<PAGE>

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

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

                                    FORM 10-K
(Mark One)
              [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 2001
                                       OR
              [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                        For the transition period from          to
                                                       ---------   -----------

 Commission              Registrant, State of Incorporation,   I.R.S. Employer
 File Number                Address, and Telephone Number     Identification No.
-------------     ------------------------------------------  -----------------
  000-32503                 PSEG ENERGY HOLDINGS INC.            22-2983750
                           (A New Jersey Corporation)
                               80 Park Plaza -T22
                          Newark, New Jersey 07102-4194
                                  973 456-3581

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

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

                   Documents incorporated by reference - NONE


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

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

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

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



<PAGE>


                                TABLE OF CONTENTS
                                -----------------
<TABLE>
<CAPTION>
                                                                                                       Page
                                                                                                       ----
PART I
------
<S>                                                                                                     <C>
Item 1.    Business.....................................................................................  1
           General......................................................................................  1
           Risk Factors................................................................................. 18
           Competitive Environment...................................................................... 23
           Regulatory Issues............................................................................ 23
           Customers.................................................................................... 25
           Employee Relations........................................................................... 25
           Environmental Matters........................................................................ 25
Item 2.    Properties................................................................................... 25
Item 3.    Legal Proceedings............................................................................ 25
Item 4.    Submission of Matters to a Vote of Security Holders.......................................... 26

PART II
Item 5.    Market for Registrant's Common Equity and Related Stockholder Matters........................ 26
Item 6.    Selected Financial Data...................................................................... 27
Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations........ 28
           Overview and Future Outlook.................................................................. 28
           Results of Operations........................................................................ 30
           Liquidity and Capital Resources.............................................................. 35
           Capital Requirements......................................................................... 38
           Disclosures about Contractual Obligations and Commercial Obligations......................... 40
           Off-Balance Sheet Arrangements............................................................... 40
           Discussion of Critical Accounting Policies................................................... 41
           Environmental Matters........................................................................ 43
           Accounting Issues............................................................................ 45
           Forward Looking Statements................................................................... 45
Item 7A.   Qualitative and Quantitative Disclosures About Market Risk................................... 45
Item 8.    Financial Statements and Supplementary Data.................................................. 45
           Consolidated Financial Statements............................................................ 46
           Notes to Consolidated Financial Statements................................................... 51
           Financial Statement Responsibility........................................................... 78
           Independent Auditors' Report................................................................. 79
Item 9.    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure......... 80

PART III
Item 10.   Directors and Executive Officers of the Registrant........................................... 80

PART IV
Item 14.   Exhibits, Financial Statement Schedules and Reports on Form 8-K.............................. 81
           Schedule II--Valuation and Qualifying Accounts............................................... 82
           Signatures................................................................................... 83
</TABLE>

                                        i

<PAGE>

                                     PART I
                                     ------

ITEM 1:  BUSINESS

GENERAL

     PSEG Energy Holdings Inc. (Energy Holdings), incorporated under the laws of
the State of New Jersey with its principal executive offices located at 80 Park
Plaza, Newark, New Jersey 07102 is a direct wholly-owned subsidiary of Public
Service Enterprise Group Incorporated (PSEG). Unless the context otherwise
indicates, all references to "Energy Holdings," "we," "us" or "our" herein mean
PSEG Energy Holdings Inc. and its consolidated subsidiaries. We have three
principal direct wholly-owned subsidiaries; PSEG Global Inc. (Global), PSEG
Resources Inc. (Resources) and PSEG Energy Technologies Inc. (Energy
Technologies).

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

                            PSEG Organizational Chart


                                  ------------
                                      PSEG
                                  ------------

          ------------    ------------    -------------------      ------------
             PSE&G           Power          Energy Holdings          Services
          ------------    ------------    -------------------      ------------

                                          -------------------
                                                Global
                                          -------------------

                                          -------------------
                                              Resources
                                          -------------------

                                          -------------------
                                          Energy Technologies
                                          -------------------


     We are 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.

ENERGY HOLDINGS

     We participate in three energy-related reportable segments through our
wholly-owned subsidiaries: Global, Resources and Energy Technologies. Together,
these operating segments have more than 100 financial and operating investments.
We seek to pursue investment opportunities in the rapidly changing global energy
markets, with Global focusing on the operating segments of the electric
industries and Resources seeking to make financial investments in these
industries. Energy Technologies focuses on constructing, operating and
maintaining heating, ventilating and air conditioning (HVAC) systems and
providing energy-related engineering, consulting and mechanical contracting
services to industrial and commercial customers.

