the  subsidiary  guarantors,  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.


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<PAGE>

Interest on Exchange Notes

      Interest  on the 67/8%  Senior  Notes due 2006 will  accrue at the rate of
67/8% per annum and will be  payable  semi-annually  in  arrears on April 15 and
October 15 of each year,  commencing  October  15,  2001.  Interest on the 73/4%
Senior  Notes  due 2011  will  accrue at the rate of 73/4% per annum and will be
payable  semi-annually  in  arrears  on April 15 and  October  15 of each  year,
commencing  October 15,  2001.  Interest on the 85/8% Senior Notes due 2031 will
accrue  at the rate of 85/8%  per annum  and will be  payable  semi-annually  in
arrears on April 15 and October 15 of each year (each an "Interest Payment Date"
for each series) commencing October 15, 2001. We will make each interest payment
to the persons in whose names the exchange  notes are registered at the close of
business on the 15th day immediately  preceding the applicable  Interest Payment
Date. 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

      The Bank of New York 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 letters of  transmittal  should be directed to the exchange
agent as follows:

                        By Registered or Certified Mail:
                              The Bank of New York
                           101 Barclay Street, 7 East
                               New York, NY 10286
                           Attention: William Buckley
                             Reorganization Section

                     By Hand or Overnight Delivery Service:
                              The Bank of New York
                               101 Barclay Street
                         Corporate Trust Services Window
                                  Ground Level
                               New York, NY 10286
                           Attention: William Buckley
                             Reorganization Section

           By Facsimile Transmission (for Eligible Institutions only):
                                 (212) 815-6339

                              Confirm by Telephone:
                                or (212) 815-5788

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


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<PAGE>

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 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 THE EXCHANGE NOTES
General

      We issued the  original  notes and will issue each series of the  exchange
notes under the indenture dated as of April 16, 2001 (the  "indenture")  between
and among us, the  Subsidiary  Guarantors  and The Bank of New York,  as trustee
(the "trustee"). The terms of the exchange notes are stated in the indenture and
include terms made part of the indenture by reference to the Trust Indenture Act
of 1939,  as amended  (the  "Trust  Indenture  Act").  You  should  refer to the
indenture  and the Trust  Indenture  Act for a  statement  of these  terms.  The
indenture  is governed by New York law. As used  herein,  "Senior  Notes"  means
original notes and/or exchange notes as the context requires.

      The  following  summary of selected  provisions  of the  indenture and the
registration  rights  agreement  referred to below under  "Registration  Rights;
Additional  Interest" is not complete.  We recommend that you read the indenture
and the registration rights agreement,  copies of which may be obtained from the
trustee.  You can find the definitions of certain  capitalized terms used in the
following summary under the subheading "-- Definitions."

      Each  series  of  the  exchange   notes  will  be  our  senior   unsecured
obligations.  They will rank  equally in right of payment to all of our existing
and future senior unsecured  indebtedness.  Upon completion of the exchange,  we
will have approximately  $1,800,000,000 of senior indebtedness outstanding.  The
exchange notes will rank junior to secured indebtedness to the extent of related
collateral. We currently do not have any outstanding secured indebtedness.

      Each  series  of the  exchange  notes  will  be  guaranteed,  jointly  and
severally,  by the  Subsidiary  Guarantors as described  below.  The  Subsidiary
Guaranties  will rank  equally in right of payment  to all  existing  and future
senior  unsecured  indebtedness  of  the  Subsidiary   Guarantors.   Other  than
intercompany  debt, the  Subsidiary  Guarantors  currently have no  indebtedness
outstanding.

Principal, Maturity and Interest

      The  indenture  does not  limit  the  aggregate  principal  amount of debt
securities  that we may issue under it and provides that debt  securities may be
issued  under it up to the  principal  amount as we may  authorize  from time to
time. The debt securities may be issued from time to time in one or more series.
We may "reopen" any series of debt securities,  including the 67/8% Senior Notes
due 2006,  the 73/4%  Senior Notes due 2011 and the 85/8% Senior Notes due 2031,
and issue additional debt securities of that series.

      The 67/8% Senior Notes due 2006 were  initially  limited to  $500,000,000,
the 73/4% Senior Notes due 2011 were initially  limited to $800,000,000  and the
85/8%  Senior Notes due 2031 were  initially  limited to  $500,000,000.  Each of
these  series of Senior  Notes were  issued in  registered  form  only,  without
coupons,  in minimum  denominations of $100,000 and integral multiples of $1,000
in excess  thereof.  The 67/8% Senior Notes due 2006 will mature at par on April
15, 2006 (the "67/8% Senior Note Stated


                                       75
<PAGE>

Maturity Date"), the 73/4% Senior Notes due 2011 will mature at par on April 15,
2011 (the "73/4% Senior Note Stated  Maturity  Date") and the 85/8% Senior Notes
due 2031 will  mature at par on April 15,  2031 (the  "85/8%  Senior Note Stated
Maturity  Date") unless we redeem them in  accordance  with their terms prior to
such date.

      Interest on the 67/8%  Senior  Notes due 2006 accrues at the rate of 67/8%
per annum and is payable  semi-annually in arrears on April 15 and October 15 of
each year,  commencing October 15, 2001.  Interest on the 73/4% Senior Notes due
2011  accrues  at the rate of 73/4% per annum and is  payable  semi-annually  in
arrears on April 15 and October 15 of each year,  commencing  October 15,  2001.
Interest  on the 85/8%  Senior  Notes due 2031  accrues at the rate of 85/8% per
annum and is payable semi-annually in arrears on April 15 and October 15 of each
year (each, an "Interest Payment Date" for each series)  commencing  October 15,
2001.  We will make each  interest  payment to the  persons  in whose  names the
Senior Notes are registered at the close of business on the 15th day immediately
preceding the applicable 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 is not a Business Day, the required payment shall be made on
the next  succeeding  day that 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.

Payment and Paying Agents

      Interest  on the  exchange  notes  will be payable at any office or agency
that we maintain for such purpose in West Paterson,  New Jersey, The City of New
York and, for so long as any of the exchange  notes are listed on the Luxembourg
Stock  Exchange and the rules of the Luxembourg  Stock  Exchange so require,  in
Luxembourg.  At our option, however, interest may be paid (i) by check mailed to
the address of the person  entitled to the interest  payment at the address that
appears in the "security  register" that we maintain for such purpose or (ii) by
wire transfer to an account  maintained  by the person  entitled to the interest
payment  as  specified  in the  security  register  subject  to  the  provisions
described under "-- Book Entry; Delivery and Form". (Sections 301, 1001 and 1002
of the indenture.)

Transfer and Exchange

      Under the indenture,  debt securities of any series, including each series
of the exchange notes,  may be presented for registration of transfer and may be
presented  for  exchange  (i) at each office or agency  that we are  required to
maintain  for  payment of such  series as  described  in "--  Payment and Paying
Agents,"  above and (ii) at each other  office or agency  that we may  designate
from time to time for such  purposes.  No  service  charge  will be made for any
transfer or exchange of debt  securities,  including each series of the exchange
notes,  but we 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 us to (i) 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 the day of mailing of the relevant notice
of  redemption;  (ii)  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;  or (iii) 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 such debt security not to be so repaid.  (Section 305 of the
indenture.)

      The registered holder of an exchange note of any series will be treated as
its owner for all purposes.


                                       76
<PAGE>

Mandatory Redemption

      We will not be  required  to make  mandatory  redemption  or sinking  fund
payments with respect to any series of the exchange notes.

Optional Redemption

      We may redeem each series of the exchange  notes at any time,  in whole or
in part, upon not less than 30 nor more than 60 days' prior written  notice,  as
more fully  described under "-- Selection and Notice" below, at a price equal to
the greater of:

      (a)   100  percent of the  principal  amount of the  exchange  notes being
            redeemed, or

      (b)   as  determined  by the  calculation  agent,  the sum of the  present
            values of the remaining scheduled payments of principal and interest
            on the exchange  notes being  redeemed not  including any portion of
            such payment of interest accrued on the date of redemption, from the
            redemption  date to the maturity date,  discounted to the redemption
            date on a semiannual  basis  (assuming a 360-day year  consisting of
            twelve 30-day  months) at the treasury rate plus 30 basis points for
            the 67/8% Senior Notes due 2006,  at the treasury rate plus 35 basis
            points for the 73/4% Senior Notes due 2011 and at the treasury  rate
            plus 40 basis points for the 85/8% Senior Notes due 2031.

plus any accrued and unpaid  interest to the date of redemption  and  liquidated
damages, if any, and additional amounts, if any.

      "Treasury rate" means,  with respect to any redemption date for any of the
notes being redeemed:

      (a)   the yield for the maturity  corresponding to the comparable treasury
            issue (as defined  below),  under the heading  that  represents  the
            average for the immediately  preceding  week,  appearing in the most
            recently published statistical release designated "H.15(519)" or any
            successor  publication  that is  published  weekly  by the  Board of
            Governors of the Federal Reserve System and that establishes  yields
            on actively  traded United States  Treasury  securities  adjusted to
            constant maturity under the caption "Treasury Constant  Maturities,"
            provided, that if no maturity is within three months before or after
            the maturity date for any series of notes being  redeemed the yields
            for the two published  maturities most closely  corresponding to the
            comparable  treasury  issue will be determined and the treasury rate
            shall  be  interpolated  or  extrapolated  from  those  yields  on a
            straight line basis, rounding to the nearest month; or

      (b)   if the release referred to in (a) (or any successor  release) is not
            published during the week preceding the calculation date or does not
            contain the yields  referred  to above,  the rate per annum equal to
            the  semiannual  equivalent  yield  to  maturity  of the  comparable
            treasury issue, calculated using a price for the comparable treasury
            issue  (expressed as a percentage of its principal  amount) equal to
            the comparable treasury price for that redemption date.

      The treasury rate will be  calculated on the third  business day preceding
the redemption date.

      "Comparable treasury issue" means, with respect to any redemption date for
any of the exchange notes being redeemed,  the United States  Treasury  security
selected by an "independent investment banker" as having the maturity comparable
to the remaining  term of the series of exchange notes to be redeemed 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 to the  remaining  term of the series of exchange  notes.  "Independent
investment  banker" means one of the reference treasury dealers appointed by the
trustee after consultation with us.

      "Comparable  treasury price" means with respect to any redemption date for
any of the exchange notes being redeemed:

      (a)  the average of four reference  treasury dealer quotations (as defined
           below) for the  redemption  date,  after  excluding  the  highest and
           lowest of those reference treasury dealer quotations, or


                                       77
<PAGE>

      (b)  if the calculation  agent obtains fewer than four reference  treasury
           dealer  quotations,  the  average of all  reference  treasury  dealer
           quotations obtained.

      "Reference  treasury  dealer"  means each of four primary U.S.  Government
securities dealers in New York City selected by the trustee in consultation with
us and initially  will include  Morgan  Stanley & Co.  Incorporated  and Salomon
Smith Barney,  Inc. If any reference treasury dealer ceases to be a primary U.S.
government  securities  dealer, the trustee will substitute another primary U.S.
government securities dealer for that dealer.

      "Reference   treasury  dealer  quotations"  means,  with  respect  to  any
redemption date, the average, as determined by the calculation agent, of the bid
and asked prices for the comparable  treasury issue (expressed in each case as a
percentage  of its principal  amount)  quoted to the  calculation  agent by that
reference  treasury  dealer at 5:00 p.m. New York time on the third business day
preceding the redemption date.

      Unless we default in payment  of the  redemption  price,  on and after the
redemption  date,  interest  will  cease  to  accrue  on the  notes  called  for
redemption.

Selection and Notice

      The trustee will select the exchange notes of any series for redemption on
a pro rata basis or in  accordance  with any other method the trustee  considers
fair and appropriate.  Exchange notes in denominations of $1,000 or less may not
be redeemed in part. Notices of redemption will be mailed by first class mail at
least 30 but not more than 60 days prior to the  redemption  date to each holder
of  exchange  notes to be  redeemed  at its  registered  address.  The notice of
redemption will state the portion of the principal  amount to be redeemed if the
exchange note is to be redeemed in part.  An exchange  note in principal  amount
equal to the  unredeemed  portion  will be issued in the name of the holder upon
cancellation  of the original  exchange note. On and after the redemption  date,
interest will no longer accrue on those  exchange  notes or portions of exchange
notes  called for  redemption  (unless  we default in the  payment of any amount
payable by us upon such redemption).

      Notices to the holders of the exchange notes shall be given by first class
mail, postage prepaid, to the registered holders of such exchange notes at their
addresses  appearing  in the  note  register.  In  addition,  for so long as any
exchange  notes are listed on the  Luxembourg  Stock Exchange and so long as the
rules of such exchange so require, notices to the holders of such exchange notes
shall also be given by publication in an Authorized  Newspaper in Luxembourg and
the  Luxembourg  Stock  Exchange will be notified of the  outstanding  amount of
exchange notes following any redemption.  Such Authorized  Newspaper is expected
to be the Luxemburger Wort.

Selected Indenture Covenants

      Limitations on Obligations

      Restricted Subsidiaries.  We will not permit any Restricted Subsidiary to,
directly or indirectly,  Incur any Obligations  (including,  without limitation,
Acquired  Obligations),   except  for  (i)  the  Subsidiary   Guaranties;   (ii)
Obligations  existing on the date of the  indenture;  (iii)  Obligations of ER&T
related to the purchase and sale of fuel, capacity,  energy (including,  but not
limited to,  electric  power,  natural gas and coal),  environmental  credits or
entitlements, utility services, fuel, water, related transportation services and
other  similar or related  products and services in the  ordinary  course;  (iv)
Obligations  of Nuclear  related to the  purchase  and sale of fuel and  related
transportation   services  in  the  ordinary  course;   (v)  Permitted   Hedging
Obligations;  (vi) Obligations  incurred in exchange for, or the net proceeds of
which are used to refund,  refinance,  or replace  Obligations  described  under
"Limitations on Obligations",  provided that the average life of the refinancing
Obligations  shall not be shorter than the average life of the Obligations being
refinanced and the principal  amount of the  refinancing  obligations  shall not
exceed the principal  amount of the Obligations  being so refinanced;  and (vii)
Obligations to us or any other  Restricted  Subsidiary which are subordinated to
the  Subsidiary  Guaranty  with  respect to the Senior  Notes of the  Restricted
Subsidiary incurring the Obligations.


                                       78
<PAGE>

      The  foregoing   notwithstanding,   Restricted   Subsidiaries   may  Incur
Obligations not otherwise  permitted by the preceding  paragraph in an aggregate
amount  outstanding  after giving effect to such Incurrence not to exceed at any
one time the greater of $250 million or 15% of Consolidated  Net Tangible Assets
as of the last day of the preceding month.

      Subsidiaries  Other Than  Restricted  Subsidiaries.  Except  for  parental
guaranties  of  debt  service  reserves,   surety  bonds,   equity   guarantees,
performance  bonds and bid bonds entered into in the ordinary course of business
aggregating at any one time not more than $100 million,  we shall not permit any
Subsidiary that is not a Restricted Subsidiary to, directly or indirectly, Incur
any Obligations (including,  without limitation,  Acquired Obligations) that are
recourse to us or any Restricted Subsidiary. (Section 1008 of the indenture.)

      Limitation on Liens

      We may not, and may not permit any Restricted  Subsidiary to,  directly or
indirectly,  create, incur, assume or permit to exist any Lien of any kind on or
with  respect to any  Property or interest in our Property or that of any of our
Restricted  Subsidiaries  or any  income or  profits  therefrom  (in each  case,
whether  the  Property  is  owned  at the date of the  indenture  or  thereafter
acquired),  unless the Senior  Notes are secured  equally  and ratably  with (or
prior to) any and all other Obligations secured by the Lien, provided,  however,
that these restrictions shall not apply to or prevent the creation,  incurrence,
assumption or existence of Permitted Liens.

      Permitted Liens shall include:

   o  Liens existing on the date of the indenture;

   o  Liens to secure or provide for the payment of all or part of the  purchase
      price of any Property or the cost of construction or improvement  thereof;
      provided  that no such Lien  shall  extend to or cover any other of our or
      our Restricted Subsidiaries' Property;

   o  Liens  existing on Property at the time such Property is acquired by us or
      any Restricted  Subsidiary;  provided that such Liens (x) are not created,
      Incurred or assumed in  contemplation  of such Property being acquired and
      (y) do  not  extend  to or  cover  any  other  of  our  or our  Restricted
      Subsidiaries' Property;

   o  Liens existing on Property of any entity at the time such entity is merged
      with or into or consolidated with us or a Restricted Subsidiary;  provided
      that such Liens (x) are not created,  Incurred or assumed in contemplation
      of such merger or consolidation  and (y) do not extend to any other of our
      or our Restricted Subsidiaries' Property;

   o  Liens securing Permitted Hedging Obligations;

   o  Liens for taxes,  assessments  or  governmental  charges  that are not yet
      delinquent  or that are being  contested in good faith by any  appropriate
      legal  proceedings  promptly  instituted and diligently  conducted and for
      which a reserve or other  appropriate  reserve  provision,  if any,  as is
      required in conformity with GAAP shall have been made;

   o  Liens arising by reason of any judgment,  decree or order of any court, so
      long as any such Lien is being  contested  in good  faith and is bonded or
      such  judgment,  decree or order  does not  exceed  $50  million,  and any
      appropriate  legal  proceedings  that may have been duly initiated for the
      review of such judgment,  decree or order have not been finally terminated
      or the period  within  which such  proceedings  may be  initiated  has not
      expired;

   o  Liens to  secure  pledges  or  deposits  made in the  ordinary  course  of
      business in  connection  with bids,  tenders or contracts  (other than for
      payment of indebtedness) or to secure guarantees,  statutory or regulatory
      obligations  or  surety or  performance  bonds  each made in the  ordinary
      course of business;

   o  Liens  imposed by law such as  carriers',  warehousemen's  and  mechanics'
      Liens,  in each case arising in the  ordinary  course of business and with
      respect  to  amounts  not yet due or  being  contested  in good  faith  by
      appropriate legal proceedings promptly instituted and diligently conducted
      and for which a reserve  or other  appropriate  provision,  if any,  as is
      required in conformity with GAAP shall have been made;


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   o  Survey exceptions,  encumbrances,  easements or reservations of, or rights
      of others  for,  rights of way,  sewers,  electric  lines,  telegraph  and
      telephone   lines  and  other  similar   purposes,   or  zoning  or  other
      restrictions as to the use of real properties incidental to the conduct of
      the business or to the ownership of Properties  which were not incurred in
      connection with  indebtedness  or other  extensions of credit and which do
      not in the  aggregate  materially  and  adversely  affect the value of the
      Properties  or  materially  impair  their  use  in  the  operation  of the
      business;

   o  Liens securing  letters of credit  entered into in the ordinary  course of
      business;

   o  Liens to secure  pollution  control  revenue bonds or  industrial  revenue
      bonds;

   o  Liens securing Non-Recourse Obligations of Unrestricted Subsidiaries;

   o  Liens granted on the capital stock of  Unrestricted  Subsidiaries  for the
      purpose of securing the Obligations of such Unrestricted Subsidiaries;

   o  Liens pursuant to Capitalized  Leases or Synthetic  Leases permitted to be
      entered into under the "Limitation on Obligations" covenant;

   o  Liens arising by reason of leases and subleases of Property  pursuant to a
      Sale/Leaseback Transaction allowed pursuant to the Sale of Assets covenant
      that do not materially  interfere with the ordinary  conduct of our or any
      of our Restricted Subsidiaries' business;

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

   o  Liens by a Wholly-Owned Subsidiary to us or any Restricted Subsidiary;

   o  Liens on Property, other than Capital Stock of Restricted Subsidiaries, to
      secure  Obligations  so  long  as the  sum of the  amount  of  outstanding
      Obligations  secured by Liens Incurred pursuant to this provision does not
      exceed the greater of $250  million or 15% of  Consolidated  Net  Tangible
      Assets as of the end of the most recent fiscal quarter for which financial
      statements are available; and

   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 outstanding 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 Indebtedness  secured
      thereby;  provided that such replacement,  extension or renewal is limited
      to all or part of the  same  Property  that  secured  the  Lien  replaced,
      extended or renewed (plus improvements  thereon or additions or accessions
      thereto).

