As filed with the Securities and Exchange Commission on January 28, 2000

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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   ----------

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

                                   ----------

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

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

                                80 Park Plaza-T22
                          Newark, New Jersey 07102-4194
                                 (973) 456-3581
   (Address, including zip code and telephone number, including area code, of
                   Registrant's principal executive offices)

                                   ----------

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

                                   ----------

                                   Copies to:

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

                                   ----------

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

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

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

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

                         CALCULATION OF REGISTRATION FEE

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                                              Proposed    Proposed
                                               Maximum    Maximum
   Title of Each                   Amount     Offering    Aggregate   Amount of
Class of Securities                 to be     Price Per   Offering  Registration
 to be Registered                Registered     Unit        Price      Fee (1)
--------------------------------------------------------------------------------

10% Senior Notes due 2009 ...   $400,000,000    100%    $400,000,000   $105,600
================================================================================

(1)   The registration fee has been calculated  pursuant to rule 457(f)(2) under
      the  Securities  Act.  The  proposed  maximum  aggregate   offering  price
      represents  the  total  value of the  bonds  being  exchanged  under  this
      registration statement.

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

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<PAGE>

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

                 Subject to completion, dated January 28, 2000.

PROSPECTUS
[PSEG ENERGY HOLDINGS LOGO]

                                  $400,000,000
                            PSEG Energy Holdings Inc.

                                Offer to Exchange

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

                           For Any and All Outstanding
                            10% Senior Notes due 2009
                        Which have not been so registered

                               THE EXCHANGE OFFER

      We previously issued  $400,000,000  aggregate  principal amount of our 10%
Senior  Notes due 2009.  These  original  notes  were not  registered  under the
Securities  Act of 1933.  We are now  offering you the  opportunity  to exchange
these original notes for an equal amount of our 10% senior notes due 2009, which
are registered under the Securities Act of 1933.

                           TERMS OF THE EXCHANGE OFFER

o     The  exchange  offer  expires at _____ p.m.,  Eastern  Standard  Time,  on
      ______________, unless extended.

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

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

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

o     Holders of original notes do not have any appraisal or dissenters'  rights
      in connection with the exchange offer. Original notes not exchanged in the
      exchange offer will remain outstanding and will continue to be entitled to
      the benefits of the indenture.  Upon  consummation  of the exchange offer,
      holders of the original notes,  except under limited  circumstances,  will
      have no further  exchange or  registration  rights under the  registration
      rights agreement.

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

o     The only conditions to completing the exchange offer are that the exchange
      offer does not violate applicable law or any applicable  interpretation of
      the staff of the  Securities  and Exchange  Commission  and no injunction,
      order  or  decree  has  been  issued  which  would  prohibit,  prevent  or
      materially impair our ability to proceed with the exchange offer.

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

o     We do not  believe  that the  exchange  of the  original  notes  will be a
      taxable  event for U.S.  federal  income tax  purposes  but you should see
      "Certain  Federal  Income  Tax   Considerations"   on  page  80  for  more
      information.

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

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

      We may amend or  supplement  this  prospectus  from time to time by filing
amendments or  supplements as required.  You should read this entire  prospectus
(and  accompanying   letter  of  transmittal  and  related  documents)  and  any
amendments or supplements carefully before deciding to exchange your securities.

                  The date of this prospectus is _______, 2000.
<PAGE>

                                TABLE OF CONTENTS

                                                                            Page
                                                                            ----
Where to Find More Information ............................................    3
Forward-Looking Statements ................................................    4
Prospectus Summary ........................................................    5
Risk Factors ..............................................................   13
Use of Proceeds ...........................................................   18
Capitalization ............................................................   18
Selected Consolidated Financial Data ......................................   19
Management's Discussion and Analysis of Financial Condition
  and Results of Operations ...............................................   20
Business ..................................................................   34
Management ................................................................   56
The Exchange Offer ........................................................   58
Description of Exchange Notes .............................................   66
Certain Federal Income Tax Considerations .................................   80
Plan of Distribution ......................................................   82
Legal Opinions ............................................................   83
Experts ...................................................................   83
Independent Auditors' Report ..............................................  F-1
Consolidated Financial Statements .........................................  F-2

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


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<PAGE>

                         WHERE TO FIND MORE INFORMATION

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

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

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

      You should rely only on the information  contained in this prospectus.  We
have not  authorized  anyone to provide you with  information  that is different
from this information.


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<PAGE>

                           FORWARD-LOOKING STATEMENTS

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

      In addition to any assumptions and other factors  referred to specifically
in connection  with such  forward-looking  statements,  factors that could cause
actual   results  to  differ   materially   from  those   contemplated   in  any
forward-looking  statements include, among others, the following,  some of which
relate to PSEG Energy  Holdings Inc.  indirectly as a result of their  potential
impact  upon  Public  Service  Enterprise  Group  Incorporated  (PSEG) or Public
Service  Electric and Gas Company:  deregulation  and the  unbundling  of energy
supplies and services and the establishment of a competitive  energy marketplace
for products and services;  managing rapidly  changing  wholesale energy trading
operations in conjunction with electricity and gas production,  transmission and
distribution  systems;  managing foreign investments and electric generation and
distribution  operations in locations outside of the traditional utility service
territory;  political and foreign  currency risks;  an increasingly  competitive
energy  marketplace;  sales  retention  and growth  potential in a mature Public
Service  Electric  and  Gas  Company  service  territory;  ability  to  complete
development  or  acquisition  of current  and future  investments;  partner  and
counterparty risk;  exposure to market price fluctuations and volatility of fuel
and power supply, power output and marketable securities,  among others; ability
to obtain  adequate and timely rate relief,  cost recovery,  and other necessary
regulatory  approvals;  ability of Public  Service  Electric  and Gas Company to
obtain securitization  proceeds;  federal, state and foreign regulatory actions;
regulatory oversight with respect to utility and non-utility affiliate relations
and activities;  Year 2000 issues;  operating restrictions,  increased costs and
construction   delays   attributable  to  environmental   regulations;   nuclear
decommissioning  and the availability of reprocessing and storage facilities for
spent nuclear fuel; licensing and regulatory approvals necessary for nuclear and
other operating stations; the ability to economically and safely operate nuclear
facilities  in  which  PSEG  has  an  interest  in  accordance  with  regulatory
requirements; environmental concerns; and market risk and debt and equity market
concerns associated with these issues.


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                               PROSPECTUS SUMMARY

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

                                   The Company

      PSEG  Energy  Holdings  Inc.  (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).  Our objective is to pursue investment
opportunities  in the  rapidly  changing  worldwide  energy  markets  where  our
technical,  market and  regulatory  expertise can be applied to create  economic
value.

      We focus on (i) supplying  reliable,  competitively  priced energy in high
growth  markets,  (ii) providing  capital to finance  energy-related  assets and
(iii) supplying  products and services designed to assist customers in efficient
energy utilization.

   o  Global  develops,  acquires,  owns and operates  electric  generation  and
      distribution  facilities and engages in power production and distribution,
      including wholesale and retail sales of electricity,  in selected domestic
      and international markets.  Global has ownership interests in 19 operating
      generation  projects totaling 2,002 megawatts (MW) (535 MW net) located in
      the United States,  Argentina,  China and Venezuela.  Global has ownership
      interests  in  eighteen  projects  totaling  4,832  MW  (2,252  MW net) in
      construction  or  advanced  development  that are  located  in the  United
      States, Argentina,  Venezuela, India, Tunisia, China, Italy and Poland. Of
      Global's  generation  projects  in  operation,  construction  or  advanced
      development,  1,292 MW net,  or 46%,  are  located in the  United  States.
      Global is actively involved,  through its joint ventures,  in managing the
      operations  of eight  operating  generation  projects and will be actively
      involved  in  managing  the   operations   of  five  of  the  projects  in
      construction  or  advanced  development.  Global  owns  interests  in  six
      distribution   companies,   which  as  of  September  30,  1999,   totaled
      approximately   70%  of  Global's   assets,   providing   electricity   to
      approximately 2.7 million customers in Argentina,  Brazil, Chile and Peru.
      Global  is  actively   involved  in  managing  the   operations  of  these
      distribution companies. Global was established in 1984 and as of September
      30, 1999 had assets of approximately $1.7 billion.

      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  in markets in which it  believes  most of the new
      worldwide electric  generating capacity will be installed in the next five
      years:  China,  India, the Middle East, Latin America and selected regions
      in the United  States.  Global has  established  a presence  in these high
      growth  markets  which allows it to access and better  evaluate  potential
      investment   opportunities.   Prior  to   proceeding   with  a  particular
      investment,  Global's  strategy is to conduct a multi-faceted  analysis of
      the  resident  country,  potential  partners  and  transaction  economics.
      Initially,  countries  are  evaluated  to assess  the  social,  political,
      economic and regulatory  environment.  To mitigate  certain risks,  Global
      next  seeks  to   identify   partners   with   complementary   skills  and
      capabilities.  Global then focuses on projects which may present potential
      synergies  with  existing  projects  or future  investments.  As a result,
      Global has developed or acquired  interests in electric  generation and/or
      distribution  facilities in the United States,  Argentina,  Brazil, Chile,
      Peru, Venezuela, and China.

   o  Resources provides energy infrastructure financing in developed countries.
      Resources invests in energy-related  financial  transactions and manages a
      diversified  portfolio  of more than 60  investments  including  leveraged
      leases,  leveraged buyout (LBO) funds, limited partnerships and marketable
      securities.  As of September 30, 1999,  Resources had  approximately  $1.6
      billion invested in leveraged  leases  representing  approximately  84% of
      Resources'  assets.  Approximately  79% of these leveraged leases are with
      lessees that have investment grade


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      credit ratings.  Leveraged  leases of  energy-related  plant and equipment
      totaled  approximately  $1.1 billion or 70% of the lease portfolio and 59%
      of Resources'  assets.  The  remainder of Resources'  portfolio is further
      diversified  across a wide  spectrum of asset types and business  sectors,
      including  leveraged  leases  of  aircraft,   railcars,  real  estate  and
      industrial  equipment,  limited  partnership  interests in project finance
      transactions,  LBO and venture  funds and  marketable  securities.  All of
      Resources' investments since 1992 have been energy-related.  Resources was
      established   in  1985  and  as  of  September  30,  1999  had  assets  of
      approximately $1.9 billion.

      Worldwide  deregulation  of energy  markets  is also  creating  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. Resources
      has invested in 15 energy-related leveraged lease transactions since 1997.
      When  evaluating   leveraged  lease  investments,   Resources  focuses  on
      mitigating  credit  risk and  eliminating  operating  and  currency  risk.
      Resources  seeks  to  invest  in  transactions  where  its  expertise  and
      understanding  of the  inherent  risks and  operating  characteristics  of
      energy  assets  provide a  competitive  advantage.  Resources  expects  to
      continue  to  concentrate  its  investment   activity  on   energy-related
      financial transactions.

   o  Energy  Technologies  is an energy  management  company  that  constructs,
      operates and maintains  heating,  ventilating and air conditioning  (HVAC)
      systems for,  and  provides  energy-related  engineering,  consulting  and
      mechanical contracting services to, industrial and commercial customers in
      the  Northeastern and Middle Atlantic United States.  Energy  Technologies
      also  supplies   electricity   and  gas  to  industrial,   commercial  and
      residential customers.  Energy Technologies was established in 1997 and as
      of September 30, 1999 had assets of approximately $232 million.

      Deregulation  of the  domestic  electric  and gas  utility  industries  is
      presenting  opportunities  for Energy  Technologies in the energy services
      business in the Northeastern and Middle Atlantic United States.  Since its
      formation  in 1997,  Energy  Technologies  has  acquired  seven  companies
      involved in the  engineering,  construction,  installation,  operation and
      maintenance  of energy  equipment  and HVAC systems.  Energy  Technologies
      plans to grow its existing  operations  and utilize the recently  acquired
      companies  to  deliver  expanded  energy-related  services  and  products,
      including  gas and  electricity,  to existing and new  customers.  We will
      assess the growth  prospects and  opportunities  for Energy  Technologies'
      business before committing additional capital.

      We are a direct,  wholly-owned  subsidiary  of Public  Service  Enterprise
Group  Incorporated  (PSEG) and an affiliate of Public Service  Electric and Gas
Company, a public utility operating in New Jersey,  which is also a wholly-owned
subsidiary of PSEG. We provide  administrative  support for our subsidiaries and
financing on the basis of a combined credit profile.  In addition,  PSEG Capital
Corporation (PSEG Capital),  our subsidiary,  has provided debt financing in the
form of Medium-Term Notes (MTNs),  with maturities ranging from 2000 to 2003, in
an aggregate  principal  amount of $650 million to our subsidiaries on the basis
of a net worth  maintenance  agreement with PSEG. As of September 30, 1999, PSEG
had  approximately  $1.6  billion  of equity  (including  retained  earnings  of
approximately $258 million) invested in our company.

                                Recent Activities

Energy Holdings

   o  In October  1999,  we issued  $400  million of 10% senior  notes due 2009.
      These are the  original  notes  being  offered for  exchange.  Interest is
      payable semi-annually on April 1 and October 1,

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

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

Global

   o  In November 1999,  Global announced that it plans to build a combined heat
      and power  plant of 220 MW of  electricity  and 500 MW of  thermal  energy
      capacity utilizing  circulating  fluidized bed technology in Poland. Total
      project  cost is  estimated  at $320  million  with  commercial  operation
      targeted for late 2002.

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

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

   o  In  September  1999,  Global  and a partner  closed on a tender  offer for
      outstanding publicly traded shares of Luz del Sur, a Peruvian distribution
      company.  The number of shares tendered 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
      million.

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

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

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

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

   o  In June 1999, Global and a partner closed project financing for Parana, an
      830  MW  gas-fired  combined-cycle  electric  generation  facility  to  be
      constructed in San Nicolas, Argentina. The new facility is adjacent to the
      Central  Termica San Nicolas  (CTSN) power plant,  a 650 MW facility  also
      owned by Global and its partner.  Construction began in August 1999 and is
      expected to be

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                                       7
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      completed by 2001 at a total cost of approximately $448 million.  Global's
      equity investment for its 33% interest is expected to be approximately $86
      million, including contingencies.

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

   o  In April 1999,  Global  announced  the  formation of a joint venture which
      plans  to  construct  and  operate  three  gas-fired  electric  generation
      facilities,  the Turboven project, with total installed capacity of 200 MW
      and associated  distribution systems to serve, under contract,  industrial
      customers in Venezuela. Global expects the first two facilities, which are
      in  construction,  to be operational in early 2000 with the third facility
      in service in late 2001. Total cost is estimated to be approximately  $140
      million. Global's equity investment,  including contingencies, for its 50%
      interest is expected to be approximately $70 million.

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

Resources

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

   o  In 1999,  Resources  negotiated the early  termination of three  leveraged
      leases and  received  cash  proceeds  of $125  million and  recognized  an
      after-tax gain of approximately $14 million.

   o  In 1999,  Resources  invested  approximately $379 million in six leveraged
      lease  transactions of energy-related  assets,  including gas distribution
      networks in the Netherlands,  cogeneration plants in Germany, a generation
      facility in the United States and a liquefied natural gas storage facility
      in the United States.

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

Energy Technologies

   o  In 1999, Energy  Technologies  acquired six mechanical,  HVAC and building
      service  contractors in New Jersey,  Rhode Island and Virginia for a total
      cost of approximately $62 million. The latest acquisition was completed in
      December 1999.

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

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

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                                       8
<PAGE>

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                          Summary of the Exchange Offer

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

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

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

Required Representations .......  In order to participate in the exchange offer,
                                  you   will   be    required   to   make   some
                                  representations  in a letter  of  transmittal,
                                  including (1) that you are not affiliated with
                                  us, (2) that you are not a  broker-dealer  who
                                  bought your original  notes  directly from us,
                                  (3) that you will acquire the  exchange  notes
                                  in the ordinary  course of  business,  and (4)
                                  that  you  have  not  agreed  with  anyone  to
                                  distribute  the exchange  notes.  If you are a
                                  broker-dealer  that  purchased  original notes
                                  for your own account as part of  market-making
                                  or trading activities, you may represent to us
                                  that  you  have  not  agreed  with  us or  our
                                  affiliates to distribute  the exchange  notes.
                                  If you make this representation,  you need not
                                  make the representation provided for in clause
                                  (4) above.

Resale of the Exchange Notes ...  We believe that the exchange notes acquired in
                                  this  exchange  offer  may  be  freely  traded
                                  without  compliance with the provisions of the
                                  Securities Act that call for  registration and
                                  delivery of a prospectus,  except as described
                                  in the following paragraph.

                                  If  you  are a  broker-dealer  that  purchased
                                  original notes for your own account as part of
                                  market-making or trading activities,  you must
                                  deliver a  prospectus  when you sell  exchange
                                  notes.  We have  agreed  in the  exchange  and
                                  registration  rights agreement relating to the
                                  original  notes  to  allow  you  to  use  this
                                  prospectus for this purpose during the 180-day
                                  period  following  completion  of the exchange
                                  offer   (subject   to  our  right  under  some
                                  circumstances  to  restrict  your  use of this
                                  prospectus).

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

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

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

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

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                                       9
<PAGE>

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

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

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

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

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

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

                          Summary of the Exchange Notes

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

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

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

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

Optional Redemption ............  The exchange  notes will be  redeemable at our
                                  option in whole or in part at any  time,  at a
                                  redemption  price  equal to the greater of (i)
                                  100% of the  principal  amount of the exchange
                                  notes to be redeemed,  and (ii) the sum of the
                                  present values of the principal amount and the
                                  remaining  scheduled  payments  of interest on
                                  the  exchange  notes to be  redeemed  from the
                                  redemption  date to October 1, 2009 discounted
                                  on a semiannual basis (assuming a 360-day year
                                  consisting  of 30-day  months) at a  specified
                                  Treasury Rate plus 40 basis  points,  plus, in
                                  either case,  accrued  interest thereon to the
                                  date  of  redemption.   See   "Description  of
                                  Exchange   Notes  --   Optional   Redemption".

--------------------------------------------------------------------------------


                                       10
<PAGE>

--------------------------------------------------------------------------------

Ranking ........................  The  exchange  notes will be senior  unsecured
                                  obligations  and will  rank  equally  with our
                                  senior unsecured  indebtedness.  See "Selected
                                  Consolidated  Financial Data".  Since we are a
                                  holding  company,  the exchange  notes will be
                                  structurally  subordinated to any indebtedness
                                  and  other  liabilities  of our  subsidiaries.

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

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

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

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

Limitation on Liens ............  Energy Holdings and its  subsidiaries  may not
                                  incur any liens to secure indebtedness without
                                  providing  that  the  exchange  notes  will be
                                  equally   and   ratably   secured   with  such
                                  indebtedness.  These restrictions do not apply
                                  to liens granted by  subsidiaries  (other than
                                  "Material Subsidiaries" as defined on page 69)
                                  in connection with project  financings,  liens
                                  securing  indebtedness  not  exceeding  10% of
                                  Consolidated  Net Tangible  Assets (as defined
                                  on page 69) and other specified liens.

Limitation on Sale and
  Leasebacks ...................  Energy Holdings and its  subsidiaries  may not
                                  enter  into  sale and  leaseback  transactions
                                  unless  it  would  be   permissible  to  incur
                                  indebtedness  secured  by  a  lien  under  the
                                  foregoing  Limitation on Liens covenant in the
                                  amount  of the  indebtedness  associated  with
                                  that sale and leaseback  transaction or unless
                                  the proceeds of that sale and  leaseback  were
                                  applied to the reduction of indebtedness. Also
                                  not restricted is indebtedness associated with
                                  sale and leaseback  transactions not exceeding
                                  10% of Consolidated Net Tangible Assets.

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

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




                                       11
<PAGE>

--------------------------------------------------------------------------------

                       SUMMARY CONSOLIDATED FINANCIAL DATA

      The  following  table sets forth a summary of our  consolidated  financial
data for the periods indicated.  The summary consolidated financial data for the
nine months ended  September  30, 1999 and 1998 was derived  from the  unaudited
financial statements of Energy Holdings and its consolidated subsidiaries which,
in the opinion of management, have been prepared in a manner consistent with the
audited  financial  statements  for the three years  ended  December  31,  1998.
Operating  results  for  the  nine  months  ended  September  30,  1999  are not
necessarily  indicative of results which may be expected for the full year.  The
summary consolidated  financial data for the years ended December 31, 1998, 1997
and 1996 was  derived  from the audited  consolidated  financial  statements  of
Energy  Holdings  and  its  consolidated  subsidiaries.  This  summary  data  is
qualified  in its  entirety  by the  more  detailed  information  and  financial
statements, including the notes thereto. The consolidated financial data for the
years ended  December  31, 1995 and 1994 was derived from  financial  statements
originally audited by our independent  auditors.  These statements were restated
to conform with audited financial  statements for the three years ended December
31,  1998  for  certain  transactions,  but  have  not  been  re-audited  by our
independent auditors.

<TABLE>
<CAPTION>
                                               Nine Months Ended
                                                 September 30,                           Years Ended December 31,
                                            -----------------------   --------------------------------------------------------------
                                               1999         1998         1998         1997         1996         1995        1994
                                            ----------   ----------   ----------   ----------   ----------   ----------   ----------
                                                          (Thousands of Dollars except ratios)
<S>                                         <C>          <C>          <C>          <C>          <C>          <C>          <C>
Operating Data:
Total Revenues ..........................   $  416,323   $  283,622   $  439,524   $  341,590   $  302,800   $  250,100   $  197,829
Total Operating Expenses ................      253,814      179,987      248,702      196,462      171,169      122,520       67,388
Earnings Before Interest and
   Taxes (EBIT) .........................      190,994      109,769      189,547      145,813      131,631      127,540      130,441
Interest, Net of Capitalized
   Interest .............................       65,517       67,930       91,987       72,363       58,261       56,894       61,799
Taxes ...................................       44,427       16,407       30,160       25,816       24,968       23,594       20,608
Income from Discontinued
   Operations (A) .......................         --           --           --           --         24,238       35,036       12,512
Net Income ..............................       81,653       26,961       69,204       47,873       72,662       82,401       60,923
Preferred Stock Dividends (B) ...........       18,755       11,226       17,478          598         --           --           --
Earnings Available for
   Common Stock .........................   $   62,898   $   15,735   $   51,726   $   47,275   $   72,662   $   82,401   $   60,923

<CAPTION>
                                               As of September 30,                          As of December 31,
                                               -------------------    --------------------------------------------------------------
                                                       1999              1998         1997         1996         1995        1994
                                                    ----------        ----------   ----------   ----------   ----------   ----------
<S>                                                 <C>               <C>          <C>          <C>          <C>          <C>
Balance Sheet Data:
Total Assets ............................           $3,878,460        $3,168,530   $3,022,956   $2,122,413   $2,295,803   $2,114,100

Total Liabilities .......................            1,052,456           958,528      962,954      817,889      634,502      526,770
Total Capitalization:
   Debt (F) .............................            1,471,544           967,673    1,275,103      627,381      707,819      624,935
   Common Equity (B) ....................              845,260           733,129      709,899      677,143      953,482      962,395
   Preferred Equity (B) .................              509,200           509,200       75,000         --           --           --
                                                    ----------        ----------   ----------   ----------   ----------   ----------
   Total Stockholder's Equity ...........            1,354,460         1,242,329      784,899      677,143      953,482      962,395
                                                    ----------        ----------   ----------   ----------   ----------   ----------
Total Capitalization ....................           $2,826,004        $2,210,002   $2,060,002   $1,304,524   $1,661,301   $1,587,330

<CAPTION>
                                                              Nine Months
                                                           Ended September 30,                Years Ended December 31,
                                                           -------------------     ------------------------------------------------
                                                             1999       1998       1998       1997       1996       1995       1994
                                                             ----       ----       ----       ----       ----       ----       ----
<S>                                                          <C>        <C>        <C>        <C>        <C>        <C>        <C>
Other Data:
Earnings to Fixed Charges (C) .........................      2.8x       1.7x       2.1x       1.4x       3.0x       2.4x       2.3x
EBIT to Interest Expense (D)  (H) .....................      2.9x       1.6x       2.1x       2.0x       2.3x       2.2x       2.1x
EBITDA to Interest Expense (E)  (H) ...................      3.1x       2.0x       2.4x       2.2x       2.5x       2.5x       2.4x
Consolidated Debt to Capitalization (F) ...............       52%        41%        44%        62%        48%        43%        39%
Consolidated Recourse Debt to Recourse
   Capitalization  (G) ................................       45%        33%        38%        57%        48%        43%        39%
</TABLE>

----------
(A)   For a  discussion  of  discontinued  operations,  see  Note 19 in Notes to
      Consolidated Financial Statements.

(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 is defined as  operating  income plus other  income.  For this ratio,
      interest  expense is net of capitalized  interest of $2.5 million and $0.8
      million  for  the  nine  months  ended   September   30,  1999  and  1998,
      respectively,  and $1.2 million,  $5.1 million, $1.3 million, $1.9 million
      and $4.5 million for the years ended December 31, 1998,  1997,  1996, 1995
      and 1994, respectively.

(E)   EBITDA is defined as 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 and
      Energy Holdings which is consolidated on the balance sheet.

(G)   Excludes  consolidated  debt that is  non-recourse  to Global  and  Energy
      Holdings of $343 million,  $228 million,  $220 million and $232 million as
      of September 30, 1999,  September 30, 1998, December 31, 1998 and December
      31,  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.
      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.

--------------------------------------------------------------------------------


                                       12
<PAGE>

                                  RISK FACTORS

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

Holding company structure could affect our ability to service debt

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

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

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

      Global has financed certain of its generation and distribution  facilities
using  non-recourse  project financing.  Each non-recourse  project financing is
structured to be repaid out of cash flow provided by the facility or facilities.
In the event of a default under a financing  agreement  which is not cured,  the
lenders would generally have rights to the facility and any related  assets.  In
the event of  foreclosure  after a  default,  Global  may lose its equity in the
facility  or may not be  entitled to any cash that the  facility  may  generate.
Although  such a default  will not cause a default  with respect to the exchange
notes,  it  may  materially  affect  our  ability  to  service  our  outstanding
indebtedness, including the exchange notes.

Our control of our minority investments is limited

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

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

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

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


                                       13
<PAGE>

and the costs of capital  depend on  numerous  factors  including,  among  other
things, general economic and market conditions,  the availability of credit from
banks and other  financial  institutions,  investor  confidence,  the success of
current projects and the quality of new projects.

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

We cannot assure sufficient cash flow to service the notes

      As of September  30, 1999,  we had total debt of $1.1  billion,  excluding
consolidated  non-recourse  debt appearing on our balance sheet.  We can give no
assurances  that our projects and investments  will generate  sufficient cash to
service our outstanding indebtedness, including the notes.

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

A substantial amount of our business is conducted outside the United States

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

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

Our project development, construction and acquisition activities may not be
successful

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

      The  construction,  expansion or  refurbishment  of a power  generation or
distribution  facility may involve equipment and material supply  interruptions,
labor disputes,  unforeseen  engineering,


                                       14
<PAGE>

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

Our operating performance may fall below projected levels

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

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

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

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

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

We and our subsidiaries are subject to substantial competition

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

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


                                       15
<PAGE>

Governmental regulation affects many of our operations

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

      The Public Utility  Holding Company Act of 1935 (PUHCA)  regulates  public
utility holding companies and their subsidiaries.  PSEG has claimed an exemption
from regulation by the SEC as a registered  holding company under PUHCA,  except
for the provision  which relates to the  acquisition of 5% or more of the voting
securities  of an  electric  or gas  utility  company.  Actions  of PSEG and its
subsidiaries  could cause PSEG and its  subsidiaries to no longer be exempt from
regulation  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  financing  and  investing  activities,  including  the  amount  and  type of
non-utility investments.

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

We are subject to control by PSEG

      As our sole stockholder, PSEG has the power to control the election of the
directors  and all other  matters  submitted  for  stockholder  approval and has
control over our management and affairs.  In circumstances  involving a conflict
of interest  between PSEG,  as the sole  stockholder,  on the one hand,  and our
creditors,  on the other, we can give no assurances that PSEG would not exercise
its power to control us in a manner that would  benefit PSEG to the detriment of
the holders of the notes.  PSEG's  subsidiary,  Public Service  Electric and Gas
Company,  has policies in place,  pursuant to applicable law, to ensure that its
ratepayers are protected from affiliate  transactions that may be adverse to the
ratepayers' interests.

      The indenture imposes no limitations on our ability to pay dividends or to
make other  payments to PSEG or on our ability to enter into  transactions  with
PSEG or our other  affiliates.  PSEG could decide to no longer  continue to hold
our stock,  although  failure to maintain  ownership of a majority of the common
stock  could  trigger  the  change  of  control  repurchase  provisions  in  the
Indenture.

      As a wholly-owned subsidiary of PSEG, we and our subsidiaries are included
in PSEG's  consolidated  tax filing for federal income tax purposes.  Generally,
the leveraged lease  transactions in which Resources  invests provide tax losses
in the early  years of their term that  offset  taxable  income  from other PSEG
subsidiaries.  We and our subsidiaries are parties to a tax allocation agreement
with PSEG under which we and each of our  subsidiaries is responsible to pay its
share of taxes due or entitled to receive tax benefits  earned.  If PSEG were to
modify the tax  allocation  agreement,  our  future  investment  strategy  might
change,  including  Resources'  possible  curtailment  of  new  leveraged  lease
investments.  However,  we do not believe  that our ability to service our debt,
including the notes,  would be impaired if a modification  to the tax allocation
agreement  were to occur,  although no assurances  can be given.  For additional
discussion, see "Business -- Regulation".

United States utility industry is undergoing fundamental change

      The  electric  and  gas  utility  industries  in  the  United  States  are
undergoing major  transformations  and are experiencing  competitive  pressures.
Regulatory  changes,  including the unbundling of energy supply and services and
the establishment of a competitive  energy marketplace for products and services
are affecting our company, PSEG and Public Service Electric and Gas Company.