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

                                      -1-
<PAGE>



     Our portfolio is diversified by number, type and geographic location of
investments. As of December 31, 2001, and December 31, 2000, assets were
comprised of the following types of investments:

<TABLE>
<CAPTION>
                                                        December 31, 2001     December 31, 2000
                                                        -----------------     -----------------
<S>                                                              <C>                 <C>
Leveraged Leases.....................................            37%                 43%
International Electric Distribution Facilities.......            28%                 24%
International Generation Plants......................            18%                 10%
Domestic Generation Plants...........................             7%                  7%
Energy Services......................................             4%                  6%
Other Passive Financial Investments..................             3%                  6%
Other................................................             3%                  4%
</TABLE>

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

GLOBAL

Business Description

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

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

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

     Generally, Global has sought to minimize risk in the development and
operation of its generation projects by selecting partners with complementary
skills, structuring long-term power purchase contracts, arranging financing
prior to the commencement of construction and contracting for adequate fuel
supply. As Global has grown, its objective has evolved from being a minority or
equal partner to seeking to be the majority or sole owner of many of its
investments. Historically, Global's operating affiliates have entered into
long-term power purchase contracts, selling the electricity produced for the
majority of the project life. However, two plants in Texas, two plants in China,
a plant in Argentina, and a plant (in advanced development) in Poland will
likely operate as merchant plants without long-term power purchase contracts.

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

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

     Global has ownership interests in 31 operating generation projects totaling
4,992 MW (2,047 MW net) and 13 projects totaling 3,205 MW (1,399 MW net) in
construction or advanced development. Of Global's generation projects in
operation, construction or advanced development, 1,350 MW net or 39% are located
in the United States. Global is actively involved, through its joint ventures,
in managing the operations of 15 operating generation projects and will be
actively involved in managing the operations of five projects in construction or
advanced development.

                                      -2-
<PAGE>



     Global's business includes electric distribution where it can be linked to
existing or prospective generation opportunities. Since 1997, Global has
invested in eight distribution companies which serve approximately 3.6 million
customers and a population of 14 million 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.
Investments in these rate-regulated distribution companies represented 28% of
our assets, or $2.1 billion, as of December 31, 2001.

     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
ultimately assume operational responsibility. 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.

     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.

     For a complete discussion of the AES notification of termination of the
pending sale of certain Argentine assets to a subsidiary of AES and certain
other events, see Note 19. "Subsequent Events" of the Notes to Consolidated
Financial Statements. For a discussion of the fiscal and cash uncertainties and
potential asset impairment due to the Argentine economic, political and social
crisis, see Note 13. "Commitments and Contingencies", of the Notes to
Consolidated Financial Statements.

     As of December 31, 2001 and December 31, 2000, Global had assets of
approximately $4.1 billion and $2.3 billion, respectively.

     Strategic Overview

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



                                      -3-
<PAGE>
                              Generation Facilities
      Global has invested in the following generation facilities which are in
operation or under construction or advanced development:

<TABLE>
<CAPTION>
                                                                                                     Global's
                                                                                       Global's     Net Equity
                                                                           Total      Ownership    Interest in
                                       Location         Primary Fuel         MW        Interest      Total MW
                                       --------         ------------         --        --------      --------
Operating Power Plants
----------------------
United States
-------------
<S>                                       <C>          <C>                 <C>            <C>          <C>
Texas Independent Energy
   Guadalupe.......................       TX            Natural gas         1,000         50%           500
   Odessa..........................       TX            Natural gas         1,000         50%           500
Kalaeloa...........................       HI                Oil               180         50%            90
GWF
   Bay Area I......................       CA           Petroleum coke          21         50%            10
   Bay Area II.....................       CA           Petroleum coke          21         50%            10
   Bay Area III....................       CA           Petroleum coke          21         50%            10
   Bay Area IV.....................       CA           Petroleum coke          21         50%            10
   Bay Area V......................       CA           Petroleum coke          21         50%            10
Hanford............................       CA           Petroleum coke          27         50%            14
Hanford - Peaking Plant............       CA            Natural gas            90         50%            45
SEGS III...........................       CA               Solar               30          9%             3
Tracy..............................       CA              Biomass              21         35%             7
Bridgewater........................       NH              Biomass              16         40%             6
Kennebec...........................       ME               Hydro               15         16%             2
Conemaugh..........................       PA               Hydro               15         50%             8
                                                                           ---------               -------------
         Total United States                                                2,499                     1,225
                                                                           ---------               -------------
International
-------------
CTSN(B)............................   Argentina     Coal/Natural gas/Oil      650         19%           124
MPC
   Jingyuan - Units 5 and 6........     China               Coal              600         15%            90
   Tongzhou........................     China               Coal               30         40%            12
   Nantong.........................     China               Coal               24         46%            11
   Jinqiao (Thermal Energy)........     China             Coal/Oil            N/A         30%           N/A
   Zuojiang - Units 1, 2 and 3.....     China              Hydro               72         30%            22
   Fushi - Units 1, 2 and 3........     China              Hydro               54         35%            19
   Shanghai BFG....................     China        Blast furnace gas         50         16%             8
PPN................................     India       Naphtha/Natural gas       330         20%            66
Tanir Bavi.........................     India             Naphtha             220         74%           163
Prisma
   Crotone.........................     Italy             Biomass              20         26%             5
Electroandes.......................      Peru              Hydro              183        100%           183
Chorzow (Existing Facility)........     Poland              Coal              100         55%            55
Turboven
   Maracay.........................   Venezuela         Natural gas            60         50%            30
   Cagua...........................   Venezuela         Natural gas            60         50%            30
TGM................................   Venezuela         Natural gas            40          9%             4
                                                                           ---------               -------------
         Total International                                                2,493                       822
                                                                           ---------               -------------
         Total Operating Power Plants                                       4,992                     2,047
                                                                           ---------               -------------
                                                                                                                   Scheduled In
Power Plants in Construction or Advanced Development                                                               Service Date
----------------------------------------------------                                                               ------------
United States
-------------
GWF Energy
   Henrietta - Peaking Plant(A)....       CA            Natural gas            90         50%            45            2002
   Tracy - Peaking Plant(A)........       CA            Natural gas           160         50%            80            2002
International
-------------
Parana(B)..........................   Argentina         Natural gas           830         33%           274            2002
Haian (Thermal Energy).............     China               Coal              N/A         50%           N/A            2002
Prisma
   Strongoli.......................     Italy             Biomass              40         26%            10            2002
   Porto Empedocle(A)..............     Italy             Biomass              24         26%             6            2002
   Bando...........................     Italy             Biomass              20         51%            10         2002/2003
Salalah............................      Oman           Natural gas           200         81%           162            2003
Skawina CHP(A).....................     Poland              Coal              590         35%           207            2002
Chorzow............................     Poland              Coal              220         90%           198            2003
Kuo Kuang..........................     Taiwan          Natural gas           480         18%            84            2003
Rades..............................    Tunisia          Natural gas           471         60%           283            2002
Turboven
   Valencia(A).....................   Venezuela         Natural gas            80         50%            40            2002
                                                                           ---------               -------------
         Total Construction or Advanced Development                         3,205                     1,399
                                                                           ---------               -------------
         TOTAL Generation Facilities                                        8,197                     3,446
                                                                           =========               =============
</TABLE>

A = Advanced Development
B = Assets Held for Sale

                                      -4-
<PAGE>

The following descriptions include Global's significant generation facilities:

Domestic Generation In Operation

    Texas Independent Energy

     In April 1999, Global and its partner, Panda Energy International, Inc.,
established Texas Independent Energy, L.P. (TIE), a 50/50 joint venture, to
develop, construct, own, and operate electric generation facilities in Texas.

     The first TIE facility, a 1,000 MW gas-fired combined-cycle electric
generation facility in Guadalupe County in south central Texas commenced
commercial operation in January 2001. Guadalupe has entered into bilateral power
purchase agreements for the sale of approximately 46% of its expected output in
2002. The balance of the output will be sold via spot or short-term basis into
the Texas power market. As market conditions warrant, Guadalupe will continue to
enter into power purchase agreements. In 2001, the plant generated approximately
3,723 GWH of electric energy and $168 million of gross revenue.

     The second TIE facility, a 1,000 MW gas-fired combined-cycle electric
generation facility near Odessa, Texas commenced full commercial operations in
August 2001. Odessa has entered into bilateral power purchase agreements for the
sale of approximately 19% of its expected output in 2002. The balance of the
output will be sold via spot or short-term basis into the Texas power market. As
market conditions warrant, Guadalupe will continue to enter into power purchase
agreements. In 2001, the plant generated approximately 1,398 GWH of electric
energy and $38 million of gross revenue. For a discussion of the Texas power
market, See "-- Managements Discussion and Analysis -- Business Environment."

    Kalaeloa

     The Kalaeloa power plant is a 180 MW oil-fired cogeneration plant located
at Barbers Point, Oahu, Hawaii, which began operating in April 1990. Global
purchased a 49% limited partnership interest in the facility in 1997 and a 1%
general partnership interest in April 2000. Global's partner is Harbert Power.
All of the electricity generated by the Kalaeloa power plant is sold to Hawaiian
Electric Company under a 25-year power purchase contract terminating in May
2016. Under a steam purchase and sale agreement expiring in May 2016, the
Kalaeloa power plant will supply approximately 121,000 lbs./hr. of steam to
Hawaiian Independent Refinery, Inc. In 2001, the plant generated approximately
1,354 GWH of electric energy for sale to Hawaiian Electric Company and
approximately $111 million of gross revenue. The plant availability factor in
2001 was 97%.