      Guaranty of Senior Notes

      Each initial Subsidiary Guarantor (Fossil,  Nuclear and ER&T) has executed
and any subsequent  Subsidiary Guarantor at or before the time the definition of
Subsidiary  Guarantor  shall be  applicable to it, shall  execute,  a Subsidiary
Guaranty of each series of the Senior Notes in  substantially  the form provided
for by the indenture. (Section 1601 of the indenture.)

      Guaranty of ER&T Obligations

      We have executed a guaranty of the  Obligations of ER&T  substantially  in
the form provided for by the indenture.

      Payment of Dividends by ER&T to Us

      For so long as we continue to guarantee the  Obligations of ER&T, we shall
cause  ER&T,  to the  extent  permitted  by  applicable  law,  to pay,  at least
quarterly, dividends or distributions to us of the excess cash not then required
for its business operations. (Section 1010 of the indenture.)


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<PAGE>

      Limitation on Dividend and Other Payment Restrictions

      Other than  pursuant to the  indenture or as otherwise  may be required by
law, we will not, and will not permit any Restricted  Subsidiary to, directly or
indirectly,  create or cause to become, or as a result of the acquisition of any
Person or Property, or upon any Person becoming a Restricted Subsidiary,  remain
subject to, any consensual  encumbrance or consensual restriction of any kind on
the ability of any Restricted Subsidiary to:

      (i)   pay dividends or make any other distributions on its Capital Stock;

      (ii)  make payments on any Obligations owed to us or any of our Restricted
            Subsidiaries;

      (iii) make  loans  or  advances  to  us  or  to  any  of  our   Restricted
            Subsidiaries;

      (iv)  transfer  any of  its  Property  to us or to  any of our  Restricted
            Subsidiaries; or

      (v)   make payments under a Subsidiary Guaranty with respect to the Senior
            Notes.

      The foregoing shall not prohibit:

      (a)  encumbrances  and  restrictions  resulting from customary  provisions
           relating to (i) transfers of Property that restrict the subletting or
           assignment  of any  lease  or (ii)  transfers  of  Property  that are
           contained  in  licenses  and  that  relate  to the  Property  covered
           thereby,  in  each  case  entered  into  in the  ordinary  course  of
           business;

      (b)  encumbrances  and  restrictions on transfers of Property  existing on
           any assets at the time such assets are acquired (or the entity owning
           such assets is acquired)  by any  Restricted  Subsidiary,  whether by
           merger, consolidation, purchase of such assets or otherwise; provided
           that such restrictions and encumbrances (i) are not created, Incurred
           or assumed in  contemplation  of such assets or entity being acquired
           by the  Restricted  Subsidiary  and (ii) do not  extend  to any other
           assets of the Restricted Subsidiary; and

      (c)  restrictions  on transfers  of Property  created in  connection  with
           sales or purchases of  electricity,  energy,  capacity,  natural gas,
           coal, ancillary services,  environmental credits and/or entitlements,
           utility services,  fuel, water, related  transportation  services and
           other similar  products and  services,  in each case, in the ordinary
           course of  business;  provided  that  restrictions  arising  from any
           transaction or series of related transactions pursuant to this clause
           (c) shall not be materially more restrictive,  taken as a whole, than
           encumbrances  and  restrictions   customarily  accepted  as  industry
           standard for similar transactions. (Section 1008 of the indenture.)

      Limitation on Sale of Assets

      Except for a sale of all or substantially  all of our assets,  as provided
in the "Merger,  Consolidation or Sale of Assets"  covenant,  and other than (1)
assets  required  to be sold to conform  with  government  regulations,  laws or
impositions,  (2)  sales  or  dispositions  of  surplus,  obsolete  or worn  out
equipment,  (3) sales or  dispositions  of ownership  interests in  Unrestricted
Subsidiaries,  or (4) any  other  sale or  disposition  so long as after  giving
effect to such events, the Rating Agencies shall have confirmed their ratings on
our debt securities in effect immediately prior to such sale or disposition,  we
may not, and may not permit any  Restricted  Subsidiary  to, make any Asset Sale
(other  than  short-term,  readily  marketable  investments  purchased  for cash
management  purposes  with funds not  representing  the  proceeds of other Asset
Sales) if, on a pro forma basis,  the aggregate net book value of all such Asset
Sales during the most recent  12-month  period would exceed 15% of  Consolidated
Net Tangible Assets computed as of the most recent quarter  preceding such sale;
provided, however, that any such Asset Sale shall be disregarded for purposes of
this 15% limitation if the Net Cash Proceeds are within 270 days  thereafter (i)
invested in a Permitted  Business,  (ii) used to purchase and retire Obligations
ranking  equal in right of payment  to the Senior  Notes or (iii) used to redeem
the Senior Notes at a redemption  price equal to 100% of the principal amount of
the Senior Notes to be redeemed,  plus accrued and unpaid interest thereon up to
and including the applicable  redemption  date, plus a make-whole  premium equal
to, with respect to any Senior  Note,  the excess of (a) the  aggregate  present
value as of the date of  prepayment  of the  expected  future  cash flows of the
Senior  Note (for the  avoidance  of doubt,  these


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<PAGE>

amounts shall  include all  principal  and interest  payable with respect to the
Senior Note) (exclusive of interest accrued to the date of prepayment) that, but
for the prepayment, would have been payable if the prepayment had not been made,
determined by discounting such amounts at a rate that is equal to the applicable
treasury rate (as defined under "-- Optional  Redemption"  above) plus 0.30% for
the 67/8% Senior  Notes due 2006,  0.35% for the 73/4% Senior Notes due 2011 and
0.40% for the 85/8 Senior Notes due 2031 over (b) the aggregate principal amount
of the Senior Note then to be prepaid.

      In addition, on a cumulative basis we may not sell or otherwise dispose of
more than 25% of the assets or Capital Stock in Fossil, unless Net Cash Proceeds
from  such  sale are  invested  in other  non-nuclear  generation  assets or the
capital stock of entities engaged in fossil generation and related businesses.

      Merger, Consolidation or Sale of Assets

      We may not,  directly  or  indirectly,  consolidate  or merge with or into
(whether or not we are the surviving entity), or sell, assign, transfer,  lease,
convey or otherwise dispose of all or substantially all of our assets, in one or
more related transactions, to another Person unless:

      (i)   the Person  formed by the  consolidation  or surviving the merger or
            the Person that acquires by sale, assignment,  transfer,  conveyance
            or other disposition,  or that leases, the assets (if other than us)
            (in each such case,  the  "Successor  Entity"),  is a corporation or
            limited  liability  company organized and existing under the laws of
            the United States, any state thereof or the District of Columbia and
            expressly assumes our obligations under the indenture and the Senior
            Notes;

      (ii)  if any of our or a Restricted  Subsidiary's Property or assets would
            become  subject  to a Lien  other  than a  Permitted  Lien under the
            "Limitations on Liens"  covenant,  the Senior Notes shall be equally
            and ratably secured in accordance with such covenant;

      (iii) immediately  after such  transaction no event exists that is or with
            the  passage  of time or the  giving of  notice or both  would be an
            Event of Default under the indenture; and

      (iv)  each Subsidiary  Guarantor shall have by amendment to its Subsidiary
            Guaranty  with  respect  to the  Senior  Notes  confirmed  that  its
            Subsidiary  Guaranty shall apply to the obligations of the Successor
            Entity  under the  indenture  and each  series of the Senior  Notes.
            (Section 801 of the indenture.)

Events of Default and Remedies

      Each of the  following  is an Event of Default  under the  indenture  with
respect to any series of the Senior Notes:

      (i)   default for five days in the payment  when due of interest on any of
            the exchange notes of such series;

      (ii)  default in the payment when due of the principal of, or premium,  if
            any, or make-whole amount, on, the exchange notes of such series;

      (iii) failure  by us or any  Restricted  Subsidiary  to  comply  with  the
            provisions  described  under  "Limitation  on  Sale  of  Assets"  or
            "Merger, Consolidation or Sale of Assets";

      (iv)  failure by us or any Restricted  Subsidiary for 60 days after notice
            by the  trustee or to us and to the trustee by the holders of 25% or
            more in  aggregate  principal  amount  of the  Senior  Notes of such
            series to comply with any of our  agreements in the indenture or the
            Senior  Notes of such  series  that  are not  otherwise  covered  in
            clauses (i), (ii), (iii), (v), (vi) or (vii);

      (v)   default  under any  mortgage,  indenture or  instrument  under which
            there may be issued or by which  there may be secured  or  evidenced
            any of our or  any  of  our  Subsidiaries;  indebtedness  (including
            indebtedness  represented  by any other  series  of debt  securities
            under the  indenture or the payment of which is  guaranteed by us or
            by any of our Subsidiaries) (but other than


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<PAGE>

            Non-Recourse  Obligations) whether such indebtedness or guaranty now
            exists or is created after the date of the indenture,  which default
            (a) is caused by a failure to pay the principal of such indebtedness
            at the stated maturity of such indebtedness  after the expiration of
            grace periods provided in the indebtedness (a "Payment  Default") or
            (b) has resulted in the  acceleration of the  indebtedness  prior to
            its stated  maturity;  and, in each case the principal amount of the
            indebtedness,  together  with  the  principal  amount  of any  other
            indebtedness  under  which  there has been a Payment  Default or the
            maturity of which has been so accelerated,  aggregates $50.0 million
            or more;

      (vi)  failure by us or any of our  Restricted  Subsidiaries  to pay one or
            more final judgments not otherwise covered by insurance  aggregating
            in excess of $50.0 million, which judgments are not paid, discharged
            or stayed for a period of 60 days; and

      (vii) certain events of bankruptcy or insolvency with respect to us or any
            of our Restricted Subsidiaries. (Section 501 of the indenture.)

      Additional  series  of debt  securities  issued  under the  indenture  may
specify other events of default for such series of debt securities.

      We  are  required  to  file  with  the  trustee,  annually,  an  officer's
certificate  as to our compliance  with all  conditions and covenants  under the
indenture.  (Section 1011 of the  indenture.)  The  indenture  provides that the
trustee  may  withhold  notice to the  holders of debt  securities  of a series,
including  each  series of the Senior  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  (other than an Event of Default  occasioned by our
or any of our Restricted Subsidiaries' bankruptcy or insolvency) with respect to
debt  securities  of a series,  including  any series of the Senior  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  (or, if the debt  securities  of that series are issued with original
issue discount or are "indexed debt  securities"  (i.e.,  debt  securities,  the
interest  and  principal  payments on which are  determined  by  reference  to a
particular index, such as a foreign currency or commodity),  such portion of the
principal as may be specified in the terms of those debt  securities)  of all of
the debt  securities  of that  series to be due and  payable  immediately,  by a
notice in writing to us.
(Section 502 of the indenture.)

      If an  Event  of  Default  occasioned  by our  or  any  of our  Restricted
Subsidiaries'  bankruptcy or insolvency occurs, the principal of and interest on
all debt  securities,  including  each series of the Senior Notes,  shall,  ipso
facto become and be immediately due and payable without any declaration or other
act on the part of the trustee or any holders of debt securities.

      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  any  series  of  the  Senior  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
indemnity satisfactory to the trustee against the expenses and liabilities which
might be incurred by it in  compliance  with such  request.  (Section 507 of the
indenture.)

      Subject to such  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 each series of the Senior 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  each  series of the Senior  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 such series
and its  consequences,  except a default (i) in the payment of the  principal of
(or premium,  if any) or


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interest,  if any,  on or  additional  amounts  payable  in  respect of any debt
security of such series or any related  coupons or (ii) 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 such  series  affected  thereby.
(Section 513 of the indenture.)

Definitions

      "Acquired  Obligations" means, with respect to any Person, (i) Obligations
of any other Person existing at the time the other Person is merged with or into
or became a Subsidiary of the Person, including, without limitation, Obligations
Incurred in connection  with, or in  contemplation  of, the other Person merging
with or into or  becoming  a  Subsidiary  of the  Person;  and (ii)  Obligations
secured by a Lien  encumbering  any asset acquired by the Person at the time the
asset is acquired by the Person.

      "Asset  Sale"  means  any  sale,  transfer,  conveyance,  lease  or  other
disposition (including by way of merger,  consolidation or sale-leaseback) by us
or any of our  Restricted  Subsidiaries  to any  Person  (other  than to us or a
Restricted Subsidiary of ours and other than in the ordinary course of business)
of any  Capital  Stock or  other  Property  of ours or of any of our  Restricted
Subsidiaries  (including  Capital Stock of Subsidiaries).  The term "Asset Sale"
will not include (i) any sale, transfer,  conveyance, lease or other disposition
of Property  governed by the "Merger,  Consolidation or Sale of Assets" covenant
and (ii) any  transaction  or series of related  transactions  consisting of the
sale, transfer, conveyance, lease or other disposition of Capital Stock or other
Property  with a Fair  Market  Value  aggregating  less than $50  million in any
fiscal  year.  The term  "Asset  Sale" also will not include (a) the grant of or
realization  upon a Lien permitted  under the  "Limitation on Liens" covenant or
the  exercise of remedies  thereunder  and (b) sales of fuel,  capacity,  energy
(including,  but  not  limited  to,  electric  power,  natural  gas  and  coal),
environmental credits or entitlements, related transportation services and other
related services by ER&T and its Permitted  Hedging  Obligations as permitted by
the "Limitation on Obligations" covenant.

      "Attributable Debt" means with respect to any Sale/Leaseback  Transaction,
at the time of determination, the present value (discounted at the interest rate
borne by the Senior Notes,  compounded annually) of the total Obligations of the
lessee for rental  payments  during the remaining  term of the lease included in
the  Sale/Leaseback  Transaction  (including  any period for which the lease has
been extended).

      "Board of Directors"  means either the Board of Directors of PSEG Power or
any duly authorized committee of such Board.

      "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.

      "Capital Stock" means (i) in the case of a corporation,  corporate  stock,
(ii) in the case of an  association  or  business  entity,  any and all  shares,
interests,  participations,  rights or other equivalents (however designated) of
corporate  stock,  (iii)  in the  case of a  partnership  or  limited  liability
company,  partnership or membership  interests  (whether general or limited) and
(iv) any other interest or  participation  that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of, the
issuing Person.

      "Capitalized  Lease"  means as  applied  to any  Person,  any lease of any
Property of which the discounted present value of the rental obligations of such
Person as lessee,  in conformity with GAAP, is required to be capitalized on the
balance  sheet of such Person,  and  "Capitalized  Lease  Obligation"  means the
rental obligations, as aforesaid, under such lease.

      "Commodity  Trading  Obligations,"  with respect to any Person,  means the
Obligations  of such Person under (i) any commodity  swap  agreement,  commodity
future agreement, commodity option agreement, commodity cap agreement, commodity
floor agreement,  commodity collar agreement, commodity hedge agreement, and any
put, call or other agreement or arrangement, or combination thereof, designed to
protect  such  Person  against  fluctuations  in  commodity  prices  or (ii) any
commodity  swap  agreement,   commodity  future   agreement,   commodity  option
agreement,  commodity hedge  agreement,  and any put, call or other agreement or
arrangement,  or combination  thereof  (including an


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agreement  or  arrangement  to hedge  foreign  exchange  risks)  in  respect  of
commodities  entered  into  by  us  pursuant  to  asset  optimization  and  risk
management  policies  and  procedures  adopted  in good  faith  by the  Board of
Directors.

      "Consolidated Current Liabilities," as of the date of determination, means
the aggregate  amount of our and our Restricted  Subsidiaries'  liabilities on a
consolidated  basis which may  properly  be  classified  as current  liabilities
(including taxes accrued as estimated),  after eliminating (i) all inter-company
items between us and any consolidated  Restricted  Subsidiary,  (ii) all current
maturities of long-term indebtedness,  all as determined in accordance with GAAP
and (iii) all liabilities  attributable to Subsidiaries  that are not Restricted
Subsidiaries.

      "Consolidated Net Tangible Assets" means, as of any date of determination,
the total  amount of assets  (less  accumulated  depreciation  or  amortization,
allowances  for  doubtful  receivables,  other  applicable  reserves  and  other
properly deductible items) of us and our Restricted Subsidiaries,  determined on
a consolidated basis in accordance with GAAP,  consistently  applied,  and after
giving  effect to purchase  accounting  and after  deducting  therefrom,  to the
extent otherwise included, the amounts of:

   o  Consolidated Current Liabilities;

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

   o  unamortized  debt  discount  and  expense and other  unamortized  deferred
      charges,  goodwill,  patents,  trademarks,  service  marks,  trade  names,
      copyrights,  licenses,  organization or  developmental  expenses and other
      intangible items;

   o  treasury stock;

   o  any  cash  set  apart  and  held in a  sinking  or  other  analogous  fund
      established  for the purpose of redemption or other  retirement of Capital
      Stock to the extent  such  obligation  is not  reflected  in  Consolidated
      Current Liabilities; and

   o  all  assets   attributable  to   Subsidiaries   that  are  not  Restricted
      Subsidiaries  (including  Capital Stock thereof),  except to the extent of
      dividends or distributions received from such Subsidiaries.

