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

                                    FORM 10-K
(Mark One)
              [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 2000
                                       OR
              [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                         OF THE SECURITIES EXCHANGE ACT
                    OF 1934 For the transition period from to

  Commission           Registrant, State of Incorporation,     I.R.S. Employer
  File Number             Address, and Telephone Number       Identification No.
---------------        -----------------------------------    ------------------
   333-95697                 PSEG ENERGY HOLDINGS INC.            22-2983750
                           (A New Jersey Corporation)
                               80 Park Plaza -T22
                          Newark, New Jersey 07102-4194
                                  973 456-3581

       Securities registered pursuant to Section 12 (b) of the Act: - NONE

         Securities registered pursuant to Section 12 (g) of the Act: -
                  100 Shares of Common Stock without par value.

                   Documents incorporated by reference - NONE

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

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

Registrant  is a wholly owned  subsidiary  of Public  Service  Enterprise  Group
Incorporated. Registrant meets the conditions set forth in General Instruction I
(1) (a) and (b) of Form 10-K and is filing this Annual  Report on Form 10-K with
the reduced disclosure format authorized by General Instruction I.

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<PAGE>

                                TABLE OF CONTENTS
                                                                            Page
                                                                            ----
PART I
Item 1.   Business.........................................................  1
          General..........................................................  1
          Risk Factors.....................................................  17
          Competitive Environment..........................................  18
          Regulatory Issues................................................  18
          Customers........................................................  20
          Employee Relations...............................................  20
          Environmental Matters............................................  20
Item 2.   Properties.......................................................  20
Item 3.   Legal Proceedings................................................  20
Item 4.   Submission of Matters to a Vote of Security Holders..............  21

PART II
Item 5.   Market for Registrant's Common Equity and Related Stockholder
            Matters........................................................  21
Item 6.   Selected Financial Data..........................................  22
Item 7.   Management's Discussion and Analysis of Financial Condition
            and Results of Operations......................................  23
          Energy Holdings..................................................  23
          Overview and Future Outlook......................................  23
          Results of Operations............................................  25
          Liquidity and Capital Resources..................................  28
          External Financings..............................................  31
          Environmental Matters............................................  33
          Accounting Issues................................................  33
          Forward Looking Statements.......................................  34
Item 7A.  Qualitative and Quantitative Disclosures About Market Risk.......  34
Item 8.   Financial Statements and Supplementary Data......................  34
          Consolidated Financial Statements................................  35
          Notes to Consolidated Financial Statements.......................  40
          Financial Statement Responsibility...............................  65
          Independent Auditors' Reports....................................  66
Item 9.   Changes in and Disagreements With Accountants on Accounting
            and Financial Disclosure.......................................  67

PART III
Item 10.  Directors and Executive Officers of the Registrant...............  67
Item 11.  Executive Compensation...........................................  68
Item 12.  Security Ownership of Certain Beneficial Owners and Management...  68
Item 13.  Certain Relationships and Related Transactions...................  68

PART IV
Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K..  68
          Schedule II--Valuation and Qualifying Accounts...................  69
          Signatures.......................................................  70


                                       i
<PAGE>

                                     PART I

ITEM 1:  BUSINESS

GENERAL

      PSEG Energy Holdings Inc. (Energy  Holdings),  incorporated under the laws
of the State of New Jersey with its principal  executive  offices  located at 80
Park Plaza,  Newark,  New Jersey 07102 is a direct  wholly-owned  subsidiary  of
Public Service Enterprise Group Incorporated  (PSEG).  Energy Holdings has three
principal direct  wholly-owned  subsidiaries;  PSEG Global Inc.  (Global),  PSEG
Resources  Inc.   (Resources)  and  PSEG  Energy   Technologies   Inc.   (Energy
Technologies).

      The   following   organization   chart   shows  PSEG  and  its   principal
subsidiaries;  Public Service Electric and Gas Company  (PSE&G),  PSEG Power LLC
(Power), Energy Holdings, and PSEG Services Corporation  (Services),  as well as
the principal operating subsidiaries of Energy Holdings.

                            PSEG Organizational Chart

                               -----------------
                                      PSEG
                               -----------------
                                       |
      --------------------------------------------------------------------------
      |                 |                      |                       |
--------------   --------------         ---------------         --------------
    PSE&G             Power          -- Energy Holdings            Services
--------------   --------------      |  ---------------         --------------
                                     |
                                     |  -------------------
                                     --        Global
                                     |  -------------------
                                     |
                                     |  -------------------
                                     --      Resources
                                     |  -------------------
                                     |
                                     |  -------------------
                                     -- Energy Technologies
                                        -------------------

      Energy  Holdings  is a  direct,  wholly-owned  subsidiary  of PSEG  and an
affiliate of Public Service Electric and Gas Company, a public utility operating
in New Jersey,  which is also a wholly-owned  subsidiary of PSEG. As of December
31, 2000 and 1999,  PSEG had  approximately  $2.0  billion  and $1.6  billion of
equity, respectively, (including retained earnings of approximately $353 million
and $276  million,  respectively)  invested in Energy  Holdings.  In 2000,  PSEG
invested $300 million in additional equity in Energy Holdings.

ENERGY HOLDINGS

      Energy  Holdings  participates in three  energy-related  lines of business
through   its   wholly-owned   subsidiaries:   Global,   Resources   and  Energy
Technologies. Together, these operating subsidiaries have more than 90 financial
and  operating   investments.   Energy  Holdings  seeks  to  pursue   investment
opportunities  in the  rapidly  changing  global  energy  markets,  with  Global
focusing  on the  operating  segments of the  electric  and gas  industries  and
Resources  seeking to make  financial  investments in these  industries.  Energy
Technologies  focuses on  supplying  products  and  services  designed to assist
customers in efficient energy utilization.

      Energy  Holdings  has  assets  that  support  both  long-term  growth  and
near-term earnings.  Energy Holdings balances risk, return,  timing of cash flow
and growth  objectives in creating a complementary  blend of assets.  Resources'
assets  generate cash flow and earnings in the near term,  while  investments at
Global and Energy  Technologies  generally  have a longer  time  horizon  before
achieving expected cash flow and earnings.  Also,  Resources' passive lower-risk
assets  serve to balance the higher risk  associated  with  operating  assets at
Global and Energy Technologies.


                                       1
<PAGE>

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

                                                      December 31,  December 31,
                                                         2000          1999
                                                      ------------  ------------
Leveraged Leases ...................................      43%          43%
Other Passive Financial Investments ................       6%           8%
Domestic Generation Plants .........................       7%           5%
International Generation Plants ....................      10%           7%
International Distribution Facilities ..............      24%          28%
Energy Services ....................................       6%           6%
Other ..............................................       4%           3%

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

GLOBAL

      Strategic Overview

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

Business Description

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

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

      Global  has  ownership  interests  in  24  operating  generation  projects
totaling  3,236 MW (1,131 MW net) and 15  projects  totaling  3,940 MW (1,978 MW
net) in construction or advanced development. Of Global's generation projects in
operation, construction or advanced development, 1,294 MW net or 42% are located
in the United States.  Global is actively involved,  through its joint ventures,
in managing the  operations of nine  operating  generation  projects and will be
actively  involved  in  managing  the  operations  of  13  of  the  projects  in
construction   or  advanced   development.   Global  owns   interests  in  seven
distribution  companies  providing  electricity to  approximately  three million
customers in Argentina,  Brazil,  Chile and Peru. Global is actively involved in
managing the  operations  of these  distribution  companies in  accordance  with
shareholder  agreements and/or operating contracts.  As of December 31, 2000 and
December  31,  1999,  Global had assets of  approximately  $2.3 billion and $1.7
billion, respectively.

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


                                       2
<PAGE>

Generation

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

      Global  seeks to minimize  risk in the  development  and  operation of its
generation projects by selecting partners with complementary skills, structuring
long-term  power,   purchase   contracts,   arranging  financing  prior  to  the
commencement  of   construction   and  contracting  for  adequate  fuel  supply.
Historically,  Global's  operating  affiliates have entered into long-term power
purchase  contracts,  selling the  electricity  produced for the majority of the
project life. However, two plants in Texas, one of which is in construction, and
a plant in  Argentina,  also in  construction,  will operate as merchant  plants
without long-term power purchase contracts.

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

      Global  attempts to limit its  financial  exposure to each  project and to
mitigate  development  and operating risk,  including fuel and foreign  currency
exposure,  through contracts. In addition, project loan agreements are generally
structured on a non-recourse basis. Further, Global structures project financing
so that a default under one project's  loan agreement will have no effect on the
loan agreements of other projects or the debt of Energy Holdings.


                                       3
<PAGE>

                              Generation Facilities

      Global has invested in the following  generation  facilities  which are in
operation or under construction or advanced development:

<TABLE>
<CAPTION>
                                                                                                  Global's
                                                                                                 Net Equity
                                                                                                 Interest
                                                                                     Global's        in
                                                                          Total      Ownership     Total
                                      Location         Primary Fuel         MW       Interest        MW
                                      --------         ------------       -----      --------     ---------
<S>                                      <C>         <C>                   <C>          <C>         <C>
Operating Power Plants
United States
Texas Independent Energy
   Guadalupe......................       TX            Natural gas         1,000        50%         500
Eagle Point (A)...................       NJ            Natural gas           225        50%         113
Kalaeloa..........................       HI                Oil               180        50%          90
GWF
   Bay Area I.....................       CA           Petroleum coke          21        50%          10
   Bay Area II....................       CA           Petroleum coke          21        50%          10
   Bay Area III...................       CA           Petroleum coke          21        50%          10
   Bay Area IV....................       CA           Petroleum coke          21        50%          10
   Bay Area V.....................       CA           Petroleum coke          21        50%          10
Hanford...........................       CA           Petroleum coke          27        50%          14
Tracy.............................       CA              Biomass              21        35%           7
Bridgewater.......................       NH              Biomass              16        40%           7
SEGS III..........................       CA               Solar               30         9%           3
Kennebec..........................       ME               Hydro               15        16%           2
Conemaugh.........................       PA               Hydro               15        50%           8
                                                                           -----                  -----
         Total United States                                               1,634                    794
                                                                           -----                  -----

International
CTSN..............................   Argentina     Coal/Natural gas/Oil      650        19%         124
MPC
   Jingyuan - Units 5 and 6.......     China               Coal              600        15%          90
   Tongzhou.......................     China               Coal               30        40%          12
   Nantong........................     China               Coal               24        46%          11
   Jinqiao (Thermal Energy).......     China             Coal/Oil            N/A        30%         N/A
   Zuojiang - Units 1, 2 and 3....     China              Hydro               72        30%          21
   Fushi - Units 1 and 2..........     China              Hydro               36        35%          13
   Shanghai BFG...................     China        Blast furnace gas         50        16%           8
TGM...............................   Venezuela         Natural gas            40         9%           3
Chorzow...........................     Poland              Coal              100        55%          55
                                                                           -----                  -----
         Total International                                               1,602                    337
                                                                           -----                  -----
         Total Operating Power Plants                                      3,236                  1,131
                                                                           -----                  -----
</TABLE>

<TABLE>
<CAPTION>
                                                                                                             Scheduled In
Power Plants in Construction or Advanced Development                                                         Service Date
----------------------------------------------------                                                         ------------
<S>                                  <C>               <C>                 <C>          <C>         <C>          <C>
Texas Independent Energy
   Odessa.........................     Texas           Natural gas         1,000        50%         500          2001
Turboven
   Maracay........................   Venezuela         Natural gas            60        50%          30          2001
   Cagua..........................   Venezuela         Natural gas            60        50%          30          2001
   Valencia.......................   Venezuela         Natural gas            80        50%          40          2002
MPC
   Fushi - Unit 3.................     China              Hydro               18        35%           6          2001
Prisma 2000
   Strongoli......................     Italy             Biomass              40        35%          14          2002
   Porto Empedocle................     Italy             Biomass              24        35%           8          2002
   Crotone........................     Italy             Biomass              20        35%           7          2001
   Bando..........................     Italy             Biomass              20        70%          14          2001
Parana............................   Argentina         Natural gas           830        33%         274          2001
Rades.............................    Tunisia          Natural gas           487        60%         292          2001
PPN...............................     India       Naphtha/Natural gas       330        20%          66          2001
Tri-Sakthi........................     India               Coal              525        63%         331        2003/2004
Tanir Bavi........................     India             Naphtha             220        74%         163          2001
Chorzow...........................     Poland              Coal              226        90%         203          2003
                                                                           -----                  -----
         Total Construction or Advanced Development                        3,940                  1,978
                                                                           -----                  -----
         TOTAL GENERATION FACILITIES                                       7,176                  3,109
                                                                           =====                  =====
</TABLE>

(A)   Subsequent to December 31, 2000,  Global withdrew from its interest in the
      Eagle Point Cogeneration  Partnership in exchange for a series of payments
      expected to total up to $290  million.  These  payments are expected to be
      received over the next five years, subject to certain contingencies.


                                       4
<PAGE>

Domestic Generation in Operation

      Guadalupe

      In April 1999, Global and its partner,  Panda Energy International,  Inc.,
established  Texas  Independent  Energy,  L.P. (TIE), a 50/50 joint venture,  to
develop,  construct,  own, and operate electric generation  facilities in Texas.
The first TIE facility, a 1,000 MW gas-fired  combined-cycle electric generation
facility  in  Guadalupe  County  in south  central  Texas  commenced  commercial
operation in January  2001.  Approximately  60% of the plant's  total output has
been sold via bilateral power purchase agreements and the remainder will be sold
in the Texas spot market.

      Eagle Point

      The Eagle Point Power Plant is a 225 MW gas-fired  combined-cycle facility
located in West  Deptford,  New  Jersey.  Approximately  90% of the  electricity
generated by the Eagle Point Power Plant is sold to Public Service  Electric and
Gas Company under a 25-year power purchase contract terminating in May 2016. The
balance of the electricity  generated is sold to Coastal Eagle Point Oil Company
along  with  approximately  575,000  lbs./hr of steam  under a 20-year  contract
terminating  in May 2011.  Global  and its  partner,  ANR  Venture  Eagle  Point
Company,  a  subsidiary  of  The  Coastal  Corporation,  each  owned  50% of the
facility.  The plant has been in commercial  operation  since May 1991. In 2000,
the Eagle Point Power Plant generated  approximately  1,706 gigawatt hours (GWH)
of electric energy and  approximately  $167 million of gross revenue.  The plant
availability  factor for 2000 was 92%.  Subsequent to December 31, 2000,  Global
withdrew  from its  interest  in the Eagle  Point  Cogeneration  Partnership  in
exchange for a series of payments  expected to total up to $290  million.  These
payments  are  expected  to be  received  over the next five  years,  subject to
certain contingencies.

      Kalaeloa

      The Kalaeloa Power Plant is a 180 MW oil-fired  cogeneration plant located
at Barbers Point,  Oahu,  Hawaii,  which began  operating in April 1990.  Global
purchased a 49% limited  partnership  interest in the  facility in 1997 and a 1%
general  partnership  interest in April 2000. Global's partner is Harbert Power.
All of the electricity generated by the Kalaeloa Power Plant is sold to Hawaiian
Electric  Company under a 25-year power  purchase  contract  terminating  in May
2016.  Under a steam  purchase  and sale  agreement  expiring  in May 2016,  the
Kalaeloa  Power Plant will supply  approximately  121,000  lbs./hr.  of steam to
Hawaiian Independent Refinery,  Inc. In 2000, the plant generated  approximately
1,319  GWH of  electric  energy  for  sale  to  Hawaiian  Electric  Company  and
approximately $114 million of gross revenue.  The plant  availability  factor in
2000 was 92%.

      GWF and Hanford

      Global and Harbert Power each own 50% of GWF, which owns and operates five
petroleum  coke-fired  power plants  totaling  102.5 MW in the San Francisco Bay
area in California.  Power purchase  contracts for the plants' net output are in
place with Pacific Gas and Electric  Company  ending in 2020 and 2021.  In 2000,
the plants  generated  734 GWH of  electric  energy for sale to Pacific  Gas and
Electric  Company and  approximately  $101 million of gross revenue.  The plants
went  into  service   between  October  1989  and  December  1990.  The  average
availability factor of the five plants in 2000 was 88%.

      Global and Harbert Power each own 50% of Hanford,  which owns and operates
a 27 MW petroleum coke-fired facility in Hanford,  California.  A power purchase
contract  for the plant's net output is in place with  Pacific Gas and  Electric
Company  through 2011. In 2000, the Hanford plant  generated 163 GWH of electric
energy for sale to Pacific Gas and Electric  Company and steam which was sold to
Pirelli-Armstrong  Tire Corp.  pursuant to a 20-year contract  expiring in 2011.
The Hanford plant generated  approximately  $31 million of gross revenue in 2000
and had an availability factor of 80%.

      The 2000 average availability  factors listed above exclude  contractually
agreed monthly  curtailment periods of two months each for two of the GWF plants
and  Hanford.  Pacific  Gas and  Electric  Company  compensates  GWF and Hanford
amounts  equivalent to their normal profit margins for such monthly  curtailment
periods.

      Power from the  California  facilities is sold pursuant to Pacific Gas and
Electric's  Standard  Long-term  Energy and Capacity Power  Purchase  Agreements
(S04).  For  a  discussion  of  recent  developments  in  the  wholesale  energy
marketplace  in  California,   see  "Management's   Discussion  and  Analysis  -
California Power Market."


                                       5
<PAGE>

      Other

      Other  minority  investments  held by Global in five  domestic  generation
facilities  totaled 27 MW net and generated less than 6% of Global's total gross
revenues in 2000.

International Generation in Operation

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

   Argentina

      CTSN

      Central  Termica  San  Nicolas  (CTSN)  is a 650  MW  electric  generation
facility  located near the city of San Nicolas,  Argentina  that is 19% owned by
Global and 69% by The AES  Corporation  (AES),  with the  remaining 12% owned by
CTSN's  employees.  CTSN was  acquired in 1993 in  conjunction  with the initial
Argentine privatization process, and is the third largest thermal power plant in
Argentina,  consisting of one 350 MW and four 75 MW steam turbines. CTSN, as the
only  multi-fuel  generation  facility in Argentina,  is capable of operating on
natural gas, oil or coal. At the time of privatization,  CTSN's availability was
below 45%. The plant availability factor in 2000 was 85%.

      The facility  sells its output through a combination of spot market sales,
contracts with distributors and contracts with a wide variety of large or medium
sized  industrial  users.  Approximately  half of the output is sold pursuant to
power  purchase  contracts  that expire in 2001.  Upon  expiration  of its power
purchase  contracts,  Global  expects  that CTSN's  output will be sold into the
merchant  market.  Although CTSN is an older facility and will face  substantial
competition from more efficient plants, the facility has direct access by vessel
to its own port,  rail and motorway,  and is located in  Argentina's  industrial
belt on the Parana River.  It is also  situated  near the Argentine  natural gas
transportation  system and is connected to the regional transmission lines which
provide  access to the wholesale  electricity  market.  In 2000,  CTSN generated
1,751 GWH of electric energy.  Experience  gained through this investment led to
Global's subsequent  investments in Argentine electric  distribution systems and
the development of a new power plant adjacent to CTSN, as described  below.  See
"-- Power Plants in Construction or Advanced Development -- Argentina -- Parana"
and "--Distribution -- Argentina -- EDEN, EDES, EDELAP and EDEERSA".

   China

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

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

      MPC is focused on  developing,  acquiring,  owning and operating  electric
generation  facilities  in China and Taiwan.  MPC seeks to  structure  long-term
power purchase  contracts with its customers and to incorporate  take-or-pay and
minimum take  provisions to support debt service and a specified  equity return.
Pricing terms for energy from its facilities  generally include a base price and
indexed  adjustments  to compensate for changes in inflation,  foreign  currency
exchange rates up to the minimum equity return and laws  affecting  taxes,  fees
and  required  reserves.  MPC's  projects,   either  under  construction  or  in
operation, have obtained all required approvals to enable issuance of a business
license  in their  respective  localities.  As legal  business  entities,  these
projects generally have access to foreign currency exchange markets.


                                       6
<PAGE>

      Minority investments held by Global in seven generation facilities located
in China totaled 161 MW net and generated  less than 4% of Global's  total gross
revenues in 2000.

   Venezuela

      TGM

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

   Poland

      For a discussion of Global's  interest in the generation  facility located
in Poland, see " Power Plants in Construction or Advanced  Development -- Poland
-- Chorzow."

   Other

      Global  currently  holds a  minority  interest  in a  project  development
company  located  in the  Philippines.  The  total  investment  in this  company
represented  less than 1% of Global's assets as of December 31, 2000. As part of
a comprehensive review of existing assets and development  activities,  Global's
management  decided that it would not currently commit  additional  resources to
its investment in the Philippines  and will focus its current Asian  development
activities in China. For further  discussion,  see "Management's  Discussion and
Analysis  of  Financial  Condition  and  Results  of  Operations  --  Results of
Operations -- Global".

Power Plants in Construction or Advanced Development

      Global has 15 projects in  construction or advanced  development  totaling
3,940 MW (1,978 MW net) located in the United States,  Argentina,  China, India,
Italy,  Poland,  Tunisia and  Venezuela.  Global seeks to obtain power  purchase
contracts  for the output of its plants.  Global has  obtained  long-term  power
purchase contracts for the output of its plants in China, India, Italy,  Poland,
Tunisia and  Venezuela.  Conditions  in certain  markets,  including  the United
States,  dictate that Global's  generation  projects will be merchant facilities
that sell their  output  under  short-term  contracts  or into the open  market.
Global's assessment of investments in merchant generation facilities is based on
an underlying  analysis of the wholesale power market in the relevant geographic
area.  This analysis  includes models which simulate the market and the dispatch
order of existing and planned power facilities.  These models form the basis for
the economic evaluation of projects and their expected performance.

   United States

      Odessa

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

   Venezuela

      Turboven

      In April 1999,  Global and CIE announced plans to construct and operate up
to three  gas-fired  simple  cycle  electric  generation  facilities  with total
installed capacity of up to 200 MW and associated  distribution systems to serve
industrial  customers  in Maracay (60 MW),  Cagua (60 MW) and  Valencia (80 MW),
Venezuela.  The  facilities  will be owned and operated by  Turboven,  an entity
which is  jointly  owned by


                                       7
<PAGE>

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

      The Maracay and Cagua  facilities are currently  selling some energy under
power  purchase  contracts  to various  customers  while  undergoing  additional
testing.  Turboven has not yet accepted  either  facility as complete  under the
applicable turnkey construction contracts with the Engineering,  Procurement and
Construction contractor due to technical and contractual issues.

      Argentina

         Parana

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

      Tunisia

         Rades

      Global and its partners,  Sithe Energies,  Inc. and Marubeni  Corporation,
closed  project  financing  for  a  487  MW  gas-fired  combined-cycle  electric
generation facility in Rades,  Tunisia, in August 1999. In December 2000, Global
and Marubeni Corporation  purchased Sithe Energies,  Inc.'s interest in Carthage
Power Company. As a result, Global owns 60% of the facility with Marubeni owning
40%.  Global will be the operator.  A 20-year power  purchase  contract has been
entered  into  for  the  sale  of  100%  of the  output  to  Societe  Tunisienne
d'Electricite  et du Gaz,  the national  utility.  The power  purchase  contract
tariff  consists of a fixed  capacity  charge to cover debt and equity return as
well as fixed and variable  charges to cover fuel,  operations  and  maintenance
costs. Each tariff component will be paid in local currency (dinars) and indexed
to actual  costs or a  combination  of United  States  Dollars  and  Euros.  The
facility is expected to be in operation in the third  quarter of 2001 at a total
cost of approximately $261 million. Global's equity investment is expected to be
approximately $59 million, including contingencies.

      India

         PPN

      Global owns a 20% interest in PPN Power Generating  Company Limited (PPN),
which has a 330 MW gas-fired  combined-cycle  facility under construction in the
State of Tamil Nadu,  India.  Global's  partners  include  Marubeni,  with a 26%
interest,  El Paso Energy Corporation,  with a 26% interest and the Reddy Group,
with a 28% interest.  Upon  completion,  scheduled for the second  quarter 2001,
Global will be the operator.  A  take-or-pay  power  purchase  contract has been
entered into for the sale of 100% of the output to the State  Electricity  Board
of Tamil Nadu for 30 years.  Letters of credit,  a State guarantee and an escrow
arrangement  support the contract.  Foreign currency exposure has been minimized
by utilizing  local  currency  (rupee)  financing and providing for  devaluation
protection,  up to a base  return,  in the power  purchase  contract.  The total
project cost is estimated to be  approximately  $341  million.  Global's  equity
investment, including contingencies, is not expected to exceed $34 million.


                                       8
<PAGE>

         Tri-Sakthi

      In May 1999,  Global  acquired an interest in  Tri-Sakthi  Energy  Private
Limited, a company which is developing and will own a 525 MW coal-fired electric
generation  facility  to be  constructed  in Ennore,  Tamil  Nadu,  India.  Upon
completion,  Global  will be the  operator  of the  plant.  Global's  partner is
Pembinaan  Redzai Bhd Sdn (PR Group) of Malaysia.  A take-or-pay  power purchase
contract  has been  entered into for the sale of 100% of the output to the State
Electricity  Board of Tamil Nadu for 30 years.  It is expected that the contract
will be  supported  by  letters  of credit,  an escrow  arrangement  and a State
guarantee.  Negotiations  with the State and the  Electricity  Board to finalize
these  agreements  have been  delayed.  Global will not begin  discussions  with
financing  sources and construction  will not commence until support  agreements
are  satisfactorily  completed.  The  total  project  cost  is  estimated  to be
approximately $633 million. Global's equity investment, including contingencies,
for its 63% interest is expected to be approximately $180 million.

         Tanir Bavi

      In  September  2000,  Global  acquired a 49%  interest in Tanir Bavi Power
Company Private Ltd. In January 2001, Global acquired an additional 25% interest
in the project  bringing  its total  ownership  interest to 74%.  The company is
constructing  a 220  MW  barge  mounted,  combined  cycle  generating  facility.
Global's  partner  in the  venture  will be GMR  Vasavi  Group,  a local  Indian
company.  Upon  scheduled  completion in 2001, a joint venture of Global and GMR
Vasavi Group will operate the plant.  Power from the facility will be sold under
a seven year fixed price power purchase agreement with the Karnataka Electricity
Board  that is  renewable  for an  additional  five year term  under a  mutually
agreeable  tariff.  The initial  agreement is take or pay to a plant load factor
(PLF) of 85% with  incentive  payments for  performance  above the base PLF. The
contract is  supported  by letters of credit,  a State  guarantee  and an escrow
arrangement.  The total  project  cost is  estimated  to be  approximately  $207
million and Global's equity investment, including contingencies, is not expected
to exceed $89 million.