      The New  Jersey  Board of  Public  Utilities  (BPU)  has  been  conducting
proceedings  pursuant to the New Jersey Energy Master Plan (Energy  Master Plan)
and  the New  Jersey  Electric  Discount  and


                                       16
<PAGE>

Energy  Competition  Act (Energy  Competition  Act),  and is expected to issue a
series of orders that will decide both generic  issues for the energy  industry,
including  affiliate   standards   (including  fair  competition  and  affiliate
transactions),   and  company   specific   matters  for   utilities   under  its
jurisdiction,  including Public Service Electric and Gas Company.  On August 24,
1999, the BPU issued its Final Decision and Order (Final Order) in the matter of
Public Service  Electric and Gas Company's rate  unbundling,  stranded costs and
restructuring  filings.  Appeals  filed on  behalf  of  several  Public  Service
Electric and Gas Company customers are pending at the Appellate  Division of the
New Jersey Superior Court.

      As a result of the 1992  focused  audit of PSEG's  non-utility  businesses
(Focused Audit),  PSEG agreed,  among other things, that it would not permit its
non-utility  assets to exceed 20% of PSEG's  consolidated  assets  without prior
notice to the BPU and that it would make a good faith  effort to  eliminate  its
net worth  maintenance  agreement  with PSEG Capital by 2003.  At September  30,
1999,  such  assets  were  approximately  21% of  consolidated  assets  and PSEG
Capital's outstanding debt was $650 million, with maturities in 2003 or sooner.

      Regulatory oversight by the BPU to assure that there is no harm to utility
ratepayers from PSEG's non-utility  assets is expected to continue.  As a result
of the final  outcome of the  Energy  Master  Plan  proceedings  and  accounting
impacts resulting from the deregulation of the generation of electricity and the
unbundling  of the utility  business,  we do not believe that the Focused  Audit
provision  regarding BPU notification if PSEG's non-utility assets exceed 20% of
its consolidated  assets remains appropriate and believe that modifications will
be required.

      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.  Further, Public Service
Electric  and Gas  Company  was  directed  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.

      We believe that these issues will be satisfactorily resolved,  although no
assurances can be given. We also believe that if still required,  we are capable
of  eliminating  PSEG  support of PSEG  Capital  debt within the time period set
forth in the Focused  Audit.  Inability to achieve  satisfactory  resolution  of
these  matters  could  impact  our  future  relative  size  and  financing  and,
accordingly,   future  prospects,  including  financial  condition,  results  of
operations and cash flows. See "Business -- Regulation".

There is no public market for the exchange notes

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

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

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


                                       17
<PAGE>

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

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

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

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

                                 USE OF PROCEEDS

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

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

                                 CAPITALIZATION

      The   following   table   sets   forth   Energy   Holdings'   consolidated
capitalization  as of September  30, 1999 and as adjusted to reflect the sale of
the original notes.

                                                  As of September 30, 1999
                                                ---------------------------
                                                  Actual        As Adjusted
                                                ----------      -----------
                                                  (Thousands of Dollars)

      Short-term debt (A) ................      $  597,639      $  197,639
      Long-term debt .....................         873,905       1,273,905
                                                ----------      ----------
      Total debt .........................       1,471,544       1,471,544
                                                ----------      ----------
      Total common equity (B) ............         845,260         845,260
      Total preferred equity (B) .........         509,200         509,200
                                                ----------      ----------
      Total stockholder's equity .........       1,354,460       1,354,460
                                                ----------      ----------
      Total capitalization ...............      $2,826,004      $2,826,004
                                                ==========      ==========

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

(B)   Owned by PSEG.


                                       18
<PAGE>

                      SELECTED CONSOLIDATED FINANCIAL DATA

      The following  table sets forth our selected  consolidated  financial data
for the periods indicated. The selected consolidated financial data for the nine
months  ended  September  30,  1999  and  1998 was  derived  from the  unaudited
financial statements of Energy Holdings and its consolidated subsidiaries which,
in the opinion of management, have been prepared in a manner consistent with the
audited  financial  statements  for the three years  ended  December  31,  1998.
Operating  results  for  the  nine  months  ended  September  30,  1999  are not
necessarily  indicative of results which may be expected for the full year.  The
selected consolidated financial data for the years ended December 31, 1998, 1997
and 1996 was  derived  from the audited  consolidated  financial  statements  of
Energy  Holdings  and  its  consolidated  subsidiaries.  This  selected  data is
qualified  in its  entirety  by the  more  detailed  information  and  financial
statements, including the notes thereto. The consolidated financial data for the
years ended  December  31, 1995 and 1994 was derived from  financial  statements
originally audited by our independent  auditors.  These statements were restated
to conform with audited financial  statements for the three years ended December
31,  1998  for  certain  transactions,  but  have  not  been  re-audited  by our
independent auditors.

<TABLE>
<CAPTION>
                                                     Nine Months Ended
                                                        September 30,                       Years Ended December 31,
                                                    --------------------    --------------------------------------------------------
                                                      1999        1998        1998        1997        1996        1995        1994
                                                    --------    --------    --------    --------    --------    --------    --------
                                                                          (Thousands of Dollars except ratios)
<S>                                                 <C>         <C>         <C>         <C>         <C>         <C>         <C>
Operating Data:
Total Revenues .................................    $416,323    $283,622    $439,524    $341,590    $302,800    $250,100    $197,829
Total Operating Expenses .......................     253,814     179,987     248,702     196,462     171,169     122,520      67,388
Earnings Before Interest and
   Taxes (EBIT) ................................     190,994     109,769     189,547     145,813     131,631     127,540     130,441
Interest, Net of Capitalized
   Interest ....................................      65,517      67,930      91,987      72,363      58,261      56,894      61,799
Taxes ..........................................      44,427      16,407      30,160      25,816      24,968      23,594      20,608
Income from Discontinued
   Operations (A) ..............................        --          --          --          --        24,238      35,036      12,512
Net Income .....................................      81,653      26,961      69,204      47,873      72,662      82,401      60,923
Preferred Stock Dividends (B) ..................      18,755      11,226      17,478         598        --          --          --
Earnings Available for
   Common Stock ................................    $ 62,898    $ 15,735    $ 51,726    $ 47,275    $ 72,662    $ 82,401    $ 60,923

<CAPTION>

                                          As of September 30,                          As of December 31,
                                          ------------------- ----------------------------------------------------------------------
                                                 1999            1998           1997           1996           1995           1994
                                              ----------      ----------     ----------     ----------     ----------     ----------
<S>                                           <C>             <C>            <C>            <C>            <C>            <C>
Balance Sheet Data:
Total Assets .............................    $3,878,460      $3,168,530     $3,022,956     $2,122,413     $2,295,803     $2,114,100
Total Liabilities ........................     1,052,456         958,528        962,954        817,889        634,502        526,770
Total Capitalization:

   Debt (F) ..............................     1,471,544         967,673      1,275,103        627,381        707,819        624,935
   Common Equity (B) .....................       845,260         733,129        709,899        677,143        953,482        962,395
   Preferred Equity (B) ..................       509,200         509,200         75,000           --             --             --
                                              ----------      ----------     ----------     ----------     ----------     ----------
   Total Stockholder's Equity ............     1,354,460       1,242,329        784,899        677,143        953,482        962,395
                                              ----------      ----------     ----------     ----------     ----------     ----------
Total Capitalization .....................    $2,826,004      $2,210,002     $2,060,002     $1,304,524     $1,661,301     $1,587,330

<CAPTION>
                                                                         Nine Months
                                                                     Ended September 30,           Years Ended December 31,
                                                                     -------------------   ----------------------------------------
                                                                         1999     1998     1998     1997     1996     1995     1994
                                                                         ----     ----     ----     ----     ----     ----     ----
<S>                                                                      <C>      <C>      <C>      <C>      <C>      <C>      <C>
Other Data:
Earnings to Fixed Charges (C) .......................................    2.8x     1.7x     2.1x     1.4x     3.0x     2.4x     2.3x
EBIT to Interest Expense (D) (H) ....................................    2.9x     1.6x     2.1x     2.0x     2.3x     2.2x     2.1x
EBITDA to Interest Expense (E) (H) ..................................    3.1x     2.0x     2.4x     2.2x     2.5x     2.5x     2.4x
Consolidated Debt to Capitalization (F) .............................     52%      41%      44%      62%      48%      43%      39%
Consolidated Recourse Debt to Recourse
   Capitalization  (G) ..............................................     45%      33%      38%      57%      48%      43%      39%
</TABLE>

----------
(A)   For a  discussion  of  discontinued  operations,  see  Note 19 in Notes to
      Consolidated Financial Statements.

(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 is defined as  operating  income plus other  income.  For this ratio,
      interest  expense is net of capitalized  interest of $2.5 million and $0.8
      million  for  the  nine  months  ended   September   30,  1999  and  1998,
      respectively,  and $1.2 million,  $5.1 million, $1.3 million, $1.9 million
      and $4.5 million for the years ended December 31, 1998,  1997,  1996, 1995
      and 1994, respectively.

(E)   EBITDA is defined as 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 and
      Energy Holdings which is consolidated on the balance sheet.

(G)   Excludes  consolidated  debt that is  non-recourse  to Global  and  Energy
      Holdings of $343 million,  $228 million,  $220 million and $232 million as
      of September 30, 1999,  September 30, 1998, December 31, 1998 and December
      31,  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.
      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.


                                       19
<PAGE>

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

Overview and Future Outlook

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

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

      Global derives its revenues and earnings from independent power production
and the distribution of electricity.  Earnings will,  therefore,  be impacted by
the ability of Global and its partners to successfully manage the generation and
distribution  facilities  now  in  operation  and to  bring  those  projects  in
construction  and  development  into  operation.  The  acquisition of additional
facilities  and projects will be another  important  factor for future  earnings
growth  at  Global.  Future  revenue  growth  will be  partially  offset  by the
reduction of revenue,  beginning in 2000, from certain generation  facilities in
California  due to lower  energy  prices to be paid by the  purchaser  under the
energy  contracts  associated  with the plants.  Two-thirds  of such  California
facilities in which Global has an interest will change from fixed energy pricing
by December  31, 2000,  with the  remainder  changing in 2001.  Based on current
energy  prices,  Global's  share of annual income before income taxes from these
facilities is projected to decrease by approximately  $30 million to $35 million
when all such contracts  reflect the lower energy pricing.  Actual revenues over
the remaining  contract  terms,  which begin to expire in 2011, will depend on a
number  of  factors,  including  the  actual  energy  prices  in  effect  in the
applicable  future periods.  As a result of the projected  revenue loss,  Global
recognized  an after-tax  write down of $27 million in its equity  investment in
these  facilities in the third quarter of 1999.  Energy Holdings expects revenue
from projects in operation,  construction and development to offset this revenue
shortfall, however, no assurances can be given. Since Global operates in foreign
countries, it may also be affected by changes in foreign currency exchange rates
versus  the United  States  Dollar.  Generally,  revenues  associated  with rate
regulated distribution assets in relatively limited competitive environments are
more stable and predictable than revenues from generation assets.

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


                                       20
<PAGE>

      Having  acquired  seven  companies   involved  in  the   installation  and
maintenance  of energy  equipment  and HVAC  services for a total of $73 million
since its formation in 1997, Energy Technologies'  present strategic focus is to
consolidate its position as an energy services,  electricity and gas 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.

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

Results of Operations

      Energy Holdings' earnings for the nine months ended September 30, 1999 and
1998 were $63 million and $16  million,  respectively.  The  increases in Energy
Holdings'  earnings were  primarily  due to the better  overall  performance  of
Resources,  Global and Energy  Technologies.  The improvements were attributable
largely to Resources which  benefited from an upturn in the equities  markets as
compared to the same  period in 1998.  In  addition,  Energy  Holdings'  results
reflect  Global's  gain from the sale of its  interest  in a Newark,  New Jersey
cogeneration  facility,  partially offset by write-downs on other investments in
Global's portfolio.

      Additionally, higher earnings for the nine months ended September 30, 1999
were  primarily  due to  investment  gains in  Resources'  financial  investment
portfolio  and income from new capital  leases.  Improved  revenue at Global was
partially offset by higher expenses associated with project development.  Energy
Technologies'  results  improved due to higher revenues from recent  acquisition
activities partially offset by higher operating expenses.

      Energy  Holdings'  earnings for the years ended December 31, 1998 and 1997
were $52 million and $47 million, respectively. The increase in Energy Holdings'
earnings was primarily due to an increase in Global's  revenues  resulting  from
the performance of the 1997 investments in three distribution companies in Latin
America. In addition,  Energy  Technologies'  performance  improved in 1998 as a
result of increased  revenue and improved  operating  margins resulting from the
acquisition  of a  mechanical  contracting  firm in  January  1998  and  overall
improvement in cost management. The increase in revenues was partially offset by
a foreign  currency  loss of $3 million for the year ended  December 31, 1998 as
compared  to a $1 million  gain for the same  period in 1997.  The  higher  EBIT
contributions  from the subsidiaries  were offset,  however,  by higher interest
expense incurred by Global for consolidated  debt that is non-recourse to Global
and Energy Holdings, and higher financing costs incurred by Energy Holdings as a
result of increased investment activity.  Energy Holdings' earnings for the year
ended December 31, 1997 also included a $10 million pre-tax charge recognized by
Enterprise  Group  Development  Corporation  (EGDC),  a real  estate  subsidiary
conducting a controlled  exit from the business,  to reflect a decline in market
values of certain properties in the portfolio.  While Resources' contribution to
Energy Holdings' earnings was relatively constant from 1997 to 1998, significant
gains  from the LBO  funds  recognized  in the  first  six  months  of 1998 were
partially  reversed in the second half as share  prices of  companies in the LBO
funds declined.

      Energy  Holdings'  earnings for the years ended December 31, 1997 and 1996
were $47 million and $73 million, respectively. Earnings for the year ended 1996
included  income from  discontinued  operations of $24 million  associated  with
Energy Development Corporation (EDC), an oil and gas subsidiary,  which was sold
in July 1996.  Earnings  from  continuing  operations  in 1996 were $48 million.
Energy Holdings' earnings from continuing operations decreased to $47 million in
1997 primarily due to the recognition of a $10 million pre-tax charge by EGDC in
1997, and overall higher  financing costs incurred by Energy Holdings  resulting
from the 1997  investments  in three  distribution  companies in Latin  America.
Higher  expenses were partially  offset by higher revenues at Global from United
States


                                       21
<PAGE>

generation   assets  and  the  addition  of  revenues   from  the   distribution
investments.  Energy Technologies' revenues improved from 1996 to 1997; however,
this was more than offset by higher start-up expenses incurred in 1997.

      The results of operations for each of Energy Holdings'  business  segments
are explained 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.

EBIT Contribution -
Energy Holdings'                    Nine Months
Subsidiaries                     Ended September 30,   Years Ended December 31,
-------------------              -------------------  --------------------------
                                   1999      1998      1998      1997      1996
                                  -----     -----     -----     -----     -----
                                              (Millions of Dollars)

Global .......................    $  85     $  55     $  72     $  46     $  21
Resources ....................      111        67       135       134       128
Energy Technologies ..........       (6)      (12)      (15)      (25)      (18)
Other ........................        1        --        (2)       (9)        1
                                  -----     -----     -----     -----     -----
Total Consolidated EBIT ......    $ 191     $ 110     $ 190     $ 146     $ 132
                                  =====     =====     =====     =====     =====

      Global

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

      In the third quarter of 1999,  Global completed a comprehensive  review of
its existing assets and development  activities  focusing on  rationalizing  the
portfolio  to ensure  efficient  capital  deployment.  Global's  management  has
decided that Global will not commit  additional  resources to its investments in
Thailand  and the  Philippines  and will  focus its  current  Asian  development
activities in China.  As a result,  Global  recognized  an $8 million  after-tax
write-down  in the third  quarter of 1999 to adjust the carrying  value of these
assets to net realizable value. In addition,  the substantial decline in revenue
related to energy contracts for six generation facilities in California resulted
in a third quarter  after-tax  write-down of Global's equity  investment in such
facilities of $19 million.

Summary Results -                    Nine Months
Global                            Ended September 30,   Years Ended December 31,
-----------------                 -------------------  -------------------------
                                     1999     1998       1998      1997     1996
                                     ----     ----       ----      ----     ----
                                                (Millions of Dollars)
Revenues .....................       $102      $85      $ 124       $91      $60
Expenses .....................         45       36         51        46       39
                                     ----      ---      -----       ---      ---
Operating Income .............         57       49         73        45       21
Other Income/(Loss) ..........         27        6         (1)        1       --
                                     ----      ---      -----       ---      ---
EBIT .........................       $ 85      $55      $  72       $46      $21
                                     ====      ===      =====       ===      ===

      Global's EBIT contribution increased $30 million for the nine months ended
September  30,  1999  as  compared  to the  same  period  in  1998.  The  higher
contribution was due to an increase in revenues of $17 million  primarily due to
higher income from the electric distribution  companies in Brazil and Argentina.
This  increase was augmented by additional  revenues  from  investments  made in
energy distribution companies in Chile and Peru in June 1999. The revenue growth
was partially  offset by higher  expenses  associated  with the  development  of
projects that are expected to provide revenue in future  periods.  Over the next
few years,  it is anticipated  that  development  expenses at Global will remain
relatively  constant,   while  revenue  is  expected  to  trend  higher  as  the
distribution companies


                                       22
<PAGE>

increase  the number of customers  and the amount of energy sold and  generation
projects in construction  and advanced  development  become  operational.  Other
income/(loss)  increased  from $6  million to $27  million.  This  increase  was
primarily  due to the  sale  of a  cogeneration  facility  in New  Jersey  which
resulted in a $69 million pre-tax gain. This gain was partially  offset by a $44
million pre-tax write down of the equity investments mentioned above.

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

      Global's  EBIT  contribution  increased  $25  million  for the year  ended
December 31, 1997 as compared to 1996 primarily due to increased revenues of $31
million.  Revenue  improvement  was primarily  due to increased  revenues of $14
million from Global's United States generation  facilities resulting from higher
sales  volume  and lower  operating  costs,  and the  addition  of $8 million in
revenues from investments made in three Latin American distribution companies in
1997. The higher revenues were partially  offset by higher  expenses  associated
with the development of projects.

      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 LBO funds,  Resources
recognizes  revenue  as the share  prices of public  companies  in the LBO 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 -                     Nine Months
Resources                         Ended September 30,   Years Ended December 31,
-----------------                 -------------------   ------------------------
                                     1999     1998      1998      1997      1996
                                     ----      ---      ----      ----      ----
                                                 (Millions of Dollars)
Revenues ......................      $118      $75      $145      $144      $143
Expenses ......................         7        8        10        10        15
                                     ----      ---      ----      ----      ----
Operating Income ..............       111       67       135       134       128
Other Income ..................       --        --       --        --        --
                                     ----      ---      ----      ----      ----
EBIT ..........................      $111      $67      $135      $134      $128
                                     ====      ===      ====      ====      ====

      Resources'  EBIT  contribution  increased  $44  million for the nine month
period ended September 30, 1999 as compared to the same period in 1998 primarily
due to an  increase in  revenues.  The  increase  in revenues  was the result of
higher  realized gains of $23 million from the sale of securities in an LBO fund
and the early  termination of two leveraged  lease assets.  These realized gains
were partially  offset by a $17 million  decrease in unrealized gains recognized
from Resources'  interest in LBO funds.  Capital lease revenues increased by $21
million due to the addition of leveraged lease investments to the portfolio made
in the latter  part of 1998.  The  increase  in  revenues  was also  offset by a
decrease in limited partnership  revenues of $9 million.  In addition,  the nine
month  period  ended  September  30,  1998  included  a  pre-tax,  non-recurring
restructuring  charge of $26 million related to two leveraged lease  investments
in real estate.

      Resources'  EBIT  contribution  increased  $1  million  for the year ended
December 31, 1998 as compared to 1997 due to an increase in revenues. Resources'
revenues  increased  $1 million  primarily  due to an increase of $19 million in
lease revenues from the addition of leveraged lease investments to


                                       23
<PAGE>

the portfolio and the sale of an asset subject to a leveraged lease resulting in
an $8 million gain.  This  increase was offset by lower  revenues of $26 million
from  the  restructuring  of two  leveraged  lease  investments  in real  estate
recognized in 1998. Revenues from investments in limited  partnership  interests
in LBO  funds and other  limited  partnership  interests  in  project  financing
transactions remained constant over the period.

      Resources'  EBIT  contribution  increased  $6  million  for the year ended
December 31, 1997 as compared to 1996 due to a reduction in operating  expenses.
Expenses in 1996 included  one-time  marketing costs associated with the sale of
two airplanes from the leveraged lease portfolio.  Resources' revenues increased
$1 million  primarily  due to an increase  of $20  million in revenues  from the
addition of  leveraged  lease  investments  to the  portfolio.  Revenues  from a
limited  partnership  interest  in  LBO  funds  and  other  limited  partnership
interests in project  financing  transactions  decreased  $19 million.  In 1996,
Resources  recognized  higher  revenue  from LBO funds due to the funds' sale of
several securities in the portfolio at gains that were recognized in 1996.

      Energy Technologies

      Energy  Technologies  was formed in January 1997 from the  combination  of
three existing  companies  formerly  consolidated  within  Resources.  Financial
statements  for 1996 were  restated for Resources  and Energy  Technologies  for
comparative purposes.  Energy Technologies derives its revenues from the sale of
natural  gas and  electricity  and the  sale of  energy  related  equipment  and
services.

Summary Results -                   Nine Months
Energy Technologies             Ended September 30,    Years Ended December 31,
-------------------             --------------------  --------------------------
                                   1999      1998      1998      1997      1996
                                  -----     -----     -----     -----     -----
                                             (Millions of Dollars)
Revenues .....................    $ 195     $ 125     $ 171     $ 104     $  95
Expenses .....................      201       137       186       129       113
                                  -----     -----     -----     -----     -----
Operating Loss ...............       (6)      (12)      (15)      (25)      (18)
Other Income (Loss) ..........       --        --        --        --        --
                                  -----     -----     -----     -----     -----
EBIT .........................    $  (6)    $ (12)    $ (15)    $ (25)    $ (18)
                                  =====     =====     =====     =====     =====

      Energy Technologies' EBIT contribution improved by $6 million for the nine
months  ended  September  30, 1999 as  compared to the same period in 1998.  The
improvement was primarily due to the addition of EBIT  contribution  from recent
acquisitions made by Energy  Technologies.  Revenues increased $70 million while
related operating  expenses  increased $64 million primarily due to the addition
of revenue and expenses from six new  mechanical,  HVAC and service  contracting
firms acquired in 1999.

      Energy Technologies' EBIT contribution  increased $10 million for the year
ended December 31, 1998 as compared to 1997 primarily due to improved  operating
results of $7 million in the existing  businesses.  The improvement was also due
to the  addition of EBIT  contribution  from the January 1998  acquisition  of a
mechanical contracting firm that added $58 million in revenue and $55 million in
expenses.

      Energy  Technologies' EBIT contribution  decreased $7 million for the year
ended  December 31, 1997 as compared to 1996.  The lower EBIT  contribution  was
primarily caused by higher start-up and formation  expenses  incurred in 1997 as
compared to 1996. Energy  Technologies'  revenues increased $9 million primarily
due to increased  revenues from natural gas sales.  Operating expenses increased
$16 million primarily due to increased cost of sales associated with natural gas
of approximately $9 million and an increase in operating expenses of $22 million
associated  with  formation and start-up  activities.  1996 expenses  included a
one-time charge of $15 million to write down a non-performing  loan in the PSCRC
portfolio.


                                       24
<PAGE>

      Other

      Other   includes   primarily   EBIT  from  EGDC.   1998  EBIT  reflects  a
non-recurring charge at Energy Holdings related to taxes incurred as a result of
Energy Holdings'  previous  interest in EDC. In 1997, EGDC recognized a one-time
pre-tax  charge of $10 million to reflect a decline in market  values of certain
properties  in the  portfolio.  See Note 19 in Notes to  Consolidated  Financial
Statements.

      Net Financing Expenses

      Overall net financing  costs have  increased  over the reported  financial
statement period  primarily due to higher debt levels  associated with investing
activities.  While Energy  Holdings  increased the amounts of debt  outstanding,
some benefit was derived from declining interest rates over the reported period,
reducing Energy Holdings' embedded cost of debt. Future net financing costs will
be dependent upon the level of PSEG equity  investments  in Energy  Holdings and
the  timing and  extent of  investment  by our  subsidiaries.  See "--  External
Financings" for a discussion of Energy Holdings' embedded cost of debt.

      Interest expense  decreased $2 million for the nine months ended September
30, 1999 as compared to the same period in 1998 due to the  refinancing  of debt
with preferred stock during the first half of 1998. In January, June and July of
1998,  Energy  Holdings  issued a total of $509 million of cumulative  preferred
stock to PSEG,  the  proceeds of which were used to reduce  short-term  debt and
retire $75 million of preferred stock held by PSEG. As a result, preferred stock
dividends  increased $8 million for the nine months ended  September 30, 1999 as
compared to the same period in 1998.

      Interest  expense  increased  $20 million for the year ended  December 31,
1998  as  compared  to 1997  primarily  due to debt  financing  associated  with
Global's  acquisition  of three Latin American  distribution  companies in 1997.
While the debt is non-recourse to Global and Energy Holdings, it is consolidated
on the  balance  sheet  since it was issued by  acquisition  entities  which are
majority or wholly-owned by Global.  The interest  expense  associated with such
debt increased $16 million from 1997 to 1998.  Interest expense  associated with
financing  activities at Energy  Holdings,  other than  non-recourse  financing,
increased $4 million from 1997 to 1998  primarily due to higher debt levels from
the 1997  investment  activity.  Preferred stock dividends to PSEG increased $17
million in 1998 as compared to 1997 due to the issuance of the  preferred  stock
noted above.

      Interest  expense  increased  $14 million for the year ended  December 31,
1997 as compared to 1996 primarily due to the  consolidated  project  financings
for Global's investments in three Latin American distribution companies in 1997.
The interest expense associated with such debt was $8 million in 1997.  Interest
expense  associated  with financing  activities at Energy  Holdings,  other than
non-recourse financing,  increased $6 million from 1996 to 1997 primarily due to
higher debt levels associated with the above-mentioned 1997 investment activity.

      Discontinued Operations

      EDC was sold on July 31, 1996.  Income  related to EDC  operations was $11
million in 1996.  Additionally,  a gain of $13 million was recorded on the sale.
For  a  discussion  of  discontinued  operations,   see  Note  19  in  Notes  to
Consolidated Financial Statements.

Liquidity and Capital Resources

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


                                       25
<PAGE>

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

                                      Nine Months
                                  Ended September 30,   Years Ended December 31,
                                  -------------------  -------------------------
                                     1999     1998       1998     1997     1996
                                    -----    -----      -----    -----    -----
                                             (Millions of Dollars)
Operating Activities
Normal ...........................  $ 104    $  43      $  50    $  70    $ 134
Non-recurring (A) ................   --       --         --         67       98
Discontinued Operations (B) ......   --       --         --       --         78
                                    -----    -----      -----    -----    -----
  Total Operating Activities .....  $ 104    $  43      $  50    $ 137    $ 310
                                    =====    =====      =====    =====    =====
Investing Activities
Normal ...........................  $(783)   $ (33)     $(157)   $(998)   $ (92)
  Discontinued Operations (B) ....   --       --         --       --        653
                                    -----    -----      -----    -----    -----
    Total Investing Activities ...  $(783)   $ (33)     $(157)   $(998)   $ 561
                                    =====    =====      =====    =====    =====
Financing Activities
  Debt ...........................  $ 504    $(434)     $(311)   $ 648    $(377)
  Equity .........................    180      419        416       75     (349)
                                    -----    -----      -----    -----    -----
    Total Financing Activities ...  $ 684    $ (15)     $ 105    $ 723    $(726)
                                    =====    =====      =====    =====    =====

----------
(A)   In 1997 and 1996  Resources  received  additional  cash  from  income  tax
      benefits  related to tax deductions  deferred in earlier years as a result
      of PSEG previously paying Alternative Minimum Tax. These benefits had been
      deferred by Resources due to the overall consolidated position of the PSEG
      tax filing  group  which did not permit  the full  recognition  of the tax
      deductions  associated  with the leases in the tax return.  The  aggregate
      amount of cash received  related to such deferrals that is included in the
      operating  cash flow noted  above was  approximately  $67  million and $98
      million  in  1997  and  1996,  respectively.   Energy  Holdings  does  not
      anticipate that this situation will occur in the future.

(B)   See Note 19 in Notes to Consolidated Financial Statements.

      Operating Activities

      Cash flow from operations  increased $61 million for the nine months ended
September  30, 1999 as compared to the same period in 1998 due to improved  cash
generation at  Resources.  Approximately  $14 million was due to increased  cash
generation from existing  investments as well as the addition of cash generation
from new investments.  Approximately $38 million resulted from an improvement in
cash flow from income taxes  primarily  caused by the termination of a leveraged
lease in the Resources  portfolio in early 1998 at a taxable gain causing higher
cash payments for income taxes in 1998. Cash paid for interest expense decreased
$2 million due to the refinancing of debt with preferred stock in 1998.

      Cash flow from  operations  decreased  $87  million in 1998 as compared to
1997  primarily  due to a reduction in  Resources'  cash flow from the leveraged
lease  portfolio  of  $67  million  related  to  the  previous  deferral  of tax
deductions  as a result of PSEG's  consolidated  tax position  noted  above.  In
addition,  cash  generation  at Resources was affected by the  termination  of a
leveraged lease at a taxable gain resulting in an increase in the current income
tax  liability  of  approximately  $38  million  as noted  above.  Cash paid for
interest  expense  increased  by $24 million in 1998 due to higher  average debt
outstanding  resulting from 1997 and 1998 investing activity partially offset by
lower interest rates.  The above reductions were partially offset by overall net
improvement  in cash  generation by Energy  Holdings'  subsidiaries  aggregating
approximately  $38 million  primarily from improvement in the cash generation of
existing  investments  as  well as the  addition  of cash  generation  from  new
investments.