    GWF and Hanford

     Global and Harbert Power each own 50% of GWF Power Systems, LP, 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 (PG&E) ending in 2020
and 2021. In 2001, the plants generated 802 GWH of electric energy for sale to
PG&E and approximately $90 million of gross revenue. The plants went into
service between October 1989 and December 1990. The average availability factor
of the five plants in 2001 was 97%.

     Global and Harbert Power each own 50% of Hanford LP, 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 PG&E through 2011.
In July 2001, GWF, Hanford and Tracy entered into an agreement with PG&E
(Agreement) and amendments to their power purchase agreements with PG&E that
contained the Public Utilities Commission of the State of California (CPUC)
approved pricing for a term of five years commencing July 16, 2001.

     In 2001, the Hanford plant generated 196 GWH of electric energy for sale to
PG&E and steam which was sold to Pirelli-Armstrong Tire Corp. The Hanford plant
generated approximately $20 million of gross revenue in 2001 and had an
availability factor of 94%.

     For a discussion of the California Power Market and PG&E, see "Management's
Discussion and Analysis of Financial Condition and Results of Operation -
Qualitative and Quantitative Disclosures About Market Risk - California Power
Market."

    Hanford Peaking Plant

     In May 2001, GWF Energy LLC (GWF Energy), a 50/50 joint venture between
Global and Harbinger GWF LLC (an affiliate of Harbert Power), entered into a
10-year power purchase agreement with the California Department of Water
Resources (DWR) to provide 340 MW of electric capacity to California

                                      -5-
<PAGE>

from three new natural gas-fired peaking plants. Total project cost is estimated
at $325 million. The first plant, the Hanford Peaking facility, was completed
and began operation in August 2001. The simple-cycle Hanford Peaking Plant,
based on two General Electric LM 6000 gas turbines, is located in Hanford,
California and was designed to provide up to 95 MW of electricity during "peak
periods" of high electric demand. Energy and capacity not scheduled by the DWR
is available for sale by GWF Energy. This facility is one of three plants GWF
Energy is building in California to support the agreement entered into in May
2001 with the DWR. The additional two peaking generation facilities are expected
to begin operations in 2002. The Hanford Peaking plant had approximately $18
million in gross revenue in 2001.

     On February 25, 2002 the CPUC filed a complaint with the Federal Energy
Regulatory Commission (FERC) under Section 206 of the Federal Power Act against
sellers who, pursuant to long-term, FERC authorized contracts, provide power to
the DWR. GWF Energy is a named respondent in this proceeding. The CPUC's
complaint, which addresses 44 transactions embodied in 32 contracts with 22
sellers, alleges that collectively, the specified long term wholesale power
contracts are priced at unjust and unreasonable levels and requests FERC to
abrogate the contracts to enable the State to obtain replacement contracts as
necessary or in the alternative, to reform the contracts to provide for just and
reasonable pricing, reduce the length of the contracts, and strike from the
contracts the specific non-price and conditions found to be unjust and
unreasonable. In the event of an adverse ruling by the FERC, Energy Holdings and
Global would reconsider any plans to invest in additional generation facilities
in California.

International Generation in Operation

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

   Argentina
   ---------

    CTSN

     Central Termica San Nicolas (CTSN) is a 650 MW electric generation facility
located near the city of San Nicolas, Argentina that is 19% owned by Global and
69% by The AES Corporation (AES), with the remaining 12% owned by CTSN's
employees. CTSN was acquired in 1993 in conjunction with the initial Argentine
privatization process, and consists of one 350 MW and four 75 MW steam turbines.

     For a complete discussion of the pending sale of certain Argentine assets
to a subsidiary of AES, see Note 19. "Subsequent Events" of the Notes to
Consolidated Financial Statements. For a discussion of the Argentine economic
crisis, see Note 13. "Commitments and Contingencies", of the Notes to
Consolidated Financial Statements.