      Poland

         Chorzow

      In October 2000,  Global closed the project  financing for a combined heat
and power plant  currently  under  construction  in Poland.  The capacity of the
facility  which  will  be  located  in  Chorzow  and  is  planned  to be  226 MW
(electrical)  and 500 MW (thermal).  This new facility will replace  Elektrownia
Chorzow, an existing 100 MW heat and power generator.  At commercial  operation,
Global's  economic  interest  will  be  approximately  90% in  Elektrocieplownia
Chorzow  ELCHO  Sp.  z o.o.  (ELCHO)  with  the  balance  held by  local  Polish
companies.  Total project cost is estimated at $324 million with Global's equity
investment,  including  contingencies  not expected to exceed $105 million.  The
plant  has  a  targeted  commercial   operation  date  in  2003.  Polskie  Sieci
Elektroenergetyczne  SA, the Polish  power grid  company,  has entered into a 20
year power purchase  agreement with ELCHO for 100% of the electrical output. All
of the thermal energy will be sold to Przedsiebiorstwo  Energetyki Cieplnej, the
district  heating  company  serving  the city of  Katowice  and its  surrounding
communities, for a term of 20 years.

      Other

      Minority investments held by Global in four generation facilities, located
in  Italy,  totaled  43  MW  net  and  represented  less  than  4%  of  Global's
consolidated assets.

Distribution

      Global has expanded its business to include electric distribution where it
can be linked to existing or prospective generation  opportunities.  Since 1997,
Global has invested in seven distribution  companies which serve approximately 3
million customers and a population of 10 million in Argentina, Brazil, Chile and
Peru. Investments in these rate-regulated distribution companies represented 24%
of Energy Holdings' assets, or $1.2 billion,  as of December 31, 2000. Global is
actively involved in managing the operations of these distribution  companies in
accordance with shareholder agreements and/or operating contracts.

      Global's  analysis  of  distribution  investments  is based on an in-depth
assessment of the regulatory  environment,  expected  growth in the service area
and related generation  opportunities.  Global's experience in the technical and
operating  aspects of electric  distribution  systems enables it to identify and
correct   operational   deficiencies   and  thereby   enhance   efficiency   and
profitability.  Global's approach to management of its distribution  investments
is to appoint a  transition  team,  which  includes  its own  experts  and local
representatives,  with appropriate  experience to assess operational  activities
and implement


                                       9
<PAGE>

improvements  as  required.  The team then  recruits  local  managers  to assume
operational responsibility ultimately. When required, Global has contracted with
its affiliate,  Public Service Electric and Gas Company, to assist in investment
evaluation and project assessment and provide facility  management and operation
services.

                             DISTRIBUTION OPERATIONS

                                                                       Global's
                                               Number of               Ownership
                            Location           Customers               Interest
                            --------           ---------               --------
EDEN ...................    Argentina           280,000                  30%
EDES....................    Argentina           140,000                  30%
EDELAP..................    Argentina           290,000                  30%
EDEERSA.................    Argentina           230,000                  41%
Rio Grande Energia......    Brazil              960,000                  32%
Chilquinta Energia......    Chile               450,000                  50%
Luz del Sur.............    Peru                680,000                  44%
                                              ---------
           Total........                      3,030,000
                                              =========

   Argentina

      EDEN, EDES and EDELAP

      In 1997, Global and its partner,  AES,  acquired Empresa  Distribuidora de
Energia Norte S.A. (EDEN) and Empresa  Distribuidora  de Energia Sur S.A. (EDES)
which  distribute  electricity  to areas  within the  Province of Buenos  Aires.
Global has a 30% ownership interest in each of EDEN and EDES. EDEN and EDES each
have a 95-year exclusive territorial franchise concession and collectively serve
a total of approximately 420,000 customers. In 1998, Global purchased from AES a
30% interest in Empresa  Distribuidora La Plata S.A.  (EDELAP) which distributes
electricity  predominantly  in the provincial  capital,  La Plata.  EDELAP has a
95-year exclusive territorial franchise concession,  granted in 1992, and serves
a total of  approximately  290,000  customers.  EDEN,  EDES and EDELAP  purchase
electric power from the spot market and pursuant to contracts  with CTSN,  which
is partially owned by Global and AES. The CTSN power purchase  contracts  expire
in May 2001.  Together,  EDEN, EDES, and EDELAP provide over 6,200 GWH per annum
to a population of nearly two million.

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

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

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

      The quality of service of each  distribution  system is  measured  against
established  standards  and  penalties  may be  imposed  and paid to  compensate
customers  if such  standards  are not  achieved.  Global  intends to  implement
capital  improvement  budgets  which  will  attempt  to meet  quality of service
standards.


                                       10
<PAGE>

Failure to meet  required  standards  would  result in  penalties  which are not
expected  to have a material  impact on the  distribution  system,  although  no
assurances can be given.

      EDEERSA

      In December 2000, Global agreed to purchase 100% of the outstanding shares
of Inversora en Distribusion de Entre Rios S.A.  (INVERDERSA) which in turn owns
90% of the outstanding shares of Empresa  Distribuidora de Electricidad de Entre
Rios S.A.  (EDEERSA).  The remaining  10% of EDEERSA is indirectly  owned by its
employees.  The  acquisition  is valued at  approximately  $200 million plus the
assumption of outstanding debt of approximately $80 million.

      EDEERSA is the main  distributor  of  electricity in the Province of Entre
Rios,  Argentina.  Entre Rios is located to the north of the  Province of Buenos
Aires and west of Uruguay. EDEERSA holds a 40-year exclusive concession, granted
in 1996 at the time of privatization,  to distribute  electricity throughout its
service  territory,  which  covers  21,000  square  miles  and has an  estimated
population of 1.1 million people.  EDEERSA's  distribution  network  consists of
approximately 9,100 miles of high, medium and low voltage power lines. EDEERSA's
approximately  230,000 customers consume  approximately  1,500 GWH of electrical
energy per annum.

      On December 29, 2000,  Global  purchased 46% of INVERDERSA  and expects to
acquire the remaining 54% in the second quarter of 2001. Prior to acquiring 100%
of the shares of INVERDERSA,  Global will have management control of the company
while the seller maintains  operating control.  In addition,  effective with the
first  closing,  Global is  receiving  cash  flow  benefits  equivalent  to full
ownership.

      Distribution  tariffs are  regulated  by the  provincial  authority,  Ente
Provincial  Regulador de la Energia,  utilizing  the  "price-cap  with  periodic
review" methodology as described under "EDEN, EDES and EDELAP." Every five years
the tariff  schedule is revised  based on a variety of  factors.  The first such
tariff review is expected to be completed in May 2001.

      EDEERSA is currently  undergoing its first tariff setting  rate-case since
its  privatization  in 1996. In July 2000,  EDEERSA  submitted to the regulatory
agency its  proposed  new tariff  structure  for the  period of  2001-2006.  The
regulatory agency is analyzing the proposal and negotiations between EDEERSA and
the agency have  commenced.  The new rate  structure is expected to be effective
starting July 2001, although no assurances can be given.

      The proposed tariff  structure  includes  compensation for items that were
previously ignored in the current tariff structure,  including reimbursement for
such items as the cost of connecting and disconnecting customers,  penalties due
to power  factor and  quality of  service,  customer  contributions  for special
connections,  and the pass through of  provincial  taxes and fees.  The proposed
tariff  structure,  if approved by the regulators,  would provide for an average
increase in revenues of approximately nine percent.

      In addition, periodic rate adjustments are made as follows: changes in the
PPI and CPI - every six months; and changes in cost of electricity, distribution
and connections - every six months.

      EDEERSA receives its electricity  supply from the National  Interconnected
System through three connection points. Due to the mechanics of the pass-through
mechanism for energy purchases in EDEERSA's  tariffs,  the company does not have
any power purchase agreements with any generators but, instead, purchases all of
its energy  requirements from the spot market.  This ensures a full pass through
of all energy purchase costs to EDEERSA's customers.

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

   Brazil

      Rio Grande Energia

      Together with VBC Energia,  a consortium of Brazilian  companies formed to
invest in electric privatization, and Previ, the largest pension fund in Brazil,
Global  acquired Rio Grande  Energia  (RGE),  a Brazilian  distribution  company
privatized in 1997. Global's ownership interest in RGE is approximately


                                       11
<PAGE>

32%. Due to Global's distribution  experience,  it was designated as and remains
the named  operator  for the  system  in order to  satisfy  requirements  of the
privatization   process.  A  shareholder's   agreement   establishes   corporate
governance,  voting rights and key financial provisions.  Global has veto rights
over certain  actions,  including  approval of the annual  budget and  financing
plan,  executive  officers,  significant  investments or  acquisitions,  sale or
encumbrance of assets, establishment of guarantees,  amendment of the concession
agreement and dividend policies. Day-to-day operations are the responsibility of
RGE, subject to partnership oversight.

      RGE serves  approximately  960,000 customers in the state of Rio Grande do
Sul in Southern  Brazil and operates under a 30-year  non-exclusive  territorial
concession agreement ending in 2027. The concession is non-exclusive in that the
distribution  system must provide large  consumers  the right to choose  another
provider of energy or to self-generate.  Global does not believe this represents
a substantial  threat to the profitability of the distribution  system in Brazil
since the tariff structure  provides the distribution  system the opportunity to
recover  all costs  associated  with  distribution  service  plus a return.  RGE
secures its energy supply through  contractual  agreements expiring between 2007
and 2020.  RGE also  purchases  20% of its  requirements  through 2013 under the
terms of contracts which are denominated in United States Dollars.

      Since the  acquisition in 1997,  RGE has achieved the following  technical
improvements:  outage  duration  has  been  reduced  by  52%  and  frequency  of
interruption  has dropped by 54%; line losses were reduced from 15% to 8%, while
during the same time period, personnel costs were lowered by 41%.

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

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

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

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

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

   Chile and Peru

      Chilquinta Energia

      In June 1999, Global together with its partner,  Sempra,  jointly acquired
90.23%  of the  shares  of  Chilquinta  Energia,  S.A.  (Chilquinta),  an energy
distribution company with numerous energy holdings, based in Valparaiso,  Chile.
In January  2000,  Global and  Sempra  jointly  acquired  an  additional  9.75%,
increasing  their total share holding to 99.98% of the company.  Funding for the
purchase  of the


                                       12
<PAGE>

incremental  shares  was  provided  at  the  time  of  the  initial  investment.
Chilquinta  provides growth  opportunities and enhances Global's market position
in the region by adding electric and gas  distribution  facilities in Chile. Gas
distribution  is provided  through  Energas,  a start-up  company that  provides
service to more than 18,000  natural gas customers in Chile as of December 1999.
The  Chilquinta  acquisition  also  included a 37% interest in Luz del Sur which
owns electric distribution  facilities in Peru. Simultaneous with the closing of
this  acquisition,  Global and its partner  sold  Chilquinta's  32%  interest in
Central Puerto,  S.A., an Argentine  thermal  electric  generator.  In September
1999, Global and Sempra closed on a tender offer for outstanding publicly traded
shares of Luz del Sur. The number of shares  tendered  constitutes  22.5% of the
shares of Luz del Sur. The tender was offered  exclusively  in Peru.  Global and
Sempra  also  purchased  an  additional  25% of Luz del Sur upon  closing of the
tender  offer,  which  gives  them  approximately  85%  control  of Luz del Sur.
Global's investment in connection with these transactions was approximately $108
million.  Subsequent purchases of shares in Chilquinta and Luz del Sur by Sempra
and Global have increased ownership to 99.99% and 87.9%, respectively.

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

      In 2000, Chilquinta sold approximately 1,528 GWH per year to approximately
450,000 customers in Chile.  Chilquinta operates under a non-exclusive perpetual
franchise  within  Chile's  Region V which is  located  just  north  and west of
Santiago.  Global believes that direct  competition for  distribution  customers
would be uneconomic  for potential  competitors.  Luz del Sur operates  under an
exclusive,  perpetual  franchise in the southern portion of the city of Lima and
in an area just south of the city along the coast serving  approximately 680,000
customers. Both Chilquinta and Luz del Sur purchase energy for distribution from
generators in their respective markets on a contract basis.

      Distribution  companies  in Chile are  subject to rate  regulation  by the
Comision Nacional de Energia, a national governmental regulatory authority.  The
Chilean  regulatory  framework has been in existence  since 1982, with rates set
every  four  years  based on a model  company.  The  tariff  which  distribution
companies charge to regulated  customers consists of two components:  the actual
cost of energy  purchased plus an additional  amount to compensate for the value
added in  distribution  (DVA tariff).  The DVA tariff  considers  allowed losses
incurred in the distribution of electricity,  administrative  costs of providing
service to  customers,  costs of  maintaining  and  operating  the  distribution
systems,  and an annual real return on  investment of 8% to 14% based on the new
replacement  cost of distribution  assets.  Changes in electricity  distribution
companies' cost of energy are passed through to customers, with no impact on the
distributors'  margins  (equal  to the  DVA  tariff).  Therefore,  distributors,
including Chilquinta, are not affected by changes in the generation sector which
affect  prices.  The most recent tariff  adjustment  occurred in November  2000.
Chilquinta  received a 2% tariff  increase as a result of this process.  The DVA
tariff index  provides for monthly  adjustments  based on  variations in certain
economic  indicators  whenever the component costs increase by more than 3% over
prior levels. This index provides inflation adjustments and indirect devaluation
protection.

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

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

      Other

      Global has recently announced the planned  acquisition of Sociedad Austral
de Electricidad  S.A.,  (SAESA),  a distribution  company operating in Chile and
Argentina. See "Management's Discussion and Analysis", for further discussion.


                                       13
<PAGE>

RESOURCES

Strategic Overview

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

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

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

      As of December 31, 2000 and 1999, Resources had approximately $2.3 billion
and $1.8 billion,  respectively,  invested in leveraged lease transactions which
represented approximately 88% and 84% of Resources' total assets of $2.6 billion
and $2.1 billion,  respectively.  Leveraged leases of  energy-related  plant and
equipment totaled  approximately $1.8 billion and $1.3 billion or 79% and 73% of
the lease portfolio and 70% and 61% of Resources' assets as of December 31, 2000
and December 31, 1999,  respectively.  The remainder of Resources'  portfolio is
further  diversified  across a wide spectrum of asset types and business sectors
including  leveraged  leases of  aircraft,  railcars  and real  estate,  limited
partnership interests in project finance transactions,  and leveraged buyout and
venture  funds.  Approximately  85%  of  the  lease  investments  in  Resources'
portfolio are with lessees that have investment grade credit ratings.


                                       14
<PAGE>

Portfolio Segments

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

                               SCHEDULE OF ASSETS

<TABLE>
<CAPTION>
                                              As of December 31,      As of December 31,
                                                    2000                    1999
                                             --------------------   ---------------------
                                                         % of
                                                      Resources'            % of Resources'
                                             Amount  Total Assets   Amount   Total Assets
                                             ------  ------------   ------   ------------
                                                      (Millions of Dollars)
<S>                                          <C>          <C>      <C>          <C>
Leveraged Leases
    Energy-Related
      Foreign .........................      $  973       38%      $  759       36%
      Domestic ........................         816       32%         517       25%
    Real Estate
      Foreign .........................          --       --           --       --
      Domestic ........................         172        7%         193        9%
    Aircraft
      Foreign .........................         133        5%         132        6%
      Domestic ........................          66        3%          68        3%
    Commuter Railcars
      Foreign .........................          83        3%          81        4%
      Domestic ........................          --       --           --       --
    Industrial
      Foreign .........................          --       --           --       --
      Domestic ........................           9       --            9        1%
                                             ------      ---       ------      ---
            Total Leverages Leases, Net       2,252       88%       1,759       84%
                                             ------      ---       ------      ---
Limited Partnerships
    Leveraged Buyout
      Funds ...........................         213        8%         230       11%
      Other ...........................          26        1%          49        2%
                                             ------      ---       ------      ---
              Total Limited Parnerships         239        9%         279       13%
                                             ------      ---       ------      ---
Marketable Securities .................           6       --            7       --
Other Investments .....................           4       --           --       --
Owned Property ........................          58        3%           8       --
Current and Other Assets ..............           5       --           43        3%
                                             ------      ---       ------      ---
Total Resources' Assets ...............      $2,564      100%      $2,096      100%
                                             ======      ===       ======      ===
</TABLE>

      As of December  31,  2000 and  December  31,  1999,  no single  investment
represented more than 7.1% of Resources' total assets.

Leveraged Lease Investments

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

      Leveraged lease  investments are complex  transactions  that are carefully
structured to achieve  specific  economic  results.  In a leveraged  lease,  the
lessor acquires an asset by investing equity  representing  approximately 15% to
20% of the cost and  incurring  non-recourse  lease  debt for the  balance.  The
lessor  acquires  economic and tax  ownership of the asset and then leases it to
the  lessee  for a period of time no greater  than 80% of its  remaining  useful
life.  As the owner,  the  lessor is  entitled  to  depreciate  the asset  under
applicable federal tax guidelines.  In addition, the lessor receives income from
lease  payments  made by the lessee  during  the term of the lease and  interest
deductions   associated   with  the  lease  debt.   Lease  rental  payments  are
unconditional  obligations  of the  lessee and are always set at levels at least
sufficient to service the  non-recourse  lease debt. The lessor is also entitled
to any residual value  associated  with the leased asset at the end of the lease
term. An evaluation of the  after-tax  cash flows to the lessor  determines  the
return on the investment.  Under generally accepted accounting  principles,  the
lease  investment  is  recorded  on a net basis and  income is  recognized  as a
constant return on the net unrecovered investment.


                                       15
<PAGE>

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

      Energy-Related Leases

      The  Resources'   portfolio  contains  27  separate  leveraged  leases  of
energy-related  assets.  The total  amount  invested  in such  transactions  was
approximately  $1.8 billion,  and $1.3 billion as of December 31, 2000 and 1999,
respectively,  which  represented  approximately  70% and 61%  respectively,  of
Resources'  assets.  This portion of the portfolio,  along with  anticipated new
investments of this type, is expected to contribute  approximately 76% to 88% of
Resources'  revenues  over the next five years.  Over 95% of this portion of the
lease  portfolio  represents  investment  grade credit risk. The  energy-related
sector is expected  to be the  primary  focus of  Resources'  future  investment
activity.

      Included  in  Resources'  energy-related  leveraged  lease  portfolio  are
transactions  with United States  utilities and independent  power producers for
peaking and base-load  plants and a reservoir  storage  facility.  Resources has
also structured  leveraged lease  investments  for electric  generation  plants,
electric  and gas  distribution  networks  and a  waste-to-energy  facility  for
lessees  in the  Netherlands,  the  United  Kingdom,  Germany  and New  Zealand.
Resources  currently  owns  interests  in electric  generation  plants  totaling
approximately 7,025 MW of generation capacity, of which 2% is nuclear.

      Real Estate Leases

      The real estate  leveraged  lease  portion of the portfolio is expected to
generate revenue of approximately $10 million per annum on average over the next
five years.  This  represents  approximately  5% of  Resources'  average  annual
revenue.  Real estate  leveraged leases  represented  approximately 7% and 9% of
Resources'  assets at  December  31,  2000 and 1999,  respectively,  and totaled
approximately  $172  million  and  $193  million,  respectively.  The  portfolio
consists of separate leases on 44 properties with six lessees.  Resources is not
currently planning to invest in any new leveraged leases of real property.

      Aircraft Leases

      The  aircraft   leveraged   lease   portion  of  the   portfolio   totaled
approximately  $199  million and $200  million as of December 31, 2000 and 1999,
respectively,  which  represented  approximately  8% and 10%,  respectively,  of
Resources'  assets.  Revenue associated with these investments is expected to be
less than 1% of  Resources'  revenue or  approximately  $1 million  per annum on
average  over the next  five  years.  The  current  portfolio  contains  sixteen
aircraft leased to six separate lessees.  Resources believes that the lessees in
this portion of the  portfolio  represent  acceptable  credit risk except in one
situation  where  United  States  Treasuries  have been  provided as  additional
collateral.  Resources is not  currently  planning to invest in any new aircraft
leveraged lease transactions.

      Railcars and Industrial Equipment Leases

      The  remaining   portion  of  the  leveraged  lease   portfolio   totaling
approximately  $92  million as of December  31,  2000 is expected to  contribute
revenue of less than $2 million per annum on average over the next five years.

      Leveraged Buyout Funds/Limited Partnerships

      As of December 31, 2000 and December 31, 1999, approximately 8% and 11% of
Resources'  assets  were  invested  in  leveraged  buyout  funds  and 1% and 2%,
respectively,  in other limited  partnerships  and venture funds.  Approximately
$239 million and $279  million was invested in this segment of the  portfolio as
of December 31, 2000 and December 31,  1999,  respectively.  Approximately  $115
million  included in the  leveraged  buyout funds  represents  the fair value of
Resources' share of publicly traded common stock in six companies as of December
31, 2000.  The leveraged  buyout funds and limited  partnership


                                       16
<PAGE>

investments  in  Resources'  portfolio  are  expected to  contribute,  excluding
distributions associated with asset sales,  approximately 7% of total revenue in
2001 and diminish to approximately  1% in 2005 as they mature.  Resources is not
currently planning to make investments of this nature in the future.

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

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

ENERGY TECHNOLOGIES

      Energy   Technologies  is  an  energy  management  company  that  provides
energy-related  engineering,  consulting and mechanical  contracting services to
and constructs, operates and maintains heating, ventilating and air conditioning
(HVAC) systems for industrial and commercial  customers in the  Northeastern and
Middle  Atlantic  United States.  As of December 31, 2000 and December 31, 1999,
Energy  Technologies had assets of $312 million and $252 million,  respectively.
Energy Holdings will assess the growth  prospects and  opportunities  for Energy
Technologies' business before committing additional capital.

      Since  its  formation  in 1997,  Energy  Technologies  has  established  a
presence  in the  energy  services  business  through  the  acquisition  of nine
companies involved in the engineering, construction, installation, operation and
maintenance  of energy  equipment  and HVAC  systems.  In January  1998,  Energy
Technologies  acquired  Fluidics,  Inc., a diversified  mechanical  and building
services  contractor  with  operations  from  Pennsylvania  and  New  Jersey  to
Virginia.  In 1999 and 2000, Energy  Technologies  acquired eight mechanical and
building service companies headquartered in New Jersey, New York,  Pennsylvania,
Rhode Island and Virginia. The combination of these companies created a regional
energy  service  capability  from New England to  Virginia.  In  addition,  PSEG
transferred  one of its  subsidiaries,  Public  Service  Conservation  Resources
Corporation,  an energy management contractor,  to Energy Technologies effective
January 1, 1999.

      In February 2000, Energy Technologies  entered into a business arrangement
with  Enermetrix.com  to provide an  internet-based  auction  exchange that will
allow  their  customers  an  alternative   method  in  purchasing  their  energy
requirements.  In June  2000,  Energy  Technologies  outsourced  certain  supply
services  under its  retail gas  service  agreements.  With these  transactions,
Energy Technologies has changed the manner in which it provides electric and gas
commodities  services to customers.  Energy  Technologies plans to grow existing
operations  and utilize the  recently  acquired  companies  to deliver  expanded
energy-related services and products to new and existing customers.

OTHER SUBSIDIARIES

      Enterprise Group  Development  Corporation  (EGDC), a nonresidential  real
estate property management business,  has been conducting a controlled exit from
the real estate business since 1993.  EGDC has  investments in seven  commercial
real estate  properties  (one of which is developed) in several  states.  EGDC's
strategy  is to  preserve  the value of its  assets to allow for the  controlled
disposition  of its properties as favorable  sales  opportunities  arise.  As of
December 31, 2000 and 1999,  EGDC's  consolidated  assets aggregated $65 million
and $67 million, respectively.

      PSEG  Capital  Corporation  (PSEG  Capital)  has  served as the  financing
vehicle,  borrowing  on the basis of a minimum net worth  maintenance  agreement
with PSEG. As of December 31, 2000 and 1999,  PSEG Capital had debt  outstanding
of $650 million and $630 million, respectively.  Existing debt matures from 2001
to 2003. For additional  information  including certain restrictions relating to
the BPU Focused Audit,  see  "Management's  Discussion and Analysis of Financial
Condition  and Results of  Operations  --  Liquidity  and Capital  Resources  --
External Financings".

      Enterprise  Capital Funding  Corporation  (Funding) formerly served as the
financing  vehicle  on the  basis of  Energy  Holdings'  consolidated  financial
position.  As of December 31, 2000 and  December  31, 1999,  Funding had no debt
outstanding.

RISK FACTORS

      These  factors  should  be  considered  when  reviewing  Energy  Holdings'
businesses,   and  are  relied   upon  by  Energy   Holdings   in  issuing   any
forward-looking  statements.  Such factors could affect actual


                                       17
<PAGE>

results and cause such results to differ  materially from those expressed in any
forward-looking  statements made by, or on behalf of, Energy  Holdings.  Some or
all of these factors may apply to Energy Holdings.

      o     Deregulation  and the unbundling of energy supplies and services and
            the establishment of a competitive energy marketplace.

      o     Changes in operation  and  availability  of the electric  generation
            projects  compared  to  historical  performance  and  changes in the
            historical operating cost structure.

      o     Ability to obtain adequate and timely rate relief, cost recovery and
            other necessary regulatory approvals.

      o     The need to manage  operating  and  capital  costs in a  competitive
            environment.

      o     In certain foreign  markets:  the ability of Energy Holdings and its
            subsidiaries   to  hedge   against   foreign   exchange   rates  and
            fluctuations  in those rates;  the economic,  political and military
            conditions; and repatriation of earnings or other cash flow.

      o     Changes in trade, monetary and fiscal policies, laws and regulations

      o     Inability to raise capital on favorable terms to refinance  existing
            indebtedness  or to  fund  future  acquisitions  and  other  capital
            commitments.

      o     Successful and timely completion of electric generating projects and
            capital improvements to existing facilities.

      o     Changes in the economic and electricity  consumption growth rates in
            the U.S. and foreign countries.

      o     Operating conditions and increased capital investments  attributable
            to environmental regulations.

      o     Limited control of minority interests.

      o     Ability to maintain sufficient insurance coverages.