      "Default"  means any event,  act or condition  that is, or after notice or
the passage of time or both would be, an Event of Default.

      "Event  of  Default"  has the  meaning  specified  in  Section  501 of the
indenture.

      "Fair Market Value" means the price that would be paid by a purchaser to a
seller in an arm's-length transaction.

      "GAAP" means generally accepted accounting principles in the United States
applied on a basis  consistent  with the  principles,  methods,  procedures  and
practices  employed  in the  preparation  of our audited  financial  statements,
including,   without   limitation,   those  set  forth  in  the   opinions   and
pronouncements of the Accounting  Principles Board of the American  Institute of
Certified Public  Accountants and statements and pronouncements of the Financial
Accounting  Standards Board or in such other  statements by such other entity as
approved by a significant segment of the accounting profession.

      "Hedging  Obligations"  means, with respect to any Person, the obligations
of such Person under any interest rate or currency swap agreement, interest rate
or currency future agreement,  interest rate cap or collar  agreement,  interest
rate or  currency  hedge  agreement,  and any put,  call or other  agreement  or
arrangement  designed to protect such Person  against  fluctuations  in interest
rates or currency exchange rates.

      "Incur" means,  with respect to any Obligation,  to directly or indirectly
create,  incur,  issue,  assume,  guarantee  or  otherwise  become  directly  or
indirectly liable for or with respect to, or become  responsible for payment of,
contingently  or  otherwise,  such  Obligation.  The  term  "Incurrence"  has  a
corresponding meaning.


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<PAGE>

      "Lien" means any  mortgage,  pledge,  hypothecation,  charge,  assignment,
deposit arrangement,  encumbrance, security interest, lien (statutory or other),
or preference,  priority, or other security or similar agreement or preferential
arrangement of any kind or nature whatsoever (including, without limitation, any
agreement to give or grant a Lien or any lease,  conditional sale or other title
retention agreement having  substantially the same economic effect as any of the
foregoing).

      "Net Cash  Proceeds"  from an Asset Sale is defined to mean cash  payments
received  (including any cash payments received by way of a payment of principal
pursuant to a note or installment receivable or otherwise,  but only as and when
received  (including any cash received upon sale or disposition of any such note
or  receivable),  excluding  any  other  consideration  received  in the form of
assumption  by the  acquiring  Person of  Obligations  relating to the  Property
disposed  of in such  Asset  Sale or  received  in any  form  other  than  cash)
therefrom, in each case, net of (i) all legal, title and recording tax expenses,
commissions  and other fees and  expenses  of any kind  (including  consent  and
waiver fees and any applicable  premiums,  earn-out or working interest payments
or payments  in lieu or in  termination  thereof)  Incurred,  (ii) all  federal,
state,  provincial,  foreign  and local  taxes and  other  governmental  charges
required to be accrued as a liability  under GAAP as a consequence of such Asset
Sale, (iii) a reasonable  reserve for the after-tax cost of any  indemnification
payments  (fixed and  contingent)  attributable  to seller's  indemnities to the
purchaser  undertaken by us or any of our  Subsidiaries  in connection with such
Asset Sale,  (iv) all payments  made on any  Obligation  that is secured by such
Property,  in accordance with the terms of any Lien upon or with respect to such
Property, or that must by its terms or by applicable law or in order to obtain a
required  consent or waiver be repaid out of the proceeds  from or in connection
with  such  Asset  Sale and (v) all  distributions  and other  payments  made to
holders  of  Capital  Stock of  Subsidiaries  (other  than us or our  Restricted
Subsidiaries) as a result of such Asset Sale.

      "Non-Recourse Obligation" means, with respect to any Person, any financing
that is or was Incurred with respect to the  development,  acquisition,  design,
engineering,  procurement,  construction,  operation,  ownership,  servicing  or
management of one or more facilities  used or useful in a Permitted  Business in
respect of which such Person has a direct or indirect  interest,  provided  that
such  financing is without  recourse to any Person or Property other than to (i)
the Property that constitutes such facilities together with contracts,  permits,
licenses,  reserves and other items related to such facilities,  (ii) the income
from and  proceeds of such  facilities,  (iii) the  Capital  Stock of, and other
investments  in, the Person that owns the  Property  that  constitutes  any such
facilities and (iv) the Capital Stock of, and other  investments  in, any Person
obligated  with respect to such  financing and of any  Subsidiary of such Person
that owns a direct or indirect interest in any such facilities.

      "Obligations" of any Person shall mean at any date,  without  duplication,
(i) all obligations of such Person for borrowed  money,  (ii) all obligations of
such Person evidenced by bonds, debentures,  notes or other similar instruments,
(iii) all obligations of such Person arising under any conditional sale or other
title retention  arrangement or otherwise to pay the deferred  purchase price of
Property or services, (iv) all obligations of such Person Incurred in respect of
Attributable Debt associated with any  Sale/Leaseback  Transaction,  Capitalized
Lease or Synthetic  Lease,  (v) all  obligations of such Person under letters of
credit, (vi) all obligations of such Person under trade or bankers' acceptances,
(vii) all  obligations  of such Person under Hedging  Obligations  and Commodity
Trading Obligations,  (viii) trade payables in respect of fuel, labor,  supplies
or other  materials  or  services  or the  obligation  to  provide  power,  (ix)
Preferred  Stock and  Redeemable  Stock  issued to any Person other than us or a
Restricted  Subsidiary,  (x) all  obligations of others secured by a Lien on any
asset of such Person, whether or not such obligations are assumed by such Person
and (xi) all obligations of others to the extent guaranteed by such Person.  The
amount of any obligation shall be deemed to be the amount equal to the stated or
determinable  amount  thereof  or, if not stated or  determinable,  the  maximum
probable liability thereunder as determined by us in good faith.

      "Permitted  Business"  means  any  business  in  which  we or  any  of our
Subsidiaries  are  engaged on the date of the  indenture  or any other  power or
energy-related business, including the business of acquiring, developing, owning
or  operating  electric  power or  thermal  energy  generation  or  cogeneration
facilities,  electric power  transmission,  fuel supply and fuel  transportation
facilities,  together with their related power supply,  thermal  energy and fuel
contracts  and  other   facilities,   services  or  goods  that  are


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<PAGE>

ancillary,  incidental,  complementary  or reasonably  related to the marketing,
trading,  development,   construction  or  management  servicing,  ownership  or
operation of the foregoing.

      "Permitted  Hedging  Obligations"  of any Person  shall  mean (i)  Hedging
Obligations  entered into in the ordinary  course of business and in  accordance
with such Person's  established  risk  management  policies that are designed to
protect such Person against, among other things,  fluctuations in interest rates
or  currency  exchange  rates and which in the case of  agreements  relating  to
interest  rates shall have a notional  amount no greater  than the  payments due
with respect to the Obligations  being hedged thereby and (ii) Commodity Trading
Obligations.

      "Person" means an individual, a corporation,  a limited liability company,
a  partnership,  an  association,  a trust or any other entity or  organization,
including a government or political  subdivision or an agency or instrumentality
thereof.

      "Preferred Stock" means,  with respect to any Person,  any and all shares,
interests,  participations or other  equivalents  (however  designated,  whether
voting or  non-voting)  or preferred or preference  stock of such Person that is
outstanding or issued on or after the date of original  issuance of the original
notes.

      "Property"  of any Person is defined to mean all types of real,  personal,
tangible or mixed  property  owned by such Person whether or not included in the
most recent consolidated balance sheet of such Person under GAAP.

   "Rating  Agencies" means Moody's  Investors  Service Inc.,  Standard & Poor's
Ratings Services, Fitch Inc. and any successor thereof.

      "Redeemable Stock" is defined to mean any class or series of Capital Stock
of any Person  that by its terms or  otherwise  is (i)  required  to be redeemed
prior to the Stated Maturity of the Senior Notes,  (ii) redeemable at the option
of the holder of such Capital Stock at any time prior to the Stated  Maturity of
the Senior Notes or (iii)  convertible  into or  exchangeable  for Capital Stock
referred  to in  clause  (i) or (ii)  above or  Obligations  having a  scheduled
maturity prior to the Stated Maturity of the Senior Notes.

      "Restricted Subsidiary" means only PSEG Fossil LLC, PSEG Nuclear LLC, PSEG
Energy Resources & Trade LLC and each other of our Subsidiaries  that executes a
Subsidiary  Guaranty  with  respect  to the  Senior  Notes  and is  subsequently
designated  by the Board of  Directors  by  written  notice to the  trustee as a
Restricted Subsidiary.

      "Sale/Leaseback Transaction" means an arrangement relating to Property now
owned or hereafter acquired whereby we or one of our Subsidiaries  transfers the
Property to a Person and leases it back from that Person,  other than leases for
a term of not more  than 12  months or  between  us and one of our  Wholly-Owned
Subsidiaries   that  is  a  Restricted   Subsidiary   or  between   Wholly-Owned
Subsidiaries that are Restricted Subsidiaries.

      "Stated Maturity" means with respect to any Senior Note or any installment
of interest thereon, the date specified in such Senior Note as the fixed date on
which any principal of such Senior Note or any such  installment  of interest is
due and payable.

      "Subsidiary"  means,  with  respect to any  Person,  (i) any  corporation,
limited  liability  company,  association or other business entity of which more
than 50% of the  total  voting  power of  Voting  Stock is at the time  owned or
controlled,  directly or indirectly,  by such Person or one or more of the other
Subsidiaries of that Person (or a combination  thereof) and (ii) any partnership
(a) the sole general  partner or the managing  general  partner of which is such
Person or a Subsidiary of such Person or (b) the only general  partners of which
are such Person or one or more  Subsidiaries  of such Person (or any combination
thereof).

      "Subsidiary  Guarantor"  means all  current  and  subsequently  designated
Restricted Subsidiaries.

      "Subsidiary  Guaranty" means a guaranty of a Subsidiary Guarantor in favor
of  the  trustee  for  the  benefit  of  the  holders  of the  Senior  Notes  in
substantially  the  form  provided  for  by the  indenture  or a  guaranty  of a
Subsidiary Guarantor of any other of our Obligations.


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<PAGE>

      "Synthetic  Lease"  means  (i) a lease  pursuant  to which  the  lessee is
treated  as the owner of the  Property  subject  to the lease for tax  purposes,
whether  or not such  lease is  treated  as an  operating  lease for  accounting
purposes or (ii) a lease treated as an operating  lease for accounting  purposes
but having at least three of the following characteristics,  (a) the term of the
lease,  inclusive of all renewal periods at the lessee's option, is greater than
75% of the useful life of the Property  subject to the lease as estimated at the
inception of the Lease,  (b) the lessee has the right to purchase  such Property
at a fixed price,  (c) the lessee's  payments  under the lease are calculated to
amortize  and  service  the debt of the lessor  incurred in order to acquire the
asset  and (d) the  lessor  obtains  80% or more of the cost of the  asset  from
borrowed funds.

      "Unrestricted  Subsidiary"  means a  Subsidiary  that is not a  Restricted
Subsidiary.

      "Voting  Stock"  means any class or classes of Capital  Stock  pursuant to
which  the  holders  thereof  have  the  general  voting  power  under  ordinary
circumstances  to elect at least a majority of the Board of Directors,  managers
or trustees of any Person (irrespective of whether or not, at the time, stock of
any other class or classes shall have, or might have,  voting power by reason of
the happening of any contingency).

      "Weighted Average Life to Maturity" means, when applied to any Obligations
at any date, the number of years  obtained by dividing (i) the then  outstanding
principal amount of such Obligations into (ii) the total of the product obtained
by multiplying (a) the amount of each then remaining installment,  sinking fund,
serial maturity or other required  payments of principal,  including  payment at
final maturity,  in respect thereof,  by (b) the numbers of years (calculated to
the nearest  one-twelfth)  that will elapse  between such date and the making of
such payment.

      "Wholly-Owned  Subsidiary"  means a  Subsidiary  all the Capital  Stock of
which  (other than  directors'  qualifying  shares) is owned by us and/or one or
more of our Wholly-Owned Subsidiaries.

Reports and Rule 144A Information Requirement

      We must file with the trustee, within 30 days of filing them with the SEC,
copies of the  current,  quarterly  and annual  reports and of the  information,
documents  and other reports (or copies of such portions of any of the foregoing
as the SEC may by rules and regulations  prescribe) that we are required to file
with the SEC pursuant to Section 13 or 15(d) of the Exchange  Act. If we are not
subject to the  requirements of Section 13 or 15(d) of the Exchange Act, we must
nevertheless file with the SEC (if permitted) and the trustee,  on the date upon
which we would have been required to file with the SEC,  current,  quarterly and
annual  financial  statements,  including any notes thereto (and with respect to
annual  reports,  an  auditor's  report  by  a  firm  of  established   national
reputation,  upon which the trustee may conclusively  rely), and a "Management's
Discussion and Analysis of Financial  Condition and Results of Operations," both
comparable to that which we would have been required to include in such current,
quarterly and annual reports,  information,  documents or other reports on Forms
8-K, 10-Q and 10-K if we were subject to the requirements of Section 13 or 15(d)
of the Exchange Act; provided that we will not be required to register under the
Exchange Act by virtue of this provision, if not otherwise required to do so.

      We  have  agreed  to  furnish  to the  holders  of the  Senior  Notes  and
prospective  purchasers of the Senior Notes  designated by holders of the Senior
Notes, upon their request,  the information required to be delivered pursuant to
Rule 144A(d)(4) under the Securities Act until such time as the Senior Notes are
no longer  "restricted  securities"  within  the  meaning  of Rule 144 under the
Securities  Act (assuming  such Senior Notes have not been owned by an affiliate
of ours).

No Personal Liability of Directors, Officers, Employees and Members

      No past,  present or future director,  officer,  employee,  or member,  as
such, shall have any liability for any of our obligations under the Senior Notes
and the  indenture  or for any claim  based on, in respect  of, or by reason of,
such  obligations or their  creation.  Each holder by accepting an exchange note
waives and releases all such liability as part of the consideration for issuance
of the exchange  notes.  This waiver may not be  effective to waive  liabilities
under the federal securities laws and it is the view of the SEC that such waiver
is against public policy. (Section 113 of the indenture.)


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<PAGE>

Satisfaction and Discharge

      According  to  the  terms  of the  indenture,  we  may  discharge  certain
obligations to holders of any series of debt securities, including any series of
the  exchange  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
thereto, 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.)

Legal Defeasance and Covenant Defeasance

      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 any series of the exchange notes,  and any related coupons pursuant to
Section 301  thereunder,  we may elect  either (a) to defease and be  discharged
from any and all  obligations  with  respect  to such  debt  securities  and any
related  coupons (except for the obligation 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)
(defeasance)  (Section  1402 of the  indenture)  or (b) to be released  from our
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  (covenant  defeasance)
(Section 1403 of the indenture),  in either case upon the irrevocable deposit by
us with the trustee (or other qualifying trustee), in trust, of (i) an amount in
United States Dollars, (ii) 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
(iii) a  combination  thereof in an amount,  sufficient  to pay the principal of
(and premium,  if any) and  interest,  if any, on such debt  securities  and any
related coupons,  and any mandatory sinking fund or analogous  payments thereon,
on the scheduled due dates therefor.

      Such a trust may only be  established  if,  among  other  things,  we have
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 (i) direct obligations
of the United States or (ii) 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.)


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<PAGE>

      In the  event we  effect  covenant  defeasance  with  respect  to any debt
securities  and any  related  coupons and such 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 clause  (iii) under  "Events of
Default and  Remedies"  which  provisions  would no longer be applicable to such
debt securities and coupons),  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, we would
remain  liable to make  payment of such amount 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 our 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 all such money in  accordance  with the  Indenture;
provided,  however,  that if we make 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,  we 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

      We 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 thereby, 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 rate, or manner of calculating the rate, of interest;

   o  change any of our obligations 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 foregoing 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.)


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<PAGE>

      The trustee and we 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 us and the assumption by
      any  successor  of  our  covenants   under  the  indenture  and  the  debt
      securities;

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

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

   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 provisions  which are entitled to the benefit
      of the provisions;

   o  to secure the debt securities, including any series of the exchange notes,
      under the indenture pursuant to the "Limitations on Liens" covenant 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 an 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 any series of the exchange 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 any series of the
      exchange  notes,  provided that the action does not  adversely  affect the
      interests of the holders of the debt securities of that series,  including
      the applicable  series of the exchange  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   of  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 us or any other obligor upon the debt securities
      or any affiliate of ours 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 us or the holders of at


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<PAGE>

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 meeting of the 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.)

      Notwithstanding the foregoing provisions,  if any action is to be taken at
a meeting of holders of debt securities of a series, including any series of the
exchange 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.)

Concerning the Trustee

      The Bank of New York is the trustee under the indenture.

      The indenture  provides that, except during the continuance of an Event of
Default, the trustee will perform only such duties as are specifically set forth
in the indenture.  During the existence of an Event of Default, the trustee will
be  required,  in the  exercise  of its  power,  to use the  degree of care of a
prudent man in the conduct of his own affairs.  Subject to such provisions,  the
trustee  will be under no  obligation  to  exercise  any of its rights or powers
under the  indenture at the request of any Holder of Senior  Notes,  unless such
Holder will have offered to the trustee  security and indemnity  satisfactory to
it against any loss,  liability  or expense.  The trustee may resign at any time
with respect to a series of securities by written notice in accordance  with the
indenture. In addition, the trustee may be removed upon the happening of certain
events  specified in the indenture.  Following any resignation or removal of the
trustee,  our Board of Directors will promptly appoint a successor  trustee with
respect to the securities affected in accordance with the indenture.

Book-Entry, Delivery and Form

      The  certificates  representing  the  exchange  notes  will  be  in  fully
registered, global form without interest coupons.