      Cash flow from operations decreased by $173 million in 1997 as compared to
1996.  The  decrease  was caused by lower cash  generation  of $64 million  from
Energy Holdings' subsidiaries primarily due to lower cash distributions realized
by Resources from limited  partnership  interests in LBO funds and other limited
partnership   interests  in  financing   transactions.   Cash  flow  related  to
non-recurring  tax benefits  described  above  decreased by $31 million in 1997.
Also in 1996, Energy Holdings' operating cash flow included $78 million from EDC
which was sold in July 1996.


                                       26
<PAGE>

      Investing Activities

      In the nine months ended September 30, 1999, Global invested approximately
$536  million to acquire an interest  in two energy  distribution  companies  in
Chile and Peru.  Of the total  invested  capital $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  $171  million  for
construction  of generation  projects in the United  States,  Venezuela,  China,
Tunisia  and  India.  Resources  invested  approximately  $244  million  in five
leveraged  leases of energy  facilities:  two gas  distribution  networks in the
Netherlands,  three cogeneration plants in Germany, a generation facility in the
United  States and a liquefied  natural gas plant in the United  States.  Energy
Technologies  acquired five mechanical and HVAC service  contractors for a total
cost of approximately $44 million.

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

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

      In 1996, Energy Holdings sold EDC for gross proceeds of approximately $779
million.  The cash was used to retire short-term debt, pay dividends to PSEG and
make additional investments.

      Financing Activities

      During 1999,  PSEG  contributed  approximately  $200 million of additional
equity  to  Energy  Holdings,  the  proceeds  of  which  were  used to pay  down
short-term debt. At September 30, 1999,  Energy Holdings'  consolidated  capital
structure  consisted of 30% common  equity,  18%  preferred  stock and 52% debt.
Approximately  $343 million,  or 12%, of Energy Holdings' total invested capital
represented  debt  consolidated  on the balance  sheet that is  non-recourse  to
Global and Energy Holdings.

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

      In 1997,  Energy  Holdings,  through  PSEG  Capital and another  financing
subsidiary,  Enterprise Capital Funding  Corporation  (Funding),  issued net new
debt of $650  million  primarily to fund new  investment  activity by Global and
Resources.  In October 1997, Energy Holdings received  approximately $75 million
from the issuance of 4.10% Cumulative Preferred Stock to PSEG. The proceeds were
used to partially fund Global's investment in a Brazilian distribution company.

      In 1996,  Energy Holdings retired $379 million of debt of PSEG Capital and
Funding and paid  dividends  totaling  $369  million to PSEG as a result of cash
generated  by the sale of EDC in July 1996.  In  addition,  PSCRC  received  $20
million of equity which was used to pay down short-term  debt. Due to the growth
in Energy  Holdings'  investment  activities,  no dividends on Energy  Holdings'
common equity were paid in 1998 and 1997.


                                       27
<PAGE>

      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.  From December 31, 1998 through  September 30, 1999,  Energy  Holdings'
subsidiaries  made  investments  totaling   approximately  $931  million.  These
investments  included  leveraged  lease  investments  totalling  $244 million by
Resources and the acquisition by Global of interests in  distribution  companies
in Chile and Peru.  Global's  investment  in such assets  totaled $536  million,
including fees and closing costs and $160 million of debt consolidated on Energy
Holdings'  balance  sheet that is  non-recourse  to Global and Energy  Holdings.
Investment  expenditures for 2000 are expected to be approximately  700 million,
comprised of investments in generation and distribution  facilities and projects
and leveraged lease transactions. Investment activity in 2000 will be subject to
periodic  review and  revision  and may vary  significantly  depending  upon the
opportunities  presented.  Factors affecting actual expenditures and investments
include  availability of capital and suitable investment  opportunities,  market
volatility and local economic trends. The anticipated  sources of funds for such
growth  opportunities are additional equity from PSEG, cash flow from operations
and external financings, including the Original Notes.

      In August 1999,  Global sold its  interest in the Newark Bay  cogeneration
facility  and  received  net cash  proceeds of  approximately  $70  million.  In
addition,  in the third quarter of 1999,  Resources  received  approximately $40
million from the sale of equity interests held by an LBO fund. Also in the third
quarter of 1999,  Resources  received  net cash  proceeds of  approximately  $76
million from early buy-outs of leveraged  leases of a generation  station and an
office building.

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

      Capital  resources  and  investment  requirements  may be  affected by the
outcome of the  proceedings  being  conducted  by the BPU pursuant to the Energy
Master  Plan and Energy  Competition  Act and the  requirements  of the  Focused
Audit.  As a result of the final  outcome  of such  proceedings  and  accounting
impacts resulting from the deregulation of the generation of electricity and the
unbundling  of the  utility  business in New Jersey,  Energy  Holdings  does not
believe that the Focused Audit  provision  requiring  notification of the BPU if
PSEG's  non-utility  assets  exceed  20%  of  its  consolidated  assets  remains
appropriate  and believes  that  modifications  will be required.  On August 24,
1999,  the BPU issued its Final Order in the matter of Public  Service  Electric
and Gas Company's rate  unbundling,  stranded costs and  restructuring  filings.
Appeals  filed on behalf of several  Public  Service  Electric  and Gas  Company
customers  are  pending at the  Appellate  Division  of the New Jersey  Superior
Court.  The Final Order directed Public Service Electric and Gas Company to file
a petition  with the BPU to maintain the existing  regulatory  parameters  or to
propose  modifications  to the Focused  Audit order no later than the end of the
first quarter of 2000.  Regulatory  oversight by the BPU to ensure that there is
no harm to utility ratepayers from PSEG's non-utility investments is expected to
continue.  Energy  Holdings  believes  that these issues will be  satisfactorily
resolved,  although no  assurances  can be given.  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.  Inability
to achieve satisfactory resolution of these matters could impact the future size
and financing activities of Energy Holdings and,  accordingly,  Energy Holdings'
future prospects,  including financial condition,  results of operations and net
cash flows.  Energy  Holdings  does not believe  that its ability to service its
debt,  including the Exchange  Notes,  would be impaired in such  circumstances,
although no assurances can be given. See "Business -- Regulation".


                                       28
<PAGE>

      External Financings

      In May 1999,  Energy  Holdings  closed on two  separate  senior  revolving
credit  facilities,  with a  syndicate  of  banks,  a $495  million,  five  year
revolving  credit  and letter of credit  facility  and a $165  million,  364 day
revolving credit facility. These facilities replaced revolving credit facilities
totaling  $450 million at Funding,  a financing  subsidiary  of Energy  Holdings
which is not expected to be active in the future.

      Financial  covenants  contained in the new facilities include the ratio of
cash flow available for debt service (CFADS) to fixed charges. At the end of any
quarterly  financial  period  such  ratio  shall not be less than  1.50x for the
12-month period then ending. As a condition of borrowing, the pro-forma CFADS to
fixed charges  ratio shall not be less than 1.75x as of the quarterly  financial
period ending  immediately  following the first anniversary of each borrowing or
letter of credit issuance. CFADS includes, but is not limited to, operating cash
before  interest  and  taxes,   pre-tax  cash   distributions   from  all  asset
liquidations and equity capital  contributions  from PSEG to the extent not used
to fund investing  activity.  In addition,  the ratio of  consolidated  recourse
indebtedness  to  recourse  capitalization,  as at  the  end  of  any  quarterly
financial  period,  shall  not be  greater  than  0.60 to  1.00.  This  ratio is
calculated by dividing the total recourse indebtedness of Energy Holdings by the
total  recourse  capitalization.  This ratio  excludes  the debt of PSEG Capital
which is supported by PSEG. As of September 30, 1999, the latest 12 months CFADS
coverage  ratio was 10.9x,  and the ratio of recourse  indebtedness  to recourse
capitalization was 0.25 to 1.00.

      Compliance  with  applicable  financial  covenants will depend upon Energy
Holdings' future financial  position and the level of earnings and cash flow, as
to which no assurances can be given. In addition,  Energy  Holdings'  ability to
continue  to grow its  business  will depend to a  significant  degree on PSEG's
ability to access  capital  and Energy  Holdings'  ability to obtain  additional
financing beyond current levels. At September 30, 1999, Energy Holdings had $481
million outstanding under existing revolving credit facilities.

      In October 1999,  Energy  Holdings,  in a private  placement,  issued $400
million of its 10% senior notes due 2009. These are the original notes for which
the  exchange  notes  are  being  offered  for the  exchange  by  means  of this
prospectus.  Interest  is  payable  semi-annually  on  April  1 and  October  1,
commencing  April 1,  2000.  The net  proceeds  from the sale  were used for the
repayment of short-term debt outstanding under Energy Holdings' revolving credit
facitlities.

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

      The minimum net worth maintenance  agreement between PSEG Capital and PSEG
provides, among other things, that PSEG (1) maintain its ownership,  directly or
indirectly,  of all  outstanding  common stock of PSEG  Capital,  (2) cause PSEG
Capital to have at all times a positive  tangible net worth of at least $100,000
and (3) make sufficient  contributions of liquid assets to PSEG Capital in order
to  permit  it to pay its debt  obligations.  In 1993,  in  connection  with the
Focused Audit, PSEG agreed with the BPU to make a good faith effort to eliminate
such PSEG support  within six to ten years.  Effective  January 31,  1995,  PSEG
Capital  notified the BPU of its intention not to have more than $650 million of
debt  outstanding at any time. PSEG Capital has a $650 million MTN program which
provides for the private placement of MTNs.

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


                                       29
<PAGE>

reduce Energy  Holdings'  short-term  debt.  At September  30, 1999,  total debt
outstanding under the MTN program was $650 million,  maturing from 1999 to 2003.
Energy  Holdings  believes  it is capable of  eliminating  PSEG  support of PSEG
Capital debt within the time period set forth in the Focused Audit.

      For a discussion of  non-recourse  debt of Global,  See Note 9 in Notes to
Consolidated Financial Statements.

Qualitative and Quantitative Disclosures About Market Risk

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

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

      Commodities

      Energy  Technologies'  policy is to enter into natural gas and electricity
futures  contracts  and forward  purchases  to lock in prices  related to future
fixed sales commitments.  Whenever possible,  Energy Technologies attempts to be
100%  covered on its  electric and gas sales  positions  during  periods of peak
volatility.

      During the nine months  ended  September  30,  1999,  Energy  Technologies
entered into futures  contracts  to buy natural gas and  electricity  related to
fixed-price sales commitments.  Such contracts hedged approximately 97% and 100%
of its fixed price natural gas and electric sales  commitments,  respectively at
September  30,  1999.  As of September  30, 1999 and  December 31, 1998,  Energy
Technologies  had a net unrealized hedge gain of $3 million and a net unrealized
hedge loss of $5 million, respectively, related to its electric and gas hedges.

      Energy  Technologies uses a value-at-risk  model to assess the market risk
of its commodity business. This model includes fixed price sales commitments and
financial derivative instruments.  Value-at-risk  represents the potential gains
or losses for the  portfolio  due to changes in market  factors,  for a specific
time period and a given  confidence  level.  The methodology used to measure the
value-at-risk is the  variance/co-variance  model based on historical volatility
and  correlation,  a 95% confidence  level and a one-week  holding  period.  The
measured  value-at-risk was approximately $400,000 at December 31, 1998 compared
to the December 31, 1997 level of approximately  $45,000 due primarily to higher
natural gas price volatility and greater sales volume. As of September 30, 1999,
the value-at-risk was approximately  $710,000.  Energy Technologies'  calculated
value-at-risk exposure represents an estimate of potential net losses that could
be recognized on its portfolio of physical and financial derivative  instruments
assuming historical movements in future market rates. These estimates,  however,
are not necessarily  indicative of actual results which may occur,  since actual
future gains and losses will differ from those  historical  estimates based upon
actual  fluctuations  in  market  rates,  operating  exposures,  and the  timing
thereof,  and changes in Energy  Technologies'  portfolio of hedging instruments
during the year.

      Equity Securities

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


                                       30
<PAGE>

securities for liquidity and market volatility factors,  where appropriate.  The
aggregate fair values of such  investments  which had available market prices at
September  30,  1999 and  December  31,  1998 and 1997 were $118  million,  $204
million and $185 million, respectively. A sensitivity analysis has been prepared
to estimate Energy Holdings' exposure to market volatility of these investments.
The potential  change in fair value resulting from a hypothetical  10% change in
quoted  market  prices  of  these  investments  amounted  to $11  million  as of
September 30, 1999.

      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 September 30, 1999, a hypothetical  10% change in market  interest
rates  would  result  in a $3  million  change  in  interest  costs  related  to
short-term and floating rate debt.

      Global has $67 million of  consolidated  project debt  associated with the
investment in two  Argentine  distribution  companies  that is  non-recourse  to
Global and Energy  Holdings.  The debt was refinanced in June 1999 for a term of
one year.  An interest rate swap was entered into which  effectively  converts a
portion  of the  floating  rate  obligation  into a fixed rate  obligation.  The
interest  rate  differential  to be  received  or paid  under the  agreement  is
recorded over the life of the  agreement as an  adjustment to interest  expense.
See Note 9 of Notes to Consolidated Financial Statements.

      Foreign Operations

      In accordance  with their growth  strategies,  Global and  Resources  have
approximately  $1.4 billion and $1.0  billion,  respectively,  of  international
investments  as of September  30, 1999.  These  investments  represented  61% 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.  Net foreign currency  devaluations
have reduced the reported amount of Global's total stockholder's  equity by $202
million,  $186 million of which was caused by the  devaluation  of the Brazilian
Real, as of September 30, 1999.  In January 1999,  Brazil  abandoned its managed
devaluation strategy and allowed its currency,  the Real, to float against other
currencies.  As of September 30, 1999, the Real had devalued  approximately  37%
against the United States Dollar since December 31, 1998, affecting the carrying
value of Global's investment in a Brazilian distribution company. For additional
information, see Note 16 in Notes to Consolidated Financial Statements.

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


                                       31
<PAGE>

      Global had  consolidated  debt  totaling  $106 million as of September 30,
1999 that is  non-recourse  to Global and  Energy  Holdings  associated  with an
investment  in the  Brazilian  distribution  company  noted  above.  The debt is
denominated  in the  Brazilian  Real and is indexed  to a basket of  currencies,
approximately 50% of which is the United States Dollar.  As a result,  Global is
subject to foreign currency  exchange rate risk which would result from exchange
rate  movements  between the indexed  foreign  currencies  and the United States
Dollar.  Exchange rate changes  ultimately  impact the debt level outstanding in
the  reporting  currency  and  result  in  foreign  currency  gains or losses in
accordance with generally  accepted  accounting  principles  (GAAP). Any related
gains or (losses)  resulting  from such exchange rate  movements are included in
net income for the  period,  and  amounted to $2  million,  $(3)  million and $1
million  for the nine  months  ended  September  30,  1999 and the  years  ended
December 31, 1998 and 1997, respectively.

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

Year 2000 Disclosure

      Many of Energy Holdings'  systems,  which include  information  technology
applications, plant control and telecommunications  infrastructure systems, were
modified due to computer program  limitations in recognizing  dates beyond 1999.
Energy  Holdings  has had a formal  project in place since 1997 to address  Year
2000 issues.  All mission  critical  systems were ready before  January 1, 2000.
Energy  Holdings' and its  subsidiaries did not experience any major problems or
Year 2000-related  service  interruptions as their systems rolled over from 1999
to 2000.  Energy Holdings' and its  subsidiaries  expect most material Year 2000
compliance  problems  would have arisen on or shortly  after January 1, 2000. To
date,  Energy  Holdings' and its subsidiaries are not aware of any material Year
2000-related problems associated with their internal systems or software or with
the software and systems of their vendors,  distributors or suppliers.  Although
not expected by Energy Holdings and its  subsidiaries,  it is possible that Year
2000-related problems may arise.

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

      Energy  Holdings  estimates the total cost related to Year 2000  readiness
will  approximate  $5.3 million,  to be incurred through 2001, of which $150,000
was incurred in 1997, $1.1 million was incurred in 1998 and  approximately  $3.7
million was  incurred in 1999.  For the nine months  ended  September  30, 1999,
approximately $3.2 million was incurred.  A portion of these costs is not likely
to be incremental to Energy Holdings,  but rather,  represents a redeployment of
existing  personnel/resources  and  its  share  of  partnership  assets.  Energy
Holdings' and its  subsidiaries  expect that expenses related to remediating any
remaining noncompliant non-critical systems will not be material.

Environmental Matters

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

      Global and Energy  Technologies  attempt  to take such  expenditures  into
consideration when considering an investment; however, there can be no assurance
that  environmental  laws and regulations will not change. If environmental laws
or  regulations  change in the  future,  there can be no


                                       32
<PAGE>

assurance that Energy Holdings and its subsidiaries would be able to recover all
or any increased costs from their customers or 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.

Accounting Issues

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

Impact of New Accounting Pronouncements

      For a discussion of the impact of new accounting  pronouncements including
SFAS No. 133,  "Accounting for Derivative  Instruments  and Hedging  Activities"
(SFAS  133),  SOP 98-5,  "Reporting  on the Costs of Start-Up  Activities"  (SOP
98-5),  SFAS  No.  137,  "Accounting  for  Derivative  Instruments  and  Hedging
Activities Deferral of the Effective Date of FASB Statement No. 133" (SFAS 137),
see Note 17 in Notes to Consolidated Financial Statements.


                                       33

<PAGE>

                                    BUSINESS


ENERGY HOLDINGS

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

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

      Our portfolio is  diversified by number,  type and geographic  location of
investments.  As of  September  30,  1999,  our  assets  were  comprised  of the
following types of investments.

                                                                   Assets
                                                                   ------
      Leveraged Leases ..........................................     42%
      Other Passive Financial Investments .......................      8%
      Domestic Generation Plants ................................      5%
      International Distribution Facilities .....................     30%
      International Generation Plants ...........................      6%
      Energy Services ...........................................      6%
      Other .....................................................      3%

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

      We are a  direct,  wholly-owned  subsidiary  of PSEG and an  affiliate  of
Public  Service  Electric and Gas  Company,  a public  utility  operating in New
Jersey,  which is also a  wholly-owned  subsidiary  of PSEG. As of September 30,
1999, PSEG had approximately $1.6 billion of equity (including retained earnings
of approximately $258 million) invested in our company.

GLOBAL

Strategic Overview

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


                                       34
<PAGE>

Business Description

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

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

      Global  has  ownership  interests  in  19  operating  generation  projects
totaling  2,002  megawatts  (MW) (535 MW net) and 21 projects  totaling 4,832 MW
(2,252 MW net) in construction or advanced  development.  Of Global's generation
projects in operation, construction or advanced development, 1,292 MW net or 46%
are located in the United States. Global is actively involved, through its joint
ventures,  in managing the operations of eight operating generation projects and
will be actively  involved in managing the operations of five of the projects in
construction or advanced development.  Global owns interests in six distribution
companies  providing  electricity  to over 2.7 million  customers in  Argentina,
Brazil,  Chile and Peru.  Global is actively involved in managing the operations
of these distribution companies in accordance with shareholder agreements and/or
operating   contracts.   As  of  September  30,  1999,   Global  had  assets  of
approximately $1.7 billion.

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

Generation

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

      Global  seeks to minimize  risk in the  development  and  operation of its
projects by selecting partners with complementary skills,  structuring long-term
power purchase  contracts,  arranging  financing  prior to the  commencement  of
construction  and contracting for adequate fuel supply.  Historically,  Global's
operating  affiliates  have entered into  long-term  power  purchase  contracts,
selling the electricity produced for the majority of the project life.

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

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


                                       35
<PAGE>

                              GENERATION FACILITIES
<TABLE>
<CAPTION>
                                                                                             Global's
                                                                                            Net Equity
                                                                                  Global's  Interest in
                                                                        Total     Ownership    Total
                                    Location        Primary Fuel         MW       Interest      MW
                                    --------        ------------        -----     ---------  ---------
<S>                                    <C>       <C>                     <C>         <C>        <C>
Operating Power Plants
United States
Eagle Point ........................   NJ        Natural gas              225         50%       113
Kalaeloa ...........................   HI        Oil                      180         49%        88
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
                                                                    ---------             ---------
         Sub-Total United States                                          634                   292

International
CTSN                  ArgentinaCoal/Natural gas/Oil                       650         19%       124
MPC
     Jingyuan - Units 5 and 6 ...     China      Coal                     600         15%        90
     Jinqiao (Thermal Energy) ...     China      Coal/Oil                 N/A         30%       N/A
     Tongzhou ...................     China      Coal                      30         40%        12
     Zuojiang - Units 1 and 2 ...     China      Hydro                     48         30%        14
TGM .............................   Venezuela    Natural gas               40          9%         3
                                                                    ---------             ---------
         Sub-Total International                                        1,368                   243
                                                                    ---------             ---------
         Sub-Total Operating Power Plants                               2,002                   535
                                                                    ---------             ---------
<CAPTION>

                                                                                                     In Service
                                                                                                        Date
                                                                                                      ---------
<S>                                 <C>          <C>                        <C>        <C>        <C>      <C>
Power Plants in Construction or Advanced Development
Turboven
     Maracay ....................   Venezuela    Natural gas               60         50%        30       2000
     Cagua ......................   Venezuela    Natural gas               60         50%        30       2000
     Valencia ...................   Venezuela    Natural gas               80         50%        40       2001
MPC
     Zuojiang - Unit 3 ..........     China      Hydro                     24         30%         7       2000
     Shanghai BFG ...............     China      Blast furnace gas         50         16%         8       2000
     Fushi ......................     China      Hydro                     54         35%        19       2000
     Nantong ....................     China      Coal                      24         46%        11       2000
Texas Independent Energy, L.P.
     Guadalupe ..................     Texas      Natural gas            1,000         50%       500       2000
     Odessa .....................     Texas      Natural gas            1,000         50%       500       2001
Prisma 2000
     Crotone ....................     Italy      Biomass                   20         70%        14       2001
     Bando ......................     Italy      Biomass                   20         70%        14       2001
     Strongoli ..................     Italy      Biomass                   40         70%        28       2002
     Porto Empedocle ............     Italy      Biomass                   24         70%        17       2002
Parana ..........................   Argentina    Natural gas              830         33%       274       2001
Rades ...........................    Tunisia     Natural gas              471         35%       165       2001
PPN .............................     India      Naptha/Natural gas       330         20%        66       2001
Tri-Sakthi ......................     India      Coal                     525         63%       331       2003
Chorzow .........................    Poland      Coal                     220         90%       198       2003
                                                                    ---------             ---------
         Sub-Total Construction or Advanced Development                 4,832                 2,252
                                                                    ---------             ---------
         TOTAL                                                          6,834                 2,787
                                                                    =========             =========
</TABLE>

                                       36

<PAGE>

Domestic Generation in Operation

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

      Eagle Point

      The Eagle Point Power Plant is a 225 MW gas-fired  combined-cycle facility
located in West  Deptford,  New  Jersey.  Approximately  90% of the  electricity
generated by the Eagle Point Power Plant is sold to Public Service  Electric and
Gas Company under a 25-year power purchase contract terminating in May 2016. The
balance of the electricity  generated is sold to Coastal Eagle Point Oil Company
along  with  approximately  575,000  lbs./hr of steam  under a 20-year  contract
terminating  in May 2011.  Global  and its  partner,  ANR  Venture  Eagle  Point
Company, a subsidiary of The Coastal Corporation,  each own 50% of the facility.
The plant has been in commercial  operation  since May 1991. In 1998,  the Eagle
Point Power Plant generated approximately 1,775 gigawatt hours (GWH) of electric
energy and approximately  $125 million of gross revenue.  The plant availability
factor for 1998 was 97%.

      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% interest in the facility in 1997.  Global's partners are Harbert
Power which owns 50% and Asea Brown Boveri which owns 1%. 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 1998, the plant generated approximately 1,362 GWH of electric energy for
sale to  Hawaiian  Electric  Company  and  approximately  $84  million  of gross
revenue. The plant availability factor in 1998 was 94%.

      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 1998,
the plants  generated  649 GWH of  electric  energy for sale to Pacific  Gas and
Electric  Company and  approximately  $117 million of gross revenue.  The plants
went  into  service   between  October  1989  and  December  1990.  The  average
availability factor of the five plants in 1998 was 81%.

      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 1998, the Hanford plant  generated 155 GWH of electric
energy for sale to Pacific Gas and Electric  Company and steam which was sold to
Pirelli-Armstrong  Tire Corp.  pursuant to a 20-year contract  expiring in 2010.
The Hanford plant generated  approximately  $29 million of gross revenue in 1998
and had an availability factor of 79%.

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

      Other  minority  investments  held by Global in five  domestic  generation
facilities  totaled  27 MW net and  generated  less  than 3% of  Global's  total
revenues in 1998.


                                       37
<PAGE>

International Generation in Operation

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

   Argentina

      CTSN

      Central  Termica  San  Nicolas  (CTSN)  is a 650  MW  electric  generation
facility  located near the city of San Nicolas,  Argentina  that is 19% owned by
Global and 69% by The AES  Corporation  (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 1998 was 72%.

      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 1998,  CTSN generated
2,005 GWH of electric energy.  Experience  gained through this investment led to
Global's subsequent  investments in Argentine electric  distribution systems and
the development of a new power plant adjacent to CTSN, as described  below.  See
"-- Power Plants in Construction or Advanced Development -- Argentina -- Parana"
and "--Distribution -- Argentina -- EDEN, EDES, EDELAP".

   China

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

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

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


                                       38
<PAGE>

      Jingyuan

      MPC  through a  wholly-owned  subsidiary  owns a 30%  interest in Jingyuan
Units 5 and 6, two 300 MW mine-mouth  coal-fired  power plants  located in Gansu
Province,  China. The plants are 50% owned by the State  Development  Investment
Corporation,  15%  by the  Gansu  Electric  Power  Construction  Investment  and
Development Co. and 5% by the Gansu Electric Power Company (GEPC),  which is the
operator. GEPC has a take-or-pay power purchase contract for 22 years, ending in
2017.  The power purchase  contract  provides for a minimum take of 5,500 hours,
supporting the debt service and a specified equity return. The contract provides
incentives  for power taken above the minimum  level.  The minimum level was not
met in 1998 and 1999. Payment terms are being discussed between MPC and GEPC. In
addition,  MPC is seeking  final tariff  approval  for 1999 from the  Provincial
Government.  EnergyHoldings believes the impact of these matters will not have a
material adverse effect on it. The power contract provides for a pass through of
foreign  currency  debt service  payments.  Foreign  currency  protection of the
equity  return  resulting  from the  minimum  take is  covered  under a separate
agreement with MPC's partner,  the Gansu Electric Power Construction  Investment
and  Development Co. Equity return beyond the minimum take is exposed to foreign
currency   fluctuations.   MPC's  investment   consists  of  direct  equity  and
shareholder loans to the Jingyuan  project.  The shareholder loans were provided
in part by a  non-recourse  loan  from  international  banks  to a  wholly-owned
subsidiary of MPC. This non-recourse loan totaled  approximately $50 million and
will  mature in 2006.  The  balance of the  project  debt was  provided in local
currency by Chinese banks. The Jingyuan units have been in commercial  operation
since October 1996 and October 1997,  respectively.  In 1998, the Jingyuan units
generated 2,829 GWH of electric energy and had an availability factor of 79%.


      Jinqiao

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

      Tongzhou

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


                                       39
<PAGE>

      Zuojiang

MPC  owns  60% of  the  Zuojiang  facility,  which  is a 72 MW  run-of-the-river
hydroelectric  station comprised of three 24 MW units located near Nanning,  the
capital of  Guangxi  Province  in  Southwest  China.  The first 24 MW unit began
operating in July 1999 and the second unit began  operating in October 1999. The
third unit is in  construction  and is  expected  to be  completed  in the first
quarter  of  2000.  MPC's  investment,  through  a  combination  of  equity  and
shareholder  loans, is expected to total  approximately  $39 million.  MPC's 40%
partner is Nanning Regional Power Company, the original developer of the project
and a state enterprise owned by the Nanning  government.  The joint venture will
build, own, operate and eventually transfer the facility to its partner, Nanning
Regional  Power  Company.  Power from the  facility  will be sold to the Guangxi
Electric Power Bureau pursuant to a 23-year power purchase contract that commits
the Guangxi Electric Power Bureau to take-or-pay for an annual minimum amount of
power that is equal to approximately 80% of the total average annual electricity
expected to be produced by the facility. The price of power will be comprised of
a base price and formula  adjustments to compensate for changes in inflation and
laws regarding taxes, fees and required reserves. In addition, approximately 50%
of the tariff is indexed to United States Dollars.

Venezuela

      TGM

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

   Other

      Global  currently  holds a  minority  interest  in a  project  development
company  located  in the  Philippines.  The  total  investment  in this  company
represented less than 1% of Global's assets as of September 30, 1999. As part of
a comprehensive review of existing assets and development  activities,  Global's
management  has  decided  that it will not commit  additional  resources  to its
investment  in the  Philippines  and will focus its  current  Asian  development
activities in China. For further  discussion,  see "Management's  Discussion and
Analysis  of  Financial  Condition  and  Results  of  Operations  --  Results of
Operations -- Global".

Power Plants in Construction or Advanced Development

      Global has  eighteen  projects in  construction  or  advanced  development
totaling 4,832 MW (2,252 MW net) located in Venezuela, China, the United States,
Argentina,  India,  Italy,  Poland and  Tunisia.  Global  seeks to obtain  power
purchase  contracts for the output of its plants.  Global has obtained long-term
power purchase  contracts for the output of its plants in China,  India,  Italy,
Poland,  Tunisia and  Venezuela.  Conditions in certain  markets,  including the
United  States,  dictate  that  Global's  generation  projects  will be merchant
facilities  that sell their output under  short-term  contracts or into the open
market.  Global's assessment of investments in merchant generation facilities is
based on an underlying  analysis of the  wholesale  power market in the relevant
geographic area. This analysis includes models which simulate the market and the
dispatch order of existing and planned power  facilities.  These models form the
basis for the economic evaluation of projects and their expected performance.