COMPETITIVE ENVIRONMENT

      Energy   Holdings  and  its   subsidiaries   are  subject  to  substantial
competition  in the United States as well as in the  international  markets from
independent power producers,  domestic and  multi-national  utility  generators,
fuel  supply  companies,  energy  marketers,  engineering  companies,  equipment
manufacturers,  well capitalized investment and finance companies and affiliates
of other  industrial  companies.  Restructuring  of  worldwide  energy  markets,
including  the  privatization  of  government-owned  utilities  and the  sale of
utility-owned  assets,  is  creating  opportunities  for  Energy  Holdings,  and
likewise is creating  substantial  competition  from  well-capitalized  entities
which may  adversely  affect Energy  Holdings'  ability to make  investments  on
favorable terms and achieve its growth objectives.

REGULATORY ISSUES

      Energy  Holdings  is not  subject to direct  regulation  by the New Jersey
Board of  Public  Utilities  (BPU),  except  potentially  with  respect  to some
transfers of control and reporting requirements.

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

      The Energy  Competition Act empowers the BPU to impose  requirements  with
respect to affiliate  transactions between and among Public Service Electric and
Gas Company,  PSEG and Energy  Holdings.  In March 2000, the BPU issued an order
establishing  affiliate  standards.  This  will  primarily  affect  transactions
between  Energy  Technologies  and  Public  Service  Electric  and Gas  Company.
However,  Energy  Holdings  does not believe this will have an adverse  material
effect its financial condition, results of operations and net cash flows.

      Public  Service  Electric and Gas Company,  a  wholly-owned  subsidiary of
PSEG,  is an  operating  public  utility  providing  electric and gas service in
certain areas in the State of New Jersey and is subject to


                                       18
<PAGE>

regulation by the New Jersey Board of Public  Utilities  (BPU). For a discussion
of the 1992 Focused Audit, see, "Management's  Discussion and Analysis - Capital
Requirements."

      PSEG has claimed an exemption  from  regulation by the SEC as a registered
holding company under Public Utility Holding Company Act of 1935 (PUHCA), except
for the provision  which relates to the  acquisition of 5% or more of the voting
securities of an electric or gas utility company. PUHCA regulates public utility
holding companies and their  subsidiaries.  Global's  investments include exempt
wholesale  generators  (EWGs) and foreign utility companies (FUCOs) under PUHCA.
Failure to maintain  status of these plants as EWGs or FUCOs could  subject PSEG
and its subsidiaries to regulation under PUHCA.

      Public Utility  Regulatory  Policies Act of 1978 (PURPA),  provides to QFs
certain  exemptions  from  federal  and state  laws and  regulations,  including
organizational,  rate and financial regulation. Global's investments include QFs
under PURPA.  If any of the plants in which Global has an interest lose their QF
status or if  amendments  to PURPA are  enacted  that  substantially  reduce the
benefits  currently  afforded  QFs,  PSEG could lose its  exemption  under PUHCA
unless that generation plant was able to qualify for EWG status.

      In addition,  actions of PSEG,  Public  Service  Electric and Gas Company,
Resources  or  Energy   Technologies   could  cause  PSEG,   and  therefore  its
subsidiaries,  including Energy Holdings and its  subsidiaries,  to be no longer
exempt  from  regulation  under  PUHCA.  At  the  present  time,  PSEG  and  its
subsidiaries  do not expect to take any actions  that would  result in a loss of
exemption  under PUHCA.  If PSEG were no longer exempt from PUHCA,  PSEG and its
subsidiaries  would be subject to additional  regulation by the SEC with respect
to their  financing and investing  activities,  including the amount and type of
non-utility  investments.  Energy  Holdings  believes that this would not have a
material adverse effect its financial  condition,  results of operations and net
cash flows.

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

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

      In a case affecting  another utility in which Public Service  Electric and
Gas  Company  was not a  party,  the BPU  approved  an  order  treating  certain
consolidated  tax  savings  generated  after  June  30,  1990 by that  utility's
non-utility  affiliates as a reduction of that utility's rate base. In 1992, the
BPU issued an order  resolving  Public  Service  Electric and Gas Company's 1992
base rate proceeding  without  separate  quantification  of the consolidated tax
issue. Such order did not provide final resolution of the consolidated tax issue
for any subsequent  base rate filing.  The issue of PSEG sharing the benefits of
consolidated  tax savings  with Public  Service  Electric and Gas Company or its
ratepayers  was addressed by the BPU in its July 28, 1995 letter which  informed
Public  Service  Electric  and Gas Company  that the issue of  consolidated  tax
savings can be  discussed  in the  context of Public  Service  Electric  and Gas
Company's  next  base  rate case or plan for an  alternate  form of  regulation.
Energy  Holdings is not able to predict  what  action,  if any, the BPU may take
concerning  consolidation  of  tax  benefits  in  future  rate  proceedings.  An
unfavorable resolution may adversely impact Resources' investment strategy.

      INCOME TAXES

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


                                       19
<PAGE>

CUSTOMERS

      Global

      Global has ownership interests in seven distribution companies which serve
approximately three million customers and has developed or acquired interests in
electric  generation  facilities  which  sell  energy,  capacity  and  ancillary
services to numerous customers through power purchase  agreements (PPAs) as well
as into the wholesale market.

      Energy Technologies

      Energy  Technologies  currently provides services to approximately  13,000
customers.

EMPLOYEE RELATIONS

      As of December 31, 2000,  Energy Holdings had a total of 2,376  employees.
Energy  Technologies  had a total  of 1,739  employees  who are  represented  by
various  construction  trade  unions.  Energy  Technologies  and  its  operating
subsidiaries  are  parties to  agreements  with  various  trade  unions  through
multi-employer   associations.   Energy  Holdings  believes  that  it  maintains
satisfactory relationships with their employees.

ENVIRONMENTAL MATTERS

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

ITEM 2:  PROPERTIES

      Energy Holdings owns no real property.  Energy Holdings  subleases  office
space for its corporate  headquarters at 80 Park Plaza, Newark, New Jersey 07102
from Public  Service  Electric and Gas Company.  Subsidiaries  also lease office
space at various locations  throughout the world to support business activities.
Energy Holdings  maintains  adequate  insurance coverage for properties in which
its  subsidiaries  have an equity  interest,  to the extent that properties of a
similar  nature are usually  insured and  insurance is available at a reasonable
cost.

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

      For a discussion of investments in generation and distribution properties,
see "Business."

ITEM 3:  LEGAL PROCEEDINGS

      The Brazilian Consumer Association of Water and Energy has filed a lawsuit
against Rio Grande  Energia S.A.  (RGE),  a Brazilian  distribution  company (of
which Global is a 32% owner),  and two other  utilities,  claiming  that certain
value added taxes and the  residential  tariffs  that are being  charged by such
utilities  to their  respective  customers  are illegal.  RGE believes  that its
collection  of  the  tariffs  and  value  added  taxes  are in  compliance  with
applicable tax and utility laws and  regulations.  While it is the contention of
RGE that the  claims  are  without  merit,  and that it has valid  defenses  and
potential  third party claims,  an adverse  determination  could have a material
adverse effect on Energy Holdings'  financial  condition,  results of operations
and net cash flows.  Assobraee-Associacao  Brasileira de  Consumidores de Agua e
Energia Eletrica v. Rio Grande Energia S/A - RGE, CEEE and AES Sul, First Public
Treasury Court/City of Porto Alegre. Proceeding No. 101214451.

      One  Argentine  electric  distribution  company  in  which  Global  has an
interest has been notified of a claim regarding alleged PCB contamination at one
of its sites.  Clean up costs are estimated at approximately  $100,000,  and the
distribution company is subject to penalties of approximately $1 million. Global
has 30% interest in this company.


                                       20
<PAGE>

ITEM 4:  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:

      NOT APPLICABLE

                                     PART II

ITEM 5:  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS:

      All  outstanding  equity  interests in Energy Holdings are owned by Public
Service Enterprise Group Incorporated.


                                       21
<PAGE>

ITEM 6:  SELECTED FINANCIAL DATA

      The following  table sets forth selected  consolidated  financial data for
the periods indicated.  The summary consolidated financial data was derived from
the  audited  consolidated  financial  statements  of  Energy  Holdings  and its
consolidated  subsidiaries  for the five years ended  December  31,  2000.  This
summary data is qualified in its entirety by the more detailed  information  and
financial statements, including the notes thereto.

<TABLE>
<CAPTION>
                                                        Years Ended December 31,
                                   ----------------------------------------------------------------
                                     2000          1999          1998          1997          1996
                                   --------      --------      --------      --------      --------
                                                 (Thousands of Dollars, except ratios)
<S>                                <C>           <C>           <C>           <C>           <C>
Operating Data:
Total Revenues ..............      $794,710      $617,773      $440,284      $341,590      $302,800
Total Operating Expenses ....       502,886       424,468       250,539       196,462       171,169
Interest, Net of Capitalized
     Interest ...............       136,517        94,685        90,367        72,363        58,261
Taxes .......................        45,337        68,942        30,160        25,816        24,968
Income from Discontinued
     Operations (A) .........            --            --            --            --        24,238
Net Income ..................       113,947       107,999        69,204        47,873        72,662
Preferred Stock Dividends (B)        23,886        25,007        17,478           598            --
Earnings Available to
     Common Stockholder .....      $ 90,061      $ 82,992      $ 51,726      $ 47,275      $ 72,662
</TABLE>

<TABLE>
<CAPTION>
                                                                    December 31,
                                     --------------------------------------------------------------------------
                                        2000            1999            1998            1997            1996
                                     ----------      ----------      ----------      ----------      ----------
<S>                                  <C>             <C>             <C>             <C>             <C>
Balance Sheet Data:
Total Assets ..................      $5,197,534      $4,114,385      $3,168,530      $3,022,956      $2,122,413
Total Liabilities .............       1,266,925       1,037,834         958,528         962,954         817,889
Capitalization:
     Debt (F) .................       2,181,776       1,701,686         967,673       1,275,103         627,381

     Common Equity (B) ........       1,239,633         865,665         733,129         709,899         677,143
     Preferred Equity (B) .....         509,200         509,200         509,200          75,000              --
                                     ----------      ----------      ----------      ----------      ----------
     Total Stockholder's Equity       1,748,833       1,374,865       1,242,329         784,899         677,143
                                     ----------      ----------      ----------      ----------      ----------
Total Capitalization ..........      $3,930,609      $3,076,551      $2,210,002      $2,060,002      $1,304,524
</TABLE>

<TABLE>
<CAPTION>
                                                       Years Ended December 31,
                              -------------------------------------------------------------------------
                                2000             1999           1998            1997            1996
                              ---------       ---------       ---------       ---------       ---------
<S>                           <C>             <C>             <C>             <C>             <C>
Other Data:
Earnings Before Interest
     and Taxes (EBIT) ..      $ 294,722       $ 270,709       $ 187,927       $ 145,813       $ 131,631
Cash Flows from:
     Operating .........      $ 152,384       $  92,396       $  52,780       $ 137,057       $ 232,411
     Investing .........       (762,761)       (960,372)       (160,133)       (998,424)        560,965
     Financing .........        589,269         902,320         105,133         722,832        (726,442)
</TABLE>

<TABLE>
<CAPTION>
                                                                          For Years Ended December 31,
                                                               ------------------------------------------------
                                                               2000       1999       1998       1997       1996
                                                               ----       ----       ----       ----       ----
<S>                                                            <C>        <C>        <C>        <C>        <C>
Earnings to Fixed Charges (C) ...........................      1.9x       2.7x       2.4x       1.4x       3.0x
EBIT to Interest Expense (D) (H) ........................      2.2x       2.9x       2.1x       2.0x       2.3x
EBITDA to Interest Expense (E) (H) ......................      2.3x       3.1x       2.4x       2.2x       2.5x
Consolidated Debt to Capitalization (F) .................       56%        55%        44%        62%        48%
Consolidated Recourse Debt to Recourse Capitalization (G)       51%        50%        38%        57%        48%
</TABLE>

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

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

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

(D)   EBIT includes operating income plus other income. For this ratio, interest
      expense is net of capitalized interest,  $20.8 million, $8.5 million, $1.2
      million,  $5.1 million and $1.3  million for the years ended  December 31,
      2000, 1999, 1998, 1997 and 1996, respectively.

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

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

(G)   Excludes  consolidated  debt that is  non-recourse  to Global,  Resources,
      Energy  Technologies  and Energy  Holdings of $354 million,  $327 million,
      $220  million and $232 million as of December  31,  2000,  1999,  1998 and
      1997,   respectively.   There  was  no  consolidated   non-recourse   debt
      outstanding prior to 1997.

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


                                       22
<PAGE>

ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

Energy Holdings

      This  discussion  should  be read in  conjunction  with  the  Consolidated
Financial  Statements  and related notes of PSEG Energy  Holdings  Inc.  (Energy
Holdings).  Energy  Holdings  participates  in  three  energy-related  lines  of
business through its wholly-owned subsidiaries:  PSEG Global Inc. (Global), PSEG
Resources  Inc.   (Resources)  and  PSEG  Energy   Technologies   Inc.   (Energy
Technologies).  Energy Holdings' objective is to pursue investment opportunities
in  the  rapidly  changing  worldwide  energy  markets  where  Energy  Holdings'
technical,  market and  regulatory  expertise can be applied to create  economic
value.

Overview and Future Outlook

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

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

      Global derives its revenues and earnings from independent power production
and the distribution of electricity.  Earnings will,  therefore,  be impacted by
the ability of Global and its partners to successfully manage the generation and
distribution  facilities  now  in  operation  and to  bring  those  projects  in
construction  and  development  into  operation.  The  acquisition of additional
facilities  and projects will be another  important  factor for future  earnings
growth  at  Global.  Future  revenue  growth  will be  partially  offset  by the
reduction of revenue, anticipated in 2001, from certain generation facilities in
California due to lower energy prices to be paid by the power  purchaser.  For a
further discussion of the California Power Market, see below.

      Since  Global  operates in foreign  countries,  it may also be affected by
changes in foreign  currency  exchange  rates versus the United  States  Dollar.
Generally,  revenues  associated  with  rate  regulated  distribution  assets in
relatively limited competitive environments are more stable and predictable than
revenues from generation assets.  Global's revenue includes its share of the net
income from joint ventures recorded under the equity method of accounting.

      Revenues from Resources'  existing  leveraged lease  investments are based
upon fixed rates of return. Generally, the leveraged lease transactions in which
Resources  invests  provide  tax  losses in the early  years of their  term that
offset taxable income from other PSEG subsidiaries.  Resources'  revenues in the
future are expected to be derived primarily from energy-related leveraged leases
with a decrease in contribution  from leveraged buyout funds,  other partnership
investments and  non-energy-related  leveraged leases.  Revenues from Resources'
investments in leveraged buyout funds are subject to the share price performance
and dividend income of the securities held by these funds.

      Having  acquired  nine  companies   involved  in  the   installation   and
maintenance  of energy  equipment  and HVAC  services for a total of $95 million
since its formation in 1997, Energy Technologies'  present strategic focus is to
consolidate its position as an energy services  supplier in the Northeastern and
Middle Atlantic United States.  Earnings at Energy  Technologies are expected to
be modest as it grows existing  operations and integrates  recent  acquisitions.
Energy  Technologies  recognized a pre-tax charge of approximately  $6.6 million
relating to severance costs, deferred transportation costs and the write-down of
fixed  assets  during the first  quarter of 2000 as a result of its  decision to
change the manner in which it provides electric and gas commodities  services to
customers.  An additional  pre-tax charge of $3.2 million occurred in the second
quarter of 2000 due to  unhedged  gas sale  positions  and the  increase  in gas
prices.


                                       23
<PAGE>

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

      California Power Market

      The deregulation of the California  power market has produced  significant
unanticipated   results  in  the  past  year.  The  California   Public  Utility
Commission,  (CPUC) as part of deregulation,  froze the rates that utilities can
charge their retail and business  customers in  California  and  prohibited  the
utilities from buying power on a forward  basis,  while  wholesale  power prices
were not subjected to limits.  In the past year,  an increase in demand  coupled
with a reduced supply of power has caused a severe imbalance in the market. Such
imbalance has led to unprecedented wholesale prices.

      As a result of this  situation,  two major  California  utilities that are
subject  to the retail  price  cap,  including  Pacific  Gas & Electric  Company
(PG&E),  have  significantly  underrecoved  from customers costs paid for power.
They have been widely  reported to be facing the  prospect of  insolvency.  As a
consequence,  these  utilities  have  defaulted  under a variety of  contractual
obligations,  including  payment  obligations  to GWF,  Hanford  and Tracy,  the
California facilities in which Global has an interest.

      Global has partnership  interests in seven qualifying  facilities (QFs) in
California  having a  combined  output  of 153 MW (71 MW net).  Power  from such
facilities is sold under  long-term  energy and capacity  contracts to PG&E. The
contracts  provide  for a fixed  energy  payment  for the  first 10 years  and a
capacity  payment over the entire contract terms expiring between 2011 and 2021.
After the initial 10-year period, energy prices were to change to reflect PG&E's
short run avoided cost calculated using a formula based methodology  approved by
the CPUC. As part of the deregulation,  the seller could elect to receive energy
payments at the California Power Exchange's (PX) day-ahead zonal market clearing
price. As of December 31, 2000, partnership management made such an election for
four of the seven facilities, representing approximately 84 MW (37 MW net) until
January 19,  2001 when the CPUC  deemed  that the PX had ceased  operating a day
ahead market. The remaining three units were never subject to PX pricing.  Since
that time, the CPUC has ordered that the price to be paid for energy  deliveries
by QF's electing the PX price shall be based on a cost-based transition formula.
The CPUC has  conducted  proceedings  to determine  whether the PX price was the
appropriate  price for the energy  component upon which to base payments to QF's
that had elected the PX based pricing option. It is possible that the CPUC could
order a payment  adjustment based on a different energy price  determination.  A
preliminary  decision  by the CPUC did not find any  adjustment  to the PX price
appropriate.  Energy  Holdings  believes  that the PX price was the  appropriate
price for energy  payments but there can be no  assurance  that this will be the
outcome of the CPUC proceedings.

      GWF,  Hanford  and  Tracy,  have  continued  to  honor  their  contractual
obligations  to PG&E under existing QF contracts.  To date,  they have refrained
from pursuing collection remedies with respect to PG&E's default,  and have been
actively  involved in being part of the  solution  to  stabilize  energy  prices
through  the  application  of a  long-term  energy  pricing  methodology  (for a
five-year  period).  On March 27, 2001,  the CPUC  approved a plan to assure the
state's  QFs are paid for  future  deliveries  of  energy  within 15 days of the
receipt of an invoice.  The CPUC's plan, while  immediately  effective,  did not
address amounts due such  facilities for past due receivables  related to energy
delivered  since December 2000. In addition to the payment issue,  the CPUC also
approved a 40%  increase in electric  retail  rates to help the state  utilities
recover significantly higher wholesale energy costs. It is expected further that
legislation  will be  developed to enable the  California  utilities to finance,
over a longer term the  difference  between the wholesale  prices that have been
paid and the retail  prices  received  during the  latter  half of 2000.  Energy
Holdings believes that this should enhance PG&E's ability to make payment of all
past due amounts. However, Energy Holdings cannot predict the timing or ultimate
outcome of the  legislative  process,  or the  payment of amounts  due under the
contracts with PG&E.

      As of December 31, 2000, GWF,  Hanford and Tracy had combined  receivables
due from PG&E,  for all plants  amounting  to $40 million.  Of this  amount,  $8
million had been reserved as an allowance for doubtful  accounts  resulting in a
net receivable  balance of $32 million.  Energy Holdings  pro-rata share of this
net receivable was $15 million.


                                       24
<PAGE>

      As of February 28, 2001, GWF,  Hanford and Tracy had combined  receivables
due from PG&E,  for all plants  amounting to $48  million,  adjusted for certain
payments  received  through March 6, 2001. Of this amount,  $14 million had been
reserved as an allowance  for doubtful  accounts  resulting in a net  receivable
balance of $34 million.  Energy  Holdings  pro-rata share of this net receivable
was $16 million.

Results of Operations - 2000 compared to 1999

      Energy Holdings'  earnings improved $7 million from $83 million in 1999 to
$90 million in 2000.

Revenues

      Revenues increased $177 million from $618 million to $795 million in 2000,
as compared to 1999,  primarily  due to an increase of $28 million at  Resources
due to higher  leveraged  lease income from new leveraged lease  investments,  a
$120 million increase in revenues at Energy  Technologies due to the addition of
revenues from  acquisitions of various HVAC companies in 2000 and 1999 and a $28
million  increase in revenues at Global primarily due to improvement in revenues
from  domestic  generation  assets as well as the addition of revenues  from the
distribution companies in Chile and Peru acquired in 1999.

Operating Expenses

      Operating expenses increased $79 million from $424 million to $503 million
in 2000,  as compared to 1999,  primarily due to the addition of $123 million in
operating  expenses from the HVAC and mechanical service  contracting  companies
acquired  by  Energy  Technologies  in  2000  and  1999.  A  pre-tax  charge  of
approximately  $55 million,  to reduce the carrying  value of certain assets was
recorded in 1999 and is discussed below.

Other Income (Loss)

      Other  income  decreased  by $74 million from $77 million to $3 million in
2000, as compared to 1999  primarily  from Global's sale in 1999 of its interest
in a co-generation facility, which yielded a pre-tax gain of $69 million.

Net Financing Expenses

      Interest expense increased $42 million from $95 to $137 million in 2000 as
compared to 1999. Interest expense associated with recourse financing activities
at Energy Holdings increased $51 million primarily due to additional  borrowings
incurred  as a result of  equity  investments  in  distribution  and  generation
facilities and the repayments of non-recourse debt.  Interest expense associated
with non-recourse debt financing decreased by $9 million due to the repayment of
approximately $157 million of non-recourse debt.

Income Taxes

      Income taxes decreased $24 million from $69 million to $45 million in 2000
as compared to 1999. The year ended December 31, 2000 reflects a lower effective
tax rate due to a decrease in the foreign tax liability from foreign investments
at Global.  Income from certain foreign investments is assumed to be permanently
reinvested  outside of the United States.  During 1999, there was an increase in
state  income  taxes at  Resources  totaling  $11  million  due to to the  early
termination of a leveraged lease.

Results of Operations -- 1999 Compared to 1998

      Energy Holdings' earnings improved $31 million from $52 million in 1998 to
$83 million in 1999.

Revenues

      Revenues increased $177 million from $440 million to $617 million in 1999,
as compared to 1998, due to an increase of $17 million at Global, primarily from
additional  revenue of $8 million from  generation  assets in the United States,
augmented  further by an increase of $6 million due to the  acquisition of a 50%
interest in a distribution  company serving  customers in Chile and Peru in June
1999. Revenues from Resources improved $34 million primarily due to the addition
of revenue from new leveraged  lease  investments in 1999.  Revenues from Energy
Technologies  improved  approximately $126 million due to the acquisition of six
mechanical service/HVAC companies in 1999.


                                       25
<PAGE>

Operating Expenses

      Operating  expenses  increased  $173  million  from $251  million  to $424
million in 1999, as compared to 1998,  primarily driven by Energy  Technologies'
acquisitions  noted above.  In addition,  Global  recognized a pre-tax charge of
approximately  $44 million to reduce the  carrying  value of certain  assets and
EGDC  recognized  a  charge  of $11  million  to  reflect  a  write-down  to net
realizable value of a property in its portfolio. For a further discussion of the
write-downs, see the expanded discussion of EBIT contribution below.

Other Income (Loss)

      Other  income  (loss)  increased  by $79 million  from $(2) million to $77
million in 1999, as compared to 1998, primarily due to the sale by Global of its
50% interest in a 137 MW  cogeneration  facility in New Jersey  which  yielded a
gain of approximately $69 million.

Net Financing Expenses

      Interest  expense  increased by $5 million from $90 million to $95 million
for the year ended  December  31, 1999 as compared to 1998  primarily  due to an
increase of $8 million  related to the debt financing  associated  with Global's
acquisition of an interest in distribution  facilities in Chile and Peru in June
1999.  While such debt is  non-recourse  to Global and  Energy  Holdings,  it is
consolidated  on the balance  sheet  since it was issued by  entities  which are
majority or wholly-owned by Global.  Interest  expense  associated with recourse
financing  activities at Energy Holdings decreased $3 million for the year ended
December  31, 1999 as  compared  to 1998  primarily  due to lower  average  debt
outstanding.  Preferred stock dividends increased $8 million from $17 million to
$25 million due to the issuance of $509 million of cumulative preferred stock to
PSEG in January, June and July of 1998.

Income Taxes

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

EBIT Contribution

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

EBIT Contribution
Energy Holdings'
Subsidiaries

                                                   Years Ended December 31,
                                              --------------------------------
                                              2000          1999          1998
                                              ----          ----          ----
                                                     (Millions of Dollars)
Global ...............................        $ 123         $ 117         $  72
Resources ............................          190           169           135
Energy Technologies ..................          (11)           (8)          (16)
Other ................................           (7)           (7)           (3)
                                              -----         -----         -----
Total Consolidated EBIT ..............        $ 295         $ 271         $ 188
                                              =====         =====         =====

      Global

      Until the  fourth  quarter  of 2000,  Global's  investments  consisted  of
minority  ownership  positions in projects and joint  ventures.  Other than fees
collected for providing operations and maintenance  services,  Global's revenues
represented  its  pro-rata  ownership  share of net income  generated by project
affiliates  which is  accounted  for by the  equity  method of  accounting.  The
expenses in the table below are those  required to develop  projects and general
and administrative expenses required to operate the business as a whole. Project
operating  expenses  are not  reported  as direct  expenses  of  Global  but are
deducted  to arrive at net income of  project  affiliates,  a pro-rata  share of
which is reported as revenues by Global.


                                       26
<PAGE>

      The  accounts  of Global  include the assets,  liabilities,  revenues  and
expenses of majority-owned  subsidiaries over which Global exercises control and
for which control is other than temporary. In the fourth quarter of 2000, Global
increased  its  interest in an electric  generation  facility,  currently  under
construction  in Tunisia from 35% to 60% and completed  project  financing for a
90% economic interest in a power plant currently under construction in Poland.