      Ownership  of  beneficial  interests  in a Global  Note will be limited to
persons  who  have  accounts  with  DTC  ("participants")  or  persons  who hold
interests through  participants.  Ownership of beneficial  interests in a Global
Note will be shown on, and the transfer of that  ownership will be effected only


                                       92
<PAGE>

through,  records maintained by DTC or its nominee (with respect to interests of
participants)  and the records of  participants  (with  respect to  interests of
persons other than participants).

      So long as DTC or its  nominee  is the  registered  owner or holder of the
Global Notes,  DTC or such nominee,  as the case may be, will be considered  the
sole record owner or holder of the  exchange  notes  represented  by such Global
Notes for all purposes under the indenture.  No beneficial  owner of an interest
in the Global Notes will be able to transfer that interest  except in accordance
with DTC's  applicable  procedures,  in addition to those provided for under the
indenture and, if applicable, Euroclear or Clearstream.

      Payments of the principal of and interest on the Global Notes will be made
to DTC or its nominee, as the case may be, as the registered owner thereof. None
of us,  the  trustee,  or any  paying  agent  will  have any  responsibility  or
liability for any aspect of the records  relating to or payments made on account
of  beneficial  ownership  interests  in the  Global  Notes or for  maintaining,
supervising  or  reviewing  any records  relating to such  beneficial  ownership
interests.

      We  expect  that  DTC or its  nominee,  upon  receipt  of any  payment  of
principal or interest in respect of the Global  Notes will credit  participants,
accounts with payments in amounts  proportionate to their respective  beneficial
ownership  interests in the principal  amount of such Global Notes,  as shown on
the records of DTC or its nominee.  We also expect that payments by participants
to owners of  beneficial  interests  in such  Global  Notes  held  through  such
participants will be governed by standing  instructions and customary practices,
as is now the case with securities held for the accounts of customers registered
in the names of nominees for such customers.
Such payments will be the responsibility of such participants.

      DTC has  advised us as follows:  DTC is a limited  purpose  trust  company
organized  under  the laws of the State of New York,  a  "banking  organization"
within the meaning of the New York Banking Law, a member of the Federal  Reserve
System,  a "clearing  corporation"  within the  meaning of the New York  Uniform
Commercial Code and a "Clearing Agency" registered pursuant to the provisions of
Section 17A of the  Exchange  Act.  DTC was created to hold  securities  for its
participants   and   facilitate  the  clearance  and  settlement  of  securities
transactions  between  participants  through  electronic  book-entry  changes in
accounts of its participants, thereby eliminating the need for physical movement
of Senior Notes.  Participants  include securities  brokers and dealers,  banks,
trust  companies  and clearing  corporations  and certain  other  organizations.
Indirect access to the DTC system is available to others such as banks, brokers,
dealers  and  trust  companies  that  clear  through  or  maintain  a  custodial
relationship  with a  participant,  either  directly  or  indirectly  ("indirect
participants").

      Neither  the  trustee  nor  we  will  have  any   responsibility  for  the
performance  by  DTC or its  participants  or  indirect  participants  of  their
respective   obligations   under  the  rules  and  procedures   governing  their
operations.

      If DTC is at any time  unwilling or unable to continue as a depositary for
the Global Notes and a successor  depositary is not appointed within 90 days, we
will issue  definitive,  certificated  Senior  Notes in exchange  for the Global
Notes.

      Euroclear has advised us as follows: Euroclear was created in 1968 to hold
securities for its participants and to clear and settle transactions between its
participants  through  simultaneous   electronic   book-entry  delivery  against
payment,  thereby eliminating the need for physical movement of certificates and
any risk from lack of simultaneous  transfers of securities and cash.  Euroclear
provides various other services, including securities lending and borrowing, and
interfaces with domestic markets in several countries.  Euroclear is operated by
Euroclear  Bank  S.A./N.V.  (the  "Euroclear  Operator"),  under  contract  with
Euroclear  Clearance  Systems,  S.C.,  a Belgian  cooperative  corporation  (the
"Cooperative").  All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator,  not the Cooperative.  The Cooperative  establishes
policy for Euroclear on behalf of Euroclear participants. Euroclear participants
include banks  (including  central  banks),  securities  brokers and dealers and
other  professional  financial  intermediaries.  Indirect access to Euroclear is
also available to others that clear through or maintain a custodial relationship
with a Euroclear participant, either directly or indirectly.


                                       93
<PAGE>

      The  Euroclear  Operator  was  granted a banking  license  by the  Belgian
Banking  and Finance  Commission  in 2000,  authorizing  it to carry out banking
activities  on a global  basis.  It took over  operation of  Euroclear  from the
Brussels,  Belgium  office  of  Morgan  Guaranty  Trust  Company  of New York on
December 31, 2000.

      Securities  clearance  accounts  and  cash  accounts  with  the  Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System, and applicable Belgian
law (collectively,  the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from  Euroclear,  and receipts of payments  with respect to  securities  in
Euroclear.  All  securities  in Euroclear  are held on a fungible  basis without
attribution of specific  certificates to specific securities clearance accounts.
The  Euroclear  Operator acts under the Terms and  Conditions  only on behalf of
Euroclear participants and has no record of or relationship with persons holding
through Euroclear participants.

      Distributions  with respect to exchange  notes held  beneficially  through
Euroclear  will be credited to the cash  accounts of Euroclear  participants  in
accordance with the Terms and Conditions, to the extent received by Euroclear.

      Clearstream has advised us as follows:  Clearstream is incorporated  under
the  laws  of The  Grand  Duchy  of  Luxembourg  as a  professional  depositary.
Clearstream  holds securities for its participants and facilitates the clearance
and  settlement  of securities  transactions  between its  participants  through
electronic   book-entry  changes  in  accounts  of  its  participants,   thereby
eliminating the need for physical movement of certificates. Clearstream provides
to  its   participants,   among  other   things,   services   for   safekeeping,
administration,  clearance and settlement of  internationally  traded securities
and  securities  lending and  borrowing.  Clearstream  interfaces  with domestic
markets in several  countries.  As a  professional  depositary,  Clearstream  is
subject  to  regulation  by  the  Luxembourg  Monetary  Institute.   Clearstream
participants are financial  institutions around the world,  including securities
brokers and dealers,  banks, trust companies,  clearing corporations and certain
other organizations.  Indirect access to Clearstream is also available to others
that clear  through or  maintain a  custodial  relationship  with a  Clearstream
participant either directly or indirectly.

      Distributions  with respect to exchange  notes held  beneficially  through
Clearstream  will be credited to cash accounts of  Clearstream  participants  in
accordance with its rules and procedures, to the extent received by Clearstream.

                        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
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 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.


                                       94
<PAGE>

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.

      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


                                       95
<PAGE>

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
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


                                       96
<PAGE>

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.

                              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 90
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.

      For a period of 90 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 us 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 exchange  notes will be passed upon for us by James T.
Foran, Esquire,  Associate General Counsel of PSEG. The information contained in
"Federal Income Tax Considerations" has been passed upon for us by Mr. Foran.


                                       97
<PAGE>

                                     EXPERTS

      The  financial  statements  of PSEG Power LLC as of December  31, 2000 and
1999,  and for each of the three years in the period  ended  December  31, 2000,
included  in this  prospectus  have  been  audited  by  Deloitte  & Touche  LLP,
independent  auditors,  as  stated in their  report  appearing  herein,  and are
included in reliance upon the report of such firm given upon their  authority as
experts in accounting and auditing.


                                       98
<PAGE>

                          Index to Financial Statements

                                                                           Page
                                                                           ----
Independent Auditors' Report ...........................................   F-2

Consolidated Statements of Income ......................................   F-3

Consolidated Balance Sheets ............................................   F-4

Consolidated Statements of Cash Flows ..................................   F-6

Consolidated Statements of Capitalization and Member's Equity ..........   F-7

Notes to Consolidated Financial Statements .............................   F-8


                                      F-1
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

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

      We have audited the accompanying consolidated balance sheets of PSEG Power
LLC  (the  "Company")  as of  December  31,  2000  and  1999,  and  the  related
consolidated  statements of income,  capitalization and member's equity and cash
flows for each of the three years in the period ended  December 31, 2000.  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 conducted our audits in accordance  with auditing  standards  generally
accepted in the United States of America.  Those standards  require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

      In our opinion, such consolidated  financial statements present fairly, in
all material respects,  the financial position of the Company as of December 31,
2000 and 1999,  and the results of its operations and its cash flows for each of
the three  years in the  period  ended  December  31,  2000 in  conformity  with
accounting principles generally accepted in the United States of America.

Deloitte & Touche LLP

Parsippany, New Jersey
March 21, 2001


                                      F-2
<PAGE>

                                 PSEG POWER LLC
                        CONSOLIDATED STATEMENTS OF INCOME

                              (Millions of Dollars)

<TABLE>
<CAPTION>
                                                   For the Six Months                For the Years Ended
                                                     Ended June 30,                      December 31,
                                               ------------------------       --------------------------------
                                                     2001         2000         2000        1999          1998
                                                    ------       ------       ------      -------       ------
                                                       (unaudited)
<S>                                                 <C>          <C>          <C>         <C>           <C>
OPERATING REVENUES
  Generation ..................................     $1,159       $1,070       $2,203      $ 2,652       $2,551
  Trading .....................................      1,161        1,303        2,724        1,842        1,877
                                                    ------       ------       ------      -------       ------
     Total Operating Revenues .................      2,320        2,373        4,927        4,494        4,428
OPERATING EXPENSES
  Energy Costs ................................        385          341          719          831          945
  Trading Costs ...............................      1,083        1,260        2,647        1,800        1,854
  Operation and Maintenance ...................        349          325          686          689          584
  Depreciation and Amortization ...............         55           68          136          224          381
  Taxes Other Than Income Taxes ...............         11            9           27           19           30
                                                    ------       ------       ------      -------       ------
     Total Operating Expenses .................      1,883        2,003        4,215        3,563        3,794
                                                    ------       ------       ------      -------       ------
OPERATING INCOME ..............................        437          370          712          931          634

Other Income and Deductions ...................         (2)           7            7           --           --
Interest Expense ..............................         89           43          198          112          216
Preferred Securities Dividend
  Requirements of Subsidiaries                          --           --           --           12           25
                                                    ------       ------       ------      -------       ------
INCOME BEFORE INCOME TAXES
  AND EXTRAORDINARY ITEM ......................        346          334          521          807          393

INCOME TAXES ..................................        140          136          208          291          156
                                                    ------       ------       ------      -------       ------
INCOME BEFORE EXTRAORDINARY
  ITEM ........................................        206          198          313          516          237
  Extraordinary Item (Net of Tax
   of $2,002) .................................         --           --           --       (3,204)          --
                                                    ------       ------       ------      -------       ------
NET INCOME (LOSS) .............................        206          198          313       (2,688)         237
  Preferred Stock Dividend
   Requirements ...............................         --           --           --            3            5
                                                    ------       ------       ------      -------       ------
EARNINGS (LOSS) AVAILABLE TO
  PUBLIC SERVICE ENTERPRISE
  GROUP INCORPORATED ..........................     $  206       $  198       $  313      $(2,691)      $  232
                                                    ======       ======       ======      =======       ======
</TABLE>

See Notes to Consolidated Financial Statements.


                                      F-3
<PAGE>

                                 PSEG POWER LLC
                           CONSOLIDATED BALANCE SHEETS
                                     ASSETS

                              (Millions of Dollars)

<TABLE>
<CAPTION>
                                                                                        December 31,
                                                               June 30,           ------------------------
                                                                 2001              2000              1999
                                                                -------           -------          -------
                                                              (unaudited)
<S>                                                              <C>               <C>              <C>
ASSETS
Current Assets:
  Cash and Cash Equivalents ...............................      $    9            $   20           $   77
  Accounts Receivable .....................................         255               272              254
  Accounts Receivable-Affiliated Companies ................         186               159              179
  Materials and Supplies, net of valuation
   reserves (2001, $9, 2000 and 1999, $11) ................         108               107               88
  Fuel ....................................................          57                58               47
  Prepayments .............................................          15                10               18
  Energy Trading Contracts ................................         336               799               --
  Other ...................................................          10                 2                3
                                                                 ------            ------           ------
     Total Current Assets .................................         976             1,427              666

Property, Plant and Equipment .............................       3,500             2,705            2,289
  Less: Accumulated depreciation and amortization .........      (1,193)           (1,070)          (1,015)
                                                                 ------            ------           ------
     Net Property, Plant & Equipment ......................       2,307             1,635            1,274
                                                                 ------            ------           ------

Noncurrent Assets:
  Nuclear Decommissioning Fund ............................         723               716              631
  Deferred Income Taxes ...................................         664               676              608
  Other ...................................................         160                76              122
                                                                 ------            ------           ------
     Total Noncurrent Assets .............................        1,547             1,468            1,361
                                                                 ------            ------           ------
TOTAL ASSETS .............................................       $4,830            $4,530           $3,301
                                                                 ------            ------           ------
</TABLE>

See Notes to Consolidated Financial Statements.


                                      F-4
<PAGE>

                                 PSEG POWER LLC
                           CONSOLIDATED BALANCE SHEETS
                 LIABILITIES, CAPITALIZATION AND MEMBER'S EQUITY

                              (Millions of Dollars)

<TABLE>
<CAPTION>
                                                                                        December 31,
                                                                 June 30,          -----------------------
                                                                  2001              2000             1999
                                                                 ------            ------           ------
                                                              (unaudited)
<S>                                                                <C>               <C>            <C>
LIABILITIES, CAPITALIZATION AND
 MEMBER'S EQUITY
Current Liabilities:
  Commercial Paper and Loans .................................   $   --            $   --           $  685
  Accounts Payable ...........................................      347               336              295
  Accounts Payable - Affiliated Companies ....................      595               317               --
  Energy Trading Contracts ...................................      307               730               --
  Other ......................................................      139                87               58
                                                                 ------            ------           ------
     Total Current Liabilities ...............................    1,388             1,470            1,038
                                                                 ------            ------           ------

Noncurrent Liabilities:
  Nuclear Decommissioning ....................................      723               716              631
  Cost of Removal Liability ..................................      156               157              131
  Environmental ..............................................       53                53               53
  Other ......................................................       68                80              176
                                                                 ------            ------           ------
     Total Noncurrent Liabilities ............................    1,000             1,006              991
                                                                 ------            ------           ------

Commitments and Contingent Liabilities .......................       --                --               --

Note Payable - Affiliated Company ............................       --             2,786               --

Notes Payable ................................................    1,791                --               --

Capitalization ...............................................       --                --            1,272

Member's Equity:
  Contributed Capital ........................................    1,350               150               --
  Basis Adjustment ...........................................     (986)             (986)              --
  Retained Earnings ..........................................      310               104               --
  Accumulated Other Comprehensive Loss .......................      (23)               --               --
                                                                 ------            ------           ------
     Total Member's Equity ...................................      651              (732)              --
                                                                 ------            ------           ------
     Total Capitalization and Member's Equity ................    2,442              (732)           1,272
                                                                 ------            ------           ------
TOTAL LIABILITIES, CAPITALIZATION AND
  MEMBER'S EQUITY ............................................   $4,830            $4,530           $3,301
                                                                 ======            ======           ======
</TABLE>

See Notes to Consolidated Financial Statements.


                                      F-5
<PAGE>

                                 PSEG POWER LLC
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                              (Millions of Dollars)

<TABLE>
<CAPTION>
                                                  For the Six Months          For the Years Ended
                                                    Ended June 30,                December 31,
                                                 --------------------   ---------------------------------
                                                   2001         2000      2000       1999       1998
                                                 --------     -------   --------   --------   --------
                                                       (unaudited)
<S>                                                <C>        <C>        <C>        <C>        <C>

CASH FLOWS FROM OPERATING ACTIVITIES
  Net Income/(Loss) ............................   $   206    $   198    $   313    $(2,688)   $   237
                                                   -------    -------    -------    -------    -------
  Adjustments to reconcile net income/(loss)
    to net cash flows from operating activities:
  Extraordinary Item - net of tax ..............        --         --         --      3,204         --
  Depreciation and Amortization ................        55         68        136        224        381
  Amortization of Nuclear Fuel .................        27         45        130         92         94
  Recovery of Electric Energy Costs ............        --         --         --         20        130
  Provision for Deferred Income Taxes
    and ITC - net ..............................        12        (18)       (69)       (70)       (35)
  Demand Side Management .......................        --         --         --        (64)       (29)
  Net changes in certain current assets
    and liabilities:
      Materials and Supplies and Fuel ..........        --        (25)       (30)        51        (19)
      Accounts Receivable ......................       (10)      (144)       161         10        (41)
      Accounts Payable .........................       289        220        195         44        (29)
      Other Current Assets and Liabilities .....        79        (98)       (89)       (22)       (28)
  Other ........................................       (87)       (26)       (46)       (31)        30
                                                   -------    -------    -------    -------    -------
Net Cash Provided By Operating Activities ......       571        220        701        770        691
                                                   -------    -------    -------    -------    -------
CASH FLOWS FROM INVESTING ACTIVITIES
  Additions to Property, Plant and Equipment ...      (741)      (177)      (405)       (92)      (265)
  Acquisition of Generation Businesses .........        --         --        (74)        --         --
  Contribution to Decommissioning Funds
   and Other Special Funds .....................       (15)       (15)       (29)      (115)       (63)
  Other ........................................       (31)        (5)       (34)       (24)        (5)
                                                   -------    -------    -------    -------    -------
Net Cash Used In Investing Activities ..........      (787)      (197)      (542)      (231)      (333)
                                                   -------    -------    -------    -------    -------
CASH FLOWS FROM FINANCING ACTIVITIES
  Net Change in Short-Term Debt ................        --       (685)        --         --         --
  Net Change in Commercial Paper and Loans .....        --         --       (685)       262       (175)
  Repayment of Note Payable due to
    Affiliated Company .........................    (2,786)        --         --         --         --
  Issuance of Long-Term Debt ...................     1,791         --         --         --         --
  Net Change in Capitalization Activity ........        --        480        319       (746)      (177)
  Proceeds from Contributed Capital ............     1,200        120        150         --         --
                                                   -------    -------    -------    -------    -------
     Net Cash Provided By (Used In)
       Financing Activities ....................       205        (85)      (216)      (484)      (352)
                                                   -------    -------    -------    -------    -------
Net Change In Cash And Cash Equivalents ........       (11)       (62)       (57)        55          6
Cash And Cash Equivalents At Beginning
 Of Period .....................................        20         77         77         22         16
                                                   -------    -------    -------    -------    -------
Cash And Cash Equivalents At End Of Period .....   $     9    $    15    $    20    $    77    $    22
                                                   =======    =======    =======    =======    =======

Income Taxes Paid ..............................   $    89    $   190    $   242    $   306    $   211
Interest Paid ..................................   $   113    $    42    $   159    $   104    $   212
</TABLE>

See Notes to Consolidated Financial Statements.