                                       40
<PAGE>

   Venezuela

      Turboven

      In April 1999, Global and CIE, its partner in the TGM facility,  announced
plans to construct and operate three gas-fired simple cycle electric  generation
facilities with total installed  capacity of 200 MW and associated  distribution
systems to serve  industrial  customers  in Maracay  (60 MW),  Cagua (60 MW) and
Valencia  (80 MW),  Venezuela.  The  facilities  will be owned and  operated  by
Turboven,  an entity which is jointly  owned by Global and CIE.  The  facilities
will utilize 10 refurbished  General Electric  turbines and local fuel.  Through
its previous  investment in Venezuela,  Global  determined that industrial users
were  dissatisfied  with the quality of service from the existing power grid. To
date,  power  purchase  contracts  have  been  entered  into  for  the  sale  of
approximately  50% of the output of the first two plants,  Maracay and Cagua, to
various  industrial  customers,  approximately  33% of whom are  subsidiaries or
affiliates  of  multinational   companies.  The  power  purchase  contracts  are
structured to provide energy only with minimum take provisions.  Fuel costs will
be  passed  through  directly  to  customers  and  the  energy  tariffs  will be
calculated in United States  Dollars and paid in local  currency.  The first two
facilities  are  scheduled  to be in  operation  by early  2000.  Global and its
partner will secure power contracts with additional  customers before proceeding
with  construction  of the third  facility  which is  currently  scheduled to be
completed in late 2001.  Global's investment for all three units is not expected
to exceed approximately $70 million.

   China

      MPC is a partner in several  projects under  construction in China.  These
projects described below are expected to require a total investment by Global of
approximately $40 million.


      Shanghai BFG

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


      Nantong

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


      Fushi

      The Fushi Hydropower Project, currently under construction, is a 3 x 18 MW
run-of-river,  hydroelectric  station  located  along  the  Rongjiang  River  in
Guangxi.  MPC owns 70% of the project  with the  remaining  30% owned by Liuzhou
Development,   formed  under  two  23-year  cooperative  joint-ventures.   MPC's
investment,  through a combination of equity and shareholder  loans, is expected
to total approximately $21 million.  Power from the facility will be sold to the
Guangxi Electric Power Bureau pursuant to a 23-year power purchase contract that
commits the Guangxi  Electric Power Bureau to


                                       41
<PAGE>

take-or-pay for an annual minimum amount of power that is equal to approximately
80% of the total  average  annual  electricity  expected  to be  produced by the
facility.  The price of power  will be  comprised  of a base  price and  formula
adjustments  to compensate  for changes in inflation and laws  regarding  taxes,
fees and  required  reserves.  In addition,  approximately  50% of the tariff is
indexed to UnitedStates Dollars. Completion of the first 18 MW unit is scheduled
for the second  quarter of 2000 with the second and third  units  scheduled  for
completion later in the year.

   Italy

      Prisma 2000

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

   United States

      Guadalupe

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

      Odessa

      TIE is developing and will construct, own and operate a 1,000 MW gas-fired
combined-cycle  electric generation  facility to be located 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  $195  million.  Non recourse
project  financing  relative  to the Odessa  facility  is  expected  to close in
February 2000.

   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

                                       42

<PAGE>

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.  (Sithe)  and  Marubeni
Corporation  (Marubeni),  closed  project  financing  for  a  471  MW  gas-fired
combined-cycle  electric generation facility in Rades,  Tunisia, in August 1999.
Global will own 35% of the facility,  with Sithe and Marubeni each owning 32.5%.
Sithe will be the operator.  A 20-year power purchase  contract has been entered
into for the sale of 100% of the output to Societe  Tunisienne  d'Electricite et
du Gaz (STEG), the national utility. The power purchase contract tariff consists
of a fixed capacity  charge to cover debt and equity return as well as fixed and
variable charges to cover fuel,  operations and maintenance  costs.  Each tariff
component will be paid in local currency (dinars) and indexed to actual costs or
a combination of United States Dollars and Euros. The facility is expected to be
completed in the summer of 2001 at a total cost of  approximately  $261 million.
Global's  equity  investment  is  expected  to  be  approximately  $27  million,
including contingencies.

India

      PPN

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


      Tri-Sakthi

      In May 1999,  Global  acquired an interest in  Tri-Sakthi  Energy  Private
Limited, a company which is developing and will own a 525 MW coal-fired electric
generation  facility  to be  constructed  in Ennore,  Tamil  Nadu,  India.  Upon
scheduled completion in 2003, Global will be the operator of the plant. Global's
partner is Pembinaan Redzai Bhd Sdn (PR Group) of Malaysia.  A take-or-pay power
purchase  contract  has been  entered into for the sale of 100% of the output to
the  State  Electricity  Board  of Tamil  Nadu for 30  years.  The  contract  is
supported by letters of credit, an escrow arrangement and a State guarantee. The
total project cost is approximately $633 million. Project financing negotiations
are underway with local Indian  institutions and  international  banks.  Foreign
currency exposure will be minimized by utilizing rupee financing and as a result
of devaluation protection,  up to a base return, in the power purchase contract.
The cost of fuel is a pass through to the State Electricity Board.  Global plans
to close  financing  for this  project and commence  construction  in the second
quarter of 2000. Global's equity investment,  including  contingencies,  for its
63% interest is expected to be approximately $180 million.

   Poland

      Chorzow

      In November 1999, Global announced that, through its majority shareholding
in  Elektrocieplownia  Chorzow  ELCHO Sp zo.o  (ELCHO),  it plans to construct a
combined heat and power plant in Poland.


                                       43
<PAGE>

The capacity of the facility which will be located in Chorzow,  near Katowice in
upper Silesia, is planned to be 220 MW (electrical) and 500 MW (thermal). Global
will  hold a 90%  interest  in ELCHO  with  the  balance  held by  local  Polish
companies.  Total  project  cost is  estimated  at $320  million  with  Global's
investment  totaling  approximately  $94  million.  The  plant  has  a  targeted
commercial   operation  date  in  the  first  quarter  of  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
(PEC),  the  district  heating  company  serving  the city of  Katowice  and its
surrounding communities, for a term of 20 years.


Distribution

      Global has expanded its business to include electric distribution where it
can be linked to existing or prospective generation  opportunities.  Since 1997,
Global has invested in six distribution  companies which serve approximately 2.7
million customers and a population of 10 million in Argentina, Brazil, Chile and
Peru. Investments in these rate-regulated distribution companies represented 30%
of Energy Holdings' assets, or $1.2 billion, as of September 30, 1999. Global is
actively involved in managing the operations of these distribution  companies in
accordance with shareholder agreements and/or operating contracts.

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


                             DISTRIBUTION OPERATIONS

                                                  Number of        Global's
                                    Location      Customers   Ownership Interest
                                    --------     ----------    ----------------
EDEN ............................   Argentina      270,000            30%
EDES ............................   Argentina      130,000            30%
EDELAP ..........................   Argentina      290,000            30%
Rio Grande Energia ..............    Brazil        940,000            31%
Chilquinta Energia ..............     Chile        410,000            50%
Luz del Sur .....................     Peru         690,000            43%
                                                 ---------
      Total .....................                2,730,000
                                                 =========

   Argentina

      EDEN, EDES and EDELAP

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


                                       44
<PAGE>

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

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

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

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

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

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

   Brazil

      Rio Grande Energia

      Together with VBC Energia,  a consortium of Brazilian  companies formed to
invest in electric privatization, and Previ, the largest pension fund in Brazil,
Global  acquired Rio Grande  Energia  (RGE),  a Brazilian  distribution  company
privatized in 1997. Global's ownership interest in RGE is approximately 31%. Due
to Global's distribution experience,  it was designated as and remains the named
operator for the system in order to satisfy  requirements  of the  privatization
process. A shareholder's  agreement  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,


                                       45
<PAGE>

establishment of guarantees,  amendment of the concession agreement and dividend
policies.  Day-to-day  operations  are the  responsibility  of RGE,  subject  to
partnership oversight.

      RGE serves  approximately  940,000 customers in the state of Rio Grande do
Sul in Southern  Brazil and operates under a 30-year  non-exclusive  territorial
concession agreement ending in 2027. The concession is non-exclusive in that the
distribution  system must provide large  consumers  the right to choose  another
provider of energy or to self-generate.  Global does not believe this represents
a substantial  threat to the profitability of the distribution  system in Brazil
since the tariff structure  provides the distribution  system the opportunity to
recover  all costs  associated  with  distribution  service  plus a return.  RGE
secures its energy supply through  contractual  agreements expiring between 2007
and 2020.  RGE also purchases 20% of its  requirements  through 2013 pursuant to
United States Dollar denominated contracts.

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

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

      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  two  annual  adjustments  per the
specified  formula.  In 1998,  RGE received a 4% increase and in April 1999, RGE
was awarded a 10.9% 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 and it is not
expected to reoccur.

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

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

   Chile and Peru

      Chilquinta Energia

      In June 1999, Global together with its partner,  Sempra,  jointly acquired
(90.23%)  of the shares of  Chilquinta  Energia,  S.A.  (Chilquinta),  an energy
distribution company with numerous energy holdings, based in Valparaiso,  Chile.
In January  2000,  Global and  Sempra  jointly  acquired  an  additional  9.75%,
increasing  their total share holding to 99.98% of the company.  Funding for the
purchase  of the  incremental  shares was  provided  at the time of the  initial
investment.  Chilquinta  provides  growth  opportunities  and enhances  Global's
market position in the region by adding electric and gas


                                       46
<PAGE>


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

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

      Chilquinta sells approximately 4,500 GWH per year to approximately 410,000
customers  in  Chile.   Chilquinta  operates  under  a  non-exclusive  perpetual
franchise  within  Chile's  Region V which is  located  just  north  and west of
Santiago.  Global believes that direct  competition for  distribution  customers
would be uneconomic  for potential  competitors.  Luz del Sur operates  under an
exclusive,  perpetual  franchise in the southern portion of the city of Lima and
in an area just south of the city along the coast serving  approximately 690,000
customers. Both Chilquinta and Luz del Sur purchase energy for distribution from
generators in their respective markets on a contract basis.

      Distribution  companies  in Chile are  subject to rate  regulation  by the
Comision Nacional de Energia, a national governmental regulatory authority.  The
Chilean  regulatory  framework has been in existence  since 1982, with rates set
every  four  years  based on a model  company.  The  tariff  which  distribution
companies charge to regulated  customers consists of two components:  the actual
cost of energy  purchased plus an additional  amount to compensate for the value
added in  distribution  (DVA tariff).  The DVA tariff  considers  allowed losses
incurred in the distribution of electricity,  administrative  costs of providing
service to  customers,  costs of  maintaining  and  operating  the  distribution
systems,  and an annual real return on  investment of 8% to 12% based on the new
replacement  cost of distribution  assets.  Changes in electricity  distribution
companies' cost of energy are passed through to customers, with no impact on the
distributors'  margins  (equal  to the  DVA  tariff).  Therefore,  distributors,
including Chilquinta, are not affected by changes in the generation sector which
affect  prices.  The next setting of tariff levels based on the model company is
scheduled  to take place in November  2000.  The DVA tariff  index  provides for
monthly  adjustments based on variations in certain economic indicators whenever
the  component  costs  increase  by more than 3% over prior  levels.  This index
provides inflation adjustments and indirect devaluation protection.

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

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


                                       47
<PAGE>

RESOURCES

Strategic Overview

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

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

      Recently,  Resources  has entered into  leveraged  lease  transactions  of
electric  generation  plants and electric  and gas  distribution  networks  with
utilities located in Western Europe. In addition, Resources acquired investments
in lease  transactions of utility assets in the United States nearing the end of
their initial lease term.  Resources  has invested in 15  energy-related  leases
since 1997.

      As of  September  30,  1999,  Resources  had  approximately  $1.6  billion
invested in leveraged lease transactions which represented  approximately 84% of
Resources'  total assets of $1.9  billion.  Leveraged  leases of  energy-related
plant and  equipment  totaled  approximately  $1.1  billion  or 70% of the lease
portfolio and 59% of Resources' assets. 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  95%  of  the  lease  investments  in  Resources'
portfolio are with lessees that have investment grade credit ratings.


Portfolio Segments

      The major  components of Resources'  investment  portfolio as a percent of
its total assets as of September 30, 1999 were:

      Leveraged Lease Investments
        Energy-Related ...........................................    59%
        Real Estate ..............................................    10%
        Aircraft .................................................    10%
        Railcars and Industrial Equipment ........................     5%
      Leveraged Buyout Funds .....................................    11%
      Other Limited Partnerships and Venture Funds ...............     4%
      Marketable Securities and other ............................     1%

      As of September 30, 1999, no single investment represented more than 7% of
Resources' total assets.


Leveraged Lease Investments

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


                                       48
<PAGE>

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

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

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


      Energy-Related Leases

      The Resources'  portfolio  contains  twenty separate  leveraged  leases of
energy-related  assets.  The total  amount  invested  in such  transactions  was
approximately $1.1 billion,  or 59%, of Resources'  assets.  This portion of the
portfolio,  along with  anticipated new investments of this type, is expected to
contribute  approximately  78% to 87% 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 for peaking  plants,  combined-cycle
facilities,  nuclear  power  plants,  a  cogeneration  facility  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 and
New Zealand.  Resources  currently retains undivided  interests in approximately
1,625 MW of generation capacity, of which approximately 8% 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  10%  of
Resources' assets at September 30, 1999 and totaled  approximately $200 million.
The portfolio  consists of separate  leases on 49 properties with seven lessees.
Resources is not  currently  planning to invest in any new  leveraged  leases of
real property.


                                       49
<PAGE>

      Aircraft Leases

      The  aircraft   leveraged   lease   portion  of  the   portfolio   totaled
approximately   $200  million  as  of  September  30,  1999.  This   represented
approximately  10%  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 $90 million is expected to contribute  revenue of approximately $2
million per annum on average over the next five years.

      LBO Funds/Limited Partnerships

      As of September  30, 1999,  approximately  11% of  Resources'  assets were
invested in LBO funds and 4% in other limited  partnerships  and venture  funds.
Approximately  $292 million was invested in this segment of the  portfolio as of
September  30,  1999.  Approximately  $221  million  included  in the LBO  funds
represents the fair value of Resources' share of publicly traded common stock in
six companies.  The LBO funds and limited partnership  investments in Resources'
portfolio are expected to contribute,  excluding  distributions  associated with
asset  sales,  approximately  14% of  total  revenue  in 2000  and  diminish  to
approximately 7% in 2004 as they mature.  Resources is not currently planning to
make investments of this nature in the future.

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

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


                                       50
<PAGE>

                   SCHEDULE OF ASSETS AS OF SEPTEMBER 30, 1999
                             (Thousands of Dollars)

                                                                 % of Resources'
                                                       Amount      Total Assets
                                                     ---------     ------------
Leveraged Leases
   Energy-Related
      Foreign ....................................  $  739,539        38.0%
      Domestic ...................................     407,107        20.9%
   Real Estate
      Foreign ....................................        --          --
      Domestic ...................................     192,741         9.9%
   Aircraft
      Foreign ....................................     131,953         6.8%
      Domestic ...................................      68,038         3.5%
   Commuter Railcars
      Foreign ....................................      80,378         4.1%
      Domestic ...................................        --          --
   Industrial
      Foreign ....................................        --          --
      Domestic ...................................       9,244         0.5%
                                                    ----------       -----
        Total Leveraged Leases, Net ..............   1,629,001        83.7%

Limited Partnerships
   LBO Funds .....................................     221,186        11.4%
   Other .........................................      70,476         3.6%
                                                    ----------       -----
        Total Limited Partnerships ...............     291,662        15.0%

Marketable Securities ............................      12,707         0.7%
Owned Property and Equipment .....................       7,907         0.4%
Current Assets ...................................       3,441         0.2%
                                                    ----------       -----
Total Resources' Assets ..........................  $1,944,718       100.0%
                                                    ==========       =====


                                       51
<PAGE>

ENERGY TECHNOLOGIES

      Energy   Technologies  is  an  energy  management  company  that  provides
energy-related  engineering,  consulting and mechanical  contracting services to
and constructs, operates and maintains heating, ventilating and air conditioning
(HVAC) systems for industrial and commercial  customers in the  Northeastern and
Middle Atlantic United States. Energy Technologies also supplies electricity and
gas to industrial,  commercial and residential  customers.  Energy  Technologies
currently provides such services to 13,000 customers.  As of September 30, 1999,
Energy Technologies had assets of $232 million.  Energy Holdings will assess the
growth  prospects and  opportunities  for Energy  Technologies'  business before
committing additional capital.

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

      Energy Technologies supplies natural gas and electricity to industrial and
commercial  customers.  Energy Technologies' policy is to enter into natural gas
and  electricity  futures  contracts  and  forward  purchases  to lock in prices
related to future sales  commitments.  Whenever  possible,  Energy  Technologies
attempts to be 100% covered on its electric and gas sales positions with respect
to supply during periods of peak price volatility.

OTHER SUBSIDIARIES

      EGDC, a nonresidential real estate property management business,  has been
conducting a controlled  exit from the real estate business since 1993. EGDC has
investments  in  eight  commercial  real  estate  properties  (one of  which  is
developed) in several  states.  EGDC's  strategy is to preserve the value of its
assets to allow for the  controlled  disposition  of its properties as favorable
sales opportunities arise. As of September 30, 1999, December 31, 1998 and 1997,
EGDC's consolidated assets aggregated $75 million,  $75 million and $83 million,
respectively.

      PSEG Capital has served as our financing  vehicle,  borrowing on the basis
of a minimum net worth maintenance agreement with PSEG. As of September 30, 1999
and  December 31, 1998,  PSEG Capital had debt  outstanding  of $650 million and
$498  million,  respectively.  Existing  debt  matures  from  1999 to 2003.  For
additional  information  including  certain  restrictions  relating  to the  BPU
Focused Audit, see "Management's  Discussion and Analysis of Financial Condition
and  Results of  Operations  --  Liquidity  and  Capital  Resources  -- External
Financings".

      Funding  formerly  served  as our  financing  vehicle  on the basis of our
consolidated  financial  position.  At  December  31,  1998,  Funding  had  debt
outstanding  of  $251  million.  At  September  30,  1999,  Funding  had no debt
outstanding.


                                       52
<PAGE>

COMPETITIVE ENVIRONMENT

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

REGULATION

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

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

      As a result of the 1992 Focused  Audit of PSEG's  non-utility  businesses,
the BPU approved a plan which, among other things,  provides that: (1) PSEG will
not permit  Energy  Holdings'  non-utility  investments  to exceed 20% of PSEG's
consolidated  assets  without  prior notice to the BPU;  (2) the Public  Service
Electric and Gas Company Board of Directors will provide an annual certification
that the business and  financing  plans of Energy  Holdings  will not  adversely
affect  Public  Service  Electric and Gas Company;  (3) PSEG will (a) limit debt
supported by the minimum net worth  maintenance  agreement between PSEG and PSEG
Capital to $650  million  and (b) make a  good-faith  effort to  eliminate  such
support  over a six to ten year  period from May 1993;  and (4) Energy  Holdings
will pay Public Service  Electric and Gas Company an affiliation fee of up to $2
million a year.  PSEG and  Energy  Holdings  and its  subsidiaries  continue  to
reimburse  Public Service Electric and Gas Company for the costs of all services
provided to them by employees of Public Service Electric and Gas Company.

      Pursuant  to the  Energy  Competition  Act,  the  BPU may  impose  certain
requirements  with  respect to affiliate  transactions  between and among Public
Service  Electric and Gas Company,  PSEG and Energy  Holdings.  The BPU has been
conducting  proceedings  pursuant  to the  Energy  Master  Plan  and the  Energy
Competition  Act and is  expected  to issue a series of orders  that will decide
both  generic  issues for the energy  industry,  including  affiliate  standards
(including fair  competition and affiliate  transactions),  and company specific
matters for each utility, including Public Service Electric and Gas Company.

      As a result of the final  outcome of the BPU's  proceedings  in connection
with the Energy Master Plan and Energy  Competition  Act and accounting  impacts
resulting from  deregulation of the generation of electricity and the unbundling
of the utility  business,  we do not believe  that the Focused  Audit  provision
requiring  notification  to the BPU that PSEG's  non-utility  assets  exceed 20%
remains appropriate and believes that modifications will be required.  On August
24,  1999,  the BPU  issued  its Final  Order in the  matter  of Public  Service
Electric and Gas Company's rate  unbundling,  stranded  costs and  restructuring
filings.  Appeals  filed on behalf of  several  Public  Service  Electric  & Gas
Company  customers  are  pending  at the  Appellate  Division  of the New Jersey
Superior  Court.  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. Regulatory oversight by the BPU to assure that there is no harm
to utility  ratepayers  from  PSEG's  non-utility  investments  is  expected  to
continue.  Such assets were approximately 20% of PSEG's  consolidated  assets at
September  30,  1999.  We  believe  that if still  required,  we are  capable of
eliminating  PSEG  support of PSEG Capital debt within the time period set forth
in the Focused  Audit.  See  "Management's  Discussion and Analysis of Financial
Condition  and Results of  Operations  --  Liquidity  and Capital  Resources  --
External Financings".

      PSEG has claimed an exemption  from  regulation by the SEC as a registered
holding  company  under PUHCA,  except for the  provision  which  relates to the
acquisition of 5% or more of the voting


                                       53
<PAGE>

securities of an electric or gas utility company. PUHCA regulates public utility
holding companies and their  subsidiaries.  Global's  investments include exempt
wholesale  generators  (EWGs) and foreign utility companies (FUCOs) under PUHCA.
Failure to maintain  status of these plants as EWGs or FUCOs could  subject PSEG
and its subsidiaries to regulation under PUHCA.

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

      In addition,  actions of PSEG,  Public  Service  Electric and Gas Company,
Resources  or  Energy   Technologies   could  cause  PSEG,   and  therefore  its
subsidiaries,  including us and our  subsidiaries,  to be no longer  exempt from
regulation  under PUHCA. If PSEG were no longer exempt from PUHCA,  PSEG and its
subsidiaries  would be subject to additional  regulation by the SEC with respect
to their  financing and investing  activities,  including the amount and type of
non-utility investments.  We believe that this would not have a material adverse
effect on our company.

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

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

INCOME TAXES

      Energy Holdings and its  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.

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

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


                                       54
<PAGE>

EMPLOYEES

      At September 30, 1999, we and our majority  owned  subsidiaries  had 1,875
employees.  We  believe  that  we and  our  subsidiaries  maintain  satisfactory
relationships with employees.

ENVIRONMENTAL MATTERS

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

PROPERTIES

      Energy Holdings owns no real property.  Energy Holdings  subleases  office
space for its corporate  headquarters at 80 Park Plaza,  Newark, New Jersey from
Public  Service  Electric and Gas Company.  Our  subsidiaries  also lease office
space at various locations  throughout the world to support business activities.
We maintain adequate insurance coverage for properties in which our subsidiaries
have an equity  interest,  subject to  certain  exceptions,  to the extent  such
property is 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.


                                       55
<PAGE>

                                   MANAGEMENT

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

      Following are our executive officers and directors of Energy Holdings:

Executive Officers

      E.  JAMES  FERLAND  has been a Director  since  June 1989 and was  elected
Chairman  of the Board and Chief  Executive  Officer of Energy  Holdings in June
1989.  Age 57. He was elected a Director of Global in 1986 and of  Resources  in
1985.  Mr.  Ferland  has also been  Chairman of the Board,  President  and Chief
Executive  Officer of PSEG since July 1986 and  Chairman  of the Board and Chief
Executive  Officer of Public  Service  Electric and Gas Company since  September
1991.

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

      MICHAEL J.  THOMSON was named  President  and Chief  Executive  Officer of
Global in  January  1997.  Age 40.  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 44.  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 47. Previously he had been Executive Vice
President and Chief Operating Officer of Energy  Technologies from February 1999
to June  1999.  He had been Vice  President  --  Customer  Operations  of Public
Service  Electric  and Gas  Company  from  January  1997 to February  1999.  Mr.
Kosierowski  joined Public Service Electric and Gas Company in 1974 and has held
a number of senior management positions.

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

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

Directors

      FRANK CASSIDY has been a Director  since January 2000. Age 52. 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--


                                       56
<PAGE>

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

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


                                       57
<PAGE>

                               THE EXCHANGE OFFER

Purpose of the Exchange Offer

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

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

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

Terms of the Exchange Offer

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

      Holders  may  tender  their  original  notes  in  whole  or in part in any
integral  multiple  of  $1,000  principal  amount.  The  exchange  offer  is not
conditioned upon any minimum  principal amount of original notes being tendered.
As of the date of this prospectus,  $400,000,000  aggregate  principal amount of
the original  notes is  outstanding.  Holders of original  notes do not have any
appraisal or dissenters' rights in connection with the exchange offer.  Original
notes which are not tendered for or are tendered but not accepted in  connection
with the exchange offer will remain  outstanding and be entitled to the benefits
of the indenture,  but will not be entitled to any further  registration  rights
under the exchange  and  registration  rights  agreement,  except under  limited
circumstances. See "Risk Factors -- Consequences of failure to exchange original
notes" and "Description of exchange notes".  If any tendered  original notes are
not  accepted for  exchange  because of an invalid  tender,  the  occurrence  of
certain  other  events set forth  herein or  otherwise,  appropriate  book-entry
transfer will be made,  without  expense,  to the tendering  holder of the notes
promptly after the  expiration  date of the exchange  offer.  Holders who tender
original notes in connection with the exchange offer will not be required to pay


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<PAGE>

brokerage  commissions or fees or, subject to the  instructions in the letter of
transmittal,  transfer  taxes with respect to the exchange of original  notes in
connection with the exchange offer.

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

Expiration Date; Extensions; Amendments

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

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

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

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

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

      If  the  exchange  offer  is  amended  in a  manner  determined  by  us to
constitute a material change,  we will promptly disclose such amendment by means
of a prospectus supplement that will be distributed to the registered holders of
the original notes, and we will extend the exchange offer to the extent required
by Rule 14e-1 under the Exchange Act.

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

Acceptance for Exchange and Issuance of Exchange Notes

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

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

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

   -  any other documents required by the letter of transmittal.

      The  term  "book-entry  confirmation"  means a  timely  confirmation  of a
book-entry  transfer of original notes into the exchange agent's account at DTC.
The term "agent's  message" means a message,


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<PAGE>

transmitted by DTC to and received by the exchange agent and forming a part of a
book-entry  confirmation,   which  states  that  DTC  has  received  an  express
acknowledgment from the tendering DTC participant,  which acknowledgment  states
that such  participant  has  received  and  agrees to be bound by the  letter of
transmittal  and that Energy  Holdings  may  enforce  the letter of  transmittal
against such participant.

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

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

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

Procedures for Tendering Original Notes

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

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

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

   -  the guaranteed delivery procedures set forth below must be complied with.

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

      The method of delivery of certificates,  the letter of transmittal and all
other required documents is at the option and sole risk of the tendering holder,
and  delivery  will be deemed made only when  actually  received by the exchange
agent.  If delivery  is by mail,  registered  mail,


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<PAGE>

return receipt  requested,  properly insured or an overnight delivery service is
recommended.  In all cases,  sufficient  time should be allowed to ensure timely
delivery.

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

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

      Signature  Guarantees.  Certificates  for the  original  notes need not be
endorsed and signature  guarantees on the letter of transmittal  are unnecessary
unless (1) a  certificate  for the original  notes is registered in a name other
than  that  of the  person  surrendering  the  certificate  or (2)  such  holder
completes the box entitled "Special Issuance  Instructions" or "Special Delivery
Instructions"  in the  letter of  transmittal.  In the case of (1) or (2) above,
such  certificates  for original notes must be duly endorsed or accompanied by a
properly  executed  bond power,  with the  endorsement  or signature on the bond
power and on the  letter of  transmittal  guaranteed  by a firm or other  entity
identified  in Rule 17Ad-15  under the  Exchange  Act as an "eligible  guarantor
institution," including (as such terms are defined therein):

   -  a bank;

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

   -  a credit union;

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

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

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

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

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

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

      The Notice of Guaranteed Delivery may be delivered by hand, or transmitted
by facsimile  or mail to the  exchange  agent and must include a guarantee by an
Eligible Institution in the form shown in such


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<PAGE>

notice.  Notwithstanding  any other provision  hereof,  the delivery of exchange
notes in exchange for original notes tendered and accepted for exchange pursuant
to the exchange offer will in all cases be made only after timely receipt by the
exchange agent of original notes, or of a book-entry  confirmation  with respect
to such original  notes,  and a properly  completed and duly executed  letter of
transmittal  (or  facsimile  thereof),  together  with  any  required  signature
guarantees, or an agent's message instead of the letter of transmittal,  and any
other documents required by the letter of transmittal. Accordingly, the delivery
of exchange  notes might not be made to all tendering  holders at the same time,
and will depend upon when original notes, book-entry  confirmations with respect
to original  notes and other  required  documents  are  received by the exchange
agent. Our acceptance for exchange of original notes tendered pursuant to any of
the procedures  described above will constitute a binding  agreement between the
tendering  holder  and us upon the terms and  subject to the  conditions  of the
exchange offer.

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

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

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

Resales of Exchange Notes

      We are making the exchange offer for the exchange notes in reliance on the
position  of the staff of the  Division  of  Corporation  Finance  of the SEC as
defined in certain  interpretive  letters  addressed  to third  parties in other
transactions. However, we did not seek our own interpretive letter and there can
be no assurance that the staff of the Division of Corporation Finance of the SEC
would make a similar  determination with respect to the exchange offer as it has
in such interpretive letters to third parties. Based on these interpretations by
the staff of the Division of Corporation  Finance of the SEC, and subject to the
two  immediately  following  sentences,  we believe that  exchange  notes issued
pursuant to this  exchange  offer in exchange for original  notes may be offered
for resale,  resold and otherwise  transferred by a holder thereof (other than a
holder who is a broker-dealer)  without further compliance with the registration
and prospectus  delivery  requirements of the Securities Act, provided that such
exchange notes are acquired in the ordinary course of such holder's business and
that such holder is not  participating,  and has no arrangement or understanding
with any person to  participate,  in a  distribution  (within the meaning of the
Securities Act) of such exchange notes.