   China
   -----

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

     As the result of its existing investments in China, MPC has established
relationships and partnerships with local authorities. Its focus has been on
investment opportunities in eastern China, where power demand is high and
cogeneration opportunities exist, central China, where heavy industry is located
and there are abundant supplies of coal, and northwest and southwest China,
where power shortages prevail and central government policy continues to support
growth in designated areas. MPC has started to invest in Taiwan in 2001 through
the Kuo Kuang project (for a discussion of the Kuo Kuang project, see "Power
Plants in Construction or Advanced Development - Taiwan - Kuo Kuang"). 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 and
thermal heat generation facilities in China and Taiwan. MPC seeks to structure
long-term power purchase contracts with its customers and to incorporate
take-or-pay and minimum take provisions to support debt service and a

                                      -6-
<PAGE>

specified equity return. Pricing terms for energy from its facilities generally
include a base price and indexed adjustments to compensate for changes in
inflation, foreign currency exchange rates up to the minimum equity return and
laws affecting taxes, fees and required reserves. For cogeneration facilities,
instead of selling the electricity through long-term power purchase contracts,
MPC sells its output through an annually determined quota fixed in accordance
with a pre-determined formula which essentially determines the amount of
electricity to be sold by reference to the amount of steam generated by the
cogeneration facilities. The two cogeneration plants in Tongzhou and Nantong
operate under this system. MPC's projects, either under construction or in
operation, have obtained all required approvals to enable issuance of a business
license in their respective localities. As legal business entities, these
projects generally have access to foreign currency exchange markets.

     Minority investments held by Global in seven generation facilities located
in China totaled 162 MW net and generated less than 2% of Global's total gross
revenues in 2001.

   India
   -----

     PPN

      Global owns a 20% interest in PPN Power Generating Company Limited (PPN),
which has a 330 MW gas-fired combined-cycle facility in the State of Tamil Nadu,
India. Commercial operation commenced in April 2001. 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. A 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, with an agreement to take-or-pay to a Plant Load
Factor (PLF) of 85%. Letters of credit, a State guarantee and an escrow
arrangement are intended to support the contract. The State guarantee has been
received. The letters of credit and the escrow arrangement are being negotiated.
Foreign currency exposure has been minimized by utilizing partial local currency
(Rupee) financing and providing for devaluation protection, up to a base return,
in the power purchase contract. In 2001, the plant generated approximately 745
GWH of electric energy and $90 million of gross revenue.

      Tanir Bavi

      In September 2000, Global acquired a 49% interest in Tanir Bavi Power
Company Private Ltd. In January 2001, Global acquired an additional 25% interest
in the project bringing its total ownership interest to 74%. The facility
includes a 220 MW barge mounted, combined-cycle generating facility. Global's
partner in the venture is GMR Vasavi Group, a local Indian company. The plant
commenced combined-cycle commercial operation in November 2001. Power from the
facility will be sold under a seven year fixed price power purchase agreement
with the Karnataka Electricity Board that is renewable for an additional five
year term under a mutually agreeable tariff. The initial agreement is take or
pay to a plant load factor (PLF) of 85% with incentive payments for performance
above the base PLF. The contract is supported by a State guarantee and an escrow
arrangement. Letter of credit arrangements are in process. In 2001, the plant
generated approximately 570 GWH of electric energy and $58 million of gross
revenue.

   Peru
   ----

      Electroandes

      In December 2001, Global acquired Empresa de Electricidad de los Andes
S.A. (Electroandes) for $227 million, subject to certain purchase price
adjustments pending completion in April 2002. Electroandes is the sixth largest
electric generator in Peru with a 6% market share. Electroandes' main assets
include four hydroelectric facilities with a combined installed capacity of 183
MW and 460 miles of transmission lines located in the Central Andean region
(northeast of Lima). In addition, Electroandes has a temporary concession to
develop a 100 MW expansion of an existing station and a 150 MW greenfield
hydroelectric facility for a period of two years from March 15, 2001. In 2000,
Electroandes generated 1,150 GWH of electrical energy, of which 97% was sold
through power purchase agreements to mining companies in the region.

   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 indirect 9% ownership interest in

                                      -7-
<PAGE>

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.

      Turboven

      In January and February 2001, Global commenced commercial operation of two
gas-fired simple-cycle electric generation facilities with total installed
capacity of up to 120 MW and associated distribution systems to serve industrial
customers in Maracay (60 MW) and Cagua (60 MW). The facilities are owned and
operated by Turboven, an entity which is jointly owned by Global and CIE. The
facilities utilize 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 70% of the output of Maracay and Cagua, to various industrial
customers, of which approximately 50% 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 US Dollars
and paid in local currency. In 2001, the plants in Maracay and Cagua generated
approximately 317 GWH and 124 GWH of electric energy, respectively, and $12
million and $8 million of gross revenue, respectively. For a discussion of the
recent devaluation of the Venezuelan Bolivar, see "Note 13. Commitments and
Contingencies."