                                      F-6
<PAGE>

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

                              (Millions of Dollars)

<TABLE>
<CAPTION>
                                                                                                             Total
                                                          Accumulated                                   Capitalization
                                                             Other                Total                       and
                                    Contributed Retained Comprehensive   Basis    Member's                   Member's
                                      Capital   Earnings     Loss     Adjustment  Equity   Capitalization    Equity
                                      -------   --------     ----     ----------  ------   --------------    ------
<S>                                  <C>         <C>       <C>           <C>      <C>          <C>          <C>
Balance as of January 1, 1998 ...    $   --      $ --      $ --          $  --    $    --      $ 5,124      $ 5,124
  Net Income (1) ................        --        --        --             --         --          237          237
  Net Transfers to PSEG .........        --        --        --             --         --         (169)        (169)
  Cash Dividends Paid ...........        --        --        --             --         --           (5)          (5)
                                     ------      ----      ----          -----    -------      -------      -------
Balance as of December 31, 1998 .        --        --        --             --         --        5,187        5,187
                                     ------      ----      ----          -----    -------      -------      -------
  Net Loss (1) ..................        --        --        --             --         --       (2,688)      (2,688)
  Net Transfers to PSEG .........        --        --        --             --         --       (1,224)      (1,224)
  Cash Dividends Paid ...........        --        --        --             --         --           (3)          (3)
                                     ------      ----      ----          -----    -------      -------      -------
Balance as of December 31, 1999 .        --        --        --             --         --        1,272        1,272
                                     ------      ----      ----          -----    -------      -------      -------
  Net Income (1) ................        --       104        --             --        104          209          313
  Contributed Capital ...........       150        --        --             --        150           --          150
  Net Transfers to PSEG .........        --        --        --             --     (1,481)      (1,481)
  Transfer of Generation Business        --        --        --           (986)      (986)          --         (986)
                                     ------      ----      ----          -----    -------      -------      -------
Balance as of December 31, 2000 .    $  150      $104        --          $(986)   $  (732)          --      $  (732)
                                     ------      ----      ----          -----    -------      -------      -------
  Net Income (1) ................        --       206        --             --        206           --          206
  Other Comprehensive Income
    (Loss) ......................        --        --       (23)            --        (23)          --          (23)
  Contributed Capital ...........     1,200        --        --             --      1,200           --        1,200
                                     ------      ----      ----          -----    -------      -------      -------
Balance as of June 30, 2001
 (unaudited) ....................    $1,350      $310      $(23)         $(986)   $   651      $    --      $   651
                                     ======      ====      ====          =====    =======      =======      =======
</TABLE>

----------
(1)   Net Income  included  in  retained  earnings  reflects  earnings  from the
      operations  of PSEG  Power  LLC  during  2000 and  2001.  Net  Income/Loss
      included  in  Capitalization  for  2000,  1999 and 1998  reflects  the Net
      Income/Loss  allocated  from Public  Service  Electric  and Gas  Company's
      generation business.

See Notes to Consolidated Financial Statements.


                                      F-7
<PAGE>

                                 PSEG POWER LLC

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. ORGANIZATION,   BASIS  OF   PRESENTATION   AND  SUMMARY  OF  SIGNIFICANT
        ACCOUNTING POLICIES

Organization

      PSEG Power LLC  (Power) is a  wholly-owned  subsidiary  of Public  Service
Enterprise  Group  Incorporated   (PSEG).   Power  has  three  principal  direct
wholly-owned subsidiaries:  PSEG Nuclear LLC (Nuclear), PSEG Fossil LLC (Fossil)
and PSEG Energy Resources & Trade LLC (ER&T).  Power and its  subsidiaries  were
established to acquire, own and operate the electric generation-related business
of their affiliate, Public Service Electric and Gas Company (PSE&G), pursuant to
the Final  Decision  and Order (Final  Order)  issued by the New Jersey Board of
Public  Utilities  (BPU)  under the New  Jersey  Electric  Discount  and  Energy
Competition Act (Energy  Competition Act) discussed  below.  Power is engaged in
generation,  wholesale  energy  marketing and trading of energy.  Power provides
energy and capacity to PSE&G under certain  contracts  and markets  electricity,
natural gas,  capacity and  ancillary  services  throughout  the Eastern  United
States.  Power  also  has a  finance  company  subsidiary,  PSEG  Power  Capital
Investment Co. (Power  Capital),  which provides  certain  financing for Power's
other subsidiaries.

      Purchase of Generation-Related Business from PSE&G

      In August  2000,  pursuant to the Final  Order,  Power  purchased  PSE&G's
generation-related   property,  plant  and  equipment  for  $2.443  billion,  as
specified  in the Final Order,  plus $343  million for other  generation-related
assets and  liabilities  (the  Transaction)  in  exchange  for a $2.786  billion
promissory note with an interest rate of 14.23%,  representing  PSE&G's weighted
average cost of capital.  Power repaid the promissory  note on January 31, 2001,
with funds provided from PSEG in the form of equity and loans.

      Because the assets were  purchased  from an affiliate,  Power recorded the
assets at PSE&G's  carrying  value.  The  difference  between the total purchase
price and the net book value of the  generation-related  assets and  liabilities
was recorded as a Basis Adjustment reducing Power's equity.

Basis of Presentation

      The  consolidated  financial  statements of Power  present the  historical
financial   position,   results  of  operations   and  net  cash  flows  of  the
generation-related  business of PSE&G prior to the  Transaction  in August 2000,
and are  not  necessarily  indicative  of the  financial  position,  results  of
operations or net cash flows that would have existed had the  generation-related
business been an independent  company during the periods presented.  For periods
prior to the  Transaction,  any  references to Power  contained  herein refer to
Power's  business  and the  generation-related  business  of PSE&G  prior to the
purchase of the generation-related business from PSE&G.

      Certain information in these consolidated financial statements relating to
the results of operations and financial  condition  prior to the Transaction was
derived  from the  historical  financial  statements  of PSE&G  which  have been
prepared in accordance with generally  accepted  accounting  principles  (GAAP).
Various  allocation  methodologies  were  employed  to  separate  the results of
operations and financial condition of the generation-related  portion of PSE&G's
business from PSE&G's historical  financial statements prior to the Transaction.
Prior to the Transaction,  revenues included the generation component of revenue
from PSE&G's operations and any generation-related  revenues,  such as ancillary
services  and  wholesale  energy  activity.  Expenses,  such  as  energy  costs,
operations and maintenance and depreciation and amortization,  and assets,  such
as  property,  plant and  equipment,  materials  and  supplies  and  fuel,  were
specifically  identified  by  function  and  reported  accordingly  for  Power's
operations. Various allocations were used to disaggregate other common expenses,
assets and  liabilities  between Power and PSE&G's  regulated  transmission  and
distribution operations.  Interest and preferred stock dividends were calculated
based upon an  allocation  methodology  that charged  Power with  financing  and
equity costs from PSE&G in proportion to its share of total net property,  plant


                                      F-8
<PAGE>

                                 PSEG POWER LLC

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

and  equipment  prior to the  effects of  deregulation  discussed  below.  These
methodologies  use  the  assumption  that  Power  had  operated  as a  separate,
regulated  company  prior  to  April 1,  1999.  On the date of the  Transaction,
certain of the assets and  liabilities  which were  allocated in the  historical
consolidated financial statements,  such as other postretirement benefits (OPEB)
and working capital, remained with PSE&G.

      Management  believes that these allocation  methodologies  are reasonable.
Had Power  actually  existed  as a  separate  company,  its  results  could have
significantly differed from those presented herein. In addition,  future results
of operations,  financial  position and net cash flows could  materially  differ
from the historical results presented.

      The  unaudited   financial   information   included  herein  reflects  all
adjustments  which are, in the opinion of management,  necessary to fairly state
the results for the interim periods presented.

Summary of Significant Accounting Policies

      Accounting for the Effects of Regulation

      Prior to  April  1999,  Power's  financial  statements  were  prepared  in
accordance  with the provisions of Statement of Financial  Accounting  Standards
(SFAS) 71,  "Accounting  for the Effects of Certain Types of  Regulation"  (SFAS
71).  In  general,   SFAS  71  recognizes  that  accounting  for  rate-regulated
enterprises  should reflect the relationship of costs and revenues as determined
by regulators. Under SFAS 71, a regulated entity must defer recognition of costs
(a regulatory asset) or recognize  obligations (a regulatory liability) if it is
probable that,  through the rate-making  process,  there will be a corresponding
increase or decrease in future revenues.

      Effective April 1, 1999, Power discontinued the application of SFAS 71 and
recorded an  extraordinary  charge  consistent with the requirements of Emerging
Issues  Task  Force  (EITF)  Issue No.  97-4,  "Deregulation  of the  Pricing of
Electricity - Issues Related to the  Application  of FASB  Statements No. 71 and
No. 101" (EITF 97-4) and SFAS 101,  "Regulated  Enterprises--Accounting  for the
Discontinuation  of  Application  of FASB  Statement  No.  71" (SFAS  101).  The
extraordinary  charge  consisted  primarily of the write-down of Power's nuclear
and fossil generating stations in accordance with SFAS 121,  "Accounting for the
Impairment of  Long-Lived  Assets and for  Long-Lived  Assets to Be Disposed Of"
(SFAS 121). A discounted  cash flow  analysis  was  performed on a  unit-by-unit
basis to determine the amount of the impairment.  As a result of this impairment
analysis,  the  net  book  value  of the  generating  stations  was  reduced  by
approximately $5.0 billion (pre-tax) or approximately $3.1 billion (after-tax).

      In  addition  to  the  impairment  of  Power's  generating  stations,  the
extraordinary charge consisted of various accounting  adjustments to reflect the
absence of cost of service regulation for electric generation in the future. The
adjustments related primarily to materials and supplies, general plant items and
liabilities for certain contractual and environmental obligations.

      Other  accounting  impacts  of the  discontinuation  of SFAS  71  included
reclassifying the Accrued Nuclear  Decommissioning  Reserve and the Accrued Cost
of Removal  for  generation-related  assets  from  Accumulated  Depreciation  to
Long-Term Liabilities.

      Consolidation Policy

      The  consolidated  statements  include  the  accounts  for  Power  and its
subsidiaries.  Power and its  subsidiaries  consolidate  those entities in which
they have a controlling interest.

      Reclassifications

      Certain  reclassifications  of prior period data have been made to conform
with the current presentation.


                                      F-9
<PAGE>

                                 PSEG POWER LLC

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

      Property, Plant and Equipment

      Prior to  April  1999,  additions  to plant  and  replacement  of units of
property were capitalized at original cost. The cost of maintenance,  repair and
replacement  of minor items of property was charged to the  appropriate  expense
accounts.  Also prior to April 1999, the original cost less net salvage value of
units of depreciable  property  retired or otherwise  disposed of was charged to
accumulated depreciation.

      Beginning in April 1999, and in concert with the  discontinuation  of SFAS
71,  Power  changed  its  capitalization  policy.  Under its new  capitalization
policy,  Power  only  capitalizes  costs to acquire  new  assets or costs  which
increase  either  the  capacity  or  the  life  of an  asset  or  represent  the
replacement of a retired asset. All other costs are expensed as incurred.  Also,
under its revised policy,  upon  retirement of an asset,  the portion of Power's
future retirements which have not been fully depreciated will impact earnings.

      Depreciation and Amortization

      Depreciation is computed under the straight-line  method for each class of
depreciable  property.  Prior to April 1999,  depreciation  rates were  reviewed
periodically  and  adjustments  were made as approved  by the BPU.  Depreciation
rates stated in  percentages  of original cost of  depreciable  property in 1999
(prior to April 1, 1999) and 1998 were  3.52%.  Prior to April  1999,  Power had
certain regulatory assets embedded in property,  plant and equipment as a result
of the use of a level of depreciation  expense in the  rate-making  process that
differed  from  the  amount  that  would  have  been  recorded  under  GAAP  for
non-regulated companies.

      Beginning in April 1999, and in concert with the  discontinuation  of SFAS
71, Power  calculates  depreciation  on  generation-related  assets based on the
assets'   estimated  useful  lives  determined  by  Power,   rather  than  using
depreciation  rates  prescribed  by the BPU in rate  proceedings.  The estimated
useful  lives are from 3 to 20 years for general  plant.  The  estimated  useful
lives for buildings and generating stations are as follows:

      Class of Property                          Estimated Useful Life (Years)
      -----------------                          -----------------------------
      Fossil Production                                   25-40 years
      Nuclear Generation                                   30 years
      Pumped Storage                                       40 years

      Nuclear   fuel   burnup   costs  are   charged   to  fuel   expense  on  a
units-of-production  basis over the  estimated  life of the fuel.  Rates for the
recovery of fuel used at all nuclear  units  include a provision of one mill per
kilowatt-hour (kWh) of nuclear generation for spent fuel disposal costs.

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

      AFDC  represented  the cost of debt and equity  funds used to finance  the
construction of new facilities.  The amount of AFDC  capitalized was reported in
the Consolidated  Statements of Income as a reduction of interest  charges.  The
rates used for  calculating  AFDC in 1999 (prior to April 1, 1999) and 1998 were
5.29%  and  6.06%,  respectively.  Effective  April 1,  1999,  Power  no  longer
calculates  AFDC.  Interest  related to capital  projects is now  capitalized in
accordance with SFAS No. 34, "Capitalization of Interest Cost."

      IDC  represents  the cost of debt  used to  finance  the  construction  of
non-utility  facilities.  The  amount  of IDC  capitalized  is  reported  in the
Consolidated  Statements  of Income as a  reduction  of  interest  charges.  The
weighted average rate used for calculating IDC in 2000 was 9.98%.

Revenues and Energy Costs

      Revenues  are  recorded  based on energy and  capacity  sold and  services
rendered to customers  during each accounting  period.  Prior to August 1, 1999,
revenue was calculated by unbundling  the


                                      F-10
<PAGE>

                                 PSEG POWER LLC

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

generation  component of revenue from PSE&G's  bundled rate for the  generation,
transmission and distribution of energy and adding any other  generation-related
revenues,  such as ancillary  services and wholesale  energy  trading  activity.
Also, prior to August 1, 1999, Power recorded unbilled revenues representing the
estimated amount  customers would be billed for services  rendered from the time
meters were last read to the end of the respective accounting period.  Beginning
on August 1, 1999,  electric  rates charged to customers  were unbundled and the
generation,  transmission,  distribution  and other components of the total rate
became separate charges. Effective with that date, revenue represents the amount
recorded  for the  energy and  capacity  provided  to meet the basic  generation
service  (BGS)  requirements  to PSE&G  combined  with other  generation-related
revenues,  such as ancillary  services,  wholesale  energy trading  activity and
amounts recorded for the market  transition charge (MTC) (see Note 4. Regulatory
Issues and Accounting Impacts of Deregulation). Following the Transaction, Power
bills, and periodically  settles with, PSE&G for BGS requirements and MTC.

      Prior to August 1, 1999,  fuel revenues and expenses and  purchased  power
costs flowed  through the Electric  Levelized  Energy  Adjustment  Clause (LEAC)
mechanism and variances in fuel revenues and expenses and purchased  power costs
were subject to deferral  accounting  and thus had no direct effect on earnings.
Any LEAC underrecoveries or overrecoveries,  together with interest (in the case
of net overrecoveries),  were deferred and included in the results of operations
in the period in which they were reflected in rates.  Effective January 1, 1998,
the amount  included  for LEAC  under/overrecovery  represented  the  difference
between   fuel-related   revenues  and  fuel-related   expenses  which  included
electricity  purchases at the PJM  Interconnection,  LLC (PJM)  market  clearing
price.  Effective April 1, 1998,  PJM, as an independent  system operator (ISO),
replaced the PJM uniform market clearing price with locational  marginal pricing
(LMP) for determining the market clearing price to energy providers.  Due to the
effects of congestion and  constraints  in the PJM market,  LMP may be different
for the various delivery points in PJM. Due to the  discontinuation  of the LEAC
mechanism on August 1, 1999, earnings volatility increased since the unregulated
electric  generation  business ceased to follow deferral  accounting.  Power now
bears the full risks and rewards of managing  the fixed price BGS  contract  and
the  changes in nuclear and fossil  generating  fuel costs and  purchased  power
costs.

Materials and Supplies

      The  carrying  value of the  materials  and  supplies  for  Power  and its
subsidiaries is valued at lower of cost or market.

      Commodity-Related Contracts

      Power engages in electricity and natural gas commodity forwards,  futures,
swaps and option purchases and sales with  counterparties  to manage exposure to
electricity and natural gas price risk. Certain  contracts,  in conjunction with
owned electric generating  capacity,  are designed to manage price risk exposure
for  electric  customer  commitments.  Unrealized  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 when the related
asset or liability is realized or settled.  Unrealized  gains and losses related
to qualifying  hedges of firm  commitments or anticipated  transactions are also
deferred and recognized in income when the hedged transaction occurs.

      Power also enters into forwards,  futures,  swaps and options that are not
used to manage  price risk  exposure for  commitments  to  customers.  Effective
January 1, 1999, Power adopted EITF 98-10, "Accounting for Contracts Involved in
Energy Trading and Risk Management Activities" (EITF 98-10). EITF 98-10 requires
that energy trading contracts be marked to market with gains and losses included
in current earnings.

      Income Taxes

      Power and its  subsidiaries  join in the filing of a consolidated  federal
income tax return by PSEG.  Power 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


                                      F-11
<PAGE>

                                 PSEG POWER LLC

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

are  provided for the  temporary  differences  between book and taxable  income,
resulting  primarily from the use of accelerated  depreciation  for tax purposes
and the  recognition  of unrealized  gains for book  purposes.  Power defers and
amortizes  investment  and  energy  tax  credits  over the lives of the  related
properties.