      However, any holder of original notes who is an "affiliate" of ours or who
intends to  participate  in the exchange  offer for the purpose of  distributing
exchange notes,  or any  broker-dealer  who purchased  original notes from us to
resell  pursuant  to Rule  144A  or any  other  available  exemption  under  the
Securities Act, (a) will not be able to rely on the interpretations of the staff
of the Division of Corporation Finance of the SEC defined in the above-mentioned
interpretive  letters,  (b) will not be  permitted  or


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<PAGE>

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

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

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

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

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

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

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

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

      Accordingly,  this prospectus,  as it may be amended or supplemented  from
time to time, may be used by a  participating  broker-dealer  in connection with
resales of exchange  notes  received in exchange for  original  notes where such
original  notes were acquired by such  participating  broker-dealer  for its own
account as a result of market-making or other trading  activities.  See "Plan of
Distribution".  Subject to certain  provisions  contained  in the  exchange  and
registration rights agreement, we have agreed that this prospectus, as it may be
amended  or  supplemented  from  time to  time,  may be used by a  participating
broker-dealer in connection with resales of such exchange notes for a period not
exceeding  180  days  after  the  expiration  date.   However,  a  participating
broker-dealer  who intends to use this  prospectus in connection with the resale
of exchange  notes  received  in exchange  for  original  notes  pursuant to the
exchange  offer  must  notify us, or cause us to be  notified,  on or before the
expiration  date, that it is a participating  broker-dealer.  Such notice may be
given in the space provided for that purpose in the letter of transmittal or may
be  delivered  to the exchange  agent at one of the  addresses  set forth herein
under "-- Exchange Agent".

      Any  participating  broker-dealer who is an "affiliate" of Energy Holdings
may not rely on such interpretive  letters and must comply with the registration
and prospectus  delivery  requirements  of the Securities Act in connection with
any resale  transaction.  In that regard,  each participating  broker-dealer who
surrenders  original notes pursuant to the exchange offer will be deemed to have
agreed,  by


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<PAGE>

execution of the letter of transmittal or delivery of an agent's message in lieu
thereof,  that upon receipt of notice from Energy  Holdings of the occurrence of
any event or the discovery of:

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

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

      (3) the  occurrence of certain other events  specified in the exchange and
registration rights agreement, such participating broker-dealer will suspend the
sale of exchange  notes  pursuant to this  prospectus  until we have  amended or
supplemented  this prospectus to correct such  misstatement or omission and have
furnished copies of the amended or supplemented prospectus to such participating
broker-dealer,  or we have given notice that the sale of the exchange  notes may
be resumed, as the case may be.

Withdrawal Rights

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

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

Interest on Exchange Notes

      Interest on the notes is payable semi-annually on April 1 and October 1 of
each  year,  commencing  on April 1,  2000,  at the rate of 10% per  annum.  The
exchange  notes will bear interest from and including the last interest  payment
date on the original notes (or if none,  has yet occurred,  the date of issuance
of such  original  notes).  Accordingly,  holders  of  original  notes  that are
accepted  for  exchange  will not receive  accrued  but unpaid  interest on such
original  notes at the time of  tender,  but such  interest  will be  payable in
respect of such exchange notes  delivered in exchange for such original notes on
the first interest payment date after the expiration date.


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<PAGE>

Accounting Treatment

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

Exchange Agent

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

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

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

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

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

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

Fees and Expenses

      We have agreed to pay the exchange agent reasonable and customary fees for
its services and will reimburse it for its reasonable out-of-pocket expenses. We
will also pay brokerage  houses and other  custodians,  nominees and fiduciaries
the reasonable  out-of-pocket  expenses incurred by them in forwarding copies of
this  prospectus  and related  documents  to the  beneficial  owners of original
notes,  and in handling or  tendering  for their  customers.  Holders who tender
their  original  notes for  exchange  will not be  obligated to pay any transfer
taxes in connection  with the transfer.  If,  however,  exchange notes are to be
delivered  to, or are to be issued in the name of,  any  person  other  than the
registered  holder of the  original  notes  tendered,  or if a  transfer  tax is
imposed for any reason other than the exchange of original  notes in  connection
with the exchange  offer,  then the amount of any such transfer  taxes,  whether
imposed on the registered  holder or any other  persons,  will be payable by the
tendering holder. If satisfactory evidence of payment of such taxes or exemption
therefrom is not submitted  with the letter of  transmittal,  the amount of such
transfer  taxes will be billed  directly to such tendering  holder.  We will not
make any payment to brokers, dealers or other nominees soliciting acceptances of
the exchange offer.


                                       65
<PAGE>

                          DESCRIPTION OF EXCHANGE NOTES

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

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

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

Brief Description of the Notes

      The notes are general senior unsecured  obligations of Energy Holdings and
rank  pari  passu in right  of  payment  with  all of the  other  unsecured  and
unsubordinated indebtedness of Energy Holdings.

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

Principal, Maturity and Interest

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

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

      Interest  on the  exchange  notes will  accrue  from the date of  original
issuance or, if interest has already  been paid,  from the most recent  interest
payment date to which  interest was paid or duly provided for.  Interest will be
computed on the basis of a 360-day year  comprised of twelve 30-day  months.  If
any  interest  payment  date or the  stated  maturity  date  or date of  earlier
redemption or  repurchase  is not a business day, the required  payment shall be
made on the next succeeding day which is a business day, without any interest or
other  payment in respect of the payment  subject to delay,  with the same force
and effect as if made on the interest  payment date or stated  maturity  date or
date of earlier redemption or repurchase.

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


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<PAGE>

Payment and Paying Agents

      Interest on the notes is payable at any office or agency to be  maintained
by Energy Holdings in Newark, New Jersey and The City of New York. At the option
of Energy  Holdings,  however,  interest  may be paid (i) by check mailed to the
address of the person  entitled  to the  interest  payment at the  address  that
appears in the "security register" maintained by Energy Holdings or (ii) by wire
transfer to an account maintained by the person entitled to the interest payment
as specified  in the  security  register.  (Sections  301,  1001 and 1002 of the
Indenture).

Transfer and Exchange

      Under the indenture,  debt securities of any series,  including the notes,
may be presented for  registration of transfer and may be presented for exchange
(i) at each office or agency  required to be maintained  by Energy  Holdings for
payment of such series as described in "--Payment and Paying  Agents",  and (ii)
at each other office or agency that Energy  Holdings may designate  from time to
time for such  purposes.  No service  charge  will be made for any  transfer  or
exchange  of debt  securities,  including  the notes,  but Energy  Holdings  may
require  payment of any tax or other  governmental  charge payable in connection
with the transfer or exchange. (Section 305 of the indenture).

      The indenture does not require Energy Holdings to (i) issue,  register the
transfer of or exchange debt securities during a period beginning at the opening
of business 15 days before any selection of debt securities of that series to be
redeemed  and ending at the close of business on (A) if debt  securities  of the
series are issuable only in registered  form, the day of mailing of the relevant
notice of  redemption  and (B) if debt  securities of the series are issuable in
bearer  form,  the  day of the  first  publication  of the  relevant  notice  of
redemption, or, if debt securities of the series are also issuable in registered
form and there is no  publication,  the day of mailing of the relevant notice of
redemption;  (ii)  register  the  transfer of or exchange  any debt  security in
registered  form,  or  portion  thereof,  called  for  redemption,   except  the
unredeemed  portion of any debt  security in registered  form being  redeemed in
part;  (iii)  exchange any debt  security in bearer form called for  redemption,
except to exchange  such debt  security  in bearer  form for a debt  security in
registered form of that series and like tenor that is simultaneously surrendered
for  redemption;  or (iv) issue,  register  the transfer of or exchange any debt
security which has been  surrendered  for repayment at the option of the holder,
except the portion, if any, of such debt security not to be so repaid.  (Section
305 of the Indenture).

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

Optional Redemption

      The notes will be redeemable at the option of Energy Holdings, in whole or
in part at any time, on at least 30 days but not more than 60 days prior written
notice mailed to the registered holders thereof,  at a redemption price equal to
the greater of (i) 100% of the principal amount of the notes to be redeemed, and
(ii) the sum, as determined by the Quotation  Agent (as defined  below),  of the
present  values of the  principal  amount of the  notes to be  redeemed  and the
remaining  scheduled  payments of interest  thereon from the redemption  date to
October 1, 2009 (remaining life), discounted from their respective payment dates
to the date of  redemption  on a  semiannual  basis  (assuming  a  360-day  year
consisting  of twelve 30-day  months) at the Treasury  Rate (as defined  herein)
plus 40 basis points plus, in either case,  accrued interest thereon to the date
of redemption.

      If money sufficient to pay the redemption price of and accrued interest on
all of the Notes (or portions  thereof) to be redeemed on the redemption date is
deposited with the trustee or paying agent on or before the redemption  date and
certain other conditions are satisfied,  then on and after such redemption date,
interest will cease to accrue on such notes (or such portion thereof) called for
redemption.

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


                                       67
<PAGE>

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

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

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

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

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

Mandatory Redemption

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

Certain Definitions

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

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

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

      "Change of Control"  means the  occurrence of one or more of the following
events:  (i) PSEG (or its  successors)  shall  cease  to own a  majority  of the
outstanding  voting stock of Energy  Holdings,  (ii) at any time  following  the
occurrence of the event described in clause (i), a person or group (as that term
is used in Section  13(d)(3) of the Securities  Exchange Act of 1934) of persons
(other than PSEG) shall have  become,  directly or  indirectly,  the  beneficial
owner or shall have acquired the absolute power to direct the vote, of more than
35% of the  outstanding  voting  stock of Energy  Holdings  or (iii)  during any
twelve-month period,  individuals who at the beginning of such period constitute
the Board of Directors of Energy Holdings (together with any new directors whose
election or  nomination  was  approved by a majority  of the  directors  then in
office who were either  directors  at the  beginning  of such period or who were
previously  so approved)  shall cease for any reason to constitute a majority of
the Board of Directors of Energy Holdings,  unless approved by a majority of the
Board of Directors in office at the beginning of such period (including such new
directors),  or (iv) Energy Holdings shall have merged or consolidated  with any
other  corporation or the  properties  and assets of Energy  Holdings shall have


                                       68
<PAGE>

been  conveyed  or  transferred  substantially  as an  entirety to any Person in
accordance  with Section 801 of the  indenture as described  under "-- Merger or
Consolidation".  Notwithstanding  the  foregoing,  a Change of Control  shall be
deemed  not to have  occurred  if one or  more of the  above  events  occurs  or
circumstances  exist and,  after giving  effect  thereto,  the debt  securities,
including the notes,  are rated no less than "BBB-" by Standard & Poor's Ratings
Group and "Ba1" by Moody's Investors Service.

      "Consolidated Net Tangible Assets" means, as of any date of determination,
the total  amount of assets  (less  accumulated  depreciation  or  amortization,
valuation  allowances,  other applicable  reserves and other properly deductible
items in  accordance  with GAAP) which would  appear on a  consolidated  balance
sheet of Energy  Holdings and its  consolidated  Subsidiaries,  determined  on a
consolidated  basis in  accordance  with GAAP,  after giving  effect to purchase
accounting and after deduction therefrom,  to the extent otherwise included, the
amounts of (i)  consolidated  current  liabilities;  (ii) deferred income taxes;
(iii) minority interests in consolidated Subsidiaries held by persons other than
Energy  Holdings or a Subsidiary;  (iv) excess of cost over fair value of assets
of  businesses  acquired,  as  determined  by the  Board of  Directors;  and (v)
unamortized debt discount and expense and other  unamortized  deferred  changes,
goodwill  (including the amounts of  investments  in affiliates  that consist of
goodwill),   patents,  trademarks,   service  names,  trade  names,  copyrights,
licenses,  deferred project costs,  organizational or other development expenses
and other intangible items.

      "Indebtedness" of any person means (i) all indebtedness of such person for
borrowed money, whether or not represented by bonds, debentures,  notes or other
securities,  (ii) the  deferred  purchase  price of assets or services  which in
accordance  with GAAP would be shown on the liability  side of the balance sheet
of such person,  (iii) all Indebtedness of another person secured by any Lien on
any property  owned by such person,  whether or not such  Indebtedness  has been
assumed,  (iv) all obligations of such person to pay a specified  purchase price
for goods or services  whether or not delivered,  i.e.,  take-or-pay and similar
obligations;  (v) all Capitalized Lease Obligations of such person; and (vi) all
obligations of such person  guaranteeing any  Indebtedness,  lease,  dividend or
other obligation of any other person, directly or indirectly, whether contingent
or otherwise.

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

      "Material   Subsidiary"  means  any  Subsidiary  of  Energy  Holdings  the
consolidated  assets  of  which,  as of the date of any  determination  thereof,
constitute at least 10% of the  consolidated  assets of Energy  Holdings and its
Subsidiaries,  or the consolidated earnings before taxes of which constituted at
least 10% of the  consolidated  earnings before taxes of Energy Holdings and its
Subsidiaries  for the most recently  completed fiscal year,  provided,  however,
that no Subsidiary of a Material Subsidiary shall be a Material Subsidiary,  and
provided  further,  notwithstanding  the  foregoing,  in all  instances  each of
Global, Resources and PSEG Capital shall be a Material Subsidiary.

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

Certain Covenants

      The notes and other series of debt securities issuable under the indenture
will have the benefit of the following covenants.

      Limitation on Liens

      Energy Holdings  covenants in the indenture that it will not, and will not
permit any of its Subsidiaries to create,  incur,  assume or suffer to exist any
Lien upon or with respect to any property or assets (real or personal,  tangible
or intangible) of Energy Holdings or any of its Subsidiaries,  whether now owned


                                       69
<PAGE>

or acquired after the date of the indenture,  to secure any Indebtedness that is
incurred,  issued,  assumed  or  guaranteed  by  Energy  Holdings  or any of its
Subsidiaries without in any such case effectively  providing,  concurrently with
the incurrence,  issuance, assumption or guaranty of any such Indebtedness, that
the debt  securities  shall be equally and ratably secured with any and all such
Indebtedness; provided, however, that the foregoing restrictions shall not apply
to or prevent the creation, incurrence, assumption or existence of:

   o  Liens existing on the date of the indenture;

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

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

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

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

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

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

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

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

      Limitation on Sale and Leaseback Transactions

      Energy Holdings  covenants in the indenture that it will not, and will not
permit any Subsidiary to, enter into any Sale and Leaseback  Transaction  unless
(i) Energy  Holdings  or such  Subsidiary  would be entitled to create a Lien on
such  property  or  assets  securing  Indebtedness  in an  amount  equal  to the
Attributable  Debt with respect to such transaction  without equally and ratably
securing  the debt  securities  as  described  under  the  preceding  subsection
"--Limitation on Liens" or (ii) the net proceeds of such sale are at least equal
to the fair value (as determined by the Board of Directors) of such property and
Energy Holdings or such Subsidiary  shall apply or cause to be applied an amount
in cash


                                       70
<PAGE>

equal to the net proceeds of such sale to the retirement,  within 90 days of the
effective date of any such  arrangement,  of debt  securities or Indebtedness of
Energy  Holdings  which ranks senior or pari passu with the debt  securities  or
with  Indebtedness  of a  Subsidiary  (other  than  Indebtedness  owed to Energy
Holdings or a Subsidiary or to PSEG); provided, however, that in addition to the
transactions  permitted  as  described  in the  foregoing  clauses (i) and (ii),
Energy  Holdings  or  any  Subsidiary  may  enter  into  a  Sale  and  Leaseback
Transaction as long as the sum of (x) the Attributable Debt with respect to such
Sale and Leaseback  Transaction  and all other Sale and  Leaseback  Transactions
entered into as described in this  proviso,  plus (y) the amount of  outstanding
Indebtedness secured by Liens incurred as described in the last bullet paragraph
of the preceding  subsection  "Limitation  on Liens",  does not exceed an amount
equal to 10% of Consolidated Net Tangible  Assets,  as shown on the consolidated
balance sheet of Energy Holdings and its  Subsidiaries as of the end of the most
recent fiscal quarter for which  financial  statements  are available.  (Section
1006 of the indenture).

      Repayment of Notes Upon a Change of Control

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

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

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

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

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

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

   o  that  interest on any debt  security of the series  accepted for repayment
      pursuant to the Change of Control  Offer  shall cease to accrue  after the
      repayment of such debt security on the repayment date;

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

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

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


                                       71
<PAGE>

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

Events of Default and Remedies

      The following will constitute events of default under the indenture:

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

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

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

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

   o  acceleration   of  any  bond,   debenture,   note  or  other  evidence  of
      Indebtedness or under any mortgage, indenture (including the indenture) or
      instrument  under  which  there  may be  issued  or by which  there may be
      secured or evidenced any Indebtedness by Energy Holdings or any Subsidiary
      in excess of $25,000,000 in the aggregate (other than (i) any Indebtedness
      arising from the  obligation to make an equity  investment in a Subsidiary
      or (ii) Indebtedness which is payable solely out of the property or assets
      of a partnership, joint venture or similar entity of which Energy Holdings
      or any such Subsidiary is a participant,  or which is secured by a Lien on
      the  property  or assets  owned or held by such  entity,  without  further
      recourse  to or  liability  of Energy  Holdings  or any such  Subsidiary),
      whether such Indebtedness now exists or shall hereafter be created;

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

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

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

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

      Subject to the  provisions of the indenture  relating to the duties of the
trustee,  in case an event of default  with  respect to debt  securities  of any
series,  including  the Notes,  has occurred and is  continuing,  the trustee is
under no  obligation to exercise any of its rights or powers under the indenture
at the


                                       72
<PAGE>

request,  order or direction of the holders of debt  securities  of that series,
unless those holders have offered the trustee  reasonable  indemnity against the
expenses and  liabilities  which might be incurred by it in compliance with such
request. (Section 507 of the indenture).

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

      The  holders of a majority in  principal  amount of the  outstanding  debt
securities of a series,  including  the notes,  may, on behalf of the holders of
all debt  securities  of such  series and any  related  coupons,  waive any past
default  under the indenture  with respect to such series and its  consequences,
except a default (i) in the payment of the principal of (or premium,  if any) or
interest,  if any,  on or  additional  amounts  payable  in  respect of any debt
security of such series or any related  coupons or (ii) in respect of a covenant
or  provision  that  cannot be  modified  or amended  without the consent of the
holder of each  outstanding  debt  security  of such  series  affected  thereby.
(Section 513 of the indenture).

Repayment of Notes Upon Certain Events Involving Resources

      If (i) Energy  Holdings  shall no longer own 100% of the equity  ownership
interest  in  Resources,  or  (ii)  (a)  a  transaction  or  series  of  related
transactions  (a  "Resources   Transaction")  causes  the  assets  of  Resources
immediately  after such  Resources  Transaction to be at least 20% less than the
assets of Resources immediately prior to such Resources Transaction (as measured
from the end of the month immediately preceding the Resources Transaction (or in
the case of a  Resources  Transaction  involving a series of  transactions,  the
month immediately preceding the first of such transactions)) and (b) as a direct
result of such Resources Transaction,  either of Standard & Poor's Ratings Group
or Moody's  Investors  Service,  Inc. shall  downgrade its respective  rating of
Energy  Holdings  below  BBB- or Ba1 (or if either of such  ratings  immediately
preceding the Resources Transaction is lower than BBB- or Ba1, such rating shall
as a direct  result  of such  Resources  Transaction  be  downgraded),  then the
holders  of the  notes  shall  have the  right to  require  Energy  Holdings  to
repurchase  their notes,  in whole or in part, at a repayment price equal to the
greater of (i) 100% of the principal amount of the notes to be repurchased,  and
(ii) the sum, as determined  by the Quotation  Agent (as defined on page 68), of
the present values of the principal  amount of the notes to be  repurchased  and
the remaining  scheduled payments of interest thereon from the repayment date to
October 1, 2009  discounted from their  respective  payment dates to the date of
repayment on a semiannual  basis  (assuming a 360-day year  consisting of twelve
30-day  months) at the  Treasury  Rate (as  defined  on page 68),  plus 40 basis
points plus, in either case, accrued interest thereon to the date of repayment.

Merger or Consolidation

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

No Personal Liability of Directors, Officers, Employees and Stockholders

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


                                       73
<PAGE>

Satisfaction and Discharge, Defeasance and Covenant Defeasance

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

      The indenture  provides that, if the provisions of Article Fourteen of the
indenture are made  applicable  to the debt  securities of or within any series,
including the notes, and any related coupons pursuant to Section 301 thereunder,
Energy  Holdings may elect either (a) to defease and be discharged  from any and
all  obligations  with respect to such debt  securities and any related  coupons
(except  for  the  obligations  to pay  additional  amounts,  if any,  upon  the
occurrence  of certain  events of tax,  assessment or  governmental  charge with
respect to payments on such debt  securities and the obligations to register the
transfer or exchange of such debt securities and any related coupons, to replace
temporary  or  mutilated,  destroyed,  lost or stolen  debt  securities  and any
related  coupons,  to  maintain  an office or  agency  in  respect  of such debt
securities  and any  related  coupons,  and to hold moneys for payment in trust)
(defeasance)  (Section  1402 of the  indenture)  or (b) to be released  from its
obligations under any covenant specified pursuant to Section 301 with respect to
such debt  securities and any related  coupons,  and any omission to comply with
such  obligations  shall not  constitute  a default or an event of default  with
respect to such debt  securities and any related coupons  (covenant  defeasance)
(Section 1403 of the indenture),  in either case upon the irrevocable deposit by
Energy Holdings with the trustee (or other qualifying trustee), in trust, of (i)
an amount in United States  Dollars,  (ii)  Government  Obligations  (as defined
below)  applicable to such debt  securities and coupons that through the payment
of principal and interest in  accordance  with their terms will provide money in
an amount,  or (iii) a combination  thereof in an amount,  sufficient to pay the
principal of (and premium, if any) and interest, if any, on such debt securities
and any related coupons,  and any mandatory  sinking fund or analogous  payments
thereon, on the scheduled due dates therefor.

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

      "Government Obligations" means securities which are (i) direct obligations
of the United States or (ii) obligations of a person controlled or supervised by
and acting as an agency or  instrumentality of the United States, the payment of
which is unconditionally guaranteed as a full faith and credit obligation by the
United States,  which are not callable or redeemable at the option of the issuer
of that obligation.  Government  Obligations  also include a depository  receipt
issued  by a bank or  trust  company  as  custodian  with  respect  to any  such
Government  Obligation or a specific  payment of interest on or principal of any
such Government  Obligation held by such custodian for the account of the holder
of a  depository  receipt;  provided  that,  except  as  required  by law,  such
custodian is not authorized to make any deduction from the amount payable to the
holder of such  depository  receipt from the amount received by the custodian in
respect of the Government  Obligation or the specific  payment of interest on or
principal of the Government  Obligation  evidenced by such  depository  receipt.
(Section 101 of the indenture).

      In the event Energy Holdings effects  covenant  defeasance with respect to
any debt securities and any related coupons and such debt securities and coupons
are declared due and payable  because of


                                       74
<PAGE>

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

      If the  trustee  or any  paying  agent is  unable  to apply  any  money in
accordance with the Indenture by reason of any order or judgment of any court or
governmental  authority  enjoining,  restraining or otherwise  prohibiting  such
application, then Energy Holdings' obligations under the indenture and such debt
securities and any related  coupons shall be revived and reinstated as though no
deposit had occurred pursuant to the indenture,  until such time as such trustee
or paying  agent is  permitted  to apply all such money in  accordance  with the
indenture;  provided,  however,  that if Energy  Holdings  makes any  payment of
principal of (or premium, if any) or interest, if any, on any such debt security
or any related coupon following the  reinstatement  of its  obligations,  Energy
Holdings  shall  be  subrogated  to the  rights  of the  holders  of  such  debt
securities  and any related  coupons to receive such payment from the money held
by such trustee or paying agent.

Amendment, Supplement and Waiver

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

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

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

   o  change the manner of calculating the rate of interest;

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

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

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

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

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

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

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

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

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


                                       75
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

      The indenture contains provisions for convening meetings of the holders of
debt  securities  of a series if debt  securities of that series are issuable in
bearer form. (Section 1501 of the indenture) A meeting may be called at any time
by the trustee,  and also, upon request, by Energy Holdings or the


                                       76
<PAGE>

holders of at least 10% in principal  amount of the outstanding  debt securities
of that series, in any such case upon notice given as provided in the Indenture.
(Section 1502 of the indenture) Except for any consent that must be given by the
holder of each debt security,  as described above, any resolution presented at a
meeting (or an adjourned  meeting duly  reconvened) at which a quorum is present
may be adopted by the affirmative vote of the holders of a majority in principal
amount of outstanding debt securities of that series;  provided,  however,  that
any resolution with respect to any request,  demand,  authorization,  direction,
notice,  consent, waiver or other action that may be made, given or taken by the
holders of a specified  percentage  which is less than a majority  in  principal
amount of  outstanding  debt  securities of a series may be adopted at a meeting
(or an adjourned  meeting duly  reconvened)  at which a quorum is present by the
affirmative vote of the holders of such specified percentage in principal amount
of the  outstanding  debt  securities of that series.  Any resolution  passed or
decision  taken at any  meeting of holders of debt  securities  of a series duly
held in  accordance  with the  indenture  will be binding on all holders of debt
securities  of that  series and any related  coupons.  The quorum at any meeting
called to adopt a resolution  will be persons holding or representing a majority
in principal  amount of the outstanding  debt securities of a series;  provided,
however,  that,  if any  action is to be taken at a meeting  with  respect  to a
consent or waiver which may be given by the holders of not less than a specified
percentage in principal  amount of the outstanding  debt securities of a series,
the persons holding or representing the specified percentage in principal amount
of the  outstanding  debt  securities  of that series will  constitute a quorum.
(Section 1504 of the indenture).

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

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

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

Additional Information

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

Reports

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

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

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

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


                                       77
<PAGE>

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

Book-Entry, Delivery and Form

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

      Except as set forth below,  the global notes may be transferred,  in whole
and not in part,  only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the global notes may not be exchanged for notes
in certificated  form except in the limited  circumstances  described below. See
"--Exchange of Book-Entry Notes for Certificated  Notes".  Except in the limited
circumstances  described  below,  owners of  beneficial  interests in the global
notes will not be entitled to receive  physical  delivery of certificated  notes
(as defined below).
      Initially,  the trustee will act as paying agent and registrar.  The notes
may be presented for registration of transfer and exchange at the offices of the
registrar.

Depository Procedures

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

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

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

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


                                       78
<PAGE>

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

      Payments in respect of the principal of, premium,  if any, and interest on
a global note  registered  in the name of DTC or its nominee  will be payable to
DTC in its  capacity as the  registered  holder under the  Indenture.  Under the
terms of the indenture,  Energy  Holdings and the trustee will treat the persons
in whose names the notes,  including  the global  notes,  are  registered as the
owners  thereof for the purpose of receiving  such  payments and for any and all
other purposes whatsoever.  Consequently,  neither Energy Holdings,  the trustee
nor  any  agent  of  Energy  Holdings  or the  trustee  has  or  will  have  any
responsibility  or  liability  for  (i)  any  aspect  of  DTC's  records  or any
participant's or indirect  participant's records relating to or payments made on
account  of  beneficial   ownership   interest  in  the  global  notes,  or  for
maintaining,  supervising or reviewing any of DTC's records or any participant's
or indirect participant's records relating to the beneficial ownership interests
in the  global  notes or (ii) any  other  matter  relating  to the  actions  and
practices of DTC or any of its  participants or indirect  participants.  DTC has
advised Energy Holdings that its current  practice,  upon receipt of any payment
in respect of securities such as the notes  (including  principal and interest),
is to credit the accounts of the relevant  participants  with the payment on the
payment  date,  in amounts  proportionate  to their  respective  holdings in the
principal amount of beneficial interest in the relevant security as shown on the
records of DTC unless DTC has reason to believe it will not  receive  payment on
such payment date. Payments by the participants and the indirect participants to
the  beneficial  owners of notes will be governed by standing  instructions  and
customary  practices and will be the  responsibility  of the participants or the
indirect  participants and will not be the responsibility of DTC, the trustee or
Energy Holdings.  Neither Energy Holdings nor the trustee will be liable for any
delay by DTC or any of its participants in identifying the beneficial  owners of
the notes, and Energy Holdings and the Trustee may conclusively rely on and will
be  protected  in  relying  on  instructions  from  DTC or its  nominee  for all
purposes.

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

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

Exchange of Book-Entry Notes for Certificated Notes

      If (i) DTC is at any time  unwilling,  unable or ineligible to continue as
depository and a successor depository is not appointed by Energy Holdings within
90 days following  notice to Energy Holdings;  (ii) DTC determines,  in its sole
discretion,  not to have  any of the  notes  represented  by one or more  global
notes,  or (iii) an event of default  under the  Indenture  has  occurred and is
continuing,  then Energy  Holdings will issue  individual  notes in certificated
form in exchange for the relevant global notes.  In any such instance,  an owner
of a beneficial  interest in a global note will be entitled to physical delivery
of  individual  notes in  certificated  form of like  tenor and  rank,  equal in
principal  amount  to  such  beneficial  interest  and to  have  such  notes  in
certificated  form  registered in its name. In all cases,  notes in certificated
form delivered in exchange for any global note or beneficial  interests  therein
will be  registered  in the  names,  and issued in any  approved  denominations,
requested by or on behalf of the depositary  (in  accordance  with its customary
procedures).


                                       79
<PAGE>

                    CERTAIN FEDERAL INCOME TAX CONSIDERATIONS

General

      The following is a summary of the material  United States  federal  income
tax consequences resulting from the exchange offer and from the ownership of the
exchange notes. It deals only with exchange notes held as capital assets and not
with  special  classes  of  noteholders,   such  as  dealers  in  securities  or
currencies, life insurance companies, tax exempt entities, and persons that hold
an exchange note in connection with an arrangement  that completely or partially
hedges the exchange note. The discussion is based upon the Internal Revenue Code
of 1986, as amended, and regulations,  rulings and judicial decisions thereunder
as of the date hereof. Such authorities may be repealed,  revoked or modified so
as to produce  federal income tax  consequences  different from those  discussed
below.
      Noteholders  tendering  their original notes or prospective  purchasers of
exchange  notes  should  consult  their own tax advisors  concerning  the United
States  federal  income  tax and any  state or local  income  or  franchise  tax
consequences in their particular  situations and any consequences under the laws
of any other taxing jurisdiction.