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

Summary Results
Global

                                                   Years Ended December 31,
                                                ------------------------------
                                                2000         1999         1998
                                                ----         ----         ----
                                                     (Millions of Dollars)
Revenues ..............................         $169         $141         $ 124
Expenses ..............................           49           96            51
                                                ----         ----         -----
Operating Income ......................          120           45            73
Other Income (Loss) ...................            3           72            (1)
                                                ----         ----         -----
EBIT ..................................         $123         $117         $  72
                                                ====         ====         =====

      For the year ended December 31, 2000, Global's EBIT contribution increased
by $6 million  from $117  million to $123  million,  as compared  to 1999.  This
increase  related  primarily  to  the  favorable  performance  by  its  domestic
generation  assets and by its  investments  made in Latin  America  distribution
assets in June and September of 1999.  Global's  operating expenses in 1999 were
negatively  impacted by a pre-tax charge of approximately  $44 million to reduce
the  carrying  value of  certain  assets.  Other  income  in 1999 was  favorably
impacted by a pre-tax  gain of $69 million  from the sale of a 50% interest in a
cogeneration  facility.  After  adjusting  for the net  impact  of these  items,
Global's EBIT contribution increased by $31 million when comparing 2000 to 1999.

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

      Resources

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

Summary Results
Resources

                                                     Years Ended December 31,
                                                  ------------------------------
                                                  2000         1999         1998
                                                  ----         ----         ----
                                                       (Millions of Dollars)
Revenues ................................         $207         $179         $145
Expenses ................................           17           10           10
                                                  ----         ----         ----
Operating Income and EBIT ...............         $190         $169         $135
                                                  ====         ====         ====


                                       27
<PAGE>

      Resources'  EBIT  contribution  increased $21 million from $169 million to
$190  million  for the year ended  December  31,  2000 as  compared  to 1999 due
primarily to higher  leveraged  lease  income of $51 million from the  continued
investment by Resources in such financing transactions.  Further augmenting EBIT
was other increased  revenues of $4 million  primarily related to gains from the
sales of properties  subject to leveraged leases.  Offsetting the above benefits
were lower gains of $28 million from the sales of securities  and lower revenues
of $6 million related to lower income from certain limited partnerships.

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

      Energy Technologies

      Energy  Technologies  derives its revenues from the sale of energy-related
services and equipment.

Summary Results
Energy Technologies

                                                   Years Ended December 31,
                                            ------------------------------------
                                            2000           1999           1998
                                            -----          -----          -----
                                                   (Millions of Dollars)
Revenues ..........................         $ 417          $ 297          $ 171
Expenses ..........................           428            305            187
                                            -----          -----          -----
Operating Loss and EBIT ...........         $ (11)         $  (8)         $ (16)
                                            =====          =====          =====

      Energy Technologies' EBIT contribution decreased $3.0 million for the year
ended  December 31, 2000 compared to 1999.  Revenues  increased $120 million and
operating  expenses increased $123 million primarily due to acquisitions of HVAC
and mechanical service contracting  companies in 2000 and 1999. Also included in
the  increased  operating  expenses,  Energy  Technologies  recognized a pre-tax
restructuring  charge of approximately  $6.6 million for the year ended December
31,  2000.  Of this amount  approximately  $2.0  million was related to employee
severance costs for the termination of approximately 60 employees,  $1.6 million
was related to deferred transportation costs and $3.0 million was related to the
write-off of computer  hardware  and  software.  As of December  31,  2000,  all
severance costs had been paid related to the terminations.

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

Liquidity and Capital Resources

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


                                       28
<PAGE>

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

                                                     Years Ended December 31,
                                                --------------------------------
                                                2000         1999         1998
                                                -----       -------       -----
                                                     (Millions of Dollars)

Total Operating Activities ..............       $ 152       $    92       $  53
                                                =====       =======       =====
Total Investing Activities ..............       $(763)      $  (960)      $(160)
                                                =====       =======       =====
Financing Activities
  Debt ..................................       $ 327       $   731       $(311)
  Equity ................................         263           171         416
                                                -----       -------       -----
Total Financing Activities ..............       $ 590       $   902       $ 105
                                                =====       =======       =====

      Operating Activities

      Cash flow from operating activities increased $60 million from $92 million
to $152 million for the year ended  December 31, 2000 as compared to 1999.  This
increase  of $60  million  was  primarily  due to an  increase of $75 million at
Global largely  related to increased  dividends  received from affiliates of its
equity method investments.  In addition, an increase of $37 million in cash flow
from operations was realized by Resources, primarily due to increased rents from
the continued  investments in leveraged  leases.  These increases were partially
offset by an increase in working capital requirements of Energy Technologies.

      Cash flow from operating activities increased $39 million from $53 million
to $92  million  for the  year  ended  December  31,  1999 as  compared  to 1998
primarily  due to increased  cash  generation at  Resources.  Approximately  $21
million was due to increased cash generation from new investments as well as the
addition of cash flow from existing investments.  Cash paid for interest expense
decreased $9 million due to the  refinancing  of  approximately  $509 million of
outstanding  debt with preferred  stock in 1998 and additional  contribution  of
capital of approximately $200 million from PSEG in June 1999.

      Investing Activities

      In  2000,   Global  invested  $361  million  to  acquire  interests  in  a
distribution  company in Argentina,  a generation project in India, a generation
project in Poland and made  additional  investments  in  existing  domestic  and
international facilities. In 2000, Resources invested approximately $460 million
in five leveraged lease  transactions  including  electric and gas  distribution
assets in the  Netherlands  and electric  power plants in the United  States and
realized  $89  million  of  proceeds  from  the  sale  of four  leveraged  lease
agreements.

      In 1999, Global invested  approximately  $536 million to acquire interests
in two energy  distribution  companies in Chile and Peru.  Of the total  capital
invested,  $160 million was  financed  with  project  debt  consolidated  on the
balance sheet which is non-recourse to Global and Energy  Holdings.  Global also
invested  approximately $237 million for construction of generation  projects in
the United  States,  Venezuela,  China,  India,  Tunisia  and  Italy.  Resources
invested  approximately $380 million primarily in six leveraged leases of energy
facilities: two gas distribution networks in the Netherlands, three cogeneration
plants in Germany,  two  generation  plants in the United States and a liquefied
natural gas plant in the United States.  Energy  Technologies  acquired six HVAC
and  mechanical  service  contractors  for a  total  cost of  approximately  $49
million.

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

      For a discussion on the recently announced planned acquisition of Sociedad
Austral de Electricidad S.A.,  (SAESA),  see Note 18. "Subsequent Events" of the
Notes to Consolidated Financial Statements.

      Financing Activities

      In 2000,  Energy  Holdings  issued $300 million of 9.125% Senior Notes due
2004 and PSEG invested $300 million of additional equity in Energy Holdings. The
proceeds were used to fund the investments  discussed above and pay down certain
short-term  debt. At December 31, 2000,  Energy Holdings'  consolidated  capital
structure  consisted of 32% common  equity,  13%  preferred  stock and 55% debt.
Approximately  $354 million,  or 9% of Energy  Holdings' total invested  capital
represented  debt  consolidated  on the balance  sheet that is  non-recourse  to
Global and Energy Holdings.


                                       29
<PAGE>

      During 1999, PSEG invested approximately $200 million of additional equity
in Energy Holdings, the proceeds of which were used to repay short-term debt. In
addition,  Energy Holdings  received  proceeds from new debt  issuances,  net of
repayments, totaling approximately $572 million primarily to fund new investment
activity for Global,  Resources  and Energy  Technologies.  In addition,  Global
issued  non-recourse debt totaling  approximately $160 million primarily to fund
its acquisition of a Chilean distribution company.

      Capital Requirements

      Energy  Holdings  plans to  continue  the growth of Global and  Resources.
Energy Holdings will assess the growth  prospects and  opportunities  for Energy
Technologies'  business  before  committing  substantial  amounts of  additional
capital.  In 2000,  Energy  Holdings'  subsidiaries  made  investments  totaling
approximately   $763  million.   These  investments   included  leveraged  lease
investments  totaling $460 million by Resources and the acquisition by Global of
interests in a distribution company in Argentina,  a generation project in India
and a  generation  project  in Poland and  additional  investments  in  existing
projects. Global's investment in such assets totaled approximately $316 million,
including fees and closing costs.  Investment  expenditures in 2001 are expected
to be approximately  $1.5 billion,  including amounts related to the acquisition
of SAESA and  approximately  $600 million per year from 2002-2005,  comprised of
investments in generation and distribution facilities and projects and leveraged
lease  transactions.  Investment activity will be subject to periodic review and
revision and may vary significantly depending upon the opportunities  presented.
Factors affecting actual  expenditures and investments  include  availability of
capital and  suitable  investment  opportunities,  market  volatility  and local
economic trends. The anticipated sources of funds for such growth  opportunities
are  additional  equity  from  PSEG,  cash flow  from  operations  and  external
financings.

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

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

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

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

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

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

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

      Capital  resources  and  investment  requirements  may be  affected by the
outcome of the  proceedings  being  conducted  by the BPU pursuant to its Energy
Master Plan and the New Jersey  Electric  Discount  and Energy  Competition  Act
(Energy  Competition  Act) and the  requirements of the 1992 Focused Audit. As a
result of the final  outcome of the BPU's  proceedings  in  connection  with the
Energy Master Plan and Energy  Competition Act and accounting  impacts resulting
from  deregulation  of the generation of  electricity  and the unbundling of the
utility  business,  Energy  Holdings  does not believe  that the  Focused  Audit
provision  requiring  notification  to the BPU that  PSEG's  non-utility  assets
exceed 20% remains  appropriate and believe that modifications will be required.
In July 1999,  Public  Service  Electric  and Gas Company  notified the BPU that
PSEG's non-utility assets were expected to exceed 20% of its consolidated assets
in 1999.  On August 24,  1999,  the BPU issued its Final  Order in the matter of
Public Service  Electric and Gas Company's rate  unbundling,  stranded costs and
restructuring  filings. In


                                       30
<PAGE>

accordance with the BPU's Final Order,  Public Service  Electric and Gas Company
transferred its generation  assets to PSEG Power LLC, a wholly-owned  subsidiary
of PSEG,  on August 21,  2000.  The Final Order noted that PSEG's  non-regulated
assets  would  likely  exceed  20% of  total  PSEG  assets  once  the  utility's
generating assets were transferred to a non-regulated subsidiary, as provided in
the Final Order. The Final Order also noted that, due to significant  changes in
the industry and, in particular,  PSEG's corporate  structure as a result of the
Final Order,  modifications  to or relief from the Focused  Audit order might be
warranted.  The Final Order directed Public Service  Electric and Gas Company to
file a petition with the BPU to maintain the existing  regulatory  parameters or
to propose modifications to the Focused Audit order no later than the end of the
first quarter of 2000. In March 2000,  Public  Service  Electric and Gas Company
submitted  a  letter  to the  BPU as its  initial  compliance  with  the  filing
requirement,  in which it notified the BPU of its  intention to make a filing to
modify the terms of the  Focused  Audit  within  120 days after the Final  Order
becomes  final and  non-appealable.  Public  Service  Electric  and Gas  Company
completed  its  securitization  transaction  on  January  31,  2001.  Regulatory
oversight by the BPU to assure that there is no harm to utility  ratepayers from
Energy  Holdings'  share  of  PSEG's  non-utility  investments  is  expected  to
continue.  Energy  Holdings'  assets  were  approximately  25% and 22% of PSEG's
consolidated  assets at December 31, 2000 and  December 31, 1999,  respectively.
Energy Holdings  believes that if still  required,  it is capable of eliminating
PSEG  support  of PSEG  Capital  debt  within  the time  period set forth in the
Focused Audit.

      In addition, if PSEG were no longer to be exempt under PUHCA, PSEG and its
subsidiaries  would be subject to additional  regulation by the SEC with respect
to  financing  and  investing  activities,  including  the  amount  and  type of
non-utility  investments.  Energy  Holdings  believes that this would not have a
material adverse effect on its financial condition,  results of corporations and
net cash flows.

External Financings

      On December 31, 2000 Energy  Holdings had two  separate  senior  revolving
credit  facilities,  with  a  syndicate  of  banks,  a $495  million,  five-year
revolving  credit  and letter of credit  facility  and a $165  million,  364-day
revolving  credit  facility.  The interest rate on these  facilities is based on
LIBOR and the average  borrowing rate at Energy Holdings current rating level is
1.375%  over the one,  three or six  month  LIBOR  rate.  The  revolving  credit
facilities  also permit shorter term base rate borrowings at the prime rate. The
five-year  facility  also  permits up to $250 million of letters of credit to be
issued. The five-year facility matures on May 12, 2004 and the 364-day facility,
which Energy Holdings expects to renew,  matures on May 9, 2001. At December 31,
2000 and December 31, 1999,  Energy  Holdings had $392 million and $351 million,
respectively, outstanding under existing revolving credit facilities.

      Financial  covenants  contained in these  facilities  include the ratio of
cash flow available for debt service (CFADS) to fixed charges. At the end of any
quarterly  financial  period  such  ratio  shall not be less than  1.50x for the
12-month period then ending. As a condition of borrowing, the pro-forma CFADS to
fixed charges  ratio shall not be less than 1.75x as of the quarterly  financial
period ending  immediately  following the first anniversary of each borrowing or
letter of credit issuance. CFADS includes, but is not limited to, operating cash
before  interest  and  taxes,   pre-tax  cash   distributions   from  all  asset
liquidations and equity capital  contributions  from PSEG to the extent not used
to fund investing  activity.  In addition,  the ratio of  consolidated  recourse
indebtedness  to  recourse  capitalization,  as at  the  end  of  any  quarterly
financial  period,  shall  not be  greater  than  0.60 to  1.00.  This  ratio is
calculated by dividing the total recourse indebtedness of Energy Holdings by the
total  recourse  capitalization.  This ratio  excludes  the debt of PSEG Capital
which is supported by PSEG. As of December 31, 2000,  the latest 12 months CFADS
coverage  ratio  was 5.92 and the ratio of  recourse  indebtedness  to  recourse
capitalization was 0.37 to 1.0.

      Compliance  with  applicable  financial  covenants will depend upon Energy
Holdings' future financial  position and the level of earnings and cash flow, as
to which no assurances can be given. In addition,  Energy  Holdings'  ability to
continue  to grow its  business  will depend to a  significant  degree on PSEG's
ability to access  capital  and Energy  Holdings'  ability to obtain  additional
financing beyond current levels.

      In February 2001,  Energy Holdings,  in a private  placement,  issued $400
million of 8.625%  Senior Notes due 2008.  The net  proceeds  from the sale were
used for  repayment  of  short-term  debt  outstanding  under  Energy  Holdings'
revolving  credit  facilities.  Energy  Holdings  plans  to file a  registration
statement  with the SEC  relating  to an  exchange  offer for, or the resale of,
these Senior Notes in 2001.

      In June 2000, Global repaid in full at maturity a $71.0 million loan which
was incurred to partially  finance its investment in two distribution  companies
in Argentina.


                                       31
<PAGE>

      In May 2000,  Global repaid in full a $94.5 million loan which  financed a
portion of its  investment  in a  distribution  company in Brazil.  The debt was
refinanced  with funds from  Energy  Holdings  and a $190  million  U.S.  Dollar
denominated loan at the Brazilian  distribution company, of which Global's share
is $62 million.

      In February 2000,  Energy Holdings,  in a private  placement,  issued $300
million of 9.125%  Senior Notes due 2004.  The net  proceeds  from the sale were
used for  repayment  of  short-term  debt  outstanding  under  Energy  Holdings'
revolving  credit  facilities.  A registration  statement  filed with the SEC in
connection  with an exchange offer for these notes was effective on September 5,
2000. The exchange offer was completed on October 18, 2000,  with  substantially
all notes being exchanged.

      In October 1999,  Energy  Holdings,  in a private  placement,  issued $400
million of its 10% senior notes due 2009.  The net  proceeds  from the sale were
used for the repayment of short-term  debt  outstanding  under Energy  Holdings'
revolving  credit  facilities.  A registration  statement  filed with the SEC in
connection  with an  exchange  offer for these notes was  effective  on June 30,
2000. The exchange offer was completed on August 11, 2000,  with all notes being
exchanged.

      In September  1999 and February  2000,  Energy  Holdings  entered into two
standby  letter  of  credit  agreements  with a group of banks in the  aggregate
principal amount of $340 million to support equity  contribution  obligations of
Global  with  respect  to two  of  its  investments.  These  agreements  contain
identical financial  covenants to those in its revolving credit facilities.  The
first letter of credit agreement ($150 million) expired in December 2000 and the
second letter of credit  agreement  will expire in November  2001. The principal
amount reduces over time as Global makes its equity investments.

      PSEG Capital has a $750 million MTN program which provides for the private
placement  of MTNs.  This MTN  program  is  supported  by a  minimum  net  worth
maintenance agreement between PSEG Capital and PSEG which provides,  among other
things,  that PSEG (1) maintain its ownership,  directly or  indirectly,  of all
outstanding common stock of PSEG Capital,  (2) cause PSEG Capital to have at all
times a positive tangible net worth of at least $100,000 and (3) make sufficient
contributions  of liquid assets to PSEG Capital in order to permit it to pay its
debt  obligations.  As noted above,  Energy  Holdings  believes it is capable of
eliminating  PSEG  support of PSEG Capital debt within the time period set forth
in the Focused  Audit.  At December 31, 2000 and  December 31, 1999,  total debt
outstanding   under  the  MTN  program  was  $650  million  and  $630   million,
respectively maturing from 2001 to 2003.

Qualitative and Quantitative Disclosures About Market Risk

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

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

      Equity Securities

      Resources has  investments in equity  securities and limited  partnerships
which invest in equity  securities.  Resources carries its investments in equity
securities at their approximate fair value. Consequently,  the carrying value of
these  investments  is affected  by changes in the fair value of the  underlying
securities.  Fair value is  determined  by  adjusting  the  market  value of the
securities for liquidity and market volatility factors,  where appropriate.  The
aggregate fair values of such  investments  which had available market prices at
December 31, 2000 and 1999 were $115 million and $131 million,  respectively.  A
sensitivity  analysis has been prepared to estimate Energy Holdings' exposure to
market  volatility  of these  investments.  The  potential  change in fair value
resulting  from a  hypothetical  10%  change  in quoted  market  prices of these
investments  would  result in a $9 million and a $11 million  change in revenues
for the years ended December 31, 2000 and 1999, respectively.


                                       32
<PAGE>

      Interest Rates

      Energy  Holdings is subject to the risk of  fluctuating  interest rates in
the normal course of business.  Energy  Holdings'  policy is to manage  interest
rates  through the use of fixed rate debt,  floating rate debt and interest rate
swaps.  As of December  31, 2000 and 1999, a  hypothetical  10% change in market
interest  rates  would  result in a $6 million  and a $4  million  respectively,
change in interest costs related to short-term and floating rate debt.

      Foreign Operations

      Global and Resources had approximately  $1,796 million and $1,194 million,
respectively,  of  international  investments  as of December  31,  2000.  These
investments represented 58% of Energy Holdings' consolidated assets.  Resources'
international  investments are primarily  leveraged  leases of assets located in
the  Netherlands,  Germany,  Australia  and the United  Kingdom with  associated
revenues  denominated  in United  States  Dollars and,  therefore not subject to
foreign  currency risk.  Global has  international  investments in projects that
generate or distribute  energy  primarily in Argentina,  Brazil,  Chile,  China,
Italy, Peru, Poland, Tunisia and Venezuela.

      For a  discussion  of  foreign  currency  risk,  see Note  13.  "Financial
Instruments  and  Risk  Management"  of  the  Notes  to  Consolidated  Financial
Statements.

Environmental Matters

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

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

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

Accounting Issues

      For a discussion of significant  accounting matters, see Notes 2. "Summary
of Significant Accounting Policies" and 17. "Accounting Matters" of the Notes to
Consolidated Financial Statements.

Impact of New Accounting Pronouncements

      For a discussion of the impact of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging  Activities" (SFAS 133), as amended and Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements", (SAB 101) which
provides guidance on the timing of revenue recognition in financial  statements,
see Note 17 in Notes to Consolidated Financial Statements.


                                       33
<PAGE>

FORWARD LOOKING STATEMENTS

      Except for the historical  information  contained  herein,  certain of the
matters  discussed  in  this  offering  memorandum  constitute  "forward-looking
statements" within the meaning of the Private  Securities  Litigation Reform Act
of 1995. Such forward-looking  statements are subject to risks and uncertainties
which could cause actual results to differ  materially  from those  anticipated.
These  statements are based on management's  beliefs as well as assumptions made
by and information currently available to management. When used in this offering
memorandum, the words "will",  "anticipate",  "intend",  "estimate",  "believe",
"expect", "plan",  "hypothetical",  "potential" and variations of such words and
similar expressions are intended to identify forward-looking statements.  Energy
Holdings   undertakes   no   obligation   to  publicly   update  or  revise  any
forward-looking  statements,  whether  as a result  of new  information,  future
events or otherwise.

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

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

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

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

      o     political and foreign currency risks;

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

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

      o     partner and counterparty risk;

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

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

      o     federal, state and foreign regulatory actions;

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

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

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

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

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

      o     environmental concerns; and

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

ITEM 7A: QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

      Information  relating to quantitative  and qualitative  disclosures  about
market  risk is set  forth  under  the  caption  "Qualitative  and  Quantitative
Disclosures  About  Market  Risk" in  Management's  Discussion  and  Analysis of
Financial  Condition and Results of Operations and "Use of Derivative  Financial
Instruments" in Note 2. Summary of Significant  Accounting Policies of the Notes
to Consolidated Financial Statements. Such information is incorporated herein by
reference.

ITEM 8:  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                                       34
<PAGE>

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

<TABLE>
<CAPTION>
                                                         Years ended December 31,
                                                  -----------------------------------
                                                     2000         1999         1998
                                                  ---------    ---------    ---------
<S>                                               <C>          <C>          <C>
REVENUES
    Income from joint ventures and partnerships   $ 158,271    $ 134,635    $ 132,257
    Energy service revenues ...................     331,002      196,143       73,954
    Energy supply revenues ....................      67,398       85,782       81,905
    Income from capital leases ................     162,678      111,798       75,801
    Net investment gains ......................      35,120       60,548       41,858
    Other revenues ............................      40,241       28,867       34,509
                                                  ---------    ---------    ---------
         Total Revenues .......................     794,710      617,773      440,284
                                                  ---------    ---------    ---------
OPERATING EXPENSES
    Cost of energy sales ......................      69,044       81,659       80,758
    Operation and maintenance .................     292,149      182,426       73,637
    Administrative and general ................     121,853      108,950       90,730
    Restructuring charge ......................       6,604           --           --
    Write-down of project investments .........          --       43,971           --
    Depreciation and amortization .............      13,236        7,462        5,414
                                                  ---------    ---------    ---------
         Total Operating Expenses .............     502,886      424,468      250,539
                                                  ---------    ---------    ---------

OPERATING INCOME ..............................     291,824      193,305      189,745
OTHER INCOME (LOSS) ...........................       2,898       77,404       (1,818)
INTEREST EXPENSE-NET ..........................     136,517       94,685       90,367
                                                  ---------    ---------    ---------
INCOME BEFORE INCOME TAXES ....................     158,205      176,024       97,560
                                                  ---------    ---------    ---------
INCOME TAXES
    Current ...................................    (129,192)      11,176       (1,480)
    Deferred ..................................     175,392       58,735       32,760
    Investment and energy tax credits-net .....        (863)        (969)      (1,120)
                                                  ---------    ---------    ---------
         Total Income Taxes ...................      45,337       68,942       30,160
MINORITY INTERESTS ............................      (1,079)        (917)      (1,804)
                                                  ---------    ---------    ---------
NET INCOME ....................................     113,947      107,999       69,204
    Preferred Stock Dividends .................      23,886       25,007       17,478
                                                  ---------    ---------    ---------
EARNINGS AVAILABLE TO COMMON STOCKHOLDER ......   $  90,061    $  82,992    $  51,726
                                                  =========    =========    =========
</TABLE>

See Notes to Consolidated Financial Statements.


                                       35
<PAGE>

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

                                                              December 31,
                                                       -------------------------
                                                          2000           1999
                                                       -----------    ----------
CURRENT ASSETS
   Cash and temporary cash investments .............   $   22,198    $   43,306
   Accounts receivable:
      Trade (net of doubtful accounts of $5,051
        and $5,228, respectively) ..................      131,893       105,542
      Other ........................................        3,885        15,697
      Affiliated companies .........................       64,134         4,099
   Assets held for sale (net of valuation allowances
     of $6,775 and $17,912, respectively) ..........       47,586        35,700
   Cost and estimated earnings in excess
     of billings on uncompleted contracts ..........       27,366        11,525
   Notes receivable ................................       22,873        11,845
   Inventory .......................................        1,105         2,036
   Prepayments .....................................        3,987         5,321
   Other current assets ............................        2,339         4,910
                                                       ----------    ----------
          Total Current Assets .....................      327,366       239,981
                                                       ----------    ----------

PROPERTY, PLANT AND EQUIPMENT
   Real estate (net of valuation allowances
     of $5,468 and $0, respectively) ...............      102,811        34,261
   Property and equipment ..........................       59,456        44,726
   Electric generation assets ......................        9,655            --
   Construction in progress ........................      171,677            --
   Accumulated depreciation and amortization .......      (50,436)      (33,125)
                                                       ----------    ----------
          Property, Plant and Equipment - net ......      293,163        45,862
                                                       ----------    ----------

INVESTMENTS
   Capital leases - net ............................    2,252,532     1,758,714
   Corporate joint ventures ........................    1,584,272     1,427,997
   Partnership interests ...........................      575,142       493,201
   Other investments ...............................       70,525        73,343
                                                       ----------    ----------
          Total Investments ........................    4,482,471     3,753,255
                                                       ----------    ----------

OTHER ASSETS
   Goodwill ........................................       55,559        34,929
   Other ...........................................       38,975        40,358
                                                       ----------    ----------
          Total Other Assets .......................       94,534        75,287
                                                       ----------    ----------

          TOTAL ASSETS .............................   $5,197,534    $4,114,385
                                                       ==========    ==========

See Notes to Consolidated Financial Statements.