   Poland
   ------

      Chorzow

      In October 2000, Global acquired a 55% economic interest in a 100 MW
combined heat and power plant in Chorzow, in the Upper Silesia region of Poland,
with Elektrownia Chorzow holding the remaining interest. As a part of the
acquisition of the existing plant, Global obtained the rights to construct, and
has begun construction on, a 220 MW electrical and 500 MW thermal combined heat
and power plant in Chorzow. Global currently holds a 55% economic interest in
Elektrocieplownia Chorzow Sp. z o.o. (ELCHO), including both the old plant and
the plant under construction, with the anticipation of expanding such interest
to approximately 90% by 2003. Global intends to operate the existing plant until
the new plant comes on line in 2003. Polskie Sieci Elektroenergetyczne SA (PSE),
the Polish Power Grid Company, has signed a long-term power purchase agreement
with ELCHO and it is planned for all of the power to be delivered into the local
distribution system. During 2001, the existing plant generated approximately 230
GWH of electric energy and $21 million of gross revenue.

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

Power Plants in Construction or Advanced Development

      Global has 13 projects in construction or advanced development totaling
3,205 MW (1,399 MW net) located in the United States, Argentina, China, Italy,
Oman, Poland, Taiwan, Tunisia and Venezuela. Global seeks to obtain power
purchase contracts for the output of its plants. Global has obtained long-term
power purchase contracts for the output of its plants in China, Italy, Poland,
Taiwan, Tunisia and Venezuela.

   United States
   -------------

      Henrietta and Tracy Peaking Plants

      In May 2001, GWF Energy entered into a 10-year power purchase agreement
with the California DWR to provide 340 MW of electric capacity to California
from three new natural gas-fired peaking plants. In addition to the 90 MW
Hanford Peaking facility that commenced operation in August 2001, two additional
peaking facilities are currently in advanced development (the Henrietta and
Tracy Peaking facilities) and are expected to commence operations in 2002.
Global's permanent equity investment in these plants, including contingencies,
is not expected to exceed $100 million after completion of project financing,
expected to occur in 2002.

      For a description of a CPUC complaint against sellers (including GWF
Energy), who are counterparties in long-term contracts with the DWR, see
"Hanford Peaking Plant."

                                      -8-
<PAGE>

   Argentina
   ---------

      Parana

      In June 1999, Global and AES closed on the non-recourse project financing
of the Parana facility, an 830 MW natural gas-fired combined-cycle electric
generation facility constructed on land adjacent to the CTSN facility in San
Nicolas. Global has a 33% ownership share in AES Parana, S.A., the joint venture
entity that constructed and operates the Parana project. AES owns the remaining
67%. Parana has been designed to serve as a base load generator and operate as a
merchant plant selling into the wholesale power market in Argentina. In February
2002, the Parana facility commenced commercial operations.

      For a complete discussion of the AES notification of termination of the
pending sale of certain Argentine assets to a subsidiary of AES and certain
other events, see Note 19. "Subsequent Events" of the Notes to Consolidated
Financial Statements. For a discussion of the Argentine economic crisis, see
Note 13. "Commitments and Contingencies" of the Notes to Consolidated Financial
Statements.

   Oman
   ----

      Salalah

      In March 2001, Global, through Dhofar Power Company (DPCO), signed a
20-year concession with the government of Oman to privatize the electric system
of Salalah. A consortium led by Global (81% ownership) and several major Omani
investment groups owns DPCO. The project will enhance the existing network of
generation, transmission and distribution assets and is expected to add 200 MW
of new generating capacity. The project achieved financial closure in September
2001 and construction on the project commenced in the same month. The project is
expected to achieve commercial operation by March 2003. Total project cost is
estimated at $277 million. Global's equity investment, including contingencies,
is expected to be approximately $82 million.

   Poland
   ------

      Chorzow

      In October 2000, Global closed the project financing for a combined heat
and power plant currently under construction in Poland. The capacity of the
facility, which will be located in Chorzow, is planned to be 220 MW (electrical)
and 500 MW (thermal). This new facility will replace an existing 100 MW heat and
power generation facility. Global's economic interest in the project is
currently 55%, with the anticipation of expanding such interest to approximately
90% by 2003, with the balance held by a local Polish company. Total project cost
is estimated at $324 million. Global's equity investment, including
contingencies is not expected to exceed $105 million. The plant has a targeted
commercial operation date in 2003. PSE, the Polish power grid company, has
entered into a 20-year power purchase agreement with ELCHO for 100% of the
electrical output. All of the thermal energy will be sold to Przedsiebiorstwo
Energetyki Cieplnej, the district heating company serving the city of Katowice
and its surrounding communities, for a term of 20 years.