      Impairment of Long-Lived Assets

      Power  reviews  for  possible  impairment  whenever  events or  changes in
circumstances  indicate  that  the  carrying  amount  of an  asset  may  not  be
recoverable. Upon deregulation, Power evaluated the recoverability of its assets
and recorded an  extraordinary,  non-cash charge to earnings.  For the impact of
the  application  of SFAS 121,  see Note 4.  Regulatory  Issues  and  Accounting
Impacts of Deregulation.

      Use of Estimates

      The process of preparing  financial  statements  in  conformity  with GAAP
requires the use of estimates and assumptions regarding certain types of assets,
liabilities,  revenues and expenses.  Also,  such estimates  relate to unsettled
transactions and events as of the date of the financial statements. Accordingly,
upon settlement,  actual results may differ from estimated amounts.  In addition
to these estimates,  see Basis of Presentation for a discussion of the estimates
used  and  methodologies   employed  to  derive  Power's  historical   financial
statements.

NOTE 2. CAPITALIZATION

      Prior to the Transaction,  PSE&G provided the necessary capital to finance
its  generation-related  business.  PSE&G's capital structure consisted of 41.1%
Long-Term Debt, 49.8% Common Equity and 9.1% Preferred Securities as of December
31,  1999.  Power had net  capitalization  of $1.272  billion as of December 31,
1999. This amount represents the amount of capital investments made by PSE&G for
its  generation-related  business and Power's allocated  capitalization prior to
the formation of the separate  entity.  Interest and preferred  stock  dividends
were  calculated  based upon an allocation  methodology  that charged Power with
financing  and equity costs from PSE&G in  proportion  to its share of total net
property,  plant and equipment prior to the effects of deregulation.  The $2.786
billion  promissory note to PSE&G is classified as long term, due to the ability
and  intent  of Power to settle  this  note  through  equity  infusions  and the
anticipated  issuance of long-term  debt.  On January 31, 2001,  through  equity
infusions  of $1.2  billion  from PSEG and demand  loans of $1.586  billion from
PSEG,  Power repaid the promissory note to PSE&G.  Power's issuance of long-term
debt in 2001 was fully and unconditionally and jointly and severally  guaranteed
by Fossil, Nuclear and ER&T. All other direct and indirect subsidiaries of Power
are minor and Power has no independent assets or operations.

      PSE&G Fuel Corporation (Fuelco), a wholly-owned subsidiary of PSE&G, had a
$125 million commercial paper program to finance a 42.49% ownership share of the
Peach Bottom  Atomic Power Station  Units 2 and 3 (Peach  Bottom)  nuclear fuel,
supported by a $125 million  revolving  credit  facility  with a group of banks.
PSE&G  guaranteed  repayment  of  Fuelco's  respective  obligations  under  this
program.  Fuelco had commercial paper of $73 million  outstanding as of December
31,  1999.  As of December  31, 1999,  there was no debt  outstanding  under the
revolving credit facility.  As a result of the Transaction,  Fuelco's commercial
paper program was  discontinued  and  financing of Peach Bottom  nuclear fuel is
being funded  through  Power.  The revolving  credit  facility  supporting  this
program was terminated on September 11, 2000.

NOTE 3. ACCOUNTING MATTERS

      In July 2000, EITF 99-19,  "Reporting  Revenue Gross as a Principal versus
Net as an Agent"  (EITF  99-19),  provided  guidance  on the issue of  whether a
company  should report  revenue based on the gross amount billed to the customer
or the net amount  retained.  The guidance  states that whether a company should
recognize  revenue based on the gross amount billed or the net retained requires
significant judgement, which depends on the relevant facts and circumstances. In
the first  quarter of


                                      F-12
<PAGE>

                                 PSEG POWER LLC

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2001, based on the analysis and interpretation of EITF 99-19, Power reported all
the revenues and cost of goods sold on a gross basis for the physical  bilateral
energy sales and purchases and capacity sales and purchases.  Power continues to
report swaps, futures, option premiums,  firm transmission rights,  transmission
congestion  credits,  and  purchases  and sales of emission  allowances on a net
basis. The prior year financial statements have been reclassified accordingly.

      On January 1, 2001, Power adopted Statement of Financial  Standards (SFAS)
No. 133, "Accounting for Derivative  Instruments and Hedging Activities",  (SFAS
133) as  amended.  Power did not have a  transition  adjustment.  Subsequent  to
December 31, 2000, Power entered into certain derivative instruments, which have
been  designated  as cash flow hedges.  As of June 30,  2001,  the fair value of
Power's  derivative  liabilities  was $34.2 million and has been recorded on the
consolidated balance sheet in Other Current Liabilities (unaudited). See Note 5.
Financial Instruments and Risk Management.

      The   Financial    Accounting    Standards   Board's   (FASB)   Derivative
Implementation  Group  (DIG)  has  issued  guidance,  effective  July  1,  2001,
regarding  certain  derivative  contracts and the eligibility of those contracts
for the normal  purchases and sales  exceptions.  Power is currently  evaluating
this guidance and cannot predict the impact on its financial position or results
of operations, however, such impact could be material (unaudited).

      In July 2001, the FASB issued SFAS No. 141, "Business  Combinations" (SFAS
141).  SFAS 141,  was  effective  July 1, 2001 and  requires  that all  business
combinations subsequent to that date be accounted for under the purchase method.
Power is currently  evaluating this guidance and does not believe it will have a
substantial effect on its growth strategy.  Power does not anticipate that there
will be a material  impact on its  financial  position or results of  operations
(unaudited).

      Also in July 2001,  the FASB  issued  SFAS No.  142,  "Goodwill  and Other
Intangible  Assets"  (SFAS  142).  Under  SFAS 142,  goodwill  is  considered  a
nonamortizable  asset and will be subject to an annual review for impairment and
an  interim  review  when  required  by events or  circumstances.  SFAS 142 also
defines  intangible  assets,  other than goodwill,  that may arise in a purchase
combination. SFAS 142 is effective for all fiscal years beginning after December
15, 2001.  Power is currently  evaluating  this guidance and does not believe it
will have a material  impact on its financial  position or results of operations
(unaudited).

      Also in July 2001,  the FASB issued SFAS No.  143,  "Accounting  for Asset
Retirement  Obligations"  (SFAS  143).  Under  SFAS  143,  the  fair  value of a
liability for an asset retirement obligation should be recorded in the period in
which it is incurred. Upon settlement of the liability, an entity either settles
the obligation for its recorded amount or incurs a gain or loss upon settlement.
SFAS 143 is effective for fiscal years beginning  after June 15, 2002.  Power is
currently  evaluating  this  guidance  and  cannot  predict  the  impact  on its
financial  position or results of  operations,  however,  such  impact  could be
material (unaudited).

NOTE 4. REGULATORY ISSUES AND ACCOUNTING IMPACTS OF DEREGULATION

New Jersey Energy Master Plan Proceedings and Related Orders

      In August 1999, following the enactment of the Energy Competition Act, the
BPU rendered a Final Order relating to PSE&G's rate  unbundling,  stranded costs
and restructuring proceedings providing, among other things, for the transfer to
Power of all of PSE&G's electric generation facilities,  plant and equipment for
$2.443 billion and all other related property, including materials, supplies and
fuel  at the net  book  value  thereof,  together  with  associated  rights  and
liabilities.

      Also in the Final Order, the BPU concluded that PSE&G should recover up to
$2.94 billion (net of tax) of its  generation-related  stranded  costs,  through
securitization  of $2.4 billion and an opportunity to recover up to $540 million
(net of tax) of its  unsecuritized  generation-related  stranded  costs on a net
present  value basis.  The $540 million is subject to recovery  through a Market
Transition  Charge (MTC)


                                      F-13
<PAGE>

                                 PSEG POWER LLC

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

which is to be collected  over a four year period ending on July 31, 2003 and is
remitted to Power along with Basic Generation  Service (BGS) revenues as part of
PSE&G's BGS contract with Power.

      In October and November 1999,  appeals were filed challenging the validity
of the Final  Order.  In April 2000,  the  Appellate  Division of the New Jersey
Superior Court (Appellate  Division)  unanimously rejected the arguments made by
the New Jersey  Business Users'  Coalition,  the New Jersey  Ratepayer  Advocate
(RPA) and Co-Steel Raritan (Co-Steel), an individual PSE&G customer (appellants)
and affirmed the Final  Order.  Thereafter,  the  appellants  requested  the New
Jersey  Supreme  Court to  review  certain  aspects  of the  Appellate  Division
decision.  On  December  6, 2000,  the New Jersey  Supreme  Court  affirmed  the
Appellate  Division's  decision  by a vote  of 4 to 1.  The New  Jersey  Supreme
Court's written opinion in the matter was issued on May 18, 2000.

      On  March  6,  2001,  Co-Steel  filed a  Petition  of  Writ of  Certiorari
(Petition)  with the United States  Supreme Court seeking  limited review of the
New  Jersey  Supreme  Court   decision,   the  granting  of  which  is  entirely
discretionary  with the Court.  Briefs in  opposition  to the Petition have been
filed. The outcome of this action cannot be predicted.

      As a result of this appellate review, PSE&G's  securitization  transaction
was  delayed  until  the  first  quarter  of  2001,   causing  a  delay  in  the
implementation  of the  Securitization  Transition Charge (STC) which would have
reduced  the MTC.  In order to properly  recognize  the  recovery of the allowed
unsecuritized stranded costs over the transition period, Power recorded a charge
to net income of $88 million,  pre-tax, or $52 million,  after tax, in the third
quarter of 2000 for the cumulative amount of estimated  collections in excess of
the allowed  unsecuritized  stranded costs from August 1, 1999 through September
30, 2000. As of June 30, 2001 (unaudited),  the amount of estimated  collections
in excess of the allowed unsecuritized stranded costs was $146 million.

NOTE 5.     FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

      Power's  operations  give rise to exposure to market risks from changes in
commodity prices, interest rates and securities prices. Power's policy is to use
derivative  financial  instruments  for the  purpose  of  managing  market  risk
consistent with its business plans and prudent business practices.

Commodity-Related Instruments

      At  December  31,  2000 and  1999,  Power  held or  issued  commodity  and
financial  instruments that reduce exposure to market  fluctuations from factors
such as weather,  environmental  policies,  changes in demand, changes in supply
and  other  events.  These  instruments,  in  conjunction  with  owned  electric
generating   capacity,   are  designed  to  cover  estimated  electric  customer
commitments under BGS and other contracts.  Power uses futures,  forwards, swaps
and options to manage and hedge price risk related to these market exposures.

      As of June 30, 2001 (unaudited),  Power had entered into 18 million mWh of
electric  physical  forward  contracts  and 30 million  MMBTU of gas futures and
swaps to hedge its forecasted BGS  requirements  and gas purchases  requirements
for generation with a maximum term of  approximately  one year,  which qualified
for hedge  accounting  treatment  under SFAS 133. These  commodity and financial
instruments  are marked to market based on  management's  best  estimates  using
over-the-counter  quotations,  exchange  prices,  volatility  factors  and other
valuation  methodology.  For the quarter  ended June 30, 2001  (unaudited),  the
total  negative  mark to market  valuation  of $34  million  was  recorded  as a
derivative  liability  offset by negative Other  Comprehensive  Income (OCI) and
deferred taxes of $21 million and $13 million, respectively.

      As discussed in Note 1. Organization, Basis of Presentation and Summary of
Significant Accounting Policies,  Power implemented EITF 98-10 effective January
1, 1999.  As a result,  Power's  energy  trading  contracts  have been marked to
market and gains and losses from such contracts were included in earnings. Power
recorded $6 million of  unrealized  gains in the six months  ended June 30,


                                      F-14
<PAGE>

                                 PSEG POWER LLC

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2001 and $55  million  and $7 million  of  unrealized  gains in the years  ended
December 31, 2000 and 1999, respectively, related to these contracts.

      The fair value of the financial  instruments that are marked to market are
based on management's best estimates using over-the-counter quotations, exchange
prices,  volatility factors and valuation  methodology.  The estimates presented
herein are not necessarily indicative of the amounts that Power could realize in
a current market exchange.  The fair values as of June 30, 2001 and December 31,
2000 and 1999 and the average  fair values for the periods then ended of Power's
significant  financial  instruments related to energy commodities are summarized
in the following table:

<TABLE>
<CAPTION>
                                                               June 30, 2001        December 31, 2000
                                                            --------------------   ------------------
                                                                        Average              Average
                                                            Fair         Fair      Fair        Fair
                                                            Value        Value     Value       Value
                                                            -----      ---------   -----     --------
                                                            (Millions of Dollars)  (Millions of Dollars)
                                                                 (Unaudited)
<S>                                                          <C>        <C>        <C>           <C>
Futures and Options -- NYMEX ...........................     $(3)       $ (1)      $   6         $(1)
Physical forwards ......................................      25          15          13          14
Options -- OTC .........................................      (7)         66         184          68
Swaps ..................................................      31         (39)       (138)         23
Emissions Allowances ...................................      28          23           6           9
</TABLE>

      Power   routinely   enters  into  exchange   traded  futures  and  options
transactions  for electricity  and natural gas as part of its wholesale  trading
operations.  Generally,  exchange-traded  futures  contracts  require deposit of
margin cash,  the amount of which is subject to change based on market  movement
and in accordance with exchange rules. The amount of the margin deposits at June
30,  2001  (unaudited)  and  December  31, 2000 and 1999 were  approximately  $4
million and $1 million, respectively.

Credit Risk

      Credit risk relates to the risk of loss that Power would incur as a result
of non-performance by counterparties, pursuant to the terms of their contractual
obligations.   Power  has   established   credit   policies   that  it  believes
significantly  minimize its exposure to credit risk.  These policies  include an
evaluation of potential  counterparties'  financial condition  (including credit
rating),  collateral  requirements  under certain  circumstances  and the use of
standardized  agreements,  which may  allow  for the  netting  of  positive  and
negative exposures associated with a single counterparty.

      Two major California  utilities,  including Pacific Gas & Electric Company
(PG&E),  have significantly  underrecovered from customers costs paid for power.
As a consequence,  these utilities have defaulted under a variety of contractual
obligations. On April 6, 2001, PG&E filed for reorganization under Chapter 11 of
the U.S. Bankruptcy Code.  Affiliates of these California utilities have entered
into physical forward and swap contracts with ER&T for delivery in the PJM area.
Although these  counterparties  have met their obligations to date and are still
investment  grade entities,  ER&T has not entered into any additional  contracts
with either  counterparty since December 2000. ER&T's exposure to these entities
under these  contracts is not material and management  does not believe that any
reserve is presently necessary.

Interest Rate Swaps

      In February 2001, Power entered into various  forward-interest rate swaps,
with an aggregate  notional  amount of $400 million,  to hedge the interest rate
risk  related to the  anticipated  issuance of debt.  On April 11,  2001,  Power
issued  $1.8  billion in  fixed-rate  Senior  Notes and  closed out the  forward
starting  interest rate swaps.  The aggregate  loss, net of tax, of $3.2 million
(unaudited) was classified as Accumulated Other  Comprehensive Loss and is being
amortized and charged to interest expense over the life of the debt.


                                      F-15
<PAGE>

                                 PSEG POWER LLC

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Current Assets and Current Liabilities

      The fair value of current assets and current liabilities approximate their
carrying amounts.

NOTE 6. CASH AND CASH EQUIVALENTS

      The December 31, 2000 and 1999 balances consist primarily of working funds
and highly  liquid  marketable  securities  (commercial  paper and money  market
funds) with an original maturity of three months or less.

NOTE 7. COMMITMENTS AND CONTINGENT LIABILITIES

Nuclear Insurance Coverages and Assessments

      At  December   31,  2000,   Power's   insurance   coverages   and  maximum
retrospective assessments for its nuclear operations are as follows:

<TABLE>
<CAPTION>
                                                                                           Power Maximum
                 Type and Source of Coverages                        Total Site Coverage    Assessments
                  --------------------------                          -----------------   --------------
                                                                             (Millions of Dollars)
<S>                                                                        <C>                    <C>
Public and Nuclear Worker Liability (Primary Layer):
  American Nuclear Insurers ..........................................   $  200.0(A)            $  9.1
Nuclear Liability (Excess Layer):
  Price-Anderson Act .................................................    9,338.1(B)             253.3
                                                                         --------               ------
    Nuclear Liability Total ..........................................   $9,538.1(C)            $262.4
                                                                         ========               ======
Property Damage (Primary Layer):
  Nuclear Electric Insurance Limited (NEIL) Primary
  (Salem/Hope Creek/Peach Bottom) ....................................   $  500.0               $  7.4
Property Damage (Excess Layers):
  NEIL II (Salem/Hope Creek/Peach Bottom) ............................    1,250.0                  5.5
  NEIL Blanket Excess (Salem/Hope Creek/Peach Bottom) ................    1,000.0(D)               0.9
                                                                         --------               ------
  Property Damage Total (Per Site) ...................................   $2,750.0               $ 13.8
                                                                         ========               ======
Accidental Outage:
  NEIL I (Salem and Peach Bottom) ....................................   $  210.0(E)            $  4.3
  NEIL I (Hope Creek) ................................................      465.5               $  2.3
                                                                         --------               ------
     Replacement Power Total .........................................   $  675.5               $  6.6
                                                                         ========               ======
</TABLE>

----------
(A)   The primary limit for Public  Liability is a per site aggregate limit with
      no potential for assessment.  The Nuclear Worker Liability  represents the
      potential  liability  from  workers  claiming  exposure  to the  hazard of
      nuclear  radiation.  This  coverage  is subject to an  industry  aggregate
      limit,  includes  annual  automatic  reinstatement  if the Industry Credit
      Rating  Plan  (ICRP)  Reserve  Fund  exceeds  $400  million,  and  has  an
      assessment potential under former canceled policies.

(B)   Retrospective   premium   program  under  the   Price-Anderson   liability
      provisions  of the  Atomic  Energy  Act of 1954,  as  amended.  Nuclear is
      subject to retrospective  assessment with respect to loss from an incident
      at any licensed nuclear reactor in the United States.  This  retrospective
      assessment  can be  adjusted  for  inflation  every five  years.  The last
      adjustment was effective as of August 20, 1998. This retrospective program
      is in excess of the Public and Nuclear Worker Liability primary layers.

(C)   Limit of liability under the Price-Anderson Act for each nuclear incident.