Consequences of Tendering Original Notes

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

United States Holders

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

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

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

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

      (4) a trust, if either:

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

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

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

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


                                       80
<PAGE>

      Payments of Interest

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

      Disposition of an Exchange Note

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

      Backup Withholding and Information Reporting

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

Payments to United States Aliens

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

      Under current United States federal income and estate tax law:

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

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

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

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

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

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

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

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

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

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

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


                                       81
<PAGE>

      United States  information  reporting  requirements and backup withholding
tax will not apply to  payments  on an  exchange  note made  outside  the United
States  by us or  any  paying  agent  (acting  in its  capacity  as  such)  to a
noteholder  that is a United States Alien  provided  that a statement  described
in(1)(c)  above has been received and neither we nor our paying agent has actual
knowledge that the payee is not a United States Alien.

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

      (1) is a United States Alien;

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

      (3) is not a controlled  foreign  corporation  as to the United  States (a
person  described in (1), (2) and (3) above being  hereinafter  referred to as a
"foreign controlled person"). Payment of the proceeds of the sale of an exchange
note effected  outside the United States by a foreign  office of any broker that
is not a foreign  controlled  person  will not be subject to backup  withholding
tax,  but will be subject to  information  reporting  requirements  unless  such
broker has  documentary  evidence in its records that the beneficial  owner is a
United  States Alien and certain  other  conditions  are met, or the  beneficial
owner  otherwise  establishes an exemption.  New  regulations  governing  backup
withholding  and  information   reporting  are  generally  scheduled  to  become
effective  for  payments  made  after  December  31,  2000.  Rules  under  these
regulations will have essentially the same  substantive  effect,  but will unify
current certification procedures and forms.

                              PLAN OF DISTRIBUTION

      Each  broker-dealer  that  receives  exchange  notes  for its own  account
pursuant  to the  exchange  offer  must  acknowledge  that  it  will  deliver  a
prospectus meeting the requirements of the Securities Act in connection with any
resale  of  such  exchange  notes.  This  prospectus,  as it may be  amended  or
supplemented  from time to time,  may be used by a  broker-dealer  in connection
with resales of exchange  notes  received in exchange  for original  notes where
such  original  notes were acquired as a result of  market-making  activities or
other trading  activities.  We have agreed that,  for a period not to exceed 180
days after the exchange offer has been completed,  we will make this prospectus,
as amended or  supplemented,  available  to any  broker-dealer  that  reasonably
requests such document for use in connection with any such resale.

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

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


                                       82
<PAGE>

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

                                 LEGAL OPINIONS

      The validity of the notes will be passed upon for Energy Holdings by James
T.  Foran,  Esquire,  Associate  General  Counsel of PSEG or R.  Edwin  Selover,
Esquire, Vice President and General Counsel of PSEG.

                                     EXPERTS

      The  consolidated  balance sheets as of December 31, 1998 and 1997 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, 1998  included in
this  prospectus  have  been  audited  by  Deloitte  & Touche  LLP,  independent
auditors,  as stated in their  report  appearing  herein  and  elsewhere  in the
Registration  Statement,  and are  included in reliance  upon the report of such
firm given upon their authority as experts in accounting and auditing.


                                       83
<PAGE>

                      (This page intentionally left blank)

<PAGE>

                          INDEPENDENT AUDITORS' REPORT




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

      We have  audited  the  accompanying  consolidated  balance  sheets of PSEG
Energy  Holdings Inc. and its  subsidiaries  (the  "Company") as of December 31,
1998 and 1997, 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, 1998. These consolidated  financial statements are the responsibility of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
consolidated  financial  statements  based on our  audits.  We did not audit the
financial  statements  of certain  general  and  limited  partnership  and joint
venture investments of the Company, which are accounted for by use of the equity
method.  The Company's equity investment of $655,107,000 and $697,956,000 in the
general and limited partnerships' and joint ventures' net assets at December 31,
1998 and 1997,  respectively,  and its $88,336,000,  $71,872,000 and $46,046,000
share of such general and limited  partnerships'  and joint ventures' net income
for the  respective  three years in the period  ended  December  31,  1998,  are
included in the accompanying  consolidated  financial statements.  The financial
statements of these  general and limited  partnerships  and joint  ventures were
audited by other  auditors  whose  reports  have been  furnished  to us, and our
opinion,  insofar as it relates to the amounts included for such partnership and
joint venture interests, is based solely on the reports of such auditors.

      We conducted our audits in accordance  with  generally  accepted  auditing
standards. Those standards require that we plan and perform the audits 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,  based on our audits and the  reports of other  auditors,
such consolidated financial statements present fairly, in all material respects,
the  financial  position of the Company at December  31, 1998 and 1997,  and the
results of its  operations and its cash flows for each of the three years in the
period ended December 31, 1998 in conformity with generally accepted  accounting
principles.

Deloitte & Touche LLP

Parsippany, New Jersey
August 16, 1999


                                      F-1
<PAGE>


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

<TABLE>
<CAPTION>
                                                              Nine Months Ended
                                                                 September 30,                    Years Ended December 31,
                                                           -------------------------      ----------------------------------------
                                                             1999            1998           1998            1997           1996
                                                           ---------       ---------      ---------       ---------      ---------
                                                                 (Unaudited)

<S>                                                        <C>             <C>            <C>             <C>            <C>
REVENUES
  Income from partnerships and
    joint ventures .....................................   $ 96,487        $ 91,087       $132,257        $107,566       $ 64,715
  Energy service revenues ..............................    124,520          54,087         74,107          21,071         22,493
  Energy supply revenues ...............................     61,081          57,625         81,905          77,485         67,220
  Income from capital leases ...........................     81,761          51,634         75,801          65,443         44,924
  Investment gains .....................................     30,661           6,936         41,098          46,331         69,103
  Other revenues .......................................     21,813          22,253         34,356          23,694         34,345
                                                           --------        --------       --------        --------       --------
    Total Revenues .....................................    416,323         283,622        439,524         341,590        302,800
                                                           --------        --------       --------        --------       --------

OPERATING EXPENSES
  Cost of energy sales .................................     58,867          56,153         79,058          76,374         65,682
  Operation and maintenance ............................    189,934         120,197        164,230         115,917        102,304
  Depreciation and amortization ........................      5,013           3,637          5,414           4,171          3,183
                                                           --------        --------       --------        --------       --------
    Total Operating Expenses ...........................    253,814         179,987        248,702         196,462        171,169
                                                           --------        --------       --------        --------       --------

OPERATING INCOME .......................................    162,509         103,635        190,822         145,128        131,631
OTHER INCOME (LOSS) ....................................     28,485           6,134         (1,275)            685             --
INTEREST EXPENSE-NET ...................................     65,517          67,930         91,987          72,363         58,261
                                                           --------        --------       --------        --------       --------
INCOME BEFORE INCOME TAXES .............................    125,477          41,839         97,560          73,450         73,370
                                                           --------        --------       --------        --------       --------
INCOME TAXES
  Current ..............................................      5,465          29,214         (1,480)       (103,636)      (118,233)
  Deferred .............................................     39,648         (11,838)        32,760         130,540        145,890
  Investment and energy tax
    credits-net ........................................       (686)           (969)        (1,120)         (1,088)        (2,689)
                                                           --------        --------       --------        --------       --------
    Total Income Taxes .................................     44,427          16,407         30,160          25,816         24,968
MINORITY INTERESTS .....................................       (603)         (1,529)        (1,804)           (239)           (22)
                                                           --------        --------       --------        --------       --------
INCOME FROM CONTINUING
  OPERATIONS ...........................................     81,653          26,961         69,204          47,873         48,424
                                                           --------        --------       --------        --------       --------
DISCONTINUED OPERATIONS
  Income from operations ...............................         --              --             --              --         10,746
  Gain on sale .........................................         --              --             --              --         13,492
                                                           --------        --------       --------        --------       --------
    Total Income From Discontinued
      Operations, Net of Income Taxes ..................         --              --             --              --         24,238
                                                           --------        --------       --------        --------       --------
NET INCOME .............................................     81,653          26,961         69,204          47,873         72,662
  Preferred Stock Dividends ............................     18,755          11,226         17,478             598             --
                                                           --------        --------       --------        --------       --------
EARNINGS AVAILABLE TO
  COMMON STOCKHOLDER ...................................   $ 62,898        $ 15,735       $ 51,726        $ 47,275       $ 72,662
                                                           ========        ========       ========        ========       ========
</TABLE>


See Notes to Consolidated Financial Statements.


                                      F-2
<PAGE>

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

<TABLE>
<CAPTION>

                                                                             September 30,                  December 31,
                                                                             -------------        --------------------------------
                                                                                 1999                  1998                1997
                                                                             -------------        -----------          -----------
                                                                             (Unaudited)

<S>                                                                           <C>                 <C>                  <C>
CURRENT ASSETS
  Cash and temporary cash investments ...................................     $   13,244          $    8,961           $   11,182
  Accounts Receivable:
    Trade (less allowance for doubtful accounts of
      $5,816, $6,091 and $2,685, respectively) ..........................        104,912              47,923               50,457
    Other ...............................................................         21,451              13,094               33,760
    Affiliated companies ................................................             --               7,557                   --
  Notes receivable ......................................................         19,788                  --                3,277
  Inventory .............................................................          2,746               1,656                   --
  Prepayments ...........................................................          4,622               8,555                5,297
                                                                              ----------          ----------           ----------
      Total Current Assets ..............................................        166,763              87,746              103,973
                                                                              ----------          ----------           ----------

PROPERTY AND EQUIPMENT
  Real estate (net of valuation allowances of
    $10,318, $10,318 and $11,079, respectively) .........................         54,039              53,844               60,531
  Property and equipment ................................................         41,956              25,753               13,944
  Accumulated depreciation and amortization .............................        (32,383)            (20,459)             (13,251)
                                                                              ----------          ----------           ----------
      Property and Equipment - net ......................................         63,612              59,138               61,224
                                                                              ----------          ----------           ----------

INVESTMENTS
  Capital leases (net of valuation allowances of
    $6,973, $6,973 and $4,000, respectively) ............................      1,629,001           1,388,871            1,147,326
  Corporate joint ventures ..............................................      1,366,652             874,286              884,898
  Partnership interests .................................................        522,766             602,710              680,652
  Other investments .....................................................         77,561              97,948              117,588
                                                                              ----------          ----------           ----------
      Total Investments .................................................      3,595,980           2,963,815            2,830,464
                                                                              ----------          ----------           ----------
OTHER ASSETS ............................................................         52,105              57,831               27,295
                                                                              ----------          ----------           ----------
      TOTAL ASSETS ......................................................     $3,878,460          $3,168,530           $3,022,956
                                                                              ==========          ==========           ==========
</TABLE>


See Notes to Consolidated Financial Statements.


                                      F-3
<PAGE>

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


<TABLE>
<CAPTION>

                                                                             September 30,                  December 31,
                                                                            -------------         --------------------------------
                                                                                  1999                1998                 1997
                                                                            -------------         -----------          -----------
                                                                              (Unaudited)

<S>                                                                         <C>                   <C>                  <C>
CURRENT LIABILITIES
  Accounts Payable:
    Trade ..............................................................      $   31,299          $   26,879           $   28,493
    Other ..............................................................          87,004              50,044               51,455
    Affiliated companies ...............................................          15,156                  --               26,974
  Notes payable ........................................................         481,000             206,000              306,400
  Other current liabilities ............................................          14,362               3,886                  598
  Current portion of long-term debt ....................................         116,639             317,725              210,459
                                                                              ----------          ----------           ----------
      Total Current Liabilities ........................................         745,460             604,534              624,379
                                                                              ----------          ----------           ----------

LONG-TERM DEBT .........................................................         873,905             443,948              758,244
                                                                              ----------          ----------           ----------

DEFERRED TAXES AND OTHER LIABILITIES
  Deferred income taxes ................................................         869,315             846,302              818,843
  Deferred investment and energy tax credits ...........................           9,088               9,394                9,656
  Other long-term liabilities ..........................................          24,510              20,685               21,955
                                                                              ----------          ----------           ----------
      Total Deferred Taxes and Other Liabilities .......................         902,913             876,381              850,454
                                                                              ----------          ----------           ----------

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

MINORITY INTERESTS .....................................................           1,724               1,338                4,980
                                                                              ----------          ----------           ----------

STOCKHOLDER'S EQUITY
  Common stock .........................................................             100                 100                  100
  Preferred stock ......................................................         509,200             509,200               75,000
  Additional paid-in capital ...........................................         789,608             579,070              579,070
  Retained earnings ....................................................         258,030             196,974              145,248
  Accumulated other comprehensive loss .................................        (202,480)            (43,015)             (14,519)
                                                                              ----------          ----------           ----------
      Total Stockholder's Equity .......................................       1,354,458           1,242,329              784,899
                                                                              ----------          ----------           ----------
TOTAL LIABILITIES AND
  STOCKHOLDER'S EQUITY .................................................      $3,878,460          $3,168,530           $3,022,956
                                                                              ==========          ==========           ==========
</TABLE>


See Notes to Consolidated Financial Statements.


                                      F-4
<PAGE>

                           PSEG ENERGY HOLDINGS INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                             (Thousands of Dollars)


<TABLE>
<CAPTION>

                                                                    Nine Months Ended
                                                                       September 30,               Years Ended December 31,
                                                                 ------------------------    -------------------------------------
                                                                    1999          1998          1998         1997          1996
                                                                 ----------    ----------    ----------   ----------    ----------
                                                                       (Unaudited)

<S>                                                              <C>           <C>           <C>          <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income ..................................................  $  81,653     $  26,961     $  69,204    $  47,873     $  48,424
  Adjustments to reconcile net income to net cash
   provided by operating activities:
    Depreciation and amortization .............................     12,876        24,910        28,107       13,782        11,532
    Deferred income taxes (other than leases) .................    (17,442)      (11,078)       (9,588)       6,204         7,642
    (Payments of) proceeds from leasing activities ............     (2,310)      (39,215)      (19,726)      68,061       107,381
    Investment distributions ..................................    124,180        78,827        88,592       82,028       134,483
    Equity income from partnerships ...........................    (50,335)      (55,648)      (43,198)     (33,290)       (2,019)
    Gains on investments ......................................    (53,106)      (10,593)      (44,867)     (29,861)      (61,225)
    Other .....................................................       (758)       (5,010)          736         (587)       (4,427)
    (Increase) decrease in current assets .....................    (76,088)        5,977        13,993      (27,718)       (4,115)
    Increase (decrease) in current liabilities ................     85,154        27,759       (33,377)      10,565        (5,265)
                                                                 ---------     ---------     ---------    ---------     ---------
    Net cash provided by continuing operations ................    103,824        42,890        49,876      137,057       232,411
                                                                 ---------     ---------     ---------    ---------     ---------
    Net cash provided by discontinued operations ..............         --            --            --           --        77,860
                                                                 ---------     ---------     ---------    ---------     ---------
  Net Cash Provided By Operating Activities ...................    103,824        42,890        49,876      137,057       310,271
                                                                 ---------     ---------     ---------    ---------     ---------
CASH FLOWS FROM INVESTING ACTIVITIES
    Increase in partnerships and joint ventures ...............   (709,439)       (1,221)      (82,779)    (849,779)      (66,606)
    Investments in capital leases .............................   (235,891)     (219,799)     (253,417)    (156,006)      (49,816)
    Proceeds from sales of capital leases .....................     76,748        66,163        71,253       22,883            --
    (Additions) reductions to property and
      equipment ...............................................     (5,209)       (6,114)       (9,865)      (6,166)       10,559
    Proceeds from sales of real estate and
      equity investments ......................................     71,431       145,062       145,449          269        12,142
    Reductions of (Additions to) deferred project costs .......     15,189       (10,827)      (13,641)      (7,028)      (10,454)
    Change in net assets-discontinued operations ..............         --            --            --           --       (51,568)
    Proceeds from sale of discontinued operations .............         --            --            --           --       704,252
    Return of capital from partnerships .......................     26,744         5,183         5,183          325        31,735
    Additions to other assets .................................    (22,697)      (11,597)      (19,413)      (2,922)      (19,279)
                                                                 ---------     ---------     ---------    ---------     ---------
  Net Cash (Used In) Provided By Investing
    Activities ................................................   (783,124)      (33,150)     (157,230)    (998,424)      560,965
                                                                 ---------     ---------     ---------    ---------     ---------
CASH FLOWS FROM FINANCING ACTIVITIES
    Proceeds from additional paid-in capital ..................    199,700            --            --           --        20,000
    Proceeds from sale of preferred stock .....................         --       434,200       509,200       75,000            --
    Redemption of preferred stock .............................         --            --       (75,000)          --            --
    Dividends paid ............................................    (20,597)      (11,824)      (18,076)          --      (369,000)
    Repayment of borrowings ...................................   (180,000)     (434,200)     (310,991)    (124,500)     (379,440)
    Proceeds from borrowings ..................................    687,627            --            --      774,013         2,540
    Other .....................................................     (3,147)       (3,366)           --       (1,681)         (542)
                                                                 ---------     ---------     ---------    ---------     ---------
  Net Cash Provided By (Used In) Financing
    Activities ................................................    683,583       (15,190)      105,133      722,832      (726,442)
                                                                 ---------     ---------     ---------    ---------     ---------
Net Increase (Decrease) In Cash And Temporary
  Cash Investments ............................................      4,283        (5,450)       (2,221)    (138,535)      144,794
                                                                 ---------     ---------     ---------    ---------     ---------
Cash And Temporary Cash Investments,
 Beginning Of Year ............................................      8,961        11,182        11,182      149,717         4,923
                                                                 ---------     ---------     ---------    ---------     ---------
Cash And Temporary Cash Investments,
 End Of Year ..................................................  $  13,244     $   5,732     $   8,961    $  11,182     $ 149,717
                                                                 =========     =========     =========    =========     =========
SUPPLEMENTAL DISCLOSURE OF
 CASH FLOW INFORMATION
Cash paid (received) for:
  Interest expense ............................................   $ 34,364      $ 44,998      $ 83,334    $  59,206     $  72,866
                                                                  ========      ========      ========    =========     =========
  Income taxes from continuing operations .....................   $(12,173)     $  6,528      $  7,396    $(129,310)    $ (48,540)
  Income taxes from discontinued operations ...................         --            --            --           --     $  (1,573)
                                                                  ========      ========      ========    =========     =========
</TABLE>

See Notes to Consolidated Financial Statements.


                                      F-5
<PAGE>

                           PSEG ENERGY HOLDINGS INC.
                CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY

                             (Thousands of Dollars)

<TABLE>
<CAPTION>

                                                                                                       Accumulated
                                                                            Additional                    Other
                                                     Common    Preferred      Paid-in      Retained   Comprehensive
                                                      Stock      Stock        Capital      Earnings      Income          Total
                                                     -------   ---------    ----------     --------   -------------    ----------

<S>                                                  <C>       <C>          <C>            <C>        <C>              <C>
Balance as of January 1, 1997 .....................    $100     $     --      $579,070      $ 97,973     $      --     $  677,143
                                                       ----     --------      --------      --------     ---------     ----------
  Net income ......................................      --           --            --        47,873            --         47,873
  Other comprehensive income,
    net of tax:
    Foreign currency translation
      adjustment (net of tax
      of $1,613) ..................................      --           --            --            --       (14,519)       (14,519)
                                                       ----     --------      --------      --------     ---------     ----------
  Comprehensive income (loss) .....................      --           --            --        47,873       (14,519)        33,354
                                                       ----     --------      --------      --------     ---------     ----------
  Issuance of cumulative
    preferred stock ...............................      --       75,000            --            --            --         75,000
  Preferred stock dividends .......................      --           --            --          (598)           --           (598)
                                                       ----     --------      --------      --------     ---------     ----------
Balance as of December 31, 1997 ...................     100       75,000       579,070       145,248       (14,519)       784,899
                                                       ----     --------      --------      --------     ---------     ----------

  Net income ......................................      --           --            --        69,204            --         69,204
  Other comprehensive income,
    net of tax:
    Foreign currency translation
      adjustment (net of tax
      of $3,166) ..................................      --           --            --            --       (28,496)       (28,496)
                                                       ----     --------      --------      --------     ---------     ----------
  Comprehensive income (loss) .....................      --           --            --        69,204       (28,496)        40,708
                                                       ----     --------      --------      --------     ---------     ----------
  Issuance of cumulative
    preferred stock ...............................      --      509,200            --            --            --        509,200
  Redemption of preferred stock ...................      --      (75,000)           --            --            --        (75,000)
  Preferred stock dividends .......................      --           --            --       (17,478)           --        (17,478)
                                                       ----     --------      --------      --------     ---------     ----------
Balance as of December 31, 1998 ...................     100      509,200       579,070       196,974       (43,015)     1,242,329
                                                       ----     --------      --------      --------     ---------     ----------

<CAPTION>

                                                                                      (UNAUDITED)
                                                       --------------------------------------------------------------------------

<S>                                                    <C>      <C>           <C>           <C>          <C>           <C>
Balance as of January 1, 1999 .....................     100      509,200       579,070       196,974       (43,015)     1,242,329
                                                       ----     --------      --------      --------     ---------     ----------
  Net income ......................................      --           --            --        81,653            --         81,653
  Other comprehensive income,
    net of tax:
    Foreign currency translation
      adjustment (net of tax
      of $17,718) .................................      --           --            --            --      (159,465)      (159,465)
                                                       ----     --------      --------      --------     ---------     ----------
  Comprehensive income (loss) .....................      --           --            --        81,653      (159,465)       (77,812)
                                                       ----     --------      --------      --------     ---------     ----------
  Capital contribution ............................      --           --       210,538            --            --        210,538
  Preferred stock dividends                                                                  (18,755)                     (18,755)
  Common stock dividends ..........................      --           --            --       ( 1,842)           --        ( 1,842)
                                                       ----     --------      --------      --------     ---------     ----------
Balance as of September 30, 1999 ..................    $100     $509,200      $789,608      $258,030     $(202,480)    $1,354,458
                                                       ====     ========      ========      ========     =========     ==========
</TABLE>


See Notes to Consolidated Financial Statements.


                                      F-6
<PAGE>

                           PSEG ENERGY HOLDINGS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1.  ORGANIZATION

     PSEG  Energy  Holdings  Inc.   (Energy   Holdings),   formerly   Enterprise
Diversified Holdings Incorporated,  a wholly-owned  subsidiary of Public Service
Enterprise  Group  Incorporated  (PSEG),  is the  parent  of  PSEG  Global  Inc.
(Global), formerly Community Energy Alternatives Incorporated, 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),   formerly  Public  Service  Resources  Corporation,   which  makes
primarily passive 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),    formerly   Energis   Resources
Incorporated,  which provides energy and a variety of energy related services to
industrial and commercial  customers;  Enterprise Group Development  Corporation
(EGDC), a non-residential real estate development and investment business;  PSEG
Capital  Corporation  (PSEG  Capital),  which serves as a financing  vehicle for
Energy Holdings' subsidiaries  (excluding Energy Technologies and EGDC), borrows
on the basis of a  minimum  net  worth  maintenance  agreement  with  PSEG;  and
Enterprise Capital Funding  Corporation  (Funding),  which serves as a financing
vehicle for Resources, Global and their subsidiaries,  borrowing on their behalf
by issuing debt which is  guaranteed  by Energy  Holdings,  as well as investing
their short-term funds. EGDC has been conducting a controlled exit from the real
estate business since 1993.


NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Consolidation

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

     Cash and Temporary Cash Investments

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

     Property and Equipment

     The  estimated  useful lives for purposes of computing  depreciation,  on a
straight-line  basis are from 3 to 12 years for  furniture  and equipment and 13
years for buildings.  Equipment used by Public  Service  Conservation  Resources
Corporation  (PSCRC) is depreciated on a straight line basis over 10 to 15 years
and is  included  in Cost of  Energy  Sales in the  Consolidated  Statements  of
Income. Maintenance and repairs are expensed when incurred.

     Security Investments

     Resources  carries  its  security  investments  and  interests  in  limited
partnerships  investing in  securities  at fair value.  Fair value is determined
based upon a review of the  underlying  investment  data performed in accordance
with  established   guidelines.   Security  investments  are  presented  on  the
consolidated   balance  sheets  as  non-current  assets  since  Energy  Holdings
presently intends to maintain such funds as a long-term investment vehicle.


     Investments in Partnerships and Corporate Joint Ventures

     Energy  Holdings'  investments in projects and  partnerships  are primarily
accounted for under the equity method of  accounting.  For  investments in which
significant  influence does not exist, the cost method of accounting is applied.
Interest is capitalized on investments in projects  engaged in the  construction
of qualifying assets.  The capitalized  interest is amortized over the operating
lives of the projects upon the date of commercial operation.


                                      F-7
<PAGE>

                           PSEG ENERGY HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


     Income Taxes

     Energy Holdings and its 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.

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

     Use of Derivative Financial Instruments

     The  market  risk  inherent  in  Energy  Holdings'  market  risk  sensitive
instruments  and  positions  relate to  potential  losses  arising  from adverse
changes in interest rates and foreign currency exchange rates.  Energy Holdings'
policy is to use derivatives to manage these risks  consistent with its business
plans and prudent practices.  PSEG has a Risk Management  Committee comprised of
executive  officers  and  an  independent  risk  oversight  function  to  ensure
compliance with corporate policies and prudent risk management  practices by all
of the PSEG subsidiaries, including Energy Holdings.

     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.

     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).

     Transaction  gains and losses that arise from exchange rate fluctuations on
transactions  denominated  in a  currency  other than the  functional  currency,
except those  transactions  which operate as a hedge of an identifiable  foreign
currency commitment,  a hedge of a foreign currency investment


                                      F-8
<PAGE>

                           PSEG ENERGY HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


position,  or when the entities involved in the transactions are consolidated or
accounted for by the equity method, are included in the results of operations as
incurred.

     Revenue and Cost Recognition on Contracts

     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. 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.

     Gas and Electric Purchase Imbalances

     Energy Technologies may receive different quantities of gas and electricity
from suppliers than the volumes sold to its customers. This results in imbalance
receivables  and payables to the local  distribution  company which delivers the
gas and electricity to the customer.  Such imbalances are valued at the lower of
cost or  market  and  accounted  for on the  first-in  first-out  basis  and are
included in accounts  receivable-other or accounts  payable-other on the balance
sheets.

     Deferred Transportation Costs

     Energy  Technologies  enters into  long-term  fixed price natural gas sales
contracts.   Energy  Technologies  also  enters  into  long-term  transportation
agreements as required to serve such contracts. The costs of transportation vary
based upon  seasonality.  In order to properly  match  revenues  with  expenses,
Energy  Technologies  records  transportation  costs  related to the fixed price
contracts   based  on  average   unit   transportation   costs.   As  a  result,
transportation  costs of  $124,000  and  $1,110,000  have  been  deferred  as of
December 31, 1998 and 1997, respectively.

     Deferred Project Costs

     Development costs are deferred and ultimately capitalized as a component of
Global's  investment account upon initial capital  contributions to the project.
These costs are amortized on a straight-line basis over the lives of the related
project  assets to the  extent  not  recovered  from  Global's  partners  or the
projects' external financing proceeds. Such amortization commences upon the date
of commercial operation.  Development costs related to unsuccessful projects are
charged to expense.

     Deferred Debt Issuance Costs

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

     Use of Estimates

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


                                      F-9
<PAGE>

                           PSEG ENERGY HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 3.  SECURITY INVESTMENTS

      Security  investments  of $25,146,000  and  $27,755,000 as of December 31,
1998 and 1997, respectively,  represent the fair value of such investments. Fair
value is  determined  based  upon a review  of the  underlying  investment  data
performed in accordance with established guidelines.

NOTE 4.  LEASES

     Energy  Holdings'  investments  in capital  lease  agreements  include  the
following:

<TABLE>
<CAPTION>

                                                                    (Unaudited)
                                                                    September 30,                       December 31,
                                                                                          ---------------------------------------
                                                                        1999                    1998                    1997
                                                                   --------------         --------------           --------------

<S>                                                                <C>                     <C>                     <C>
Leveraged leases ................................................  $1,635,974,000          $1,395,844,000          $1,146,789,000
Direct finance leases ...........................................              --                      --               2,348,000
Tax benefit transfers ...........................................              --                      --               2,189,000
                                                                   --------------          --------------          --------------
                                                                   $1,635,974,000          $1,395,844,000          $1,151,326,000
                                                                   --------------          --------------          --------------
</TABLE>

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

<TABLE>
<CAPTION>

                                                                    (Unaudited)
                                                                    September 30,                        December 31,
                                                                                          ---------------------------------------
                                                                        1999                    1998                    1997
                                                                    -------------         ---------------------------------------

<S>                                                                <C>                     <C>                     <C>
Lease rents receivable ..........................................  $2,417,055,000          $1,924,212,000          $1,501,555,000
Estimated residual value of leased assets .......................     592,234,000             665,039,000             635,274,000
                                                                   --------------          --------------          --------------
                                                                    3,009,289,000           2,589,251,000           2,136,829,000
Less - unearned and deferred income .............................  (1,373,315,000)          1,193,407,000             990,040,000
                                                                   --------------          --------------          --------------
Investment in leveraged leases ..................................   1,635,974,000           1,395,844,000           1,146,789,000
Less - valuation allowances .....................................       6,973,000               6,973,000               4,000,000
Less - deferred taxes arising from leveraged
  leases ........................................................     806,832,000             731,109,000             670,110,000
                                                                   --------------          --------------          --------------
Net investment in leveraged leases ..............................  $  822,169,000          $  657,762,000          $  472,679,000
                                                                   ==============          ==============          ==============
</TABLE>

     Energy Holdings leases property and equipment,  through  leveraged  leases,
with  terms  ranging  from 8 to 45 years.  The types of  property  placed  under
leveraged leases consisted of:

<TABLE>
<CAPTION>

                                                                                 (Unaudited)               December 31,
                                                                                 September 30,         ----------------------
                                                                                     1999              1998           1997
                                                                                 -------------         ----        ----------
<S>                                                                              <C>                   <C>         <C>
       Energy-related .........................................................        59%              64%              52%
       Aircraft ...............................................................        10%              18%              21%
       Real Estate ............................................................        10%              12%              15%
       Commuter rail cars .....................................................         4%               5%               7%
       Industrial .............................................................         1%               1%               5%
</TABLE>

     The 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.