   Skawina CHP

      In January 2002, Global completed negotiations to buy a 35% interest in
the 590 MW (electric) and 618 MW (thermal) coal-fired Skawina CHP Plant
(Skawina), located in Southern Poland. As part of the transaction, PSEG Global
will purchase additional shares at closing, which will make PSEG the majority
owner of Skawina. The transaction includes the obligation to purchase additional
shares in 2003 that will bring PSEG's aggregate interest in Skawina CHP to
approximately 75%. Skawina supplies electricity to three local distribution
companies and heat mainly to the city of Krakow, under annual one-year contracts
consistent with current practice in Poland. The sale is part of the Polish
Government's energy privatization program. Global's equity investment is
expected to be approximately $44 million.

   Taiwan
   ------

      Kuo Kuang

      In 2001, through MPC, Global acquired a 17.5% indirect interest in a 480
MW gas-fired combined-cycle electric generation facility in Kuo Kuang, Taiwan.
MPC has a 35% interest in Kuo Kuang and partners with two local Taiwanese
companies, Chinese Petroleum Corporation and CTCI Corporation. Kuo Kuang has
entered into a 25-year power purchase contract for the sale of 100% of its
electric output to Taiwan Power Company, the national utility. The power
purchase contract payments consist of a fixed capacity charge to cover debt and
equity return as well as fixed and variable charges to cover fuel,

                                      -9-
<PAGE>

operations and maintenance costs. The tariff will be paid in local currency. Kuo
Kuang obtained project financing in September 2001 and is expected to be in
operation in 2003, with a total cost of approximately $320 million. Global's
equity investment, including contingencies, is expected to be approximately $20
million.

   Tunisia
   -------

      Rades

      Global and its partners, Sithe Energies, Inc. and Marubeni Corporation,
closed project financing for a 471 MW gas-fired combined-cycle electric
generation facility in Rades, Tunisia, in August 1999. In December 2000, Global
and Marubeni Corporation purchased Sithe Energies, Inc.'s interest in Carthage
Power Company. As a result, Global owns 60% of the facility with Marubeni owning
40%. Global will be the operator. A 20-year power purchase contract has been
entered into for the sale of 100% of the output to Societe Tunisienne
d'Electricite et du Gaz, the national utility. The power purchase contract
tariff consists of a fixed capacity charge to cover debt and equity return as
well as fixed and variable charges to cover fuel, operations and maintenance
costs. Each tariff component will be paid in local currency (Dinars) and indexed
to actual costs or a combination of US Dollars and Euros. The facility is
expected to be in operation in 2002 at a total cost of approximately $261
million. Global's equity investment, including contingencies, is expected to be
approximately $59 million.


                        ELECTRIC DISTRIBUTION OPERATIONS
                                                                     Global's
                                                Number of            Ownership
                               Location         Customers            Interest
                               --------         ---------            --------
EDEN*........................ Argentina            270,000               30%
EDES*........................ Argentina            150,000               30%
EDELAP*...................... Argentina            280,000               30%
EDEERSA...................... Argentina            235,000               90%
Rio Grande Energia...........   Brazil             990,000               32%
Chilquinta Energia...........   Chile              400,000               50%
SAESA........................   Chile              630,000              100%
Luz del Sur..................    Peru              690,000               44%
                                                 ---------
           Total.............                    3,645,000
                                                 =========
* = Assets Held for Sale


   Argentina
   ---------

      EDEN, EDES and EDELAP

      Global and its partner, AES, own 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. In
addition, Global and AES own Empresa Distribuidora La Plata S.A. (EDELAP) which
distributes electricity predominantly in the provincial capital, La Plata.
Global has a 30% ownership interest in each of EDEN and EDES and EDELAP.

      Pursuant to contracts and operating practices, Global has 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.

      For a complete discussion of the AES notification of termination of the
pending sale of certain Argentine assets to a subsidiary of AES and certain
other events, see Note 19. "Subsequent Events" of the Notes to Consolidated
Financial Statements. For a discussion of the Argentine economic crisis, see
Note 13. "Commitments and Contingencies" of the Notes to Consolidated Financial
Statements.

      EDEERSA

      In December 2000, Global agreed to purchase 41% of Empresa Distribuidora
de Electricidad de Entre Rios S.A. (EDEERSA) and obtained an option to purchase
an additional 49% interest in EDEERSA. The remaining 10% of EDEERSA is
indirectly owned by its employees. In June 2001, Global exercised its option to
acquire the additional 49% of EDEERSA, bringing its total ownership of EDEERSA
to 90%. The December 2000 acquisition was valued at approximately $117 million
net of outstanding debt assumed of

                                      -10-
<PAGE>

approximately $83 million. In June 2001, Global exercised its option to acquire
an additional 49% of EDEERSA, bringing its total ownership of EDEERSA to 90%.
The additional ownership was purchased for $110 million.