(D)   For property  limits in excess of $1.75 billion,  Power  participates in a
      Blanket  Limit  policy  where the $1 billion  limit is shared by  Amergen,
      Exelon, and Power among the Clinton, Oyster Creek, TMI-1, Limerick,  Peach
      Bottom,  Salem  and  Hope  Creek  sites.  This  limit  is not  subject  to
      reinstatement  in the  event  of a loss.  Participation  in  this  program
      significantly   reduces  Power's  premium  and  the  associated  potential
      assessment.

(E)   Salem and Peach Bottom have an aggregate indemnity limit based on a weekly
      indemnity  of $1.5  million  for 52 weeks  followed  by 80% of the  weekly
      indemnity for 110 weeks. Hope Creek has an aggregate indemnity limit based
      on a weekly  indemnity of $3.3 million for 52 weeks followed by 80% of the
      weekly indemnity for 110 weeks.


                                      F-16
<PAGE>

                                 PSEG POWER LLC

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

      The Price-Anderson Act sets the "limit of liability" for claims that could
arise from an incident  involving any licensed  nuclear  facility in the nation.
The "limit of liability" is based on the number of licensed nuclear reactors and
is adjusted at least every five years based on the  Consumer  Price  Index.  The
current  "limit of liability" is $9.5  billion.  All utilities  owning a nuclear
reactor,   including  Nuclear,   have  provided  for  this  exposure  through  a
combination  of private  insurance  and mandatory  participation  in a financial
protection   pool  as   established  by  the   Price-Anderson   Act.  Under  the
Price-Anderson  Act, each party with an ownership  interest in a nuclear reactor
can be assessed its share of $88.1 million per reactor per incident,  payable at
$10 million per reactor per incident per year. If the damages  exceed the "limit
of  liability,"  the  President  is to submit to  Congress a plan for  providing
additional  compensation to the injured  parties.  Congress could impose further
revenue  raising  measures  on the nuclear  industry  to pay  claims.  Nuclear's
maximum aggregate  assessment per incident is $253.3 million (based on Nuclear's
ownership  interests  in Hope  Creek,  Peach  Bottom and Salem) and its  maximum
aggregate annual assessment per incident is $28.8 million. This does not include
the $9.1 million that could be assessed under the nuclear worker policies.

      Further, a decision by the U.S. Supreme Court, not involving Nuclear,  has
held that the  Price-Anderson  Act did not  preclude  awards  based on state law
claims for punitive damages.

      Power  is a  member  of an  industry  mutual  insurance  company,  Nuclear
Electric  Insurance  Limited  (NEIL).  NEIL  provides  the primary  property and
decontamination  liability  insurance at Salem/Hope Creek and Peach Bottom. NEIL
also provides excess property insurance through its  decontamination  liability,
decommissioning  liability,  and excess property  policy and  replacement  power
coverage  through  its  accidental   outage  policy.   NEIL  policies  may  make
retrospective  premium  assessments in case of adverse loss experience.  Power's
maximum potential  liabilities under these assessments are included in the table
and notes  above.  Certain  provisions  in the NEIL  policies  provide  that the
insurer may suspend coverage with respect to all nuclear units on a site without
notice if the NRC  suspends or revokes the  operating  license for any unit on a
site, issues a shutdown order with respect to such unit or issues a confirmatory
order keeping such unit down.

Pending Asset Purchases

      Delmarva Power and Light Company (DP&L) and Atlantic City Electric Company
(ACE),  subsidiaries of Conectiv,  are co-owners of the Salem Nuclear Generating
Station  (Salem) and the Peach Bottom Atomic Power Station  (Peach  Bottom) with
Power  and  Exelon  Generation  LLC  (Exelon).  Additionally,  Power and ACE are
co-owners of the Hope Creek  Generating  Station  (Hope Creek).  In 1999,  Power
entered into  agreements  with Conectiv,  DP&L, ACE and Exelon pursuant to which
Power would  acquire all of DP&L's and ACE's  interests  in Salem and Hope Creek
and half of DP&L's and ACE's  interest in Peach Bottom (a total of 544 MW) for a
purchase  price of $15.4  million plus the net book value of nuclear fuel at the
respective  closing dates. In December 2000, the DP&L portion of the transaction
(246 MW) closed.  In October  2000,  Power  entered into  Wholesale  Transaction
Confirmation  letter  agreements  with ACE under which  Power  obtains 298 MW of
generation  capacity and output  representing  the portion of ACE's  interest in
Salem, Hope Creek and Peach Bottom to be acquired.  Under this agreement,  Power
receives  all  revenue  and pays all  expenses  associated  with  this 298 MW of
generating  capacity and output  through the date that the purchase  transaction
closes.  Power has been  advised by Conectiv  that the  Ratepayer  Advocate,  by
letter to the BPU dated October 26, 2000,  has objected to and  challenged  this
financial transaction.

Hazardous Waste

      The New Jersey Department of Environmental  Protection (NJDEP) regulations
concerning site investigation and remediation  require an ecological  evaluation
of  potential  injuries  to  natural  resources  in  connection  with a remedial
investigation  of  contaminated  sites.  The  NJDEP is  presently  working  with


                                      F-17
<PAGE>

                                 PSEG POWER LLC

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

industry  to  develop  procedures  for  implementing  these  regulations.  These
regulations may substantially increase the costs of remedial  investigations and
remediations,  where necessary,  particularly at sites situated on surface water
bodies. Power and predecessor companies owned and/or operated certain facilities
situated on surface water bodies,  certain of which are currently the subject of
remedial  activities.  Power does not anticipate  that the compliance with these
regulations  will have a  material  adverse  effect on its  financial  position,
results of operations or net cash flows.

Passaic River Site

      The  Environmental  Protection Agency (EPA) has determined that a six mile
stretch of the Passaic  River in Newark,  New Jersey is a "facility"  within the
meaning of that term under the  Federal  Comprehensive  Environmental  Response,
Compensation  and  Liability  Act of 1980  (CERCLA) and that,  to date, at least
thirteen corporations, including Power, may be potentially liable for performing
required  remedial actions to address potential  environmental  pollution at the
Passaic  River  "facility".  In a  separate  matter,  Power and  certain  of its
predecessors  operated  industrial  facilities at properties  within the Passaic
River "facility",  including the Essex Generating Station.  Power cannot predict
what  action,  if any,  the EPA or any third party may take  against  Power with
respect  to these  matters,  or in such  event,  what  costs  Power may incur to
address any such claims. However, such costs may be material.

New Source Review

      The EPA and NJDEP issued a demand to PSE&G in March 2000 under Section 114
of the Clean Air Act requiring  information to assess whether projects completed
since 1978 at the  Hudson and Mercer  coal  burning  units were  implemented  in
accordance  with  applicable New Source Review  regulations.  As a result of the
transfer of the  generating  assets by PSE&G to Power.  The  responsibility  for
these environmental  requirements rests with Power. Power completed its response
to the  Section  114  information  request  in  November  2000.  Based  upon the
information  provided  to the EPA it is likely that the EPA will seek to enforce
the  requirements of the New Source Review  regulations at Hudson 2 and Mercer 1
and 2. Power is currently in  discussions  with the EPA and NJDEP to resolve the
matter.  However,  it is uncertain  whether these discussions will be successful
and capital costs of compliance could be material.

      Subsequent to December 31, 2000,  the EPA indicated that it is considering
enforcement   action   against  Power  under  its  PSD  rules  relating  to  the
construction that is currently in progress for Bergen 2, scheduled for operation
in 2002.  The EPA maintains  that PSD  requirements  are applicable to Bergen 2,
thereby  requiring  Power  to  obtain  a permit  prior  to the  commencement  of
construction.  To obtain  such a permit,  an  applicant  must  demonstrate  that
addition  of  the  additional   emission  source  will  not  cause   significant
deterioration of the air shed in the vicinity of the plant. The time required to
obtain such a permit is estimated at 6 to 12 months.  Power vigorously  disputes
that PSD requirements are applicable to Bergen 2 and is continuing construction.
The NJDEP has informally  indicated it agrees with Power's position but has also
advised that the ultimate  authority  to decide PSD  applicability  rests solely
with the EPA.  Settlement  discussions  are underway with the EPA and NJDEP.  At
June 30, 2001 (unaudited),  Power had expended approximately $179 million in the
construction of Bergen 2.

NOTE 8. NUCLEAR DECOMMISSIONING TRUST

      Power has an ownership  interest in five nuclear units. In accordance with
rate orders  received from the BPU,  PSE&G had  established  an external  master
nuclear decommissioning trust for all its nuclear units that were transferred to
Power.  This trust now resides with Nuclear and contains two separate  funds:  a
qualified fund and a non-qualified  fund.  Section 468A of the Internal  Revenue
Code limits the amount of money that can be contributed into a "qualified" fund.
Contributions made into a qualified fund


                                      F-18
<PAGE>

                                 PSEG POWER LLC

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

are tax deductible.  PSE&G estimated the total cost of decommissioning its share
of these five  nuclear  units at $986 million in year end 1995 dollars (the year
that  the  most  recent  site  specific  estimates  were  prepared),   excluding
contingencies.

      Contributions  made  into the  Nuclear  Decommissioning  Trust  Funds  are
invested  in debt  and  equity  securities.  Gains  and  losses  on the  Nuclear
Decommissioning  Trust Funds do not affect  earnings.  As a result of the Energy
Master Plan Proceedings,  the recovery of these investments will be continued as
part of the societal  benefits  charge levied by PSE&G on its  customers.  PSE&G
will continue to collect this $29.6 million charge and remit it to Nuclear.

      With the purchase of Conectiv's  interests in Salem,  Hope Creek and Peach
Bottom,  Power  received a transfer  of $49.7  million  representing  Conectiv's
Nuclear  Decommissioning  Trust  Funds  and the  related  liabilities  for those
stations.

NOTE 9. INCOME TAXES

      The following are the components of income tax expense:

                                             2000      1999     1998
                                             ----      ----     ----
                                              (Millions of Dollars)
Income Taxes:
Current provision--Federal and State         $ 209    $ 311    $ 206
Provision for deferred income taxes             (1)       5      (35)
Purchased State Tax Benefits .......            --      (21)      --
Investment tax credits--net ........            --       (4)     (15)
                                             -----    -----    -----
Total income tax provision .........         $ 208    $ 291    $ 156
                                             =====    =====    =====

      Reconciliation  between total income tax provision and tax computed at the
statutory tax rate on pretax income follows:

                                                    2000      1999      1998
                                                   -----     -----     -----
                                                      (Millions of Dollars)
Tax computed at Federal statutory rate of 35% ..   $ 182     $ 282     $ 138
Increase (decrease) attributable to flow-through
 of certain tax adjustments:
  Depreciation--plant related ..................      --        16        21
  Amortization of investment tax credits .......      --        (4)      (15)
  New Jersey Corporate Business Tax ............      30        27        35
  Other ........................................      (4)      (30)      (23)
                                                   -----     -----     -----
    Subtotal ...................................      26         9        18
                                                   -----     -----     -----

    Total income tax provision .................   $ 208     $ 291     $ 156
                                                   -----     -----     -----
Effective income tax rate ......................   39.92%    36.06%    39.69%
                                                   =====     =====     =====

      Power provides  deferred  taxes at the enacted  statutory tax rate for all
temporary  differences  between the financial statement carrying amounts and the
tax bases of existing assets and  liabilities  irrespective of the treatment for
rate-making purposes.


                                      F-19
<PAGE>

                                 PSEG POWER LLC

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Deferred Income Taxes

                                                              2000        1999
                                                              ----        ----
                                                           (Millions of Dollars)
Assets:
  Nuclear Decommissioning .................................   $ 26        $ 26
  Deferred Electric Energy Costs ..........................     --          25
  New Jersey Corporate Business Tax .......................    149         474
  Plant Related Items .....................................    407         125
  Cost of Removal .........................................     55          13
  Contractual & Environmental Liabilities .................     35          33
  Other ...................................................      9          23
                                                              ----        ----
    Total Assets ..........................................   $681        $719
                                                              ====        ====
Liabilities:
  Conservation Costs ......................................   $ --        $ 76
  Unamortized Debt Expense ................................     --          23
  Other ...................................................      5          12
                                                              ----        ----
    Total Liabilities .....................................      5         111
                                                              ----        ----
      Total Deferred Income Tax Asset/(Liability) .........   $676        $608
                                                              ====        ====

NOTE 10. PENSION, OTHER POSTRETIREMENT BENEFIT AND SAVINGS PLANS

      Employees of Power participate in non-contributory pension plans sponsored
by PSEG  and  administered  by PSEG  Services  Corporation.  In  addition,  PSEG
sponsors  two defined  contribution  plans.  Represented  employees of Power are
eligible for  participation  in the PSEG Employee  Savings Plan (Savings  Plan),
while  non-represented  employees of Power are eligible for participation in the
PSEG Thrift and Tax-Deferred  Savings Plan (Thrift Plan). These plans are 401(k)
plans  to  which   eligible   employees  may  contribute  up  to  25%  of  their
compensation.  Employee contributions up to 7% for Savings Plan participants and
up to 8% for Thrift Plan participants are matched with employer contributions of
cash or PSEG common stock equal to 50% of such employee contributions related to
employee   contributions.   Employer   contributions,   related  to  participant
contributions  in excess of 5% and up to 7%,  are made in shares of PSEG  common
stock  for  Savings  Plan  participants.  Employer  contributions,   related  to
participant  contributions  in excess of 6% and up to 8%,  are made in shares of
PSEG common stock for Thrift Plan  participants.  Pension costs  amounted to $12
million, $24 million and $15 million for the years ended December 31, 2000, 1999
and 1998,  respectively.  Thrift and Savings  Plan  matching  costs  amounted to
approximately $8 million, $8 million and $5 million for the years ended December
31, 2000, 1999 and 1998, respectively.

      SFAS No. 106,  "Employers'  Accounting for  Postretirement  Benefits Other
Than Pensions"  (SFAS 106),  which requires that the expected cost of employees'
postretirement  health care and life  insurance  benefits,  also  referred to as
other  postretirement  benefits (OPEB), be charged to income during the years in
which employees  render service.  Such costs were deferred  through December 31,
1997,  pursuant to an order from the BPU. In concert with the  discontinuance of
SFAS 71, the portion of the resulting  regulatory asset allocated to Power prior
to the Transaction  remained with PSE&G as recovery of these previously incurred
costs  will  be  through  PSE&G's   regulated   transmission   and  distribution
operations.  OPEB costs amounted to $4 million,  $30 million and $28 million for
the years ended December 31, 2000, 1999 and 1998, respectively.

NOTE 11. FINANCIAL INFORMATION BY BUSINESS SEGMENTS

Generation

      The  generation  segment of Power's  business earns revenue by bidding the
energy,  capacity and ancillary  services of Fossil and Nuclear into the market.
In addition to bidding into the market, Power earns a substantial portion of its
generation  revenue by selling  energy on a wholesale  basis  under  contract to
power marketers and to load serving  entities  ("LSEs") such as the BGS contract
with PSE&G.


                                      F-20
<PAGE>

                                 PSEG POWER LLC

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Trading

      The trading segment of Power's  business earns revenues by trading energy,
capacity,  fixed transmission  rights, fuel and emission allowances in the spot,
forward and futures markets. Power's trading segment also earns revenues through
financial transactions,  including swaps, options and futures in the electricity
markets.

      Information related to the segments of Power's business is detailed below:

<TABLE>
<CAPTION>
                                                                         Consolidated
                                                    Generation   Trading     Total
                                                    ----------   ------- ------------
                                                         (Millions of Dollars)
<S>                                                   <C>        <C>       <C>
For the Six Months Ended June 30, 2001 (Unaudited):
  Total Revenues ..................................   $ 1,159    $ 1,161   $ 2,320
  Depreciation and Amortization ...................        55         --        55
  Interest Income .................................        --         --        --
  Interest Expense ................................        89         --        89
  Income Before Income Taxes ......................       268         78       346
  Income Taxes ....................................       108         32       140
  Net Income ......................................       160         46       206
                                                      -------    -------   -------
  Gross Additions to Property, Plant and Equipment    $   741    $    --   $   741
                                                      =======    =======   =======
As of June 30, 2001 (Unaudited):
  Total Assets ....................................   $ 4,118    $   712   $ 4,830
                                                      =======    =======   =======
For the Six Months Ended June 30, 2000 (Unaudited):
  Total Revenues ..................................   $ 1,070    $ 1,303   $ 2,373
  Depreciation and Amortization ...................        68         --        68
  Interest Income .................................        --         --        --
  Interest Expense ................................        43         --        43
  Income Before Income Taxes ......................       291         43       334
  Income Taxes ....................................       118         18       136
  Net Income ......................................       173         25       198
                                                      =======    =======   =======
  Gross Additions to Property, Plant and Equipment    $   177    $    --   $   177
                                                      =======    =======   =======
For the Year Ended December 31, 2000:
  Total Revenues ..................................   $ 2,203    $ 2,724   $ 4,927
  Depreciation and Amortization ...................       136         --       136
  Interest Income .................................         1         --         1
  Interest Expense ................................       198         --       198
  Income Before Income Taxes ......................       444         77       521
  Income Taxes ....................................       177         31       208
  Net Income ......................................       267         46       313
                                                      =======    =======   =======
  Gross Additions to Property, Plant and Equipment    $   479    $    --   $   479
                                                      =======    =======   =======
As of December 31, 2000:
  Total Assets ....................................   $ 3,439    $ 1,091   $ 4,530
                                                      =======    =======   =======
For the Year Ended December 31, 1999:
  Total Revenues ..................................   $ 2,652    $ 1,842   $ 4,494
  Depreciation and Amortization ...................       224         --       224
  Interest Expense ................................       112         --       112
  Income Before Income Taxes ......................       765         42       807
  Income Taxes ....................................       274         17       291
  Income before Extraordinary Item ................       491         25       516
  Extraordinary Item (net of tax) .................    (3,204)        --    (3,204)
  Net Income (Loss) ...............................    (2,713)        25    (2,688)
                                                      -------    -------   -------
  Gross Additions to Property, Plant and Equipment    $    92    $    --   $    92
                                                      =======    =======   =======
</TABLE>


                                      F-21
<PAGE>

                                 PSEG POWER LLC

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


                                                                    Consolidated
                                               Generation   Trading    Total
                                               ----------   ------- ------------
As of December 31, 1999:
  Total Assets ................................   $3,055    $  246    $3,301
                                                  ======    ======    ======
For the Year Ended December 31, 1998:
  Total Revenues ..............................   $2,551    $1,877    $4,428
  Depreciation and Amortization ...............      381        --       381
  Interest Expense ............................      216        --       216
  Income Before Income Taxes ..................      370        23       393
  Income Taxes ................................      147         9       156
  Net Income ..................................      223        14       237
                                                  ------    ------    ------
  Gross Additions to Property,
   Plant and Equipment ...........                $  265    $   --    $  265
                                                  ======    ======    ======

    Power does not have any foreign investments or operations.