NOTE 5.  INVESTMENTS IN PARTNERSHIPS AND CORPORATE JOINT VENTURES

     Resources

     Resources has limited  partnership  investments in securities,  an ethylene
production  facility,  a clean  air  facility,  natural  gas  storage  and solar
electric generating systems. Resources' total investment in limited partnerships
was  $291,662,000  (unaudited),  $383,284,000  and $407,166,000 at September 30,
1999, December 31, 1998 and 1997, respectively.


                                      F-10
<PAGE>

                           PSEG ENERGY HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


     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 diversified  geographically and  technologically  and are generally financed
through debt that is non-recourse to Global. 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 or FUCOs are not restricted to a 50%
investment  limitation.  Global's  share of income  and cash  flow  distribution
percentages  currently range from 4.78% to 50%. Interest is earned on loans made
to various  projects.  Such loans earned rates of interest  ranging from 7.5% to
15% during 1998.

     During  1998,  Global  expanded  operations  in South  America,  the  Asian
sub-continent and Asia. Global's 1998 investment activities included:

     o Acquiring a 30% equity  interest in an  Argentine  electric  distribution
company,  serving  customers in the  northeast  corner of the Province of Buenos
Aires for approximately $60,000,000.

     o  Acquiring  a 20% equity  interest  of a  330-megawatt  power plant to be
constructed in India,  for which Global will be the  operations and  maintenance
contractor.   Global's  total   investment  is  expected  to  be   approximately
$32,000,000,  including  contingencies,  of which  $14,000,000  was funded as of
December 31, 1998.

     o  Exercising  a put  option  related  to its  50%  interest  in a  natural
gas-fired   generating   station  in  Colombia  for  proceeds  of  approximately
$55,000,000.  In  addition,  Global  sold  its  50%  interest  in  two  domestic
cogeneration  plants and its 5% interest in another domestic  cogeneration plant
for aggregate proceeds of approximately  $82,000,000.  The aggregate gain on the
disposition of these investments was $1,948,000.

     As of December 31, 1998,  Global's portfolio consisted of investments in 25
cogeneration or independent power projects  (including four under  construction)
which range in gross  production  capacities  from 15 to 650 MWs of electricity,
and four  electric  distribution  ventures.  As of  December  31, 1998 and 1997,
Global's net investment and share of project MWs by region were as follows:

<TABLE>
<CAPTION>

                                                                      1998             MW                  1997              MW
                                                                --------------         --            --------------          --

<S>                                                             <C>                   <C>            <C>                    <C>
Generation
North America ...............................................   $  185,203,000        367            $  239,645,000         448
Latin America ...............................................       20,914,000        128                84,121,000         236
Asia Pacific ................................................       79,380,000        149                80,083,000         124
India .......................................................       14,038,000         66                        --          --
Distribution
Latin America ...............................................      764,733,000        N/A               720,694,000         N/A
                                                               ---------------        ---           ---------------         ---
Total Investment ............................................   $1,064,268,000        710            $1,124,543,000         808
</TABLE>


     Investments in net assets of affiliated  companies  accounted for under the
equity method of accounting by Global  amounted to  $1,557,448,000  (unaudited),
$1,058,688,000 and  $1,118,642,000 at September 30, 1999,  December 31, 1998 and
1997, respectively.


                                      F-11
<PAGE>

                           PSEG ENERGY HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


     Summarized  results of  operations  and  financial  position of 100% of all
affiliates in which Global uses the equity  method of  accounting  are presented
below:

<TABLE>
<CAPTION>

                                                                         Foreign                 Domestic                 Total
                                                                        ---------          ----------------------      ----------
                                                                                           (Thousands of Dollars)

<S>                                                                     <C>                <C>                         <C>
December 31, 1998
Condensed Income Statement Information
Revenues .........................................................     $  959,691              $  440,485              $1,400,176
Net Income .......................................................        172,587                 134,679                 307,266

Condensed Balance Sheet Information
Property, Plant & Equipment ......................................      1,779,120                 701,878               2,480,998
Other Assets .....................................................      1,571,659                 241,265               1,812,924
Long-Term Debt (*) ...............................................        347,252                 538,803                 886,055
Other Liabilities ................................................        789,171                  46,944                 836,115
Equity ...........................................................      2,214,356                 357,396               2,571,752

December 31, 1997
Condensed Income Statement Information
Revenues .........................................................     $  508,907              $  637,646              $1,146,553
Net Income .......................................................         69,739                 145,112                 214,851

Condensed Balance Sheet Information
Property, Plant & Equipment ......................................      1,480,675               1,182,569               2,663,244
Other Assets .....................................................      1,636,996                 335,569               1,972,565
Long-Term Debt (*) ...............................................        278,405                 977,738               1,256,143
Other Liabilities ................................................        395,023                  96,658                 491,681
Equity ...........................................................      2,444,243              $  443,742               2,887,985
</TABLE>

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

--------------------------------------------------------------------------------
     Global's investments in Rio Grande Energia (RGE), Empresa  Distribuidora de
Energia Norte S.A. (EDEN), Empresa Distribuidora de Energia Sur S.A. (EDES), GWF
Power Systems Company Inc., GWF Power Systems,  L.P. and Hanford L.P.  comprised
77% and 73% of Global's  total  investment  balance as of December  31, 1998 and
1997, respectively.


                                      F-12
<PAGE>

                           PSEG ENERGY HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


     Summarized  results of operations  and financial  position of 100% of these
companies are presented below:

<TABLE>
<CAPTION>

                                                                         %
                                                                     Ownership                  1998                    1997
                                                                     ---------              -------------            -----------
                                                                                       (Thousands of Dollars)

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

FOREIGN
RGE - Brazil (A) .................................................      31%
Condensed Income Statement Information
Revenues .........................................................                          $  443,626              $  204,008
Net Income .......................................................                             109,619                  34,205

Condensed Balance Sheet Information
Property, Plant & Equipment ......................................                             815,371                 817,387
Other Assets (B) .................................................                           1,001,251               1,123,347
Long-Term Debt (C) ...............................................                              87,265                  98,832
Other Liabilities ................................................                             589,504                 274,452
Equity ...........................................................                           1,139,853               1,567,450

EDEN/EDES (Combined) - Argentina (D) .............................      30%
Condensed Income Statement Information
Revenues .........................................................                          $  285,018              $  166,596
Net Income .......................................................                              35,927                  15,985

Condensed Balance Sheet Information
Property, Plant & Equipment ......................................                             431,415                 383,971
Other Assets (B) .................................................                             355,662                 348,950
Long-Term Debt (C) ...............................................                             101,428                  98,185
Other Liabilities ................................................                              86,608                  53,688
Equity ...........................................................                             599,041                 581,048

DOMESTIC
GWF Power Systems Company Inc. ...................................      50%
Condensed Income Statement Information
Revenues .........................................................                          $    1,941              $    1,868
Net Income .......................................................                               1,026                   1,219

Condensed Balance Sheet Information
Property, Plant & Equipment ......................................                                 261                      74
Other Assets .....................................................                              18,499                  19,404
Other Liabilities ................................................                               4,799                   4,843
Equity ...........................................................                              13,961                  14,635

GWF Power Systems, L.P. ..........................................      49%
Condensed Income Statement Information
Revenues .........................................................                          $  118,796              $  118,477
Net Income .......................................................                              64,386                  57,827

Condensed Balance Sheet Information
Property, Plant & Equipment ......................................                             211,543                 219,254
Other Assets .....................................................                              56,308                  54,369
Long-Term Debt (C) ...............................................                              75,847                 115,848
Other Liabilities ................................................                               4,951                   5,507
Equity ...........................................................                             187,053                 152,268
</TABLE>


                                      F-13
<PAGE>


                           PSEG ENERGY HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

<TABLE>
<CAPTION>

                                                                         %
                                                                     Ownership                  1998                     1997
                                                                     ---------               -----------              ----------
                                                                                       (Thousands of Dollars)

<S>                                                                  <C>               <C>                            <C>
Investments (Continued)

Hanford L.P. .....................................................      49%
Condensed Income Statement Information
Revenues .........................................................                            $ 29,628                $ 30,159
Net Income .......................................................                              12,398                  12,963


Condensed Balance Sheet Information
Property, Plant & Equipment ......................................                              56,769                  60,480
Other Assets .....................................................                              13,808                  15,003
Long-Term Debt (C) ...............................................                              15,691                  23,000
Other Liabilities ................................................                                 872                   1,067
Equity ...........................................................                              54,014                  51,416
</TABLE>

(A)  The 1997 results of  operations  of RGE  represent the period from July 28,
     1997 (the date of incorporation) through December 31, 1997. Global acquired
     its interest in RGE in October 1997, effective August 11, 1997.

(B)  Other Assets is primarily goodwill.

(C)  Long-Term Debt is non-recourse to Global and Energy Holdings.

(D)  The 1997  results of  operations  of  EDEN/EDES  represent  the period from
     February 17, 1997 (the date of  incorporation)  through  December 31, 1997.
     Global acquired its interest in EDEN/EDES in May 1997.

     EGDC

     EGDC has partnership investments in developed commercial real estate and in
land held for development.


NOTE 6.  FOREIGN OPERATIONS

     As  of  September  30,  1999,  Global  has   approximately   $1,383,661,000
(unaudited),  including deferred project costs, of international  investments in
projects  that  generate or distribute  energy  primarily in Brazil,  Argentina,
Chile,  Peru and China.  Global is expected  to  continue to make  international
investments.  Where  possible,  Global  structures its investments to manage the
risk associated with project development, including foreign currency devaluation
and fluctuations.

     Net foreign currency  devaluation,  caused primarily by the Brazilian Real,
have reduced Stockholder's Equity by $202,480,000 (unaudited) and $43,015,000 as
of September  30, 1999 and December 31,  1998,  respectively  (see  Consolidated
Statements of Stockholder's Equity).

     In January  1999,  Brazil  abandoned its managed  devaluation  strategy and
allowed the Real to float  against other  currencies.  As of September 30, 1999,
the Real has devalued  approximately  37% against the United States Dollar since
December 31, 1998. For the nine months ended  September 30, 1999 the devaluation
has  resulted in a charge of  $146,954,000  (unaudited)  to other  comprehensive
income,  a separate  component of Stockholder's  Equity.  Energy Holdings cannot
predict to what extent,  if any,  further  devaluation may occur, and therefore,
cannot  predict the impact of  potential  devaluation  of  currencies  on Energy
Holdings' results of operations, financial condition and net cash flows.


                                      F-14
<PAGE>

                           PSEG ENERGY HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


     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>

                                       (Unaudited)
                                       September 30,                              December 31,
                                                                   -------------------------------------------
                                           1999             %           1998            %             1997          %
                                      --------------       ---     --------------      ---      --------------     ---
<S>                                   <C>                  <C>     <C>                 <C>      <C>                <C>
Income from capital leases .........  $   63,492,000               $   58,518,000               $   33,943,000
Income from joint ventures .........      33,559,000                   46,617,000                   13,949,000
Interest and dividends .............         305,000                      411,000                      404,000
Operator/Management fees ...........       5,959,000                    3,676,000                    2,820,000
                                      --------------               --------------               --------------
Total foreign revenues .............  $  103,315,000        25%    $  109,222,000       25%     $   51,116,000      15%
                                      --------------               --------------               --------------
Foreign assets (A) .................  $2,323,521,000        60%    $1,602,790,000       51%     $1,327,828,000      44%
                                      ==============               ==============               ==============
</TABLE>


(A)  Amount  is  net of  pre-tax  foreign  currency  translation  adjustment  of
     $224,298,000  (unaudited),  $47,794,000 and $16,132,000 as of September 30,
     1999, December 31, 1998 and 1997, respectively.

     IPE Energia (IPE), a subsidiary of Global, whose functional currency is the
United States Dollar,  has  non-recourse  debt of  $105,706,000  (unaudited) and
$122,834,000 as of September 30, 1999 and December 31, 1998,  respectively  (see
Note 9. Long-Term Debt),  denominated in Brazilian Reals,  which is indexed to a
basket of currencies  including United States Dollars.  As a result, the debt is
subject to foreign  currency  exchange  rate risk due to the effect of  exchange
rate movements between the indexed foreign currencies and the Brazilian Real and
between the Brazilian Real and the United States  Dollar.  Exchange rate changes
ultimately  impact the debt level  outstanding in the  denominated  currency and
result in foreign currency  transaction  gains or losses,  which are included in
net income.  The net foreign  currency  transaction  gains (losses) for the nine
months ended  September 30, 1999 and the years ended  December 31, 1998 and 1997
were $2,373,000 (unaudited),  $(3,031,000) and $685,000,  respectively,  and are
recorded in Other Income (Loss) in the Consolidated Statements of Income.


NOTE 7.  INCOME TAXES

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

<TABLE>
<CAPTION>

                                                                                                 1998                    1997
                                                                                             ------------            ------------

<S>                                                                                          <C>                     <C>
Federal income tax expense at statutory rate .............................................   $ 34,146,000            $ 25,708,000
State income taxes, net of Federal income tax benefit ....................................      4,470,000               3,110,000
Amortization of investment and energy tax credits ........................................     (1,105,000)             (1,251,000)
Dividends received deduction .............................................................       (755,000)               (651,000)
Tight sands credit .......................................................................     (3,529,000)                     --
Tax effect of tax benefit transfer expense ...............................................        878,000                 505,000
Tax effects attributable to foreign operations ...........................................     (1,120,000)                (68,000)
Rouse rehabilitation credit ..............................................................     (3,394,000)                     --
Other ....................................................................................        569,000              (1,537,000)
                                                                                             ------------            ------------
Income tax expense .......................................................................   $ 30,160,000            $ 25,816,000
                                                                                             ============            ============
</TABLE>


                                      F-15
<PAGE>

                           PSEG ENERGY HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


     The following is an analysis of Accumulated Deferred Income Taxes:

<TABLE>
<CAPTION>

                                                                                                  1998                   1997
                                                                                             ------------           -------------

<S>                                                                                          <C>                    <C>
Assets - non-current:
   Development expenses                                                                      $ 14,786,000            $ 13,553,000
   Discontinued operations                                                                      5,277,000               5,526,000
   Foreign currency translation                                                                 4,779,000                      --
   Bad debt reserve                                                                             4,813,000               4,813,000
   Other                                                                                        2,737,000               3,533,000
                                                                                             ------------            ------------
Total Assets                                                                                   32,392,000              27,425,000
                                                                                             ============            ============
Liabilities - non-current:
  Leasing activities                                                                          702,258,000             667,631,000
  Partnership activities                                                                      154,411,000             160,418,000
  Income from foreign operations                                                                3,008,000               1,329,000
  State income tax deferrals                                                                   19,017,000              16,890,000
                                                                                             ------------            ------------
Total Liabilities                                                                             878,694,000             846,268,000
                                                                                             ------------            ------------
Net Liabilities                                                                              $846,302,000            $818,843,000
                                                                                             ============            ============
</TABLE>

NOTE 8.  NOTES PAYABLE

     As of  December  31,  1998,  Funding  had in  place  a  $300,000,000  and a
$150,000,000  revolving  credit and  reimbursement  agreement.  On May 12, 1999,
Energy Holdings closed on two separate senior revolving credit facilities,  with
a syndicate of banks, a  $165,000,000,  364 day revolving  credit facility and a
$495,000,000,  five year revolving credit and letter of credit  facility.  These
facilities,  totaling  $660,000,000  replaced  the Funding  facilities  totaling
$450,000,000.

     As  of  September  30,  1999,  December  31,  1998  and  1997,   borrowings
outstanding  under  the  revolving  credit  and  reimbursement  agreements  were
$481,000,000,   $206,000,000  and  $267,000,000,   respectively.  The  effective
interest  rates  on the  September  30,  1999  and  December  31,  1998 and 1997
revolving credit facility borrowings were 6.40%, 6.70% and 6.61%,  respectively,
plus  related  fees.  The  interest   expense  incurred  related  to  short-term
borrowings amounted to $7,878,000, $8,060,000 and $9,826,000 as of September 30,
1999 and December 31, 1998 and 1997, respectively.  Due to the short-term nature
of this  debt  and the  related  interest  rates,  the  recorded  amounts  are a
reasonable estimate of fair value as of December 31, 1998 and 1997.


                                      F-16
<PAGE>

                           PSEG ENERGY HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


NOTE 9.  LONG-TERM DEBT

     Long-Term Debt was comprised of the following:

<TABLE>
<CAPTION>
                                                                  (Unaudited)                  December 31,
                                                                 September 30,     ---------------------------------
                                                  Year Due           1999              1998                   1997
                                                  --------       ------------  ---------------------------------
                                                                                (Thousands of Dollars)
<S>                                                 <C>             <C>                 <C>                  <C>
PSEG Capital
Senior Notes
9.875% .......................................      1998            $     --            $     --             $ 15,000
10.05% .......................................      1998                  --                  --               22,500
                                                                    --------            --------             --------
                                                                          --                  --               37,500
                                                                    --------            --------             --------
Medium-Term Notes (MTNs)
9.00% ........................................      1998                  --                  --               75,000
8.95% - 9.93% ................................      1999              20,000             155,000              155,000
6.54% ........................................      2000              78,000              78,000               78,000
6.73% - 6.74% ................................      2001             170,000             135,000              135,000
6.80% - 7.00% ................................      2002             130,000             130,000              130,000
6.25% ........................................      2003             252,000                  --                   --
                                                                    --------            --------             --------
                                                                     650,000             498,000              573,000
                                                                    --------            --------             --------
Principal amount outstanding .................                       650,000             498,000              610,500
Amounts due in one year ......................                        20,000            (154,973)            (112,471)
Net unamortized discount .....................                        (2,047)             (1,195)              (1,726)
                                                                    --------            --------             --------
Total long-term debt of PSEG Capital .........                       627,953             341,832              496,303
                                                                    --------            --------             --------

Funding
Senior Notes
9.95% - Series E .............................      1998                  --                  --               83,000
7.58% - Series G .............................      1999                  --              45,000               45,000
                                                                    --------            --------             --------
Principal amount outstanding .................                            --              45,000              128,000
Amounts due in one year ......................                            --             (45,000)             (83,000)
                                                                    --------            --------             --------
Total long-term debt of Funding ..............                            --                  --               45,000
                                                                    --------            --------             --------

Global
Non-recourse Debt
7.721%     - Bank Loan .......................      1999                  --              87,044               87,044
11.08%    - Bank Loan ........................      2000              66,895                  --                   --
 9.04% - Bank Loan ...........................      2001              85,000                  --                   --
13.95%    - Bank Loan ........................      2002             105,706             122,834              134,895
 9.42% - Bank Loan ...........................      2003              28,000                  --                   --
 9.42% - Bank Loan ...........................      2004              47,000                  --                   --
14.00% - Minority Interest Loan ..............      2027               9,990               9,990                9,990
                                                                    --------            --------             --------
Principal amount outstanding .................                       342,591             219,868              231,929
Amounts due in one year ......................                       (96,639)           (117,752)             (14,988)
                                                                    --------            --------             --------
Total long-term debt of Global ...............                       245,952             102,116              216,941
                                                                    --------            --------             --------
Total long-term debt .........................                      $873,905            $443,948             $758,244
                                                                    ========            ========             ========
</TABLE>

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


                                      F-17
<PAGE>

                           PSEG ENERGY HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


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

                                          (Unaudited)           December 31,
                                          September 30,   ---------------------
                                              1999          1998          1997
                                            --------      -------       --------
                                                    (Thousands of Dollars)
Senior Notes - PSEG Capital ..........      $   --        $   --        $ 37,500
MTNs - PSEG Capital ..................       637,247       503,830       581,754
Senior Notes - Funding ...............          --          45,000       129,000
Non-recourse debt - Global ...........       342,591       219,868       231,929

      Financial Covenants

      The terms of the agreement  supporting PSEG Capital's long-term borrowings
require  PSEG to cause  PSEG  Capital  to have a minimum  tangible  net worth of
$100,000 and to make sufficient contributions to PSEG Capital in order to permit
PSEG Capital to pay its debts as they become due. PSEG is in compliance with all
requirements of the agreement at December 31, 1998 and 1997.

      Bank Loan - ING

      In May 1997, PSEG Americas Operating Company (PSEG Americas), a subsidiary
of Global,  and ING Bank and ING Capital  Corporation  (collectively,  ING),  as
lender and as agent for a consortium of lenders, entered into a credit agreement
(the ING  Agreement)  which matured May 30, 1999. The loan proceeds were used to
partially  fund  the  acquisition  of  EDEN/EDES  in  Argentina  in 1997 by PSEG
Americas (see Note 5. Investments in Partnerships and Corporate Joint Ventures).
Amounts  borrowed under the ING Agreement are  non-recourse to PSEG Americas and
affiliated companies.

      Pursuant to the terms of the ING Agreement,  the principal  payment is due
in full on the maturity  date.  At December 31, 1998 and 1997,  the  outstanding
principal balance was $87,044,000.  Interest is payable quarterly and accrues at
LIBOR plus 1.875%.  Interest  expense  incurred  during 1998 and 1997 related to
such borrowings amounted to $7,042,000 and $4,003,000, respectively.

      Under the terms of the ING  Agreement,  PSEG  Americas  must  maintain  an
interest reserve for a minimum amount equal to six months of projected  interest
payments.  Additionally,  a receipts  account must be maintained  into which all
revenues and other payments are deposited. Both accounts are administered by ING
and are  restricted as to their use and  disbursements  in  accordance  with the
provisions of the ING  Agreement.  As of December 31, 1998,  restricted  cash of
$3,387,000  and  $369,000  was  included in the  interest  reserve and  receipts
accounts, respectively.

      In June 1997, PSEG Americas  entered into an interest rate swap agreement,
which effectively  converts a portion of the floating rate obligations under the
ING  Agreement  into fixed rate  obligations.  The interest  differential  to be
received or paid under the interest  rate swap  agreement  is recorded  over the
life of the  agreement  as an  adjustment  to  interest  expense.  See  Note 18.
Subsequent Events for description of the refinancing of the ING loan.

      Minority Interest Loan

      PSEG Americas  also entered into a $9,990,000  minority  shareholder  loan
(Shareholder Loan) in May 1997, which matures on May 29, 2027. The loan proceeds
were used to partially fund the acquisition of EDEN/EDES in Argentina in 1997 by
PSEG Americas  (see Note 5.  Investments  in  Partnerships  and Corporate  Joint
Ventures).  Amounts  borrowed  under  the  Shareholder  Loan are  unsecured  and
subordinated to amounts borrowed under the ING Agreement.

      In accordance with the Shareholder  Loan, the principal is due in one lump
sum on the maturity date. Interest accrues at 14% and is payable  semi-annually.
However,  failure to pay interest does not  constitute an event of default,  but
results in an increase in the principal  amount due upon  maturity.  In 1998 and
1997,  interest  expense  related  to such  borrowings  totaled  $1,418,000  and
$839,000, respectively.


                                      F-18
<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  matures on
November 15, 2002. The loan proceeds are  denominated  in Brazilian  Reals which
are indexed to a basket of  currencies,  including  United  States  Dollars.  In
total,  IPE  received  the United  States  Dollar  equivalent  of  approximately
$135,580,000, which was used to partially finance Global's acquisition of RGE in
1997.

      Under the terms of the BNDES Loan, the outstanding principal is reset on a
daily basis  based on  exchange  rate  movements  between  the  indexed  foreign
currencies  and the Brazilian Real and between the Brazilian Real and the United
States Dollar. The loan balance is subject to a base variable interest rate plus
4.5%.  The  variable  interest  rate  reflects the BNDES  borrowing  rate and is
adjusted on a quarterly  basis.  The interest  rate in effect as of December 31,
1998 was  13.23%.  Interest  incurred  during  1998  and 1997 was  approximately
$17,246,000  and  $3,223,000,  respectively.  Both  principal  and  interest are
payable  over a five  year  period  in nine  equal  installments,  beginning  in
November  1998.  As of September  30,  1999,  December 31, 1998 and December 31,
1997, the outstanding  principal  balances amounted to  $105,706,000(unaudited),
$122,834,000 and $134,895,000,  respectively.  To the extent that dividends from
RGE are insufficient to fund the principal and interest payments, Global intends
to fund those  payments  either  through an  intercompany  loan or an additional
equity  investment.   The  devaluation  of  the  Brazilian  Real  against  other
currencies may require  additional funding from Global to fully satisfy the 1999
requirement  of $30,709,000  plus  interest.  However,  Energy  Holdings  cannot
predict the amount, if any, of such additional funding requirements (see Note 6.
Foreign Operations).


      Annual Principal Requirements

      The scheduled principal maturities during the years following December 31,
1998 are as follows:

                    PSEG Capital      Funding          Global           Total
                    ------------    ------------    ------------    ------------
1999 ............   $155,000,000    $ 45,000,000    $117,752,000    $317,752,000
2000 ............     78,000,000            --        30,709,000     108,709,000
2001 ............    135,000,000            --        30,709,000     165,709,000
2002 ............    130,000,000            --        30,708,000     160,708,000
Thereafter ......           --              --         9,990,000       9,990,000
                    ------------    ------------    ------------    ------------
                    $498,000,000    $ 45,000,000    $219,868,000    $762,868,000
                    ============    ============    ============    ============

NOTE 10.  STOCKHOLDER'S EQUITY

      Common Stock

      Energy  Holdings  had  100  shares  of  no-par  common  stock  issued  and
outstanding as of December 31, 1998 and 1997, all of which was held by PSEG. The
total authorized amount as of December 31, 1998 and 1997 was 1,000,000 shares.

      Preferred Stock

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

<TABLE>
<CAPTION>
                                                                     Number
                                                   Par value           of            December 31,
Date               Description                     per share         shares       1998           1997
--------           ------------                 -------------       --------  ------------   ------------
<S>                <C>                          <C>                      <C>  <C>            <C>
October 1997       4.10% Cumulative             $  1,000,000             75   $         --   $ 75,000,000
January 1998       5.01% Cumulative                  500,000            435    217,500,000             --
June 1998          4.80% Series B Cumulative         100,000          1,467    146,700,000             --
July 1998          4.875% Series C Cumulative        100,000          1,450    145,000,000             --
                                                                              ------------   ------------
                   Total ...................................................  $509,200,000   $ 75,000,000
                                                                              ============   ============
</TABLE>


                                      F-19
<PAGE>

                           PSEG ENERGY HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


      A portion of the proceeds from the 5.01%  Cumulative  Preferred  Stock was
used to retire the  $75,000,000 of 4.10%  Cumulative  Preferred  Stock issued in
1997.

      During 1998,  Energy  Holdings  paid  preferred  dividends  from  retained
earnings of $18,076,000 to PSEG.  During 1997, Energy Holdings paid no preferred
dividends to PSEG.

      Additional Paid-in Capital

      No capital  contributions were made by or returned to PSEG during 1998 and
1997.

      In June 1999,  PSEG invested  approximately  $200 million  (unaudited)  of
equity  in  Energy  Holdings.  See Note 18.  Subsequent  Events  for  additional
information.

      Dividends on Common Stock

      Energy  Holdings  paid no common  stock  dividends to PSEG during 1998 and
1997.

      Subscription Agreement

      Global and PSEG have entered into a subscription agreement (the Agreement)
pursuant to which a  subscription  was  outstanding  as of December 31, 1998 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,  1998  were   approximately   $3,330,000  (see  Note  14.   Commitments  and
Contingencies).

      The Agreement  supports the financial  obligation of Global  relative to a
specific  project.  In December 1996,  the investment  value of this project was
reduced to zero.  In addition,  Global  recorded a $3,330,000  provision for the
aforementioned  financial  obligation.  The  Agreement  has been  assigned to an
outside party who has the right to require PSEG to perform  thereunder  and make
direct  payments  to  the  assignee  in the  event  of  default  (see  Note  14.
Commitments and Contingencies).

NOTE 11.  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  partnerships  and joint  ventures 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  $8,653,000  and  $12,072,000  were  included  in  Revenues - Other
Revenues in the  Consolidated  Statements of Income for the years ended December
31, 1998 and 1997, respectively.

      Administrative Costs

      Payroll and related  fringe  benefit costs and other expenses are incurred
by Public Service  Electric and Gas Company on behalf of Energy Holdings and are
billed on a monthly basis. Such costs amounted to approximately  $13,146,000 and
$13,023,000 for 1998 and 1997,  respectively.  In addition,  Energy Holdings was
billed administrative overheads of $2,554,000 and $2,524,000 by PSEG during 1998
and 1997, respectively.

      Employees of Energy Holdings and its  subsidiaries  are  participants in a
non-contributory  pension plan  administered by Public Service  Electric and Gas
Company and costs related to such employees are billed on a monthly basis.  Such
costs  amounted to  approximately  $3,622,000,  $3,442,000  and $938,000 for the
years ended December 31, 1998, 1997 and 1996, respectively.


                                      F-20
<PAGE>

                           PSEG ENERGY HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


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, 1998 are:

         1999 ................................    $ 5,929,000

         2000 ................................      4,247,000

         2001 ................................      3,862,000

         2002 ................................      3,773,000

         2003 ................................      2,271,000
                                                  -----------
         Total minimum lease payments ........    $20,082,000
                                                  ===========

      Rent  expense  for  1998,  1997  and 1996  was  approximately  $5,971,000,
$4,808,000 and $2,879,000, respectively.