                                       36
<PAGE>

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

                                                             December 31,
                                                      --------------------------
                                                         2000           1999
                                                      -----------    -----------
CURRENT LIABILITIES
    Accounts Payable:
      Trade ......................................    $   54,256    $   41,289
      Interest ...................................        31,134        20,320
      Other ......................................        36,822        42,154
    Affiliated companies .........................         5,379           897
    Billings in excess of costs and estimated
      earnings on uncompleted contracts ...........       17,639        10,925
    Notes payable .................................      392,000       351,000
    Short-term debt ...............................       90,671            --
    Current portion of long-term debt .............      266,898       174,956
                                                      ----------    ----------
         Total Current Liabilities ................      894,799       641,541

LONG-TERM DEBT ....................................    1,432,207     1,175,730
                                                      ----------    ----------

DEFERRED TAXES AND OTHER LIABILITIES
    Deferred income taxes .........................    1,061,955       887,463
    Deferred investment and energy tax credits ....        8,622         8,935
    Other long-term liabilities ...................       28,199        24,443
                                                      ----------    ----------
         Total Deferred Taxes and Other Liabilities    1,098,776       920,841
                                                      ----------    ----------

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

MINORITY INTERESTS ................................       22,919         1,408
                                                      ----------    ----------

STOCKHOLDER'S EQUITY
    Common stock ..................................          100           100
    Preferred stock ...............................      509,200       509,200
    Additional paid-in capital ....................    1,089,608       789,608
    Retained earnings .............................      352,848       276,182
    Accumulated other comprehensive loss ..........     (202,923)     (200,225)
                                                      ----------    ----------
         Total Stockholder's Equity ...............    1,748,833     1,374,865
                                                      ----------    ----------

TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY ........   $5,197,534    $4,114,385
                                                      ==========    ==========

See Notes to Consolidated Financial Statements.


                                       37
<PAGE>

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

<TABLE>
<CAPTION>
                                                                  Years Ended December 31,
                                                            -----------------------------------
                                                              2000         1999         1998
                                                            ---------    ---------    ---------
<S>                                                         <C>          <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net income ...........................................   $ 113,947    $ 107,999    $  69,204
                                                            ---------    ---------    ---------
   Adjustments to reconcile net income to
     net cash provided by operating activities:
   Depreciation and amortization ........................      25,726       18,340       28,106
   Deferred income taxes (other than leases) ............     (16,303)     (31,717)      (9,588)
   Rents received, less leveraged lease income ..........      73,832        6,420      (19,726)
   Investment distributions .............................      51,304      134,079       88,592
   Undistributed earnings from affiliates ...............     (28,110)     (53,084)     (41,410)
   Net gains on investments .............................     (38,524)    (116,491)     (44,867)
   Write-down of project investments ....................          --       43,971           --
   Non-cash portion of restructuring charge .............       4,604           --           --
   Other ................................................       4,770       (2,769)       1,851
   (Increase) decrease in accounts receivable ...........     (93,887)     (33,114)      16,064
   Decrease (increase) in other current assets ..........       2,265        4,450       (2,070)
   Increase (decrease) in accounts payable ..............      37,074       (9,801)     (36,202)
   Increase (decrease) in interest payable ..............      10,827       15,448       (1,275)
   Increase (decrease) in other current liabilities .....       4,859        8,665        4,101
                                                            ---------    ---------    ---------
        Net Cash Provided By Operating Activities .......     152,384       92,396       52,780
                                                            ---------    ---------    ---------
CASH FLOWS FROM INVESTING ACTIVITIES
   Increase in partnerships and joint ventures ..........    (367,976)    (725,352)     (89,242)
   Investments in capital leases ........................    (459,737)    (378,390)    (253,417)
   Proceeds from sales of capital leases ................      89,580      125,512       71,253
   Additions to property, plant and equipment ...........     (53,603)      (9,472)      (9,865)
   Proceeds from sales of real estate and
     equity investments .................................         802       71,431      145,449
   Additions to deferred project costs ..................      (7,603)      (6,604)     (17,401)
   Acquisitions, net of cash acquired ...................     (14,472)     (48,546)      (8,056)
   Return of capital from partnerships ..................      86,231       11,480        5,183
   Additions to other assets ............................     (35,983)        (431)      (4,037)
                                                            ---------    ---------    ---------
        Net Cash Used In Investing Activities ...........    (762,761)    (960,372)    (160,133)
                                                            ---------    ---------    ---------
CASH FLOWS FROM FINANCING ACTIVITIES
   Proceeds from additional paid-in capital .............     300,000      199,700           --
   Proceeds from sale of preferred stock ................          --           --      509,200
   Redemption of preferred stock ........................          --           --      (75,000)
   Dividends paid .......................................     (37,281)     (28,791)     (18,076)
   Repayment of borrowings ..............................    (157,276)    (249,826)    (310,991)
   Proceeds from borrowings .............................     477,143      980,248           --
   Other ................................................       6,683          989           --
                                                            ---------    ---------    ---------
        Net Cash Provided By Financing Activities .......     589,269      902,320      105,133
                                                            ---------    ---------    ---------
   Net (Decrease) Increase In Cash And Temporary
     Cash Investments ...................................     (21,108)      34,344       (2,220)
   Cash And Temporary Cash Investments, Beginning Of Year      43,306        8,962       11,182
                                                            ---------    ---------    ---------
   Cash And Temporary Cash Investments, End Of Yeae .....   $  22,198    $  43,306    $   8,962
                                                            =========    =========    =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
   Cash paid (received) for:
        Interest expense ................................   $ 119,298    $  74,445    $  83,334
                                                            =========    =========    =========
        Income taxes (benefits) .........................   $(111,916)   $   2,755    $   7,396
                                                            =========    =========    =========
NON-CASH INVESTING AND FINANCING ACTIVITIES
   Issuance of PSEG stock for companies acquired ........   $      --    $  10,871    $      --
   Debt assumed with companies acquired .................   $ 134,869    $  11,475    $      --
</TABLE>

See Notes to Consolidated Financial Statements.


                                       38
<PAGE>

                            PSEG ENERGY HOLDINGS INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
                             (Thousands of Dollars)

<TABLE>
<CAPTION>
                                                                                               Accumulated
                                                                      Additional                  Other
                                                Common   Preferred      Paid-in    Retained   Comprehensive
                                                Stock      Stock       Capital     Earnings   Income (Loss)     Total
                                                ------   ---------    ----------   --------   -------------     -----
<S>                                               <C>    <C>          <C>          <C>          <C>          <C>
Balance as of January 1, 1998 .................   $100   $  75,000    $  579,070   $ 145,248    $ (14,519)   $   784,899
                                                  ----   ---------    ----------   ---------    ---------    -----------
    Net income ................................     --          --            --      69,204           --         69,204
    Other comprehensive loss, net of tax:
      Foreign currency translation adjustment
        (net of tax of $3,166) ................     --          --            --          --      (28,496)       (28,496)
                                                                                                             -----------
         Other comprehensive loss .............     --          --            --          --           --        (28,496)
                                                                                                             -----------
    Comprehensive income ......................     --          --            --          --           --         40,708

    Issuance of cumulative
       preferred stock ........................     --     509,200            --          --           --        509,200
    Redemption of preferred stock .............     --     (75,000)           --          --           --        (75,000)
    Preferred stock dividends .................     --          --            --     (17,478)          --        (17,478)
                                                  ----   ---------    ----------   ---------    ---------    -----------
Balance as of December 31, 1998 ...............    100     509,200       579,070     196,974      (43,015)     1,242,329
                                                  ----   ---------    ----------   ---------    ---------    -----------
    Net income ................................     --          --            --     107,999           --        107,999
    Other comprehensive loss, net of tax:
      Foreign currency translation adjustment
        (net of tax of $17,449) ...............     --          --            --          --     (157,038)      (157,038)
      Unrealized gains (losses) on investments:
      Unrealized (losses) on marketable
        securities (net of tax of $99) ........     --          --            --          --         (283)          (283)
      Reclassification adjustment for
        losses included in net income .........     --          --            --          --          111            111
                                                                                                             -----------
         Other comprehensive loss .............     --          --            --          --           --       (157,210)
                                                                                                             -----------
    Comprehensive loss ........................     --          --            --          --           --        (49,211)

    Additional paid-in capital ................     --          --       210,538          --           --        210,538
    Preferred stock dividends .................     --          --            --     (25,007)          --        (25,007)
    Common stock dividends ....................     --          --            --      (3,784)          --         (3,784)
                                                  ----   ---------    ----------   ---------    ---------    -----------
Balance as of December 31, 1999 ...............    100     509,200       789,608     276,182     (200,225)     1,374,865
                                                  ----   ---------    ----------   ---------    ---------    -----------
    Net income ................................     --          --            --     113,947           --        113,947
    Other comprehensive income (loss), net of
      tax:
      Foreign currency translation adjustment
        (net of tax of $319) ..................     --          --            --          --       (2,870)        (2,870)
      Unrealized gains (losses) on investments:
      Unrealized (losses) on marketable
        securities  (net of tax of $27) .......     --          --            --          --          (77)           (77)
      Reclassification adjustment for
        losses included in net income .........     --          --            --          --          249            249
                                                                                                             -----------
         Other comprehensive loss .............     --          --            --          --           --         (2,698)
                                                                                                             -----------
    Comprehensive income ......................     --          --            --          --           --        111,249

    Additional paid-in capital ................     --          --       300,000          --           --        300,000
    Preferred stock dividends .................     --          --            --     (23,886)          --        (23,886)
    Common stock dividends ....................     --          --            --     (13,395)          --        (13,395)
                                                  ----   ---------    ----------   ---------    ---------    -----------
Balance as of December 31, 2000 ...............   $100   $ 509,200    $1,089,608   $ 352,848    $(202,923)   $ 1,748,833
                                                  ====   =========    ==========   =========    =========    ===========
</TABLE>

See Notes to Consolidated Financial Statements.


                                       39
<PAGE>

                            PSEG ENERGY HOLDINGS INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.  ORGANIZATION

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

NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      Consolidation

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

      Cash and Temporary Cash Investments

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

      Property, Plant and Equipment

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

      Construction  progress  payments,   engineering  costs,  insurance  costs,
salaries,  interest  and other costs  relating to  construction  in progress are
capitalized for those generation assets that are  consolidated.  Construction in
progress  balances will be  transferred to Electric  Generation  assets when the
assets are ready for their intended use.

      Impairment of Long-lived Assets

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

      The application of SFAS No. 121 relates primarily to long-lived generation
assets  of  affiliates  from  which  equity in  earnings  is  recognized  in the
consolidated  statements of income.  Should an impairment  loss be recognized at
one of Energy  Holdings  affiliates,  its pro-rata share of the loss after taxes
will be reflected in its consolidated  statements of income. For the years ended
December 31, 2000,  December 31, 1999, and December 31, 1998, no such impairment
losses  were  recognized  against  the  long-lived  assets of  Energy  Holdings'
affiliates.


                                       40
<PAGE>

                            PSEG ENERGY HOLDINGS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

      Capital Leases

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

      Income on leveraged  leases is  recognized  by a method  which  produces a
constant rate of return on the outstanding  net investment in the lease,  net of
the related deferred tax liability,  in the years in which the net investment is
positive.  Initial  direct costs are deferred and  amortized  using the interest
method over the lease period.

      Investments in Corporate Joint Ventures and Partnerships

      Global and Resources interests in 50% or less of active joint ventures and
partnerships  are  accounted  for under the equity  method of  accounting  where
significant influence over joint venture or partnership operating and management
decisions  exist.  The  pro-rata  share of income is recorded in the Income from
joint  ventures  and   partnerships   line  of  the  income   statement  with  a
corresponding  increase in the  investment  amount on the  consolidated  balance
sheets.  Cash distributions are recorded as reductions to the investment balance
on the  consolidated  balance  sheets.  For  investments  in  which  significant
influence does not exist, the cost method of accounting is applied.  Interest is
capitalized on investments  during  construction  and  development of qualifying
assets.  The  capitalized  interest is amortized over the operating lives of the
projects  upon  the  date  of  commercial  operation.  The  amount  of  interest
capitalized  was  $20,760,000,  $8,484,000,  and  $1,181,000 for the years ended
December 31, 2000, 1999 and 1998, respectively.

      Resources  carries its partnership  investments in certain venture capital
and  leveraged  buyout funds  investing in securities at fair value where market
quotations  and an  established  liquid market of  underlying  securities in the
portfolio are available.  Fair value is determined based on the review of market
price and volume data in conjunction with the Energy  Holdings'  invested liquid
position  in  such  securities.  Changes  in  fair  value  are  recorded  in Net
investment gains in the Consolidated Statements of Income.

      Income Taxes

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

      Use of Derivative Financial Instruments

      Energy  Holdings'  is subject to risk from  changes in interest  rates and
foreign currency  exchange rates.  Energy Holdings' policy is to use derivatives
to manage these risks consistent with its business plans and prudent practices.

      Gains and losses on hedges of existing  assets or liabilities are included
in the  carrying  amounts of those  assets and  liabilities  and are  ultimately
recognized in income as part of those carrying amounts. Gains and losses related
to qualifying  hedges of firm  commitments are deferred and recognized in income
when  the  hedged  transaction  occurs.  See  Note 8.  "Long-Term  Debt  and 13.
Financial Instruments and Risk Management", for additional information.


                                       41
<PAGE>

                            PSEG ENERGY HOLDINGS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

      Foreign Currency

      Energy Holdings' financial statements are prepared using the United States
Dollar as the  reporting  currency.  For  foreign  operations  whose  functional
currency  is deemed  to be the local  (foreign)  currency,  asset and  liability
accounts are translated into United States Dollars at current exchange rates and
revenues and expenses are translated at average exchange rates prevailing during
the period.  Translation gains and losses (net of applicable deferred taxes) are
not included in determining  net income but are reported in other  comprehensive
income (See the Consolidated Statements of Stockholder's Equity).

      Gains and losses on transactions  denominated in a currency other than the
functional currency are included in the results of operations as incurred. Gains
and  losses on foreign  currency  transactions,  which  operate as a hedge of an
identifiable  foreign  currency  commitment,  a  hedge  of  a  foreign  currency
investment  position,  or when the  entities  involved in the  transactions  are
consolidated  or  accounted  for by the  equity  method  and  settlement  of the
transaction  is not expected in the  foreseeable  future,  are included in other
comprehensive income.

      Net Investment Gains or Losses

      Resources holds a beneficial  partnership interest in two leveraged buyout
funds which hold  publicly  traded  securities.  Investment  gains or losses are
recognized  in income as the value of securities  in the funds  fluctuate.  When
securities are sold from the funds and cash is distributed, such gains or losses
become realized. The investments in leveraged buyout funds represent investments
in marketable  securities  that are  accounted for using fair value  accounting.
Resources  also  recognizes  investment  gains or losses  when  leveraged  lease
interests are sold at an amount either greater or less than the carrying amount,
respectively. Losses are also recognized if management determines that there has
been other than a temporary decline in the market value of a property subject to
leveraged  lease or a change in the  assumption of the residual  value  expected
upon lease  termination.  Increases in market  value of leased  property are not
recognized  in the  financial  statements.  Investment  gains or losses are also
recognized  upon sale of partnership  interests at amounts  greater than or less
than the carrying value, respectively.

      Energy Service Revenues and Expenses

      Energy  Technologies'  revenues  from  fixed  price  and  other  long-term
construction contracts are recognized on the percentage-of-completion  method of
accounting  determined by the ratio of costs incurred to management's  estimates
of final total  anticipated  costs.  Revenues  from  cost-plus-fee  and time and
material  contracts  are  recognized on the basis of costs  incurred  during the
period plus the fee earned, measured by the cost-to-cost method and are included
in Energy service  revenues in the consolidated  statements of income.  Contract
costs include all direct labor and benefits, material purchased for or installed
in the  project,  subcontract  costs and  allocations  of indirect  construction
costs. As contracts extend over one or more years,  revisions in cost and profit
estimates  during the course of the work are reflected in the accounting  period
in which the facts that require the revisions become known. Amounts representing
contract change orders,  customer approved claims or other items are included in
revenue only when they can be reasonably  estimated and realization is probable.
When it is indicated that a contract will result in an ultimate loss, the entire
loss is recognized in the financial  statements  during the period in which such
loss becomes known.

      The current asset,  Costs and Estimated  Earnings in Excess of Billings on
Uncompleted  Contracts,  represents  contract  revenues  recognized in excess of
amounts billed. The current liability, Billings in Excess of Costs and Estimated
Earnings on  Uncompleted  Contracts,  represents  billings in excess of contract
revenues recognized.

      Energy Supply

      Energy  Technologies  recorded  revenues  from the sale of natural gas and
electricity to customers.  These sales were recorded in energy supply revenue in
the consolidated  statements of income and related supply costs were recorded in
cost of energy sales.


                                       42
<PAGE>

                            PSEG ENERGY HOLDINGS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

      Energy  Technologies  entered into long-term fixed price natural gas sales
contracts.  Energy  Technologies  also  entered  into  long-term  transportation
agreements  as required  to serve such  contracts.  The costs of  transportation
varied  based  upon  seasonality.  In  order to  properly  match  revenues  with
expenses, Energy Technologies recorded transportation costs related to the fixed
price contracts based on average unit transportation costs.

      In February 2000, Energy Technologies  entered into a business arrangement
with  Enermetrix.com  to provide an  internet-based  auction  exchange that will
allow  their  customers  an  alternative   method  in  purchasing  their  energy
requirements.  In June  2000,  Energy  Technologies  outsourced  certain  supply
services  under its  retail gas  service  agreements.  With these  transactions,
Energy  Technologies  has  exited  the  electric  and  gas  commodity  business.
Subsequent to the completion of existing contracts,  Energy Technologies will no
longer record Energy Supply Revenues.

      As a result of  exiting  from the  electric  and gas  commodity  business,
Energy Technologies  recognized a pre-tax  restructuring charge of approximately
$6,604,000  for the year ended  December 31, 2000. Of this amount  approximately
$2,000,000   related  to  employee   severance  costs  for  the  termination  of
approximately 60 employees,  $1,604,000 related to deferred transportation costs
and $3,000,000  was related to the write-off of computer  hardware and software.
As of  December  31,  2000,  all  severance  costs had been paid  related to the
terminations.

      Deferred Project Costs

      Global  capitalizes  all direct external and direct internal costs related
to project  development  once a project  reaches  certain  milestones.  Once the
project reaches financial closing, Global transfers the deferred project balance
to the investment  account.  These costs are amortized on a straight-line  basis
over the  lives of the  related  project  assets  as a  reduction  to  equity in
earnings  of  the  investee.  Such  amortization  commences  upon  the  date  of
commercial  operation.  Development  costs related to unsuccessful  projects are
charged to expense.  Deferred project costs on the  consolidated  balance sheets
are shown in Other Assets.

      Deferred Debt Issuance Costs

      Deferred  debt issuance  costs are amortized  over the term of the related
indebtedness using the interest method.

      Goodwill

      Energy  Holdings  has  classified  as goodwill  the cost in excess of fair
value of the net assets  (including  tax  attributes)  of companies  acquired in
purchase  transactions.  Goodwill is being amortized on a  straight-line  method
over 20 years.

      Use of Estimates

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

NOTE 3. CAPITAL LEASES

      Resources' net investment in leveraged leases is composed of the following
elements:

                                                             December 31,
                                                     ---------------------------
                                                        2000             1999
                                                     ----------       ----------
                                                        (Thousands of Dollars)
Lease rents receivable .......................       $3,175,304       $2,643,447
Estimated residual value of
  leased assets ..............................        1,039,587          653,596
                                                     ----------       ----------
                                                      4,214,891        3,297,043
Less - unearned and deferred income ..........        1,962,359        1,538,329
                                                     ----------       ----------
Investment in leveraged leases ...............        2,252,532        1,758,714
                                                     ----------       ----------
Less - deferred taxes arising from
  leveraged leases ...........................        1,030,719          843,810
                                                     ----------       ----------
Net investment in leveraged leases ...........       $1,221,813       $  914,904
                                                     ==========       ==========


                                       43
<PAGE>

                            PSEG ENERGY HOLDINGS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

      Resources' pre-tax income and income tax effects related to investments in
leveraged leases are as follows:

                                                    Years ended December 31,
                                              ---------------------------------
                                                 2000        1999        1998
                                              ---------    --------    --------
                                                     (Thousands of Dollars)
Pre-tax income ............................   $ 162,678    $ 11,798    $ 75,801
                                              =========    ========    ========
Income tax effect on pre-tax income .......   $  57,597    $ 40,852    $ 27,038
Amortization of investment tax credits ....   $    (550)   $   (510)   $   (850)

      Resources' leases property and equipment,  through leveraged leases,  with
terms ranging from 8 to 45 years. The leveraged lease portfolio consisted of the
following types of property:

                                                                December 31,
                                                           ---------------------
                                                           2000            1999
                                                           ----            ----
Energy-related .................................             79%             72%
Aircraft .......................................              9%             11%
Real Estate ....................................              7%             11%
Commuter rail cars .............................              4%              5%
Industrial .....................................              1%              1%

      Resources' initial investment in leveraged leases represents approximately
20% of the  purchase  price of the  leveraged  leased  property;  the balance is
provided by  third-party  financing in the form of  non-recourse  long-term debt
which is secured by the property.

      In January  2000,  Resources  reclassified  its  investment in a leveraged
lease,   to  an  operating   lease.   The   reclassification   was  due  to  the
unpredictability  of future rent  collection.  The leveraged lease investment of
$30,609,000 was reclassified to Property, Plant and Equipment and Current Assets
totaling  approximately  $53,974,000 at December 31, 2000,  partially  offset by
long-term debt of $23,734,000 and other liabilities of $1,622,000.

      In 2000,  Resources  negotiated  the early  termination  of four leveraged
leases and received cash proceeds of  $89,179,000  and recognized a pre-tax gain
of $37,629,000. The pre-tax gain was recorded in Net investment gains.

      In 1999,  Resources  negotiated the early  termination of three  leveraged
leases and received cash proceeds of $125,512,000  and recognized a pre-tax gain
of $22,065,000. The pre-tax gain was recorded in Net investment gains.

NOTE 4.  INVESTMENTS IN CORPORATE JOINT VENTURES, PARTNERSHIPS AND OTHER

Global

      Global's  investments include domestic  qualifying  facilities (QFs) under
the Public Utility  Regulatory  Policies Act of 1978,  foreign exempt  wholesale
generators  (EWGs)  under the 1992  amendments  to the  Public  Utility  Holding
Company Act of 1935 and foreign utility companies (FUCOs).  Global's investments
are generally  financed  through debt that is  non-recourse to Global and Energy
Holdings.  Global's  investments in QF projects have been  undertaken with other
participants because Global, together with other utility affiliates, may not own
more than 50% of a QF subsequent to its in-service date. Projects involving EWGs
are not restricted to a 50% investment limitation.  Global's share of income and
cash flow distribution  percentages  currently range from 4.78% to 70%. Interest
is earned on loans made to various projects. Such loans earned rates of interest
ranging from 7.5% to 15% during 2000 and 1999.

      As of December 31, 2000, Global's portfolio consisted of investments in 39
cogeneration or independent power projects  (including 15 under  construction or
advanced  development)  which range in gross  production  capacities  from 15 to
1,000 megawatts (MW) of electricity,  and seven electric distribution companies.
As of  December  31, 2000 and 1999,  Global's  assets and share of project MW by
region was as follows:


                                       44
<PAGE>

                            PSEG ENERGY HOLDINGS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                   2000          MW           1999          MW
                                ----------      -----      ----------      -----
                              (Thousands of               (Thousands of
                                 Dollars)                   Dollars)
Generation
North America ............      $  320,891      1,294      $  208,040      1,294
Latin America ............         114,744        501          90,784        501
Asia Pacific .............         110,820        161          89,629        161
EAMS (1) .................         338,416      1,153          86,996        803
Distribution
Latin America ............       1,221,427        N/A       1,159,051        N/A
                                ----------      -----      ----------      -----
Total Investment .........      $2,106,298      3,109      $1,634,500      2,759
                                ==========      =====      ==========      =====

(1)   Europe,  Africa,  Middle  East and India.  Included  in 2000 are assets of
      $201,135,000  related to the consolidation of certain generation  projects
      currently under construction in Europe and Africa.

      Investments in net assets of affiliated  companies accounted for under the
equity  method  of  accounting  by  Global   amounted  to   $1,900,003,000   and
$1,629,237,000  at December  31, 2000 and 1999,  respectively.  During the three
years ended December 31, 2000, 1999 and 1998, the amount of dividends from these
investments was $107,009,000,  $81,794,000 and $91,752,000 respectively.  Energy
Holdings'  after-tax share of undistributed  earnings of affiliates  included in
consolidated  retained earnings was approximately  $32,000,000,  $31,000,000 and
$14,000,000, respectively for the years ended December 31, 2000, 1999 and 1998.