    Information related to Property, Plant and Equipment is detailed below:

                                                            December 31,
                                                         ------------------
                                                         2000          1999
                                                         ----          ----
                                                        (Millions of Dollars)
Property, Plant and Equipment
Electric Plant in Service:
  Fossil Production .................................   $1,840       $1,628
  Nuclear Production ................................      130          110
                                                        ------       ------
    Total Electric Plant in Service .................    1,970        1,738
                                                        ------       ------
Nuclear Fuel in Service .............................      417          466
Construction Work in Progress
  Including Nuclear Fuel ............................      311           78
Plant Held For Future Use ...........................        1            1
Other ...............................................        6            6
                                                        ------       ------
    Total ...........................................   $2,705       $2,289
                                                        ======       ======

NOTE 12.  JOINTLY OWNED FACILITIES -- PROPERTY, PLANT AND EQUIPMENT

      Power has  ownership  interests in and is  responsible  for  providing its
share of the necessary financing for the following jointly owned facilities. All
amounts   reflect  the  share  of  Power's   jointly  owned   projects  and  the
corresponding direct expenses are included in Consolidated  Statements of Income
as operating expenses.

                                              Plant--December 31, 2000
                                       ---------------------------------------
                                       Ownership                   Accumulated
                                       Interest        Plant      Depreciation
                                       ---------       -----       -----------
                                               (Millions of Dollars)
Coal Generating
  Conemaugh .......................      22.50%        $198             $ 63
  Keystone ........................      22.84%         122               47
Nuclear Generating
  Peach Bottom ....................      46.25%          88               10
  Hope Creek ......................      95.00%         606              508
  Salem ...........................      50.00%         645              544
  Nuclear Support Facilities ......    Various            5                1
Pumped Storage Facilities
  Yards Creek .....................      50.00%          28               11
  Merrill Creek Reservoir .........      13.91%           2               --


                                      F-22
<PAGE>

                                 PSEG POWER LLC

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 13. SELECTED QUARTERLY DATA (UNAUDITED)

      The information  shown below,  in the opinion of management,  includes all
adjustments,  consisting only of normal recurring accruals,  necessary to a fair
presentation  of such  amounts.  Due to the  seasonal  nature of the  generation
business, quarterly amounts vary significantly during the year.

<TABLE>
<CAPTION>
                                                                      Calendar Quarter Ended
                                                  -----------------------------------------------------------
                                               December 31,      September 30,      June 30,        March 31,
                                               ------------      -------------     -----------     ------------
                                               2000    1999     2000     1999      2000   1999     2000    1999
                                               ----    ----     ----     ----      ----   ----     ----    ----
                                                                       (Millions of Dollars)

<S>                                            <C>     <C>       <C>      <C>       <C>    <C>     <C>     <C>
Revenues ..................................    $603    $575      $564     $746      $555   $ 697   $ 558   $676
Operating Income ..........................     199     184       143      300       134     251     236    196
Income before
 Extraordinary Item .......................      64      99        51      176        71     149     127     92
Extraordinary Item ........................      --      --        --      (14)       --  (3,190)     --     --
Net Income/(Loss) .........................      64      99        51      162        71  (3,041)    127     92
Earnings/(Loss) Available
 to PSEG ..................................      64      98        51      162        71  (3,041)    127     90
</TABLE>

NOTE 14.  RELATED PARTY TRANSACTIONS

PSE&G

      PSE&G's transfer of its electric  generating  assets was in exchange for a
promissory  note from Power in an amount  equal to the total  purchase  price of
$2.786  billion.  Interest  on the note was payable at an annual rate of 14.23%,
which represented PSE&G's weighted average cost of capital.  For the period from
August 21,  2000 to  December  31,  2000,  Power  recorded  interest  expense of
approximately $143 million relating to the promissory note.

      For the period from  January 1, 2001 to January 31, 2001,  Power  recorded
interest expense of  approximately  $34 million relating to the promissory note.
Power settled the promissory  note on January 31, 2001, with funds provided from
PSEG in the form of equity and loans.  In addition,  on January 31,  2001,  PSEG
loaned  $1.620  billion  to Power at  various  rates  for which  Power  recorded
interest expense of approximately  $40 million for the six months ended June 30,
2001 (unaudited).

      In April 2001  (unaudited),  Power,  in a private  placement,  issued $500
million of 6.875% Senior Notes due 2006,  $800 million of 7.75% Senior Notes due
2011 and $500 million  8.625%  Senior Notes due 2031.  The net proceeds from the
sale of the Senior Notes were used primarily for the repayment of the loans from
PSEG. Each series of the Senior Notes is fully and  unconditionally  and jointly
and  severally  guaranteed  by Fossil,  Nuclear and ER&T.  All other  direct and
indirect  subsidiaries  of Power that are not  guarantors of the Notes are minor
and Power has no independent assets or operations.

      Effective  with the asset  transfer,  Power  charges PSE&G for MTC and the
energy and  capacity  provided  to meet  PSE&G's BGS  requirements.  For the six
months ended June 30, 2001  (unaudited),  Power has charged PSE&G  approximately
$938  million  for MTC  and  BGS.  As of  June  30,  2001  (unaudited),  Power's
receivable  from PSE&G relating to these costs was  approximately  $186 million.
For the six  months  ended June 30,  2001  (unaudited),  PSE&G  sold  energy and
capacity to Power at the market price of approximately $80 million,  which PSE&G
purchased under various non-utility  generation (NUG) contracts.  As of June 30,
2001  (unaudited),  Power's  payable to PSE&G  relating to these  purchases  was
approximately $14 million.

      For the year ended  December  31, 2000,  Power has recorded  approximately
$1.827 billion for MTC and BGS  requirements.  As of December 31, 2000,  Power's
receivable  from PSE&G relating to these costs was  approximately  $159 million.
Also through  December 31, 2000,  Power purchased energy and


                                      F-23
<PAGE>

                                 PSEG POWER LLC

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

capacity  from PSE&G at the market price of  approximately  $152  million  which
PSE&G  purchased under various NUG contracts.  As of December 31, 2000,  Power's
payable to PSE&G relating to these purchases was approximately $17 million.

PSEG Global Inc. (Global)

      In September 2000, Power announced that it will assume  responsibility  of
four  Midwest  generation  projects  being  developed  by  Global  and  will  be
responsible  for all future  generation  projects and  development in the United
States. The four projects will have a combined  generating capacity of 2,830 MW.
As of  December  31,  2000,  Power  owed  Global  $52  million  related to these
projects, which was paid in 2001. In 2001, Power decided to continue development
on two of the four projects with a combined generation capacity of 2,000 MW.

PSEG Services Corporation (Services) (unaudited)

      Services provides and bills administrative  services to Power on a monthly
basis.  Power's  costs related to such services  amounted to  approximately  $37
million and $81 million for the quarter and six months ended June 30,  2001.  As
of June 30,  2001,  Power's  intercompany  payable  related  to these  costs was
approximately $19 million.


                                      F-24
<PAGE>

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

                                 $1,800,000,000

                             [LOGO] PSEG POWER LLC

                                Offer to Exchange

                    $500,000,000 67/8% Senior Notes due 2006
                    $800,000,000 73/4% Senior Notes due 2011
                    $500,000,000 85/8% Senior Notes due 2031

               Which have been registered under the Securities Act

                           For Any and All Outstanding
                    $500,000,000 67/8% Senior Notes due 2006
                    $800,000,000 73/4% Senior Notes due 2011
                    $500,000,000 85/8% Senior Notes due 2031

                        Which have not been so registered

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


<PAGE>

                                     Part II

                     Information not required in Prospectus

Item 20. Indemnification of Directors and Officers

      Article 18 of each registrant's  limited liability agreement provides,  as
follows:

      o     No Member, Officer,  Director,  employee or agent of the Company and
            no  employee,  representative,  agent  or  Affiliate  of the  Member
            (collectively, the "Covered Persons") shall be liable to the Company
            or any other  Person who has an  interest  in or claim  against  the
            Company for any loss,  damage or claim incurred by reason of any act
            or  omission  performed  or omitted by such  Covered  Person in good
            faith on behalf of the Company and in a manner  reasonably  believed
            to be within the scope of the  authority  conferred  on such Covered
            Person by this  Agreement,  except  that a Covered  Person  shall be
            liable for any such loss, damage or claim incurred by reason of such
            Covered Person's willful misconduct.

      Article 18 also provides as follows:

      o     To the fullest extent  permitted by applicable law, a Covered Person
            shall be entitled to indemnification  from the Company for any loss,
            damage or claim incurred by such Covered Person by reason of any act
            or  omission  performed  or omitted by such  Covered  Person in good
            faith on behalf of the Company and in a manner  reasonably  believed
            to be within the scope of the  authority  conferred  on such Covered
            Person by this  Agreement,  except that no Covered  Person  shall be
            entitled to be indemnified  in respect of any loss,  damage or claim
            incurred by such Covered  Person by reason of such Covered  Person's
            willful misconduct with respect to such acts or omissions; provided,
            however,  that any indemnity under this Section 18 shall be provided
            out of and to the extent of Company assets only, and no Member shall
            have personal liability on account thereof.

      The directors and officers of the  registrants  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
each registrant 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 the respective registrant.

Item 21. Exhibits and Financial Statement Schedules

(a)   Exhibits.

Exhibit
Number                        Description
-------                       -----------
 3.1   --   Certificate of Formation of PSEG Power LLC.
 3.2   --   PSEG Power LLC Limited Liability Company Agreement.
 3.3   --   Certificate of Formation of PSEG Fossil LLC.
 3.4   --   PSEG Fossil LLC Limited Liability Company Agreement.
 3.5   --   Certificate of Formation of PSEG Nuclear LLC.
 3.6   --   PSEG Nuclear LLC Limited Liability Company Agreement.
 3.7   --   Certificate of Formation of PSEG Energy Resources & Trade LLC.
 3.8   --   PSEG  Energy  Resources  &  Trade  LLC  Limited   Liability  Company
            Agreement.
 4.1   --   Indenture  dated April 16, 2001 between  Registrants and The Bank of
            New York and form of Subsidiary Guaranty included therein.
 4.2   --   Registration   Rights   Agreement   dated  April  9,  2001   between
            Registrants and the purchasers named therein.
 4.3   --   Form of 67/8% Exchange Note.
 4.4   --   Form of 73/4% Exchange Note.
 4.5   --   Form of 85/8% Exchange Note.
 5     --   Opinion of James T. Foran, Esquire.
 8     --   Opinion of James T. Foran, Esquire regarding tax matters.


                                      II-1
<PAGE>

Exhibit
Number                        Description
-------                       -----------
 10    --   Basic  Generation   Service  Contract  with  PSE&G.
 12    --   Statement regarding computation of ratios of earnings.
 21    --   Subsidiaries of the Registrants.
 23.1  --   Consent of James T. Foran, Esquire (contained in Exhibits 5 and 8).
 23.2  --   Independent Auditors' Consent.
 24    --   Power of Attorney.
 25    --   Statement of Eligibility of Trustee on Form T-1.
 99.1  --   Form of Letter of Transmittal.
 99.2  --   Form of Notice of Guaranteed Delivery.

Item 22. Undertakings

      Insofar as  indemnification  for liabilities  arising under the Securities
Act may be  permitted to  directors,  officers  and  controlling  persons of the
registrants pursuant to the foregoing provisions,  or otherwise, the registrants
have 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 registrants of expenses incurred
or paid by a director,  officer or controlling  person of the registrants 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  registrants  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  registrants  hereby  undertake 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 registrants hereby undertake (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 by Section 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 Fossil LLC, 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
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 10th day of
September, 2001.

                                       PSEG Fossil LLC

                                       By:  /s/ THOMAS R. SMITH
                                           ---------------------------
                                                Thomas R. Smith
                                                  President

      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.

       Signature              Title                                 Date
       ---------              -----                                 ----

  /s/ THOMAS R. SMITH        Principal Executive              September 10, 2001
-----------------------      Officer, Principal Financial
    Thomas R. Smith          Officer and Director

 /s/ PATRICIA A. RADO        Principal Accounting Officer     September 10, 2001
-----------------------
   Patricia A. Rado

   /s/ FRANK CASSIDY         Director                         September 10, 2001
-----------------------
     Frank Cassidy

 /s/ HAROLD W. KEISER        Director                         September 10, 2001
-----------------------
   Harold W. Keiser

/s/ STEVEN R. Teitelman      Director                         September 10, 2001
-----------------------
  Steven R. Teitelman


                                      II-3
<PAGE>

                                   SIGNATURES

      Pursuant  to  the   requirements  of  the  Securities  Act  of  1933,  the
registrant,  PSEG  Nuclear  LLC,  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  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 10th day of September, 2001.

                                      PSEG Nuclear LLC

                                      By:   /s/ HAROLD W. KEISER
                                           -----------------------------
                                              Harold W. Keiser
                                                 President

      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.

        Signature              Title                                Date
        ---------              -----                                ----

  /s/ HAROLD W. KEISER        Principal Executive             September 10, 2001
------------------------      Officer, Principal Financial
    Harold W. Keiser          Officer and Director

  /s/ PATRICIA A. RADO        Principal Accounting Officer    September 10, 2001
------------------------
    Patricia A. Rado

    /s/ FRANK CASSIDY         Director                        September 10, 2001
------------------------
      Frank Cassidy

   /s/ THOMAS R. SMITH        Director                        September 10, 2001
------------------------
     Thomas R. Smith

 /s/ STEVEN R. Teitelman      Director                        September 10, 2001
------------------------
   Steven R. Teitelman


                                      II-4
<PAGE>

                                   SIGNATURES

      Pursuant  to  the   requirements  of  the  Securities  Act  of  1933,  the
registrant,  PSEG Energy Resources & Trade LLC, 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  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 10th day of September, 2001.

                                        PSEG Energy Resources & Trade LLC

                                        By:     /s/ STEVEN R. Teitelman
                                               --------------------------------
                                                  Steven R. Teitelman
                                                       President

      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.

       Signature              Title                                 Date
       ---------              -----                                 ----

/s/ STEVEN R. Teitelman      Principal Executive              September 10, 2001
-----------------------      Officer, Principal Financial
  Steven R. Teitelman        Officer and Director

/s/ PATRICIA A. RADO        Principal Accounting Officer      September 10, 2001
-----------------------
   Patricia A. Rado

   /s/ FRANK CASSIDY         Director                         September 10, 2001
-----------------------
     Frank Cassidy

 /s/ HAROLD W. KEISER        Director                         September 10, 2001
-----------------------
   Harold W. Keiser

/s/ THOMAS R. SMITH          Director                         September 10, 2001
-----------------------
    Thomas R. Smith


                                      II-5
<PAGE>

                                   SIGNATURES

      Pursuant  to  the   requirements  of  the  Securities  Act  of  1933,  the
registrant,  PSEG Power LLC, 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
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 10th day of
September, 2001.

                                            PSEG POWER LLC

                                           By:     /s/ FRANK CASSIDY
                                                -------------------------
                                                     Frank Cassidy
                                                      President

      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.

          Signature             Title                            Date
          ---------             -----                            ----

    /s/ E. JAMES FERLAND       Principal Executive         September 10, 2001
---------------------------    Officer and Director
      E. James Ferland

      /s/ FRANK CASSIDY        Principal Financial         September 10, 2001
---------------------------    Officer and Director
        Frank Cassidy

    /s/ PATRICIA A. RADO       Principal Accounting        September 10, 2001
---------------------------    Officer
      Patricia A. Rado

                               Director
---------------------------
       Robert E. Busch

/s/ ROBERT J. DOUGHERTY, JR.   Director                    September 10, 2001
---------------------------
  Robert J. Dougherty, Jr.

    /s/ ROBERT C. MURRAY       Director                    September 10, 2001
---------------------------
      Robert C. Murray

    /s/ THOMAS M. O'FLYNN      Director                    September 10, 2001
---------------------------
      Thomas M. O'Flynn

    /s/ R. EDWIN SELOVER       Director                    September 10, 2001
---------------------------
      R. Edwin Selover

   /s/ MICHAEL J. THOMSON      Director                    September 10, 2001
---------------------------
     Michael J. Thomson


                                      II-6
<PAGE>

                                 Exhibit Index

Exhibit
Number                        Description
-------                       -----------
 3.1   --   Certificate of Formation of PSEG Power LLC.
 3.2   --   PSEG Power LLC Limited Liability Company Agreement.
 3.3   --   Certificate of Formation of PSEG Fossil LLC.
 3.4   --   PSEG Fossil LLC Limited Liability Company Agreement.
 3.5   --   Certificate of Formation of PSEG Nuclear LLC.
 3.6   --   PSEG Nuclear LLC Limited Liability Company Agreement.
 3.7   --   Certificate of Formation of PSEG Energy Resources & Trade LLC.
 3.8   --   PSEG  Energy  Resources  &  Trade  LLC  Limited   Liability  Company
            Agreement.
 4.1   --   Indenture  dated April 16, 2001 between  Registrants and The Bank of
            New York and form of Subsidiary Guaranty included therein.
 4.2   --   Registration   Rights   Agreement   dated  April  9,  2001   between
            Registrants and the purchasers named therein.
 4.3   --   Form of 6 7/8% Exchange Note.
 4.4   --   Form of 7 3/4% Exchange Note.
 4.5   --   Form of 8 5/8% Exchange Note.
 5     --   Opinion of James T. Foran, Esquire.
 8     --   Opinion of James T.  Foran,  Esquire  regarding  tax  matters.
 10    --   Basic Generation Service Contract with PSE&G.
 12    --   Statement regarding computation of ratios of earnings.
 21    --   Subsidiaries of the Registrants.
 23.1  --   Consent of James T. Foran, Esquire (contained in Exhibits 5 and 8).
 23.2  --   Independent Auditors' Consent.
 24    --   Power of Attorney.
 25    --   Statement of Eligibility of Trustee on Form T-1.
 99.1   --  Form of Letter of Transmittal.
 99.2   --  Form of Notice of Guaranteed Delivery.