NOTE 13.  FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

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

      The notional amounts of derivatives do not represent  amounts exchanged by
the parties  and,  thus,  are not a measure of the  exposure of Energy  Holdings
through its use of derivatives.  The amounts  exchanged,  under the terms of the
derivatives,  are  calculated  on the  basis  of the  notional  amounts.  Energy
Holdings  limits  its  exposure  to  credit-related   losses  in  the  event  of
nonperformance by  counterparties  by limiting its  counterparties to those with
high credit ratings.

      Hedging

      In order to limit  Energy  Technologies'  exposure  to price  fluctuations
related to fixed price sales commitments,  Energy Technologies,  pursuant to its
internal  trading  policy,  may not have an outstanding  net balance of unhedged
fixed price sales  commitments  in excess of levels  established  by management.
Energy Technologies purchases futures contracts in addition to physical purchase
commitments, to ensure compliance with the trading policy. The futures contracts
are accounted for as hedges for book purposes and, accordingly, gains and losses
are deferred until the related sales are made.

      During 1998 and 1997, 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 90% and 96% of
Energy  Technologies'  fixed price sales  commitments  at December  31, 1998 and
1997, respectively. Energy Technologies had a net deferred unrealized hedge loss
of $(5,160,000) and $(1,681,000) at those respective dates.

      During  1998 and  1997,  Energy  Technologies  entered  into  fixed  price
electricity sales commitments.  Physical purchase contracts hedged approximately
63% and 10% of such fixed price sales commitments at December 31, 1998 and 1997,
respectively.

      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


                                      F-21
<PAGE>


                           PSEG ENERGY HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


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
September  30, 1999,  December  31, 1998 and December 31, 1997 was  $117,792,000
(unaudited),  $204,303,000  and  $184,861,000,  respectively.  The portfolio has
exposure to market price risk. As such, a sensitivity analysis has been prepared
to estimate Energy Holdings' exposure to market volatility of these investments.
The potential  change in fair value resulting from a hypothetical  10% change in
quoted market prices of these investments amounted to $11,300,000 (unaudited) at
September 30, 1999 and $17,000,000 at December 31, 1998.

NOTE 14.  COMMITMENTS AND CONTINGENCIES

      Energy  Holdings  and/or Global 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  $327,639,000  (unaudited),  $86,565,000  and  $73,874,000  as  of
September  30, 1999,  December 31, 1998 and 1997,  respectively.  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 10. Stockholder's Equity).

      Global's 1999 principal  payments,  referred to in Note 9. Long-Term Debt,
are related to the non-recourse  ING and BNDES bank loans. In addition,  certain
project  financing  related to Global's 30% equity  investment  in the Argentine
electric  distribution  company in the Province of Buenos Aires matures in 1999.
See Note 18. "Subsequent  Events" for information  concerning the refinancing of
these loans.  Cash  proceeds from the  refinancing  would be used to service the
debt  payments.  To the extent there is a shortfall in cash,  Global  intends to
fund the difference  either through an intercompany loan or an additional equity
investment.  Global's 1999 possible  exposure  resulting  from a potential  cash
shortfall  related to these  projects  is  approximately  $40,000,000.  Any debt
shortfall would be funded through additional external debt or equity from Energy
Holdings.  See  Note  18.  Subsequent  Events  for  information  concerning  the
refinancing of non-recourse debt.

      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 New
Jersey Board of Public  Utilities (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 September 30, 1999 and December
31, 1998 Energy Holdings'  assets  represented 21% (unaudited) and 17% of PSEG's
consolidated  assets  and  PSEG  Capital's  debt  outstanding  was  $650,000,000
(unaudited) and $498,000,000, respectively.

NOTE 15.  PENSION AND OTHER POSTRETIREMENT BENEFIT AND SAVINGS  PLANS

      Employees of Energy Holdings and its  subsidiaries  are  participants in a
non-contributory  pension plan  administered by Public Service  Electric and Gas
Company.  See Note 11. Related Party  Transactions for Energy Holdings'  pension
costs for the years 1998, 1997 and 1996.

      In addition,  Public Service Electric and Gas Company sponsors two defined
contribution  plans.  Represented  employees of Energy Holdings are eligible for
participation in the Public Service Electric and Gas Company's  Employee Savings
Plan while all other employees of Energy Holdings are eligible


                                      F-22
<PAGE>

                           PSEG ENERGY HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


for participation in the Public Service Electric and Gas Company's  Tax-Deferred
Savings Plan. The two principal defined  contribution plans are sponsored 401(k)
plans  to  which   eligible   employees  may  contribute  up  to  25%  of  their
compensation. Employee contributions up to 8% for all employees are matched with
employer  contributions  of cash  or  PSEG  common  stock  equal  to 50% of such
employee contributions.  Employer contributions in excess of 6% and up to 8% are
made in shares of PSEG common stock for all employees.  Public Service  Electric
and  Gas  Company   billed   Energy   Holdings   for  its  portion  of  employer
contributions.  The amount expensed for the matching  provision of the plans was
approximately   $803,000,   $573,000  and  $297,000  in  1998,  1997  and  1996,
respectively.

NOTE 16.  FINANCIAL INFORMATION BY BUSINESS SEGMENTS

      Basis of Organization

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

      Global

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

      Resources

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

      Energy Technologies

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


                                      F-23
<PAGE>

                           PSEG ENERGY HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


      Other Activities

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

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

<TABLE>
<CAPTION>
                                                                      Energy         Other        Consolidated
                                            Global     Resources   Technologies   Activities (A)     Total
                                            ------     ---------   ------------   --------------     -----
                                                              (Thousands of Dollars)
<S>                                      <C>          <C>          <C>           <C>             <C>
For the Year Ended December 31, 1998:
   Total Revenues ....................   $  123,935   $  145,115   $  170,840    $     (366)     $  439,524
   Depreciation and Amortization .....        1,416        1,612        2,138           248           5,414
   Interest Income ...................          569        9,350        1,010           986          11,915
   Interest Expense-- Net ............       40,672       48,727        1,620           968          91,987
   Income Taxes ......................       12,296       26,624       (5,193)       (3,567)         30,160
   Net income from equity investments       113,900       34,537         --             297         148,734
   Operating Income Before Income
     Taxes ...........................       31,246       86,364      (16,364)       (3,686)         97,560
   EBIT(B) ...........................       71,918      135,091      (14,744)       (2,718)        189,547
   Segment Net Income (Loss) .........   $    7,477   $   55,523   $  (11,171)   $     (103)     $   51,726
                                         ==========   ==========   ==========    ==========      ==========
As of December 31, 1998:
   Total Assets ......................   $1,124,160   $1,809,295   $  196,610    $   38,465      $3,168,530
   Investments in equity method
      affiliates .....................   $1,058,688   $  383,284         --      $   34,223      $1,476,195
                                         ==========   ==========   ==========    ==========      ==========
For the Year Ended December 31, 1997:
   Total Revenues ....................   $   90,886   $  144,334   $  104,076    $    2,294      $  341,590
   Depreciation and Amortization .....        1,597        1,327          960           287           4,171
   Interest Income ...................         --          4,226          299         2,768           7,293
   Interest Expense-- Net ............       21,926       45,921        2,846         1,670          72,363
   Income Taxes ......................       10,276       28,998       (9,783)       (3,675)         25,816
   Net income from equity investments        77,986       48,929         --             165         127,080
   Operating Income Before Income
      Taxes ..........................       23,794       88,140      (27,984)      (10,500)         73,450
   EBIT(B) ...........................       45,720      134,061      (25,138)       (8,830)        145,813
   Segment Net Income (Loss) .........   $   13,733   $   59,142   $  (18,201)   $   (7,399)     $   47,275
                                         ==========   ==========   ==========    ==========      ==========
As of December 31, 1997:
   Total Assets ......................   $1,169,948   $1,616,122   $  177,361    $   59,525      $3,022,956
   Investments in equity method
      affiliates .....................   $1,118,642   $  407,166         --      $   33,841      $1,559,649
                                         ==========   ==========   ==========    ==========      ==========
For the Year Ended December 31, 1996:
   Total Revenues ....................   $   60,142   $  142,546   $   95,219    $    4,893      $  302,800
   Depreciation and Amortization .....          732        1,560          512           379           3,183
   Interest Income ...................          102       11,224        3,872         3,902          19,100
   Interest Expense-- Net ............        5,512       43,341        5,159         4,249          58,261
   Income Taxes ......................        6,258       28,057       (8,285)       (1,062)         24,968
Net income from equity investments ...       45,623       72,838         --             778         119,239
   Operating Income Before Income
     Taxes ...........................       15,516       84,548      (23,564)       (3,130)         73,370
   Income from Discontinued operations         --           --           --          24,238          24,238
   EBIT(B) ...........................       21,028      127,889      (18,405)        1,119         131,631
   Segment Net Income (Loss) .........   $    9,258   $   56,491   $  (15,279)   $   22,192      $   72,662
                                         ==========   ==========   ==========    ==========      ==========
As of December 31, 1996:
   Total Assets ......................   $  286,350   $1,442,569   $  174,222    $  219,272      $2,122,413
   Investments in equity method
      affiliates .....................   $  258,654   $  407,994         --      $   34,891      $  701,539
                                         ==========   ==========   ==========    ==========      ==========
</TABLE>


                                      F-24
<PAGE>

                           PSEG ENERGY HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

<TABLE>
<CAPTION>
                                                                     (Unaudited)
                                             ----------------------------------------------------------------
                                                                       Energy        Other       Consolidated
                                             Global     Resources   Technologies  Activities (A)     Total
                                             ------     ---------   ------------  --------------     -----
                                                               Thousands of Dollars)
<S>                                        <C>          <C>          <C>           <C>           <C>
For the Nine Months Ended
September 30, 1999:
   Total Revenues ........................ $  102,008   $  118,669   $  195,465    $      181    $  416,323
   Segment Net Income (Loss) ............. $   20,701   $   46,451   $   (4,733)   $      479    $   62,898
                                           ==========   ==========   ==========    ==========    ==========
For the Nine Months Ended
September 30, 1998:
   Total Revenues ........................ $   84,564   $   74,819   $  124,582    $     (343)   $  283,622
   Segment Net Income (Loss) ............. $    5,239   $   19,914   $   (9,303)   $     (115)   $   15,735
                                           ==========   ==========   ==========    ==========    ==========
As of September 30, 1999:
   Total Assets .......................... $1,658,458   $1,944,718   $  232,468    $   42,816    $3,878,460
                                           ==========   ==========   ==========    ==========    ==========
As of September 30, 1998:
   Total Assets .......................... $1,063,852   $1,727,861   $  178,043    $   47,013    $3,016,769
                                           ==========   ==========   ==========    ==========    ==========
</TABLE>

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

(B)   EBIT is defined as Operating Income plus Other Income (Loss).

      Geographic Information for Energy Holdings is disclosed below.

<TABLE>
<CAPTION>

                                                             Revenues(1)
                                -----------------------------------------------------------------
                                Nine Months Ended September 30,          Years Ended December 31,
                                -------------------------------          ------------------------
                                  1999               1998               1998               1997
                                  ----               ----               ----               ----
                                        (Unaudited)
                                                     (Thousands of Dollars)
<S>                            <C>                <C>                <C>                 <C>
United States .............    $ 313,008          $ 211,011          $ 330,302           $ 290,474
Foreign Countries:
   Argentina ..............       12,721             12,151             16,407               7,464
   Brazil .................       15,314             16,277             30,669               3,500
   Netherlands ............       45,912             26,924             38,718              19,716
   Other ..................       29,368             17,258             23,428              20,436
                               ---------          ---------          ---------           ---------
Total Foreign .............      103,315             72,611            109,222              51,116
                               ---------          ---------          ---------           ---------
      Total ...............    $ 416,323          $ 283,622          $ 439,524           $ 341,590
                               =========          =========          =========           =========
</TABLE>

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

<TABLE>
<CAPTION>
                                                       Identifiable Assets
                               ---------------------------------------------------------------------
                                      September  30,                          December 31,
                               -------------------------                ---------------------------
                               1999                 1998                1998                   1997
                               ----                 ----                ----                   ----
                                       (Unaudited)
                                                      (Thousands of Dollars)
<S>                        <C>                  <C>                  <C>                   <C>
United States .........    $ 1,554,939          $ 1,554,921          $ 1,565,740           $ 1,695,128
Foreign Countries:
   Chile and Peru .....        528,229                 --                   --                    --
   Argentina ..........        355,432              241,348              306,724               239,411
   Brazil(1) ..........        321,960              501,465              480,411               505,010
   Netherlands ........        607,521              354,008              399,655               192,827
   Other ..............        510,379              365,027              416,000               390,580
                           -----------          -----------          -----------           -----------
   Total Foreign ......      2,323,521            1,461,848            1,602,790             1,327,828
                           -----------          -----------          -----------           -----------
      Total ...........    $ 3,878,460          $ 3,016,769          $ 3,168,530           $ 3,022,956
                           ===========          ===========          ===========           ===========
</TABLE>

(1)   Amount is net of foreign currency  translation  adjustment of $206,304,000
      (unaudited),  $31,870,000 (unaudited),  $43,022,000 and $6,862,000 for the
      periods ended  September 30, 1999,  September 30, 1998,  December 31, 1998
      and December 31, 1997, respectively.


                                      F-25
<PAGE>

                           PSEG ENERGY HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


NOTE 17.  ACCOUNTING MATTERS

      In April 1998,  the American  Institute of  Certified  Public  Accountants
issued  Statement  of  Position  98-5,  "Reporting  on  the  Costs  of  Start-up
Activities" (SOP 98-5),  which is effective for financial  statements for fiscal
years  beginning after December 15, 1998. SOP 98-5 requires the expensing of the
costs of start-up activities as incurred.  Additionally,  previously capitalized
start-up  costs  must be  written  off as a  Cumulative  Effect  of a Change  in
Accounting  Principle.  The adoption of SOP 98-5 did not have a material adverse
impact on the financial  condition,  results of operations and net cash flows of
Energy Holdings.

      In June 1998,  the FASB issued SFAS No. 133,  "Accounting  for  Derivative
Instruments and Hedging Activities" (SFAS 133), which is effective for financial
statements for all fiscal quarters of fiscal years beginning after June 15, 1999
(see  below).  SFAS 133  establishes  accounting  and  reporting  standards  for
derivative  instruments  and  hedging  activities.  It  requires  an  entity  to
recognize  all  derivatives,  within the scope of this  statement,  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. Energy Holdings is currently evaluating the impact of SFAS 133.

      In June 1999,  the FASB issued SFAS No. 137 (SFAS  137),  "Accounting  for
Derivative Instruments and Hedging Activities, Deferral of the Effective Date of
FASB Statement No.133",  an amendment of FASB Statement No. 133 which defers the
effective date of SFAS 133 for one year.  SFAS 133 will now be effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS 137 also
defers by one year the transition  date regarding  embedded  derivatives in SFAS
133.

NOTE 18.  SUBSEQUENT EVENTS

      In January 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.  PSCRC is a Demand  Side
Management energy  consulting  company with total assets as of December 31, 1998
of $85,000,000 and earnings of $2,300,000 for the fiscal year ended December 31,
1998.

      In February 1999,  PSEG Capital issued  $252,000,000 of 6.25% MTNs due May
2003. The proceeds were used to repay $100,000,000 of PSEG Capital's MTNs, which
matured in February 1999,  and to reduce Energy  Holdings'  short-term  debt. In
June 1999,  PSEG Capital  issued  $35,000,000  of 6.73% MTNs due June 2001.  The
proceeds were used to pay down short-term debt.

      In April 1999, Global and a partner entered into a joint venture agreement
to develop a  1,000-megawatt  combined-cycle  gas plant in  Guadalupe  County in
south central Texas.  Global's equity investment is expected to be approximately
$193,000,000, including loans and guarantees.

      In April 1999,  Global and a partner,  through  their joint  ownership  in
Turboven,  a Venezuelan  company,  announced an  investment of  $140,000,000  to
construct three electric generation plants and associated  distribution  systems
serving industrial clients in Maracay, Cagua and Valencia,  Venezuela.  Global's
equity  investment,  including  contingencies,  is expected to be  approximately
$70,000,000.

      In May 1999,  Global  acquired a 63  percent  stake in  Tri-Sakthi  Energy
Company Ltd., a 525 MW coal-fired  project in North Chennai,  India. The project
is in an  advanced  stage  of  development  with  all  major  project  contracts
completed or  substantially  negotiated and ready for  execution.  Total project
costs  are   approximately   $633,000,000.   Global   will   invest,   including
contingencies,  approximately  $180 million in equity in the  project,  which is
expected to reach  financial  closure in the fall of 1999.  The  project  should
begin  construction  by the end of the  year  and  Global  will  be the  plant's
operator.

      In June 1999,  Global and a partner,  entered into an agreement to jointly
acquire 90 percent of the shares of  Chilquinta  Energia  S.A.  (Chilquinta),  a
power distribution company based in Valparaiso, Chile


                                      F-26
<PAGE>

                           PSEG ENERGY HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


under a 50/50  partnership.  Global paid approximately  $268,000,000,  including
fees and closing costs.  Global's  investment was also financed with acquisition
debt totaling $160,000,000 that is non-recourse to Global and Energy Holdings.

      In  June  1999,   non-recourse   project  financing  for  Global's  equity
investment  in  EDEN/EDES  was  refinanced.  Approximately  $66,894,000  of  the
$87,044,000  loan was  refinanced for a total of 364 days maturing in June 2000.
The   remaining   $20,150,000   from  the  original  loan  was  paid  down  with
approximately  $11,250,000  from  EDEN/EDES and  approximately  $8,900,000  from
Global.  The  pricing  on the loan is indexed to LIBOR and 50% of the amount was
swapped from a floating rate to a fixed rate as follows:

       Notional Amount ........................................   $33,447,000
       Pay Rate ...............................................         5.79%
       Average Receive Rate ...................................         5.33%

      In June 1999,  PSEG  invested  approximately  $200,000,000  of  additional
equity in Energy Holdings to repay short-term debt.

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

      In June 1999, Resources sold its interest in a generating station that was
subject to a leveraged  lease for  approximately  $83,000,000,  and  recorded an
after-tax gain of $9,000,000.  After repayment of the debt,  Resources  received
approximately $58,000,000 on July 1, 1999 related to this sale.

      In July 1999,  EDELAP,  a  distribution  company in which Global has a 33%
interest,  refinanced a portion of non-recourse  debt. The arrangement  required
Global to make an additional equity  investment of approximately  $25,000,000 to
repay a portion of the original  loan. The loan is indexed to LIBOR and the term
is 3 years.

      In August 1999, Global sold its 50% partnership interest in the Newark Bay
cogeneration  facility,  a 137 MW gas-fired  combined-cycle plant in Newark, NJ.
Global  received  approximately  $70,000,000  from the sale  and  recognized  an
after-tax gain of approximately $40,000,000.

      In August 1999,  Global and its partners closed project  financing for the
Rades facility, a 471 MW gas-fired  combined-cycle  electric generating facility
in Rades,  Tunisia.  Construction  of the  facility  began in August 1999 and is
expected to be completed in the summer of 2001 for a total cost of approximately
$261,000,000.  Global's  equity  investment  is  expected  to  be  approximately
$27,000,000 including contingencies.

      In  1999,   Energy   Technologies   purchased  five  HVAC  and  mechanical
contracting  companies for a total purchase price of  approximately  $43,400,000
including assumed debt.

      In 1999,  Resources,  through its  investment in an LBO Fund, has received
cash distributions of approximately  $88,000,000  resulting in an after-tax gain
of  approximately  $22,000,000  from the fund's  sale of a portion of its equity
interests.

      In 1999, Resources invested approximately  $137,000,000 in three leveraged
lease transactions of energy-related  assets:  two gas distribution  networks in
the Netherlands and a liquefied natural gas facility in the United States.


                                      F-27
<PAGE>

                           PSEG ENERGY HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


SUBSEQUENT EVENTS--UNAUDITED

      In August 1999,  the BPU issued its Final Decision and Order (Final Order)
in the matter of Public  Service  Electric and Gas  Company's  rate  unbundling,
stranded costs and  restructuring  filings.  The Final Order  addressed the 1992
Focused  Audit  of  PSEG's   non-utility   businesses   and  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.  It
was also  recognized in the Final Order that, due to significant  changes in the
industry and, in particular, PSEG's corporate structure as a result of the Final
Order, modifications to or relief from the Focused Audit might be warranted.

      In  September  and  December  1999,   Resources   invested   approximately
$242,000,000  in  leveraged  lease  transactions  of a natural gas  distribution
network in the  Netherlands,  cogeneration  plants in Germany  and a  generation
plant in the United States.

      In  September  1999,  Resources,  through its  investment  in an LBO fund,
received  a cash  distribution  of  approximately  $11,500,000  resulting  in an
after-tax gain of approximately  $1,500,000 from the fund's sale of a portion of
its equity interests.

      In September 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 to refocus
on its  current  Asian  development  activities  in China.  As a result,  Global
recognized  an $8 million  after-tax  write-down in the third quarter of 1999 to
adjust the carrying value of these assets to net realizable  value.  In December
1999,  Global sold its Thai  investment  for its  adjusted  carrying  value.  In
addition,  the  projected  substantial  decline  in  revenue  related  to energy
contracts  for six  generation  facilities  in  California  resulted  in a third
quarter $ 19 million after-tax  write-down of Global's equity investment in such
facilities.

      In  September  1999,  Global and its partner  completed 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.  Global and its  partner  also
purchased an  additional  25% of Luz del Sur upon  closing of the tender  offer.
Global's investment in connection with these transactions was approximately $108
million.

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

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

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

      In November 1999,  Global announced that it plans to build a combined heat
and power plant of 220 MW of electricity  and 500 MW of thermal energy  capacity
utilizing  circulating fluidized bed technology in Poland. Total project cost is
estimated at $320 million with commercial operation targeted for late 2002.

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


                                      F-28
<PAGE>

                           PSEG ENERGY HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


      In  November  1999,  Resources  negotiated  the  early  termination  of  a
leveraged lease of an interest in a nuclear generating station and received cash
proceeds of $48.8 million including a premium of $7.3 million.

NOTE 19.  DISCONTINUED OPERATIONS

      In 1996, EDC was sold for an aggregate  price of  $779,000,000.  This sale
resulted in an after-tax gain of $13,492,000.



<PAGE>

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

                                  $400,000,000

                            PSEG Energy Holdings Inc.

                                Offer to Exchange
                            10% Senior Notes due 2009
                           which have been registered
                            under the Securities Act
                           For Any and All Outstanding
                            10% Senior Notes due 2009
                        which have not been so registered

                          [PSEG ENERGY HOLDINGS LOGO]

================================================================================
<PAGE>

                                     PART II
                     INFORMATION NOT REQUIRED IN PROSPECTUS

Item 20. Indemnification Of Directors And Officers

            Article 6 of Energy Holdings' Certificate of Incorporation  provides
      as follows:

            To the full extent from time to time permitted by law, directors and
      officers  of  the  corporation  shall  not  be  personally  liable  to the
      corporation or its shareholders for damages for breach of any duty owed to
      the  corporation  or its  shareholders.  No  amendment  or  repeal of this
      provision shall adversely  affect any right or protection of a director or
      officer  of the  corporation  existing  at the time of such  amendment  or
      repeal.

            Section 24 of Energy Holdings' By-Laws provides as follows:

            The corporation shall indemnify to the full extent from time to time
      permitted by law any person made, or threatened to be made, a party to any
      pending,  threatened  or  completed  civil,  criminal,  administrative  or
      arbitrative  action,  suit or proceeding  and any appeal  therein (and any
      inquiry  or  investigation  which  could  lead  to  such  action,  suit or
      proceedings)  by reason of the fact that he is or was a director,  officer
      or employee of the corporation or serves or served any other enterprise as
      a director,  officer or employee at the request of the  corporation.  Such
      right  of  indemnification  shall  inure  to  the  benefit  of  the  legal
      representative of any such person.

      The directors and officers of Energy  Holdings are insured under  policies
of insurance,  within the limits and subject to the limitations of the policies,
against claims made against them for acts in the discharge of their duties,  and
Energy Holdings is insured to the extent that it is required or permitted by law
to indemnify  the  directors  and officers for such loss.  The premiums for such
insurance are paid by Energy Holdings.

Item 21. Exhibits and Financial Statement Schedules

(a)  Exhibits.

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

3.2   -- By-Laws.

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

4.2   -- Exchange and Registration Rights Agreement dated October 8, 1999
         between Energy Holdings and the purchasers named in Schedule I of the
         purchase agreement.

4.3   -- Form of Exchange Note.

5     -- Opinion of James T. Foran, Esquire.*

8     -- Opinion of James T. Foran,  Esquire regarding tax matters.*

12    -- Statement regarding computation of ratios of earnings.

21    -- Subsidiaries of the Registrant.

23.1  -- Consent of James T. Foran, Esquire (contained in Exhibits 5 and 8).

23.2  -- Independent Auditors' Consent.

24    -- Power of attorney (included in the signature page to the registration
         statement).

25    -- Statement of Eligibility of Trustee on Form T-1.

99.1  -- Form of Letter of Transmittal.

99.2  -- Form of Notice of Guaranteed Delivery.

----------
 * To be filed by amendement.


                                      II-1
<PAGE>

Item 22.  Undertakings

      The undersigned registrant hereby undertakes (a):

      1.    To file, during any period in which offers or sales are being made,
            a post-effective amendment to this registration statement:

            (i)   To include any prospectus required by Section l0(a)(3) of the
                  Securities Act;

            (ii)  To reflect in the prospectus any facts or events arising after
                  the effective date of the registration statement (or the most
                  recent post-effective amendment thereof) which, individually
                  or in the aggregate, represent a fundamental change in the
                  information set forth in the registration statement;

            (iii) To include any material information with respect to the plan
                  of distribution not previously disclosed in the registration
                  statement or any material change in such information in the
                  registration statement; provided, however, that the registrant
                  need not file a post-effective amendment to include the
                  information required to be included by subsection (a)(1)(i) or
                  (a)(l)(ii) if such information is contained in periodic
                  reports filed by the registrant pursuant to Section 13 or
                  Section 15(d) of the Securities Exchange Act that are
                  incorporated by reference in the registration statement.

      2.    That, for the purpose of determining any liability under the
            Securities Act, each such post-effective amendment shall be deemed
            to be a new registration statement relating to the securities
            offered therein, and the offering of such securities at that time
            shall be deemed to be the initial bona fide offering thereof.

      3.    To remove from registration by means of a post-effective amendment
            any of the securities being registered which remain unsold at the
            termination of the offering.


                                      II-2
<PAGE>

                                   SIGNATURES

      Pursuant  to  the   requirements  of  the  Securities  Act  of  1933,  the
registrant,  PSEG Energy Holdings Inc., certifies that it has reasonable grounds
to believe it meets all of the  requirements for filing on Form S-4 and has duly
caused  this  Registration   Statement  to  be  signed  on  its  behalf  by  the
undersigned,  thereunto  duly  authorized,  in the City of Newark,  State of New
Jersey, on this 28th day of January, 2000.

                                      PSEG ENERGY HOLDINGS INC.

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


                                      II-3
<PAGE>

                                POWER OF ATTORNEY

      Each Director of PSEG Energy Holdings Inc. whose  signature  appears below
hereby  appoints  Bruce  E.  Walenczyk  the  agent  for  service  named  in this
Registration Statement, and James T. Foran, Esq. as attorney-in-fact, to execute
in the name of each such  person and to file with the  Securities  and  Exchange
Commission this  Registration  Statement and any and all additional  amendments,
including post-effective amendments to this Registration Statement.

          Signature                      Title                      Date
          ---------                      -----                      ----

      /s/ FRANK CASSIDY                 Director               January 26, 2000
----------------------------
        Frank Cassidy

/s/ ROBERT J. DOUGHERTY, JR.            Director               January 26, 2000
----------------------------
     Robert J. Dougherty

    /s/ E. JAMES FERLAND                Director               January 26, 2000
----------------------------
      E. James Ferland

    /s/ ROBERT C. MURRAY                Director               January 26, 2000
----------------------------
      Robert C. Murray

    /s/ R. EDWIN SELOVER                Director               January 26, 2000
----------------------------
      R. Edwin Selover


                                      II-4
<PAGE>

      Pursuant  to  the  requirements  of  the  Securities  Act  of  1933,  this
Registration  Statement  has  been  signed  by  the  following  persons  in  the
capacities and on the dates indicated.

       Signature                    Title                          Date
       ---------                    -----                          ----

 /s/ E. James Ferland       Principal Executive              January 28, 2000
-----------------------     Officer and Director
   E. James Ferland

/s/ Bruce E. Walenczyk      Principal Financial Officer      January 28, 2000
-----------------------
  Bruce E. Walenczyk

 /s/ Derek M. DiRisio       Principal Accounting Officer     January 28, 2000
-----------------------
   Derek M. DiRisio

      This  Registration  Statement has also been signed by Bruce E.  Walenczyk,
Attorney-in-Fact, on behalf of the following Directors on January 28, 2000.

       Frank Cassidy
       Robert J. Dougherty
       Robert C. Murray
       R. Edwin Selover

                                           By:    /s/ BRUCE E. WALENCZYK
                                               ------------------------------
                                                    Bruce E. Walenczyk
                                                     Attorney-in-Fact


                                      II-5
<PAGE>

                                  Exhibit Index

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

3.2   -- By-Laws.

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

4.2   -- Exchange and Registration Rights Agreement dated October 8, 1999
         between Energy Holdings and the purchasers named in Schedule I of the
         purchase agreement.

4.3   -- Form of Exchange Note.

5     -- Opinion of James T. Foran, Esquire.*

8     -- Opinion of James T. Foran,  Esquire regarding tax matters.*

12    -- Statement regarding computation of ratios of earnings.

21    -- Subsidiaries of the Registrant.

23.1  -- Consent of James T. Foran, Esquire (contained in Exhibits 5 and 8).

23.2  -- Independent Auditors' Consent.

24    -- Power of attorney (included in the signature page to the registration
         statement).

25    -- Statement of Eligibility of Trustee on Form T-1.

99.1  -- Form of Letter of Transmittal.

99.2  -- Form of Notice of Guaranteed Delivery.

----------
 * To be filed by amendement.