      Summarized  results of operations and financial position of all affiliates
in which Global uses the equity method of accounting are presented below:

                                          Foreign       Domestic       Total
                                         ----------    ----------    ----------
                                                 (Thousands of Dollars)
December 31, 2000
Condensed Income Statement
 Information
Revenue ..............................   $1,059,396    $  451,620    $1,511,016
Gross Profit .........................      434,208       255,457       689,665
Minority Interest ....................      (24,464)          (67)      (24,531)
Net Income ...........................      155,450       162,194       317,644
Condensed Balance Sheet Information
Assets:
 Current Assets ......................   $  503,327    $  130,485    $  633,812
 Property, Plant & Equipment .........    2,354,804     1,348,930     3,703,734
 Goodwill ............................    1,201,311            --     1,201,311
 Other  Non-current Assets ...........      464,090        76,558       540,648
                                         ----------    ----------    ----------
Total Assets .........................   $4,523,532    $1,555,973    $6,079,505
                                         ----------    ----------    ----------
Liabilities:
 Current Liabilities .................   $  817,831    $   99,483    $  917,314
 Debt* ...............................      696,052       732,280     1,428,332
 Other Non Current Liabilities .......      173,874        90,050       263,924
 Minority Interest ...................      129,089           491       129,580
                                         ----------    ----------    ----------
Total Liabilities ....................    1,816,846       922,304     2,739,150
Equity ...............................    2,706,686       633,669     3,340,355
                                         ----------    ----------    ----------
Total Liabilities & Equity ...........   $4,523,532    $1,555,973    $6,079,505
                                         ----------    ----------    ----------


                                       45
<PAGE>

                            PSEG ENERGY HOLDINGS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                          Foreign       Domestic       Total
                                         ----------    ----------    ----------
                                                 (Thousands of Dollars)
December 31, 1999
Condensed Income Statement Information
Revenue ..............................   $1,183,713    $  423,477    $1,607,190
Gross Profit .........................      415,615       264,806       680,421
Minority Interest ....................      (22,826)          (79)      (22,905)
Net Income ...........................      110,248       154,705       264,953
Condensed Balance Sheet Information
Assets:
 Current Assets ......................   $  518,085    $  121,934    $  640,019
 Property, Plant & Equipment .........    2,495,133       794,385     3,289,518
 Goodwill ............................    1,199,589            --     1,199,589
 Other Assets ........................      322,004        86,990       408,994
                                         ----------    ----------    ----------
Total Assets .........................   $4,534,811    $1,003,309    $5,538,120
                                         ----------    ----------    ----------
Liabilities:
 Current Liabilities .................   $  577,242    $  114,327    $  691,569
 Debt* ...............................      559,759       460,817     1,020,576
 Other Non Current Liabilities .......      502,199        23,608       525,807
 Minority Interest ...................      230,806           490       231,296
                                         ----------    ----------    ----------
Total Liabilities ....................    1,870,006       599,242     2,469,248
Equity ...............................    2,664,805       404,067     3,068,872
                                         ----------    ----------    ----------
Total Liabilities & Equity ...........   $4,534,811    $1,003,309    $5,538,120
                                         ----------    ----------    ----------

                                          Foreign       Domestic       Total
                                         ----------    ----------    ----------
                                                 (Thousands of Dollars)
December 31, 1998
Condensed Income Statement Information
Revenue ..............................   $1,123,169    $ 441,228    $1,564,397
Gross Profit .........................      587,241      276,724       863,965
Minority Interest ....................       (2,474)         (55)       (2,529)
Net Income ...........................      173,603      139,199       312,802

(*)   Debt is non-recourse to Global and Energy Holdings

      In 2000,  Global  agreed  to  purchase  90% of  Empresa  Distribuidora  de
Electricidad  de Entre Rios S.A.  (EDEERSA),  an electric  distribution  company
providing  electric  service to more than  230,000  customers in the Province of
Entre Rios,  Argentina.  The acquisition is valued at approximately $200,000,000
plus the assumption of outstanding debt of approximately $80,000,000.

      In 2000, Global closed the project financing for a combined heat and power
plant  consisting of 226 MW of electricity and 500 MW of thermal energy capacity
located in Poland. Total project cost is estimated at $324,000,000 with Global's
equity investment not expected to exceed $105,000,000 for its 90% interest.  The
plant is under construction and commercial operation is targeted for 2003.

      In 2000,  Global  acquired a 49%  interest  in Tanir  Bavi  Power  Company
Private Ltd.,  which is  constructing  a 220 MW barge  mounted,  combined  cycle
generating  facility to be located  near  Mangalore  in the state of  Karnataka,
India.  Upon scheduled  completion in the second quarter of 2001, power from the
facility will be sold to the  Karnataka  Electricity  Board  pursuant to a seven
year fixed price power purchase  agreement.  In January 2001, Global acquired an
additional 25% interest in the project bringing its total ownership  interest to
74%. Global's equity investment is not expected to exceed $89,000,000.

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


                                       46
<PAGE>

                            PSEG ENERGY HOLDINGS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

      In 1999,  Global and its partners  closed  project  financing for a 487 MW
gas-fired   combined-cycle  electric  generation  facility  in  Rades,  Tunisia.
Construction  of the  facility  began  in  August  1999  and is  expected  to be
completed in the third quarter of 2001. In 2000,  Global increased its ownership
in the project to 60% by acquiring a 25% interest from one of its  partners.  In
addition,  Global assumed the contract  rights and obligations for management of
construction and ongoing  operation and maintenance of the plant.  Total cost is
anticipated  to  be  approximately  $261,000,000.  Global's  equity  investment,
including contingencies is not expected to exceed $59,000,000.

      In 1999, Global and a partner acquired 90.23% of Chilquinta Energia, S.A.,
a  distribution  company  providing  electric  and gas  service to more than one
million  customers in Chile and Peru.  In January  2000,  Global and its partner
completed  the  purchase  of an  additional  9.75% of the  shares of  Chilquinta
Energia, S.A., increasing their total holdings to 99.98%.  Global's 50% share of
the  acquisition  was  funded  with  approximately  $268,000,000  of equity  and
$160,000,000 of debt that is non-recourse to Global and Energy Holdings.

      In 1999,  Global and a partner  closed on a tender  offer for  outstanding
publicly  traded  shares of Luz del Sur, a Peruvian  distribution  company.  The
number of shares tendered constitutes 22.5% of the shares of Luz del Sur. At the
time of the  tender,  Global and its  partner  already  owned 37% of Luz del Sur
which  was  acquired  in June  1999 as part  of the  acquisition  of  Chilquinta
Energia,  S.A.  discussed  below.  The tender was offered  exclusively  in Peru.
Global and its partner  also  purchased  an  additional  25% of Luz del Sur upon
closing  of the tender  offer.  Global's  investment  in  connection  with these
transactions was approximately $108,000,000.

      In 1999,  Global and a partner closed project financing for Parana, an 830
MW gas-fired  combined-cycle  electric  generation facility to be constructed in
San Nicolas,  Argentina. The new facility is adjacent to the Central Termica San
Nicolas  (CTSN)  power  plant,  a 650 MW  facility  also owned by Global and its
partner.  Construction  began in August 1999 and is expected to be  completed in
2001 at a total cost of approximately  $448,000,000.  Global's equity investment
for its 33%  interest  is expected to be  approximately  $86,000,000,  including
contingencies.

      In 1999,  Global and its 50%  partner  completed  a  $312,000,000  project
financing of a 1,000 MW gas-fired combined-cycle electric generation facility in
Guadalupe County in south central Texas. Commercial operation of the first phase
occurred in December 2000 and full operation occurred in January 2001.

      In 1999,  Global  sold its 50%  partnership  interest  in the  Newark  Bay
Cogeneration  Facility,  a 137 MW gas-fired  combined-cycle plant in Newark, New
Jersey.  Global  recognized a pre-tax  gain of  approximately  $69,000,000  as a
result of this transaction. This was recorded in Other income/(loss).

      As part of a comprehensive  review of assets and  development  activities,
Global recognized a $43,971,000 write-down in the third quarter of 1999, related
to equity investments in generation  facilities in California and in development
companies in the Philippines and Thailand.

      In  California,  Global  owns a 50% equity  interest  in seven  generating
facilities  totaling  153 MW (71  MW)  known  as GWF,  Hanford  and  Tracy.  The
facilities  began  operations  between 1989 and 1991. Power is sold to a utility
under a pricing  structure  that  provided for fixed rate energy  prices for the
first 10 year  period  coupled  with  capacity  payments  over the entire  power
purchase contract terms which range from 20 to 30 years. In the 11th year of the
contracts,  the energy component of the price is based on Short Run Avoided Cost
(SRAC) which is a formula  based pricing  mechanism  that takes into account the
cost of fuel,  plant  efficiency and other factors.  This price is correlated to
market pool prices on the exchange.  The market prices and correspondingly,  the
SRAC prices, are driven by many factors  including,  but not limited to, demand,
availability of generation supply and cost of the supply. Market prices are most
volatile  during the summer  when high  temperatures  cause a higher  demand for
power  often  increasing  the cost.  In 1999,  as part of a review of all equity
investments,  Global  assessed the carrying value of GWF and Hanford taking into
account the future cash flows  expected from these  investments  after review of
the most  current  SRAC prices  which were  significantly  lower than fixed rate
prices paid in the first 10 years.  Global determined that there was a permanent
loss in value of its equity investment and recognized a pre-tax charge to income
of $31,100,000  in accordance  with APB 18, "The Equity Method of Accounting for


                                       47
<PAGE>

                            PSEG ENERGY HOLDINGS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Investments in Common  Stock".  For a discussion of recent  developments  in the
California Power Market, see Note 18., "Subsequent Events."

      Interests  in  two  power  development   companies  in  Thailand  and  the
Philippines were acquired in 1997 for a total cost of approximately $22,000,000.
The  Asian  financial  crisis,  which  began  in  1997,  significantly  impacted
development  prospects in the region having an impact on the financial condition
of the companies which consistently recognized losses over the reported periods.
In the third quarter of 1999,  management  made a decision to cease providing an
operating and financial commitment to the development ventures. A pre-tax charge
to income of $7,800,000 was recognized to write-off the equity investment in the
development  company in Thailand.  Global sold its investment  later in the year
for $5,000.  A pre-tax  charge to income of $5,000,000  was recognized to reduce
the value of  Global's  equity  investment  in the  development  company  in the
Philippines to the remaining cash and land value of approximately $3,000,000.

      Resources

      Resources has limited  partnership  investments  in two  leveraged  buyout
funds, an ethylene production  facility, a clean air facility and solar electric
generating  systems.  Resources'  total  investment in limited  partnerships was
$238,985,000, and $279,286,000 at December 31, 2000 and 1999, respectively.

      Included in the amounts  above are limited  partnership  interests  in two
leveraged buyout funds that hold publicly traded  securities,  which are managed
by KKR Associates L.P., (KKR). The book value of the investment in the leveraged
buyout funds was $212,755,000 and $230,104,000 as of December 31, 2000 and 1999,
respectively.  The largest  single  investment  in the funds held  indirectly by
Resources is the investment in approximately  16,847,000  shares of common stock
of Borden  Inc.,  having a book  value of  $82,824,000,  and  $84,400,000  as of
December 31, 2000 and 1999,  respectively.  Borden is in the  consumer  products
industry.

      Resources  applies fair value accounting to investments in the funds where
publicly  traded  market prices are available as described in Note 2. Summary of
Significant  Accounting  Policies.  Approximately  $114,724,000 and $130,546,000
represent the fair value of Resources'  share of the publicly traded  securities
in the funds as of December 31, 2000 and December 31, 1999, respectively.

      During  January and February  2001,  KKR sold its interest in Fleet Boston
Financial  Corporation.  Resources  received  cash proceeds of  $34,500,000  and
recorded a $4,300,000 pre-tax gain as a result of this transaction.

      EGDC

      As of December  31, 2000 and 1999,  EGDC has  partnership  investments  of
$19,687,000 and $19,673,000,  respectively,  in developed commercial real estate
and in land held for  development.  EGDC has been  conducting a controlled  exit
from  the real  estate  business  since  1993.  In 1999,  a  pre-tax  charge  of
approximately $11,229,000 was recorded for a property held for sale. This amount
is  recorded  in  operations  and  maintenance  expense.  Since  EGDC  has  been
conducting a  controlled  exit from the real estate  business,  gains and losses
from  property  sales are  considered  to be in the normal course of business of
EGDC.  As of  December  31,  2000 and  1999,  EGDC has two  properties  and four
properties,  respectively,  reported  as  Assets  Held  for  Sale  amounting  to
$12,602,000 and $35,700,000, respectively.


                                       48
<PAGE>

                            PSEG ENERGY HOLDINGS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 5.  FOREIGN OPERATIONS

      Energy Holdings' foreign investments were comprised of leveraged leases in
aircraft, utility facilities and commuter rail cars, a note receivable, electric
distribution  facilities,   exempt  wholesale  generators  and  foreign  utility
companies.  Foreign revenues and foreign assets,  as a percent of total revenues
and total assets, is as follows:

<TABLE>
<CAPTION>
                                                   Years ended December 31
                                  ----------------------------------------------------------
                                    2000       %        1999       %       1998        %
                                  ----------------------------------------------------------
                                                     (Thousands of Dollars)
<S>                               <C>          <C>    <C>          <C>   <C>
Income from capital leases.....   $  108,857          $   88,757         $   58,518
Income from joint ventures.....       73,836              52,601             46,617
Interest and dividends.........          940                 407                411
Operator/Management fees.......        4,397               7,228              3,676
                                  ----------          ----------         ----------
Total foreign revenues ........   $  188,030   24%     $ 148,993   24%    $ 109,222    25%
                                  ==========          ==========         ==========
Foreign assets (A).............   $2,989,749   58%    $2,420,277   59%   $1,602,790    51%
                                  ==========          ==========         ==========
</TABLE>

(A)   Amount  is net of  pre-tax  foreign  currency  translation  adjustment  of
      $225,470,000, $222,281,000, $47,794,000 as of December 31, 2000, 1999, and
      1998, respectively.

      As of December 31, 2000, Global had approximately $1,795,845,000 including
deferred   project  costs,  of   international   investments   ($396,758,000  in
construction)  in projects  that  generate or  distribute  energy  primarily  in
Argentina,  Brazil,  Chile, China,  Italy, Peru, Poland,  Tunisia and Venezuela.
Global  is  expected  to  continue  to  make  international  investments.  Where
possible,  Global  structures its investments to manage the risk associated with
project development, including foreign currency devaluation and fluctuations.

      Net foreign currency devaluations, caused primarily by the Brazilian Real,
have reduced  Stockholder's Equity by the net of tax amounts of $202,923,000 and
$200,053,000,  as of December 31, 2000 and 1999,  respectively (see Consolidated
Statements of Stockholder's Equity).

      Global had consolidated  project debt totaling  approximately  $94,500,000
associated with its 32% investment in a Brazilian  distribution company that was
non-recourse  to Global,  Energy  Holdings and PSEG. The debt was denominated in
the  Brazilian  Real and was indexed to a basket of  currencies,  including  the
United States Dollar. The debt was refinanced in May 2000 with funds from Energy
Holdings  and a  $190,000,000  United  States  Dollar  denominated  loan  at the
Brazilian  distribution  company,  of which Global's share is  $62,000,000.  The
functional  currency  of  the  distribution   company  is  the  Brazilian  Real.
Therefore,  its debt is  subject to  exchange  rate risk as the  Brazilian  Real
fluctuates with the United States Dollar. Changes in the exchange rate cause the
loan amount,  as reported in the  functional  currency,  to be marked  upward or
downward, with an offset to the income statement. Global entered into a currency
collar with a notional amount of $60,000,000  which expired on December 29, 2000
to  mitigate  its  share of the loss at RGE which  would  have  resulted  from a
significant devaluation of the Brazilian Real against the United States Dollar.

      The net foreign currency transaction gains or (losses) for the years ended
December 31, 2000, 1999 and 1998 were $2,858,000,  $2,490,000, and $(3,212,000),
respectively,  and are  recorded  in Other  Income  (Loss)  in the  Consolidated
Statements of Income.


                                       49
<PAGE>

                            PSEG ENERGY HOLDINGS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 6.  INCOME TAXES

      A reconciliation  of income taxes calculated at the Federal statutory rate
of 35% of income before income taxes and the income tax provision is as follows:

                                                     Years ended December 31,
                                                 ------------------------------
                                                   2000       1999        1998
                                                 --------    -------    -------
                                                      (Thousands of Dollars)
Federal income tax expense at statutory rate .   $ 55,372    $61,608    $34,146
State income taxes, net of Federal income
tax benefit ..................................      4,394     15,782      4,470
Amortization of investment and energy
tax credits ..................................       (848)      (807)    (1,105)
Dividends received deduction .................       (510)      (807)      (755)
Tax effect of tax benefit transfer expense ...        192        192        878
Tax effects attributable to foreign operations    (13,921)    (7,204)    (1,120)
Tax credits ..................................     (1,125)        --     (6,923)
Other ........................................      1,783        178        569
                                                 ========    =======    =======
Income tax expense ...........................   $ 45,337    $68,942    $30,160
                                                 ========    =======    =======

The following is an analysis of Deferred Income Taxes:

                                                             December 31,
                                                     --------------------------
                                                        2000             1999
                                                     ----------       ---------
                                                        (Thousands of Dollars)
Assets - non-current:
    Development expenses .....................       $   17,229       $  16,074
    Foreign currency translation .............           22,547          22,228
    Notes receivable reserve .................            5,336           5,578
    Real estate ..............................            4,303           4,404
    Discontinued operations ..................            5,324           5,042
    Other ....................................            5,343          (1,599)
                                                     ----------       ---------
Total Assets .................................       $   60,082       $  51,727
                                                     ==========       =========
Liabilities - non-current:
    Leasing activities .......................       $  986,663       $ 796,570
    Partnership activities ...................          101,395         117,593
    Income from foreign operations ...........           13,775           6,200
    State income tax deferrals ...............           20,204          18,827
                                                     ----------       ---------
Total Liabilities ............................        1,122,037         939,190
                                                     ----------       ---------
Net Liabilities ..............................       $1,061,955       $ 887,463
                                                     ==========       =========

      As of December  31, 2000 and 1999,  the  amounts  due  from/(to)  PSEG for
federal income tax were $1,029,000 and ($754,000), respectively.

NOTE 7.  NOTES PAYABLE/SHORT-TERM DEBT

      On December 31, 2000 Energy  Holdings had two  separate  senior  revolving
credit  facilities,  with  a  syndicate  of  banks,  a  $495,000,000,  five-year
revolving  credit  and  letter of credit  facility  and a  $165,000,000  364-day
revolving  credit  facility.  The interest rate on these  facilities is based on
London Inter-Bank  Offered Rate (LIBOR) and the average borrowing rate at Energy
Holdings  current  rating level is 1.375% over the one, three or six month LIBOR
rate.  The  revolving  credit  facilities  also  permit  shorter  term base rate
borrowings  at the  prime  rate.  The  five-year  facility  also  permits  up to
$250,000,000 of letters of credit to be issued.  The five-year  facility matures
on May 12, 2004 and the 364-day facility matures on May 9, 2001. At December 31,
2000 and December 31, 1999,  Energy Holdings had  $392,000,000  and $351,000,000
respectively, outstanding under existing revolving credit facilities.

      In December 2000,  Global agreed to purchase 90% of Empresa  Distribuidora
de Electricidad de Entre Rios S.A. (EDEERSA). In connection with this agreement,
PSEG  Americas  Ltd., a subsidiary  of Global,  signed a promissory  note. As of
December 31, 2000, Global had short-term debt of $90,671,000 as a result of this
transaction.


                                       50
<PAGE>

                            PSEG ENERGY HOLDINGS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 8.  LONG-TERM DEBT

Long-Term Debt was comprised of the following:

<TABLE>
<CAPTION>
                                                                            December 31,
                                                                    ---------------------------
                                                       Year Due        2000            1999
                                                       --------     ----------       ----------
                                                                       (Thousands of Dollars)
<S>                                                    <C>          <C>              <C>
Energy Holdings
Senior Notes
9.125%..............................................   2004         $  300,000       $       --
10.00%..............................................   2009            400,000          400,000
                                                                    ----------       ----------
Principal amount outstanding........................                   700,000          400,000
Net unamortized discount............................                    (4,789)          (4,914)
                                                                    ----------       ----------
      Total long-term debt of Energy Holdings.......                   695,211          395,086
                                                                    ----------       ----------
PSEG Capital
Medium-Term Notes (MTNs) (A)
6.54%                                                  2000                 --           78,000
6.73% - 6.74%.......................................   2001            170,000          170,000
6.80% - 7.72%.......................................   2002            228,000          130,000
6.25% ..............................................   2003            252,000          252,000
                                                                    ----------       ----------
Principal amount outstanding........................                   650,000          630,000
Amounts due in one year.............................                  (169,838)         (77,937)
Net unamortized discount............................                    (1,343)          (1,857)
                                                                    ----------       ----------
      Total long-term debt of PSEG Capital..........                   478,819          550,206
                                                                    ----------       ----------
Global
Non-recourse Debt
11.08% - 13.73% - Bank Loan.........................   2000                 --           96,919
9.87% - 10.245% - Bank Loan.........................   2001             96,003          126,027
10.245% - Bank Loan.................................   2002-2004        63,998           94,023
6.64% Bank Loan.....................................   2002-2009       125,565               --
9.95% - Bank Loan...................................   2004-2019        34,607               --
14.00% - Minority Shareholder Loan..................   2027              9,990            9,990
                                                                    ----------       ----------
Principal amount outstanding........................                   330,163          326,959
Amounts due in one year.............................                   (96,003)         (96,919)
                                                                    ----------       ----------
      Total long-term debt of Global................                   234,160          230,040
                                                                    ----------       ----------
Resources
8.60% - Bank Loan...................................   2001-2019        23,734               --
                                                                    ----------       ----------
Principal amount outstanding........................                    23,734               --
Amounts due in one year.............................                      (789)              --
                                                                    ----------       ----------
      Total long-term debt of Resources.............                    22,945               --
                                                                    ----------       ----------
Energy Technologies
2.90% - 11.65% - Other Loans........................   2001-2005           794              498
9.75% - Bank Loan...................................   2001-2005           546               --
                                                                    ----------       ----------
Principal amount outstanding........................                     1,340              498
Amounts due in one year.............................                      (268)            (100)
                                                                    ----------       ----------
      Total long-term debt of Energy Technologies...                     1,072              398
                                                                    ----------       ----------
         Total long-term debt.......................                $1,432,207       $1,175,730
                                                                    ==========       ==========
</TABLE>

(A)   PSEG  Capital's  MTN  program  permits   borrowings  up  to  $750,000,000.
      Effective January 31, 1995, PSEG Capital  determined that it will not have
      more  than  $650,000,000  of debt  outstanding  at any time  (See Note 14.
      Commitments and Contingencies).


                                       51
<PAGE>

                            PSEG ENERGY HOLDINGS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

      Annual Principal Requirements

      The scheduled principal maturities during the years following December 31,
2000 are as follows:

<TABLE>
<CAPTION>
                Energy        PSEG                                  Energy
               Holdings      Capital      Global     Resources   Technologies     Total
               --------      -------      ------     ---------   ------------     -----
                                       (Thousands of Dollars)
<S>            <C>          <C>          <C>          <C>         <C>            <C>
2001 .....     $     --     $170,000     $ 96,003     $   789     $      268     $  267,060
2002 .....           --      228,000       27,881       1,002            268        257,151
2003 .....           --      252,000       42,310       1,017            268        295,595
2004 .....      300,000           --       35,374       1,108            268        336,750
2005 .....           --           --       17,865       1,207            268         19,340
Thereafter      400,000           --      110,730      18,611             --        529,341
               --------     --------     --------     -------     ----------     ----------
               $700,000     $650,000     $330,163     $23,734     $    1,340     $1,705,237
               ========     ========     ========     =======     ==========     ==========
</TABLE>

      Senior Notes-- Energy Holdings

      In February 2000,  Energy  Holdings  issued  $300,000,000 of 9.125% Senior
Notes  due  February  2004.  The net  proceeds  from the sale  were used for the
repayment of short-term debt outstanding under the revolving credit  facilities.
For a discussion  of Notes sold  subsequent  to December 31, 2000,  see Note 18.
"Subsequent Events."

     In October 1999, Energy Holdings issued  $400,000,000 of 10.0% Senior Notes
due October 2009.  The proceeds  were used for the repayment of short-term  debt
outstanding  under revolving credit  facilities.  Borrowings under the revolving
credit  facilities  were used to finance  investments and  acquisitions  and for
general corporate purposes.

      Bank Loan-- Carthage Power Company

      In June 1999,  Carthage Power Company (Carthage Power), a 60 percent owned
subsidiary of Global, and The Sanwa Bank Limited and Paribas, as arrangers for a
consortium of lenders, entered into a 10 year term loan facility agreement (Term
Loan Facility). In addition,  Carthage Power and The Export-Import Bank of Japan
(JEXIM) entered into a 10-year loan facility  agreement  (JEXIM  Facility).  The
agreements  are related to the project  financing of a gas-fired  combined-cycle
electric  generation  facility in Tunisia.  The Term Loan Facility  provides for
borrowing up to EUR 92,717,000 and the JEXIM Facility  provides for borrowing up
to US $73,000,000. The interest reset period for both the Term Loan Facility and
the JEXIM  Facility is six months.  The  borrowing  rates for the Term Loans are
based on a Euro Area Inter-Bank  Offered Rate (EURIBOR) plus a specified  margin
ranging from 1.40% to 1.55% per annum depending upon the origination date of the
loan.  The borrowing  rate for the JEXIM Loans is based on a LIBOR plus a margin
of 0.60% per annum.  As of  December  31,  2000,  borrowing  under the Term Loan
Facility and the JEXIM  Facility  amounted to US  $60,467,000  equivalent and US
$65,098,000, respectively.

      In August 1999,  Carthage Power entered into interest rate swap agreements
to hedge 85% of the  projected  loan  amounts  over the life of the  loans.  The
hedges will convert floating rate obligations related to the facility agreements
into fixed rate obligations.

      Bank Loan-- Elcho

      In October  2000,  Elektrocieplownia  Chorzow  (ELCHO),  a majority  owned
subsidiary  of Global,  and Dresdner  Bank AG, as arranger  for a consortium  of
lenders,  entered into an 18.5 year term loan  facility  agreement and a working
capital facility agreement.  The agreements are related to the project financing
of a combined heat and power plant under  construction in Poland in which Global
will have a 90%  interest.  The loan  facilities  are  comprised  of a US Dollar
tranche  and  a  Polish  Zloty  tranche  up  to  an  aggregate  borrowing  of US
$193,000,000  and PLN  352,500,000,  respectively.  The interest periods for the
term loans may be one, three or six months.  The borrowing  rates are based on a
reference rate (for the Dollar Loan, the reference rate is LIBOR and for a Zloty
Loan, the reference  rate is Warsaw  Inter-Bank  Offered Rate  (WIBOR)),  plus a
specified  margin  ranging  from  1.15% to 1.75%  per annum  depending  upon the
origination  date of the loan. As of December 31, 2000,  borrowings under the US
Dollar and Polish Zloty tranches of the facility  amounted to US $28,085,000 and
US $6,522,000 equivalent, respectively.

      In October 2000, ELCHO entered into interest rate swap agreements to hedge
100% of  projected  loan amounts  until  October  2010.  The hedges will convert
floating rate  obligations  related to the facility  agreements  into fixed rate
obligations.


                                       52
<PAGE>

                            PSEG ENERGY HOLDINGS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

      Bank Loan -- BNDES

      In October 1997, IPE and The National Economic and Social Development Bank
(BNDES), entered into a credit agreement (the BNDES Loan) which was scheduled to
mature on November 15, 2002.  The loan  proceeds were  denominated  in Brazilian
Reals which were  indexed to a basket of  currencies,  including  United  States
Dollars.  In total,  IPE received the U.S.  dollar  equivalent of  approximately
$135,580,000,  which was used to partially finance the Company's  acquisition of
RGE in 1997.

      In May 2000,  Global  refinanced this loan with funds from Energy Holdings
and a  $190,000,000  United  States  Dollar  denominated  loan at the  Brazilian
distribution  company,  of  which  Global's  share is  $62,000,000,  see Note 5.
"Foreign Operations."

      Bank Loan -- Chase Manhattan Bank

      In June 1999,  PSEG Global  Funding II LLC, a  wholly-owned  subsidiary of
Global and Chase  Manhattan  Bank,  as lender and as agent for a  consortium  of
lenders,  entered into a  $160,000,000  non-recourse  debt  financing  under the
following  terms:  Tranche A for $85,000,000  maturing June 9, 2001 at a rate of
LIBOR plus 3.25%;  and Tranche B for  $75,000,000  maturing by June 9, 2004,  in
increasing  percentages  every six months commencing on the 24th month following
the  closing  date  (June  9,  1999) at a rate of LIBOR  plus  3.625%.  The loan
proceeds were used to partially fund the acquisition of Chilquinta  Energia S.A.
in Chile.

      For a  discussion  of the Senior  Notes  issued in March 2001 to refinance
this loan, see Note. 18, "Subsequent Events."

      Minority Shareholder Loan

      PSEG Americas  also entered into a $9,990,000  minority  shareholder  loan
(Shareholder Loan) in May 1997, which matures on May 29, 2027. The loan proceeds
were used to  partially  fund the  acquisition  of EDEN and EDES in Argentina in
1997 by PSEG Americas (see Note 4.  Investments  in  Partnerships  and Corporate
Joint  Ventures).  Amounts borrowed under the Shareholder Loan are unsecured and
subordinated to amounts borrowed under the ING Agreement.

      In accordance with the Shareholder  Loan, the principal is due in one lump
sum on the maturity date. Interest accrues at 14% and is payable  semi-annually.
However,  failure to pay interest does not  constitute an event of default,  but
results in an increase in the principal amount due upon maturity.

NOTE 9. STOCKHOLDER'S EQUITY

      Common Stock

      Energy  Holdings  had  100  shares  of  no-par  common  stock  issued  and
outstanding as of December 31, 2000 and 1999, all of which was held by PSEG. The
total authorized amount as of December 31, 2000 and 1999 was 1,000,000 shares.

      Preferred Stock

      In October 2000, Energy Holdings exchanged 435 shares of 5.01% Cumulative,
1,467 shares of 4.80% Series B  Cumulative  and 1,450 shares of 4.875%  Series C
Cumulative  of  outstanding  preferred  stock  owned by PSEG for a new series of
4.03% Series D Cumulative  preferred  stock owned by PSEG. In January 2000, that
rate was reset to 4.47% through June 2008.


                                       53
<PAGE>

                            PSEG ENERGY HOLDINGS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

      Energy Holdings has authorized  1,000,000  shares of preferred  stock. The
issuance of preferred stock is as follows:

<TABLE>
<CAPTION>
                                            Par value per                       December 31,
    Date               Description             share        Number of Shares       2000
------------    -------------------------   -------------   ----------------    ------------
<S>             <C>                           <C>                <C>            <C>
October 2000    4.03% Series D Cumulative     $100,000           5,092          $509,200,000
</TABLE>

      Energy Holdings paid preferred dividends of $23,886,000 and $25,007,000 in
2000 and 1999, respectively, to PSEG.

      Additional Paid-in Capital

      PSEG invested  approximately  $300,000,000  and  $200,000,000 of equity in
Energy  Holdings in 2000 and 1999,  respectively.  The proceeds were used to pay
down short term debt.

      On January 1, 1999, PSEG contributed its equity  investment in the capital
stock of PSCRC,  formerly a wholly-owned  subsidiary of Public Service  Electric
and Gas Company, through Energy Holdings into Energy Technologies. The aggregate
book value of the stock contributed was $57,000,000.  Energy Holdings' financial
statements have been restated for 1998 to show the effect of this acquisition in
accordance with the accounting for business  combinations  of transfers  between
companies  under common  control,  and is  reflected  in the opening  balance of
Additional Paid-in Capital for 1998.

      Dividends on Common Stock

      Energy Holdings paid $13,395,000 and $3,784,000 in dividends on its common
stock to PSEG in 2000 and 1999, respectively.

      Subscription Agreement

      Global and PSEG have entered into a subscription agreement (the Agreement)
pursuant to which a  subscription  was  outstanding  as of December 31, 2000 for
PSEG to purchase up to 333 shares of Global's  capital stock at a purchase price
of $10,000 per share,  or an aggregate  purchase price of $3,330,000.  Excluding
financial  obligations which have been recorded,  funded or otherwise fulfilled,
the remaining obligations under existing subscription  agreements as of December
31, 2000 were  approximately  $3,330,000.  The Agreement  supports the financial
obligation  of Global  relative to a specific  project.  The  Agreement has been
assigned  to an  outside  party who has the  right to  require  PSEG to  perform
thereunder and make direct payments to the assignee in the event of default. See
Note 14. "Commitments and Contingencies".

NOTE 10.  RELATED PARTY TRANSACTIONS

      Operation and Maintenance and Development Fees

      Global provides operating,  maintenance and other services to and receives
management  and guaranty fees from various joint  ventures and  partnerships  in
which it is an investor.  Fees related to the  development  and  construction of
certain  projects  are deferred and  recognized  when earned.  Income from these
services of $12,184,000  $12,007,000  and  $8,653,000  were included in Revenues
Other  Revenues  in the  Consolidated  Statements  of Income for the years ended
December 31, 2000, 1999 and 1998, respectively.

      Income from Partnerships

      Approximately  90% of the  electricity  generated by the Eagle Point Power
Plant,  a 50% owned  equity  investment  of  Global,  is sold to Public  Service
Electric and Gas Company under a 25-year power purchase contract  terminating in
May 2016.  Global's share of partnership  revenues  received from Public Service
Electric and Gas Company represented approximately $68,000,000, $55,000,000, and
$54,000,000  for the years December 31, 2000, 1999 and 1998,  respectively.  For
further  discussion  on  Eagle  Point  Cogeneration  Partnership,  see  Note 18.
"Subsequent Events."


                                       54
<PAGE>

                            PSEG ENERGY HOLDINGS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

      Administrative Costs

      PSEG Services Corporation  provides and bills  administrative  services to
Energy  Holdings  on a monthly  basis.  These costs  amounted  to  approximately
$19,390,000, $10,695,000, and $13,119,000 for 2000, 1999 and 1998, respectively.
In addition,  Energy Holdings was billed administrative overheads of $2,322,000,
$2,170,000, and $2,554,000 by PSEG during 2000, 1999 and 1998, respectively.

      Employees of Energy Holdings and its  subsidiaries  are  participants in a
non-contributory  pension plan  administered by PSEG and are billed on a monthly
basis based on funding  requirements.  Such billings  amounted to  approximately
$1,896,000  and  $4,587,000,  for the years  ended  December  31, 1999 and 1998,
respectively.  For the year ended  December  31,  2000,  Energy  Holdings had no
funding requirements for the pension plan.

      Transfer of Assets

      In 2000, PSEG Power LLC,  (Power) assumed  responsibility  of four Midwest
generation  projects that were being developed by Global. The four projects will
have a combined  generating capacity of 2,830 MW. As of December 31, 2000, Power
owed Global $52,000,000 related to the asset transfer, which was paid in January
2001.

NOTE 11.  OTHER INCOME (LOSS)

      Other income (loss) is comprised of the following:

                                                     December 31,
                                        -------------------------------------
                                          2000           1999          1998
                                        --------      ---------      --------
                                                  (Thousands of Dollars)
Net gain on sale of investments......   $     23      $  68,972(1)   $  1,948(2)
Foreign currency gain (loss).........      2,858          2,490        (3,212)
Other................................         17          5,942          (554)
                                        --------      ---------      --------
        Total Other Income (loss)....   $  2,898      $  77,404      $ (1,818)
                                        ========      =========      ========

(1)   Primarily the sale of the Newark Bay Cogeneration Facility by Global.

(2)   Primarily the sale of interests in four generating stations by Global.

NOTE 12.  MINIMUM LEASE PAYMENTS

      Energy Holdings and its subsidiaries lease administrative office space and
equipment under operating  leases,  which expire prior to the end of 2003. Total
future minimum lease payments as of December 31, 2000 are:


                                                   (Thousands of Dollars)
       2001.............................................. $ 6,603
       2002..............................................   5,201
       2003..............................................   4,242
       2004..............................................   3,212
       2005..............................................   2,522
       Thereafter........................................   6,123
                                                          -------
                Total minimum lease payments............. $27,903
                                                          =======

      Rent  expense  for  2000,  1999  and 1998  was  approximately  $7,056,000,
$7,306,000, and $5,971,000, respectively.

NOTE 13.  FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

      Energy  Holdings'  operations  give rise to exposure to market  risks from
changes  in  interest  rates,  foreign  exchange  rates and  security  prices of
investments   recorded  at  fair  value.  Energy  Holdings'  policy  is  to  use
derivatives to manage market risk consistent with its business plans and prudent
practices.  Energy  Holdings does not hold or issue  financial  instruments  for
trading purposes.

      The notional amounts of derivatives do not represent  amounts exchanged by
the parties  and,  thus,  are not a measure of the  exposure of Energy  Holdings
through its use of derivatives.  The amounts  exchanged,  under the terms of the
derivatives,  are  calculated  on the  basis  of the  notional  amounts.


                                       55
<PAGE>

                            PSEG ENERGY HOLDINGS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Energy  Holdings  limits its exposure to  credit-related  losses in the event of
nonperformance by  counterparties  by limiting its  counterparties to those with
high credit  ratings.  For a discussion  of the adoption of SFAS 133 as amended,
see Note 17. "Accounting Matters."

      Credit Risk

      Credit risk relates to the risk of loss that Energy  Holdings  would incur
as a result of nonperformance by counterparties,  pursuant to the terms of their
contractual obligations. Energy Holdings has established credit policies that it
believes  significantly  minimizes its exposure to credit risk.  These  policies
include  an  evaluation  of  potential   counterparties'   financial  condition,
including credit ratings.

      Interest Rates

      Energy  Holdings is subject to the risk of  fluctuating  interest rates in
the normal course of business.  Energy  Holdings'  policy is to manage  interest
rate risk  through the use of fixed rate debt,  floating  rate debt and interest
rate swaps.

      Based on the borrowing  rates  currently  available to Energy Holdings for
debt with  similar  terms and  remaining  maturities,  the fair  value of Energy
Holdings' long-term debt was as follows:

                                                              December 31,
                                                      --------------------------
                                                        2000              1999
                                                      --------          --------
                                                         (Thousands of Dollars)
Senior Notes-- Energy Holdings .............          $727,037          $407,592
MTNs-- PSEG Capital ........................           642,591           611,889
Non-recourse debt-- Global .................           330,163           326,959
Bank Loan-- Resources ......................            24,292                --
Loans - Energy Technologies ................             1,340               498

      The fair  value of the  Senior  Notes  and  Medium-term  notes is based on
information obtained quarterly from market sources.

      Substantially all non-recourse debt is floating rate that is reset several
times  during  the year to  various  market  indices.  As such,  carrying  value
approximates market value.

      ELCHO and  Carthage  Power,  majority-owned  subsidiaries  of Global,  are
constructing electric generation facilities in Poland and Tunisia, respectively.
Such entities have entered into interest rate swaps to hedge up to  $422,000,000
of their  construction  loan  agreements.  The interest  rate swaps  effectively
convert the existing floating rate debt into fixed rate borrowings. The notional
amounts, interest rates and fair values as of December 31, 2000 are as follows:

<TABLE>
<CAPTION>
                                            ELCHO                                Carthage Power
                             -----------------------------------     -----------------------------------
                                  US $                PLN                 US $                Euro
                                 Tranche            Tranche             Tranche             Tranche
                             ----------------    ---------------     ---------------     ---------------
                                                     (Millions, where applicable)
<S>                                <C>                 <C>                 <C>                <C>
Notional Amount............        $18                 $8                  $52                $61
Pay Rate...................       8.4%               13.2%                 6.9%              5.2%
Receive Rate...............       LIBOR              WIBOR                LIBOR             EURIBOR
Fair Value.................       ($26)              ($11)                 ($3)              ($1)
Termination Date...........    October, 2010      October, 2010        December, 2009    December, 2009
</TABLE>

      Hedging

      During 1999,  Energy  Technologies  entered into futures  contracts to buy
natural gas related to fixed price sales commitments.  Such contracts,  together
with  physical   purchase   contracts,   hedged   approximately  64%  of  Energy
Technologies'  fixed  price  sales  commitments  at December  31,  1999.  Energy
Technologies had a net deferred  unrealized hedge loss of $(550,000) at December
31, 1999.

      During 1999,  Energy  Technologies  entered  into fixed price  electricity
sales commitments.  Physical purchase contracts hedged approximately 85% of such
fixed price sales  commitments at December 31, 1999.  Energy  Technologies had a
net deferred  unrealized  hedge gain of $414,000 at December  31,  1999.  Energy
Technologies  has  changed  the  manner in which it  provides  electric  and gas
commodities  services  to  customers  and at  December  31,  2000  there were no
electric or gas commodity financial instruments outstanding.


                                       56
<PAGE>

                            PSEG ENERGY HOLDINGS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

      Resources has investments in equity securities and partnerships,  in which
Resources is a limited  partner,  which invest in equity  securities.  Resources
carries its investments in equity  securities at their approximate fair value as
of the reporting date. Consequently,  the carrying value of these investments is
affected  by changes in the market  prices of the  underlying  securities.  Fair
value  is  determined  by  adjusting  the  market  value of the  securities  for
liquidation and market  volatility  factors,  where  appropriate.  The aggregate
amount of such  investments  which have available  market prices at December 31,
2000, and 1999 was $114,724,000 and  $130,546,000,  respectively.  The portfolio
has exposure to market  price risk.  As such,  a  sensitivity  analysis has been
prepared to estimate  Energy  Holdings'  exposure to market  volatility of these
investments.  The potential  change in fair value  resulting from a hypothetical
10% change in quoted market prices of these investments would result in a change
in revenues of $9,000,000 and  $11,000,000 for the years ended December 31, 2000
and 1999, respectively.

      Foreign Operations

      Global and Resources had approximately  $1,795,845,000 and $1,193,904,000,
respectively,  of  international  investments  as of December  31,  2000.  These
investments represented 58% of Energy Holdings' consolidated assets.  Resources'
international  investments are primarily  leveraged  leases of assets located in
the  Netherlands,  Germany,  Australia  and the United  Kingdom with  associated
revenues  denominated  in United  States  Dollars and,  therefore not subject to
foreign currency risk.

      Global's   international   investments  are  primarily  in  projects  that
currently,  or upon  completion  will,  distribute  or generate  electricity  in
Argentina,  Brazil,  Chile,  China,  India,  Italy,  Peru,  Poland,  Tunisia and
Venezuela.  Investing in foreign  countries  involves  certain  risks.  Economic
conditions  that  result in higher  comparative  rates of  inflation  in foreign
countries  likely result in declining values in such countries'  currencies.  As
currencies  fluctuate against the United States Dollar, there is a corresponding
change in Global's  investment value in terms of the United States Dollar.  Such
change is  reflected  as an  increase or decrease  in  comprehensive  income,  a
separate component of stockholder's equity. As of December 31, 2000, net foreign
currency devaluations have reduced the reported amount of Energy Holdings' total
stockholder's  equity by $203  million,  $150 million of which was caused by the
devaluation of the Brazilian Real. In January 1999, Brazil abandoned its managed
devaluation strategy and allowed its currency,  the Real, to float against other
currencies.  As of December 31, 2000,  the Real had devalued  approximately  38%
against the United States Dollar since December 31, 1998, affecting the carrying
value of Global's investment in a Brazilian distribution company. For additional
information, see Note 16. "Financial Information by Business Segments."

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

      Global had consolidated  project debt totaling  approximately  $94,500,000
associated with its 32% investment in a Brazilian  distribution company that was
non-recourse  to Global and Energy  Holdings.  The debt was  denominated  in the
Brazilian Real and was indexed to a basket of  currencies,  including the United
States  Dollar.  The debt was  refinanced  in May 2000 with  funds  from  Energy
Holdings  and a $190  million  United  States  Dollar  denominated  loan  at the
Brazilian  distribution  company,  of which Global's  share is $62 million.  The
functional  currency  of  the  distribution   company  is  the  Brazilian  Real.
Therefore,  its debt is  subject to  exchange  rate risk as the  Brazilian  Real
fluctuates with the United States Dollar. Changes in the exchange rate cause the
loan amount,  as reported in the  functional  currency,  to be


                                       57
<PAGE>

                            PSEG ENERGY HOLDINGS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

marked  upward  or  downward,  with an offset to the  income  statement.  Global
entered  into a currency  collar  with a notional  amount of $60  million  which
expired on  December  29,  2000 to  mitigate  its share of the loss at RGE which
would have resulted from a significant devaluation of the Brazilian Real against
the United States Dollar.

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

NOTE 14. COMMITMENTS AND CONTINGENCIES

      Energy Holdings, Global and/or PSEG have guaranteed certain obligations of
Global's affiliates,  including the successful completion,  performance or other
obligations  related  to  certain  of the  projects  in an  aggregate  amount of
approximately  $484,711,000,  as of December 31, 2000. A substantial  portion of
such  guarantees is eliminated upon successful  completion,  performance  and/or
refinancing  of  construction  debt  with  non-recourse  project  term  debt.  A
subscription  agreement  for PSEG to purchase  Global's  capital  stock  secures
$3,330,000 of such obligations. See Note 9. "Stockholder's Equity".

      In May 1993,  following a 1992 audit of Energy  Holdings,  which concluded
that Energy Holdings' businesses had not harmed PSEG's  wholly-owned,  operating
public  utility  subsidiary,  Public Service  Electric and Gas Company,  the BPU
accepted a Focused Audit  Implementation Plan in which PSEG agreed,  among other
things,  that it will not  permit  Energy  Holdings  assets,  as  defined in the
agreement,  to exceed 20% of its consolidated assets without prior notice to the
BPU,  and that debt  supported  by a  support  agreement  between  PSEG and PSEG
Capital will be limited to  $750,000,000,  with a good faith effort to eliminate
such support within six to ten years.  Effective  January 31, 1995, PSEG Capital
determined that it will not have more than  $650,000,000 of debt  outstanding at
any time. At December 31, 2000 and 1999, Energy Holdings' assets represented 25%
and 22% of PSEG's  consolidated  assets and PSEG Capital's debt  outstanding was
$650,000,000, and $630,000,000,  respectively.  Notice that the asset percentage
exceeded 20% was made to the BPU in July 1999.  Energy  Holdings does not expect
there will be any material  adverse  effect to its financial  statements of as a
result of the assets exceeding 20%.

      The Brazilian Consumer Association of Water and Energy has filed a lawsuit
against Rio Grande  Energia S.A.  (RGE),  a Brazilian  distribution  company (of
which Global is a 32% owner),  and two other  utilities,  claiming  that certain
value added taxes and the  residential  tariffs  that are being  charged by such
utilities  to their  respective  customers  are illegal.  RGE believes  that its
collection  of  the  tariffs  and  value  added  taxes  are in  compliance  with
applicable tax and utility laws and  regulations.  While it is the contention of
RGE that the  claims  are  without  merit,  and that it has valid  defenses  and
potential  third party claims,  an adverse  determination  could have a material
adverse effect on Energy Holdings'  financial  condition,  results of operations
and net cash flows.

NOTE 15. PENSION AND OTHER POSTRETIREMENT BENEFIT AND SAVINGS PLANS

      Employees of Energy Holdings and its  subsidiaries  are  participants in a
non-contributory  pension plan administered by PSEG. See Note 10. "Related Party
Transactions",  for Energy  Holdings'  funding  requirements for the years ended
2000, 1999, and 1998.

      In addition,  PSEG sponsors two defined  contribution  plans.  Represented
employees of Energy Holdings are eligible for participation in the PSEG Employee
Savings  Plan while all other  employees  of Energy  Holdings  are  eligible for
participation  in PSEG's  Tax-Deferred  Savings Plan. The two principal  defined
contribution  plans are sponsored  401(k) plans to which eligible  employees may
contribute up to 25% of their compensation.  Employee contributions up to 8% for
all  employees are matched with  employer  contributions  of cash or PSEG common
stock equal to 50% of such employee  contributions.  Employer  contributions  in
excess  of 6% and up to 8% are  made in  shares  of PSEG  common  stock  for all
employees.   PSEG   billed   Energy   Holdings   for  its  portion  of  employer
contributions.  The amount expensed for the matching  provision of the plans was
approximately  $1,058,000,  $750,000  and  $803,000,  in 2000,  1999,  and 1998,
respectively.


                                       58
<PAGE>

                            PSEG ENERGY HOLDINGS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 16. FINANCIAL INFORMATION BY BUSINESS SEGMENTS

      Basis of Organization

      The  reportable  segments  disclosed  herein  were  determined  based on a
variety of factors  including the way management  organizes the segments  within
Energy Holdings for making operating decisions and assessing performance.

      Global

      Global  receives  its revenues  from its  investment  in and  operation of
projects in the generation and  distribution of energy,  both  domestically  and
internationally.

      Resources

      Resources  receives  revenues  from its passive  investments  in leveraged
leases, limited partnerships, leveraged buyout funds and marketable securities.

      Energy Technologies

      Energy  Technologies  receives revenues from energy sales and a variety of
energy related  services to industrial and commercial  customers to reduce costs
and improve related energy efficiencies.


                                       59
<PAGE>

                            PSEG ENERGY HOLDINGS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

      Other Activities

      Information  related  to the  segments  of Energy  Holdings'  business  is
detailed below:

<TABLE>
<CAPTION>
                                                                                      Other
                                                                        Energy      Activities  Consolidated
                                              Global     Resources   Technologies      (A)          Total
                                            ----------   ----------  ------------    --------    ----------
                                                                       (Thousands of Dollars)
<S>                                         <C>          <C>          <C>          <C>         <C>
For the year ended December 31, 2000
  Total revenues                            $  169,403   $  206,849   $ 416,714    $  1,744    $  794,710
  Depreciation and amortization(B)               1,027        4,730       7,256         223        13,236
  Interest expense-- net                        53,318       79,192       2,629       1,378       136,517
  Income taxes                                  12,553       39,906      (4,182)     (2,940)       45,337
  Equity in earnings of unconsolidated
    affiliates(C)                              155,730       12,501          --         375       168,606
  Income before income taxes                    69,262      111,167     (13,823)     (8,401)      158,205
  EBIT(D)                                      122,580      190,359     (11,194)     (7,023)      294,722
Segment net income (loss) available for
  common stock                              $   40,178   $   64,985   $  (9,641)   $ (5,461)   $   90,061
                                            ==========   ==========   =========    ========    ==========
As of December 31, 2000
  Total assets                              $2,271,284   $2,564,339   $ 312,023    $ 49,888    $5,197,534
  Investments in equity method affiliates   $1,900,003   $  238,985   $      --    $ 15,265    $2,154,253
                                            ==========   ==========   =========    ========    ==========

For the year ended December 31, 1999
  Total revenues                            $  141,505   $  178,939   $ 297,046    $    283    $  617,773
  Depreciation and amortization(B)               1,058        1,321       4,888         195         7,462
  Interest expense-- net                        48,115       46,061         252         257        94,685
  Income taxes                                  23,562       49,937      (2,020)     (2,537)       68,942
  Equity in earnings of unconsolidated
    affiliates(C)                              128,876       77,573          --         171       206,620
  Income before income taxes                    69,143      122,688      (8,558)     (7,249)      176,024
  EBIT(D)                                      117,258      168,749      (8,306)     (6,992)      270,709
Segment net income (loss) available for
  common stock                              $   28,056   $   66,186   $  (6,538)   $ (4,712)   $   82,992
                                            ==========   ==========   =========    ========    ==========
As of December 31, 1999
  Total assets                              $1,715,497   $2,095,688   $ 251,883    $ 51,317    $4,114,385
  Investments in equity method affiliates   $1,629,237   $  279,286   $      --    $  6,400    $1,914,923
                                            ==========   ==========   =========    ========    ==========

For the year ended December 31, 1998
  Total revenues                            $  123,935   $  145,115   $ 170,840    $    394    $  440,284
  Depreciation and amortization(B)               1,416        1,612       2,138         248         5,414
  Interest expense-- net                        40,672       48,727           0         968        90,367
  Income taxes                                  12,296       26,624      (5,193)     (3,567)       30,160
  Equity in earnings of unconsolidated
    affiliates(C)                              113,900       34,537          --         297       148,734
  Income before income taxes                    31,246       86,364     (16,364)     (3,686)       97,560
  EBIT(D)                                       71,918      135,091     (16,364)     (2,718)      187,927
Segment net income (loss) available for
 common stock                               $    7,477   $   55,523   $ (11,171)   $   (103)   $   51,726
                                            ==========   ==========   =========    ========    ==========
As of December 31, 1998:
Total assets                                $1,124,160   $1,809,295   $ 196,610    $ 38,465    $3,168,530
Investments in equity method affiliates     $1,053,909   $  383,284   $      --    $ 34,223    $1,471,416
                                            ==========   ==========   =========    ========    ==========
</TABLE>

(A)   Other  Activities  include  amounts  applicable  to Energy  Holdings  (the
      parent), EGDC, PSEG Captial and intercompany eliminations.

(B)   Includes amounts reported in the Depreciation and amortization line of the
      Consolidated Statements of Income.  Depreciation and amortization of PSCRC
      is included in Operations and Maintenance  expense as indicated in Note 2.
      Summary of Significant Accounting Policies.

(C)   Equity in earnings of unconsolidated affiliates is included in Income from
      joint  ventures  and   partnerships   and  Net  investment  gains  in  the
      Consolidated Statements of Income.

(D)   EBIT is defined as Income before income taxes and interest expense.


                                       60
<PAGE>

                            PSEG ENERGY HOLDINGS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Geographic Information for Energy Holdings is disclosed below.

                                                      Revenues (1)
                                        ----------------------------------------
                                                       December 31,
                                        ----------------------------------------
                                          2000            1999            1998
                                        --------        --------        --------
                                                   (Thousands of Dollars)
United States ..................        $606,680        $468,780        $331,062
Foreign Countries:
    Argentina ..................          13,570          16,820          16,407
    Brazil .....................          18,415          19,664          30,669
    Chile and Peru .............          40,078          18,047              --
    Netherlands ................          83,190          64,521          38,718
    England ....................          18,183          19,176          14,423
    Other ......................          14,594          10,765           9,005
                                        --------        --------        --------
    Total Foreign ..............         188,030         148,993         109,222
                                        --------        --------        --------
      Total ....................        $794,710        $617,773        $440,284
                                        ========        ========        ========

(1)   Revenues  are  attributed  to  countries  based  on the  locations  of the
      investments.

                                                       Identifiable Assets
                                                 -------------------------------
                                                          December 31,
                                                 ------------------------------
                                                    2000                 1999
                                                 ----------           ----------
                                                      (Thousands of Dollars)
United States ........................           $2,207,785           $1,694,108
Foreign Countries:
    Argentina ........................              469,753              356,286
    Brazil ...........................              295,439              330,453
    Chile and Peru ...................              519,706              519,840
    Netherlands ......................              814,906              622,634
    Other ............................              889,945              591,064
                                                 ----------           ----------
    Total Foreign ....................            2,989,749            2,420,277
                                                 ----------           ----------
      Total ..........................           $5,197,534           $4,114,385
                                                 ==========           ==========

(1)   Amount  is net of  foreign  pre-tax  currency  translation  adjustment  of
      $166,951,000  and $188,806,000 for the periods ended December 31, 2000 and
      1999, respectively.

NOTE 17. ACCOUNTING MATTERS

      In December  1999,  the SEC released  Staff  Accounting  Bulletin No. 101,
"Revenue  Recognition  in  Financial  Statements."  (SAB  101),  which  provides
guidance on the timing of revenue recognition in financial statements. The basic
guidelines on revenue  recognition  state that revenue  should not be recognized
until it is  realized  or  realizable  and  earned.  SAB 101  provides  specific
criteria to assist in this determination. The adoption of SAB 101 did not have a
material effect on the financial statements of Energy Holdings.

      In June 1998,  the  Financial  Accounting  Standards  Board (FASB)  issued
Statement of  Financial  Accounting  Standard  (SFAS) No. 133,  "Accounting  for
Derivative  Instruments and Hedging Activities" (SFAS 133), as amended, which is
effective for financial  statements for all fiscal quarters beginning January 1,
2001.  SFAS 133  establishes  accounting and reporting  standards for derivative
instruments and hedging activities. It requires an entity to recognize as assets
or  liabilities  on the balance  sheet at fair value.  Derivatives  that are not
hedges must be adjusted  to fair value  through  income.  If a  derivative  is a
hedge, changes in the fair value of the derivative will either be offset against
the change in fair  value of the  hedged  asset,  liability  or firm  commitment
through earnings or be recognized in other comprehensive income until the hedged
item is  recognized  in  earnings,  depending  on the nature of the  hedge.  The
ineffective  portion of a derivative's  change in fair value will be immediately
recognized in earnings.


                                       61
<PAGE>

                            PSEG ENERGY HOLDINGS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

      In June 2000, the Financial Accounting Standards Board issued Statement of
Financial   Accounting   Standards  (SFAS)  No.  138,  "Accounting  for  Certain
Derivative  Instruments and Certain Hedging Activities" (SFAS 138) modifying the
requirements included in SFAS 133.

      At January 1, 2001, the effect of the adoption of SFAS 133 was as follows:

Fair value of derivative assets                                    $ 22,690,000
Fair value of derivative liabilities                                 39,794,000
Reduction of investments in joint ventures                            1,152,000
Cumulative effect on net income from a
  change in accounting, net of tax of ($4,765,000)                    8,849,000
Cumulative effect on other comprehensive
  income, net of tax of ($8,113,000)                                (15,067,000)

      The cumulative effect on net income from a change in accounting  principle
resulted from the net change in the market value of an embedded derivative, from
inception  of the contract to the date of adoption of SFAS 133. For a discussion
of other derivative  instruments held by affiliates of Energy Holdings, see Note
13. "Financial Instruments and Risk Management."

      Fair value of the  derivative  instruments  is  determined by reference to
quoted market prices, listed contracts,  published quotations or quotations from
counterparties.  In the absence  thereof,  Energy  Holdings  utilizes  valuation
models based on current and historical data.

      The FASB's Derivative  Implementation  Group has issued tentative guidance
regarding  certain  derivative  contracts and eligibility of those contracts for
the  normal  purchases  and  sales  exceptions.  Energy  Holdings  is  currently
evaluating  this  tentative  guidance in light of its  potential  impacts on the
implementation  of SFAS 133 and  cannot  predict  the  impact  on its  financial
position or results of operations.

NOTE 18.  SUBSEQUENT EVENTS

      In  February  2001,  Energy  Holdings,  in  a  private  placement,  issued
$400,000,000 of 8.625% Senior Notes due 2008. The proceeds of the sale were used
for repayment of short-term  debt.  Energy Holdings plans to file a registration
statement  with the SEC relating to an exchange  offer for these Senior Notes in
2001.

      In March 2001,  $160,000,000 of non-recourse bank debt originally incurred
to fund a portion  of the  purchase  price of  Global's  interest  in  Chilquita
Energia,  S.A.  was  refinanced.  The  offering  of  senior  secured  notes  was
structured  in two tranches:  $60,000,000  due 2008 at an interest rate of 6.47%
and $100,000,000 due 2011 at an interest rate of 6.62%.

      In March 2001,  Global reached agreement to purchase a 94% equity stake in
SAESA and all of its  subsidiaries  from  Compania  de  Petroleos  de Chile S.A.
(COPEC).   Additionally,   Global  reached  agreement  to  purchase  from  COPEC
approximately 14% of Empresa  Electrica de la Frontera S.A.  (Frontel) not owned
by SAESA. The SAESA group of companies  consists of four distribution  companies
and one transmission company that provide service in the southern part of Chile.
Additionally,  SAESA owns a 50% interest in the Argentine  distribution  company
Empresa Electrica del Rio Negro S.A. Collectively, the companies serve more than
615,000  customers.  The  purchase  price for Global  will  total  approximately
$460,000,000.

      Subsequent to December 31, 2000,  Global withdrew from its interest in the
Eagle  Point  Cogeneration  Partnership  in  exchange  for a series of  payments
expected to total up to $290,000,000. These payments are expected to be received
over the next five years, subject to certain  contingencies.  As of December 31,
2000 Global had  classified  this property as Assets Held for Sale in the amount
of $34,984,000.

      California Power Market

      The deregulation of the California  power market has produced  significant
unanticipated   results  in  the  past  year.  The  California   Public  Utility
Commission,  (CPUC) as part of deregulation,  froze the rates that utilities can
charge their retail and business  customers in  California  and  prohibited  the
utilities from buying power on a forward  basis,  while  wholesale  power prices
were not subjected to limits.  In the past year,  an increase in demand  coupled
with a reduced supply of power has caused a severe imbalance in the market. Such
imbalance has led to unprecedented wholesale prices.


                                       62
<PAGE>

                            PSEG ENERGY HOLDINGS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Concluded)

      As a result of this  situation,  two major  California  utilities that are
subject  to the retail  price  cap,  including  Pacific  Gas & Electric  Company
(PG&E),  have significantly  underrecovered from customers costs paid for power.
They have been widely  reported to be facing the  prospect of  insolvency.  As a
consequence,  these  utilities  have  defaulted  under a variety of  contractual
obligations, including payment obligations to GWF, Hanford and Tracy.

      Global has partnership  interests in seven qualifying  facilities (QFs) in
California  having a  combined  output  of 153 MW (71 MW net).  Power  from such
facilities is sold under  long-term  energy and capacity  contracts to PG&E. The
contracts  provide  for a fixed  energy  payment  for the  first 10 years  and a
capacity  payment over the entire contract terms expiring between 2011 and 2021.
After the initial 10-year period, energy prices were to change to reflect PG&E's
short run avoided cost calculated using a formula based methodology  approved by
the CPUC. As part of the deregulation,  the seller could elect to receive energy
payments at the California Power Exchange's (PX) day-ahead zonal market clearing
price. As of December 31, 2000, partnership management made such an election for
four of the seven facilities, representing approximately 84 MW (37 MW net) until
January 19,  2001 when the CPUC  deemed  that the PX had ceased  operating a day
ahead market. The remaining three units were never subject to PX pricing.  Since
that time, the CPUC has ordered that the price to be paid for energy  deliveries
by QF's electing the PX price shall be based on a cost-based transition formula.
The CPUC has  conducted  proceedings  to determine  whether the PX price was the
appropriate  price for the energy  component upon which to base payments to QF's
that had elected the PX based pricing option. It is possible that the CPUC could
order a payment  adjustment based on a different energy price  determination.  A
preliminary  decision  by the CPUC did not find any  adjustment  to the PX price
appropriate.  Energy  Holdings  believes  that the PX price was the  appropriate
price for energy  payments but there can be no  assurance  that this will be the
outcome of the CPUC proceedings.

      GWF,  Hanford  and  Tracy,  have  continued  to  honor  their  contractual
obligations  to PG&E under existing QF contracts.  To date,  they have refrained
from pursuing collection remedies with respect to PG&E's default,  and have been
actively  involved in being part of the  solution  to  stabilize  energy  prices
through  the  application  of a  long-term  energy  pricing  methodology  (for a
five-year  period).  On March 27, 2001,  the CPUC  approved a plan to assure the
state's  QFs are paid for  future  deliveries  of  energy  within 15 days of the
receipt of an invoice.  The CPUC's plan, while  immediately  effective,  did not
address amounts due such  facilities for past due receivables  related to energy
delivered  since December 2000. In addition to the payment issue,  the CPUC also
approved a 40%  increase in electric  retail  rates to help the state  utilities
recover significantly higher wholesale energy costs. It is expected further that
legislation  will be  developed to enable the  California  utilities to finance,
over a longer term the  difference  between the wholesale  prices that have been
paid and the retail  prices  received  during the  latter  half of 2000.  Energy
Holdings believes that this should enhance PG&E's ability to make payment of all
past due amounts. However, Energy Holdings cannot predict the timing or ultimate
outcome of the  legislative  process,  or the  payment of amounts  due under the
contracts with PG&E.

      As of December 31, 2000, GWF,  Hanford and Tracy had combined  receivables
due  from  PG&E,  for all  plants  amounting  to  $39,867,000.  Of this  amount,
$8,353,000 had been reserved as an allowance for doubtful accounts  resulting in
a net receivable balance of $31,514,000.  Energy Holdings pro-rata share of this
net receivable was $14,983,000.

      As of February 28, 2001, GWF,  Hanford and Tracy had combined  receivables
due from PG&E,  for all plants  amounting  to  $47,576,000  adjusted for certain
payments  received  through March 6, 2001. Of this amount,  $13,841,000 had been
reserved as an allowance  for doubtful  accounts  resulting in a net  receivable
balance of $33,735,000.  Energy  Holdings  pro-rata share of this net receivable
was $16,168,000.


                                       63
<PAGE>

                            PSEG ENERGY HOLDINGS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Concluded)

Note 19. SELECTED QUARTERLY DATA (Unaudited)

      The information  shown below, in the opinion of Energy Holdings,  includes
all adjustments,  consisting only of normal recurring  accruals,  necessary to a
fair presentation of such amounts.

<TABLE>
<CAPTION>
                                                                                  Quarter Ended
                                                             -------------------------------------------------------
2000                                                         March 31       June 30(1)    September 30    December 31
                                                             --------       ---------     ------------    -----------
                                                                                (Thousands In Dollars)
<S>                                                          <C>            <C>            <C>            <C>
Operating Revenues ......................................    $215,207       $164,413       $182,850       $232,240
Operating Income ........................................      79,021         35,117         67,490        110,196
Net Income ..............................................      31,032            886         27,734         54,315
Earnings/(Losses) Available to Common Stockholder ........     24,780         (5,386)        21,483         49,184
</TABLE>



<TABLE>
<CAPTION>
                                                                                   Quarter Ended
                                                             -------------------------------------------------------
1999                                                         March 31       June 30     September 30(2)  December 31
                                                             --------       -------     --------------   -----------
                                                                                (Thousands In Dollars)
<S>                                                          <C>            <C>            <C>            <C>
Operating Revenues ......................................    $128,673       $139,183       $148,447       $201,470
Operating Income ........................................      54,841         66,017         (2,340)        74,787
Net Income ..............................................      25,473         31,945         24,235         26,346
Earnings Available to Common Stockholder ................      19,221         25,693         17,984         20,094
</TABLE>

(1)   Second  quarter 2000  Earnings/(Losses)  Available  to Common  Stockholder
      includes a write-down to fair value of certain financial instruments, held
      by Resources, totaling $12,660,000 on a pre-tax basis.

(2)   Third  quarter  1999  Operating  Income  includes  a write down of certain
      equity  investments  of Global,  totaling  $43,971,000 on a pre-tax basis.
      Third  quarter  1999 Net Income  includes a pre-tax gain on sale of Newark
      Bay of $69,000,000.


                                       64
<PAGE>

              FINANCIAL STATEMENT RESPONSIBILITY -- ENERGY HOLDINGS

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

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

      Management has established  and maintains a system of internal  accounting
controls to provide reasonable  assurance that assets are safeguarded,  and that
transactions  are executed in accordance  with  management's  authorization  and
recorded  properly for the  prevention  and  detection of  fraudulent  financial
reporting,  so as to maintain the  integrity  and  reliability  of the financial
statements.  The  system is  designed  to  permit  preparation  of  consolidated
financial  statements and related notes in accordance  with  generally  accepted
accounting  principles.  The concept of reasonable assurance recognizes that the
costs of a system of internal  accounting controls should not exceed the related
benefits. Management believes the effectiveness of this system is enhanced by an
ongoing program of continuous and selective training of employees.  In addition,
management has  communicated to all employees its policies on business  conduct,
safeguarding assets and internal controls.

      The  Internal   Auditing   Department  of  Services  conducts  audits  and
appraisals of accounting and other  operations of PSEG and its  subsidiaries and
evaluates the  effectiveness of cost and other controls and, where  appropriate,
recommends to management  improvements  thereto.  Management  has considered the
internal  auditors'  and  Deloitte &  Touche's  recommendations  concerning  the
corporation's system of internal accounting controls and has taken actions that,
in its opinion, are cost-effective in the circumstances to respond appropriately
to these recommendations. Management believes that, as of December 31, 2000, the
corporation's  system of internal accounting controls was adequate to accomplish
the objectives discussed herein.

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

        Robert J. Dougherty, Jr.                  Bruce E. Walenczyk
              President and                    Vice President - Finance
         Chief Operating Officer            (Principal Financial Officer)

            Derek M. DiRisio
      Vice President and Controller
     (Principal Accounting Officer)

March 23, 2001


                                       65
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

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

      We have audited the  consolidated  balance sheets of PSEG Energy  Holdings
Inc. and its subsidiaries  (the "Company") as of December 31, 2000 and 1999, and
the related  consolidated  statements of income,  stockholder's  equity and cash
flows for each of the three years in the period ended  December  31,  2000.  Our
audits also included the consolidated financial statement schedule listed in the
Index  in  Item  14(B)(a).  These  consolidated  financial  statements  and  the
consolidated   financial  statement  schedule  are  the  responsibility  of  the
Company's  management.  Our  responsibility  is to  express  an opinion on these
consolidated  financial statements and consolidated financial statement schedule
based on our audits.

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

      In our opinion, such consolidated  financial statements present fairly, in
all material respects,  the financial position of the Company as of December 31,
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.  Also,
in our opinion, such consolidated financial statement schedule,  when considered
in relation to the basic  consolidated  financial  statements  taken as a whole,
presents fairly in all material respects, the information set forth therein.

      We have also previously  audited,  in accordance  with auditing  standards
generally  accepted in the United States of America,  the  consolidated  balance
sheets of the Company as of December 31, 1998,  1997,  and 1996, and the related
consolidated  statements of income,  common  stockholder's equity and cash flows
for the years ended 1997 and 1996 (none of which are presented  herein),  and we
expressed unqualified opinions on those consolidated financial statements.

      In our opinion,  the information set forth in the Selected  Financial Data
for each of the  five  years  in the  period  ended  December  31,  2000 for the
Company,  presented  in Item 6, is fairly  stated in all material  respects,  in
relation  to the  consolidated  financial  statements  from  which  it has  been
derived.

DELOITTE & TOUCHE LLP

Parsippany, New Jersey
March 23, 2001


                                       66
<PAGE>

ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE - NONE

                                    PART III

ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      As our sole stockholder, PSEG has the power to control the election of the
directors  and all other  matters  submitted  for  stockholder  approval and has
control over our management and affairs.

      Following are the executive officers and directors of Energy Holdings:

Executive Officers

      E.  JAMES  FERLAND  has been a Director  since  June 1989 and was  elected
Chairman  of the Board and Chief  Executive  Officer of Energy  Holdings in June
1989.  Age 59. Mr.  Ferland has also been  Chairman of the Board,  President and
Chief  Executive  Officer of PSEG since July 1986 and  Chairman of the Board and
Chief  Executive  Officer  of Public  Service  Electric  and Gas  Company  since
September 1991.

      ROBERT J.  DOUGHERTY,  JR. has been a Director  since January 1997 and was
elected  President  and Chief  Operating  Officer of Energy  Holdings in January
1997. Age 49. He was also elected  Chairman of the Board of Energy  Technologies
in 1997. Mr.  Dougherty  joined Public Service  Electric and Gas Company in 1973
and was President of Enterprise Ventures and Services  Corporation from February
1995 to  December  1996.  He was Senior  Vice  President  --  Electric of Public
Service Electric and Gas Company from September 1991 to February 1995.

      MICHAEL J.  THOMSON was named  President  and Chief  Executive  Officer of
Global in  January  1997.  Age 42.  Mr.  Thomson  had  served  as a Senior  Vice
President  for Global  from July 1993 to February  1994 and was Chief  Operating
Officer  from  February  1994 to December  1996.  Before  coming to Global,  Mr.
Thomson was employed by Energy  Holdings  beginning in 1990,  where he served as
Business Strategy Manager and then as Vice President of Business Development and
Planning.

      EILEEN A.  MORAN was  elected  President  and Chief  Executive  Officer of
Resources  in May  1990.  Age 46.  She  also was  elected  President  and  Chief
Executive  Officer of EGDC in January 1997.  Prior to that, Ms. Moran had served
as Vice President -- Investments of Resources from 1986. Ms. Moran joined Public
Service Electric and Gas Company in 1977.

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

      BRUCE E.  WALENCZYK  was  elected  Vice  President  --  Finance  of Energy
Holdings in March 1998. Age 49. He is also a Director and Vice President of PSEG
Capital.  Prior to joining Energy  Holdings,  Mr. Walenczyk served as a Managing
Director at Paine Webber and Kidder,  Peabody & Co., Inc.,  beginning in January
1991. He had been with Kidder,  Peabody since 1983 and was primarily  engaged in
capital raising and other financial  advisory services for a variety of entities
including major electric and gas utilities and energy companies.

      DEREK M.  DIRISIO was elected  Vice  President  and  Controller  of Energy
Holdings in June 1998.  Age 36. He had been Director -- Accounting  Services for
Energy Holdings since November 1997. Mr. DiRisio joined Public Service  Electric
and Gas Company in September  1991,  where he served in a number of positions in
corporate planning and accounting.


                                       67
<PAGE>

Directors

      ROBERT E. BUSCH has been a Director  since  December  2000. Age 54. He has
been  Senior  Vice  President  and Chief  Financial  Officer  of Public  Service
Electric  and Gas Company  since March 1998.  Prior to that,  Mr. Busch had been
national director of the utility consulting practice of The Hay Group, from 1997
to 1998.  He was  employed by  Northeast  Utilities  as  President of the Energy
Resources  Group from 1993 to 1996 and as Chief  Financial  Officer from 1989 to
1993.

      FRANK CASSIDY has been a Director  since January 2000. Age 54. He has been
President of PSEG Power LLC, a subsidiary of PSEG,  since July 1999.  Previously
he had been  President of Energy  Technologies  from November 1996 to July 1999,
Senior Vice  President--Fossil  Generation  of Public  Service  Electric and Gas
Company from  February  1995 to November  1996 and Vice  President--Transmission
Systems  of Public  Service  Electric  and Gas  Company  from  November  1989 to
February 1995.

      ROBERT C. MURRAY has been a Director  since January  2000.  Age 55. He has
been Vice President and Chief  Financial  Officer of PSEG since January 1992. He
had been Executive Vice  President--Finance  of Public Service  Electric and Gas
Company  from  June  1997 to June  2000 and  Senior  Vice  President  and  Chief
Financial  Officer of Public Service  Electric and Gas Company from January 1992
to June 1997.

      R. EDWIN SELOVER has been a Director  since  January 2000.  Age 55. He has
been Vice President and General Counsel of PSEG since April 1988 and Senior Vice
President and General  Counsel of Public Service  Electric and Gas Company since
January 1988.

ITEM 11: EXECUTIVE COMPENSATION

      NOT APPLICABLE

ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      NOT APPLICABLE

ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      NOT APPLICABLE

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(A)   Financial Statements:

      a.    Energy  Holdings  Consolidated  Statements  of Income  for the years
            ended December 31, 2000, 1999 and 1998 on page 35.

            Energy  Holdings  Consolidated  Balance  Sheets for the years  ended
            December 31, 2000 and 1999 on pages 36 and 37.

            Energy Holdings Consolidated  Statements of Cash Flows for the years
            ended December 31, 2000, 1999 and 1998 on page 38.

            Energy  Holdings  Statements of  Stockholder's  Equity for the years
            ended December 31, 2000, 1999 and 1998 on page 39.

            Energy Holdings Notes to Consolidated  Financial Statements on pages
            40 through 64.


                                       68
<PAGE>

(B)   The following documents are filed as a part of this report:

      a.    Energy Holdings Financial Statement Schedules:

            Schedule II--Valuation and Qualifying Accounts for each of the three
            years in the period ended December 31, 2000 (page 69).

      Schedules  other than those  listed  above are omitted for the reason that
      they are not required or are not applicable,  or the required  information
      is shown in the consolidated financial statements or notes thereto.

(C)   The following  exhibits are filed  herewith:  Exhibit 12:  Computation  of
      Ratios of Earning to Fixed Charges. (See Exhibit Index on page 71).

(D)   The  following  reports on Form 8-K were filed  during the last quarter of
      2000 and the 2001 period covered by this report under Items indicated:

            Date of Report                Items Reported
            --------------                --------------
           March 14, 2001                 Item 5
           October 27, 2000               Item 9
           October 19, 2000               Items 5 and 7

SCHEDULE II

                              PSEG ENERGY HOLDINGS
                Schedule II -- Valuation and Qualifying Accounts
               Years Ended December 31, 2000 -- December 31, 1998

<TABLE>
<CAPTION>
                                        Column B               Column C               Column D        Column E
                                       ---------     ---------------------------    ----------       ----------
                                                              Additions
                                                     ---------------------------
                                       Balance at    Charged to     Charged to                       Balance at
                                       beginning      cost and    other accounts    Deductions-        end of
Description                            of Period      expenses       describe         describe         Period
-----------                            ---------     ---------    --------------    ----------       ----------
                                                                (Thousands of Dollars)
<S>                                      <C>           <C>            <C>             <C>              <C>
2000:
Allowance for Doubtful Accounts.....     $ 5,228       $    20           --           $  197(A)        $ 5,051
Other Valuation Allowances..........      21,547            --           --               --            21,547

1999:
Allowance for Doubtful Accounts.....     $ 6,091       $   601           --           $1,464(A)        $ 5,228
Other Valuation Allowances..........      10,318        11,229(B)        --               --            21,547

1998:
Allowance for Doubtful Accounts.....     $ 5,172(C)    $ 1,065         $ --           $  146(A)        $ 6,091
Other Valuation Allowances..........      10,318            --           --               --            10,318
</TABLE>

(A)   Accounts Receivable written off.

(B)   Increase in valuation allowances for certain properties held by EGDC.

(C)   Balance includes a reserve  transferred in connection with the dividend of
      the outstanding stock of PSCRC by PSEG to Energy Technologies.


                                       69
<PAGE>

                                   SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                                  PSEG ENERGY HOLDINGS INC.

                                          By:  /s/ Robert J. Dougherty, Jr.
                                               ---------------------------------
                                               Robert J. Dougherty, Jr.
                                               President
                                               and Chief Operating Officer

Date: March 30, 2001

      Pursuant to the requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in the capacities and on the dates indicated.

         Signature                      Title                          Date
         ---------                      -----                          ----
                             Chairman of the Board
                             and Chief Executive Officer
   /s/ E. James Ferland      (Principal Executive Officer)        March 30, 2001
---------------------------
     E. James Ferland

                             Vice President - Finance
  /s/ Bruce E. Walenczyk     (Principal Financial Officer)        March 30, 2001
---------------------------
    Bruce E. Walenczyk

                             Vice President and Controller
   /s/ Derek M. DiRisio      (Principal Accounting Officer)       March 30, 2001
---------------------------
     Derek M. DiRisio

    /s/ Robert E. Busch      Director                             March 30, 2001
---------------------------
      Robert E. Busch

     /s/ Frank Cassidy       Director                             March 30, 2001
---------------------------
       Frank Cassidy

/s/ Robert J. Dougherty, Jr  Director                             March 30, 2001
---------------------------
  Robert J. Dougherty, Jr

   /s/ Robert C. Murray      Director                             March 30, 2001
---------------------------
     Robert C. Murray

   /s/ R. Edwin Selover      Director                             March 30, 2001
---------------------------
     R. Edwin Selover


                                       70
<PAGE>

Exhibit Index

      Certain Exhibits previously filed with the Commission are indicated as set
forth below.  Such  Exhibits are not being  refilled,  but are included  because
inclusion is desirable for convenient reference.

  Exhibit
   Number                               Description
   ------                               -----------
   3.1        -    Certificate of Incorporation, as amended

   3.2        -    By-Laws.

   4.1        -    Indenture dated October 8, 1999 between  Energy  Holdings and
                   First Union National Bank.

    12        -    Statement regarding computation of ratios of earnings.


                                       71
<PAGE>