      EDEERSA is the main distributor of electricity in the Province of Entre
Rios, Argentina. Entre Rios is located to the north of the Province of Buenos
Aires and west of Uruguay. EDEERSA holds a 40-year exclusive concession, granted
in 1996 at the time of privatization, to distribute electricity throughout its
service territory, which covers 21,000 square miles and has an estimated
population of 1.1 million people. EDEERSA's distribution network consists of
approximately 9,100 miles of high, medium and low voltage power lines. EDEERSA's
approximately 235,000 customers consume approximately 1,575 GWH of electrical
energy per annum. In 2001, EDEERSA generated $122 million of gross revenue.

      Distribution tariffs are regulated by the provincial authority, Ente
Provincial Regulador de la Energia, utilizing the "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. Every five years the tariff
schedule is revised based on a variety of factors. The first such tariff review
was completed in August 2001.

      The new tariff structure resulted in an average rate reduction of 3% on
EDEERSA's energy sales, which was partially offset by compensation for items
that were previously ignored in the tariff structure, including reimbursement
for such items as the cost of sending the cut-of-service notice, customer
contributions for special connections and network connections, and the cost of
house inspections. On average, EDEERSA's contribution margin was decreased by
less than one percent.

      In addition, periodic rate adjustments are made as follows: changes in the
lower of (i) US PPI and CPI and (ii) Argentine PPI and CPI - every six months;
and changes in cost of electricity, distribution and connections - every three
months. With the new tariff structure, the changes in the PPI and the CPI are
reflected into the tariffs as the lower of the change in local PPI/CPI or the
change in the United States' PPI/CPI, with no adjustment if the change is less
than one percent.

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

      The quality of service of the distribution system is measured against
established standards and penalties may be imposed and paid to compensate
customers if such standards are not achieved. Global is developing capital
improvement budgets, and expects to meet the 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.

      For a complete discussion of the AES notification of termination of the
pending sale of certain Argentine assets to a subsidiary of AES and certain
other events, see Note 19. "Subsequent Events" of the Notes to Consolidated
Financial Statements. For a discussion of the Argentine economic crisis, see
Note 13. "Commitments and Contingencies" of the Notes to Consolidated Financial
Statements.


   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 32%.
Global is the named operator for the system. A shareholder's agreement
establishes corporate governance, voting rights and key financial provisions.
Global has veto rights over certain actions, including approval of the annual
budget and financing plan, executive officers, significant investments or
acquisitions, sale or encumbrance of assets, establishment of guarantees,
amendment of the concession agreement and dividend policies. Day-to-day
operations are the responsibility of RGE, subject to

                                     -11-
<PAGE>

partnership oversight. During 2001, VBC Energia and Previ transferred their
shares to CPFL, an electric distribution company in which each of VBC Energia
and Previ have an interest.

      RGE serves approximately 990,000 customers in the state of Rio Grande do
Sul in Southern Brazil and operates under a 30-year non-exclusive territorial
concession agreement ending in 2027. The concession is non-exclusive in that the
distribution system must provide large consumers the right to choose another
provider of energy or to self-generate. Global does not believe this represents
a substantial threat to the profitability of the distribution system in Brazil
since the tariff structure provides the distribution system the opportunity to
recover all costs associated with distribution service plus a return. RGE
secures its energy supply through contractual agreements expiring between 2007
and 2020. RGE also purchases 20% of its requirements through 2013 under the
terms of contracts which are denominated in US Dollars. During 2001, RGE
delivered approximately 6,000 GWH of electricity and generated $475 million in
gross revenue.

      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 which is embedded in the
concession contract, and a rate revision which will be calculated for RGE in
2003 and every subsequent fifth year anniversary.

      The 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.

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

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

      During 2001, Brazil experienced severe energy shortages, which prompted
the Brazilian Federal Government to implement electricity rationing throughout
the country commencing in June 2001. The emergency legislation divided the
country into zones and applied different rationing requirements. RGE is located
in the South region and, as such, is required to observe the regulations
applicable to this region. The emergency legislation called for voluntary
rationing of 7% by all consumers who consume more than 100 kilowatt hours per
month. From implementation to the end of 2001, RGE experienced an 8% drop in
consumption. Effective March 1, 2002, the Brazilian Federal Government
terminated the plan of electricity rationing.

      In response to the rationing plan, RGE along with Brazil's other
distribution companies successfully lobbied the Brazilian Federal Government in
2001 to implement a compensation plan. The procedure for obtaining compensation
requires distribution companies to estimate their financial losses from
rationing to ANEEL for review and approval. Once ANEEL has approved the loss
amount, RGE will be entitled to receive a loan from BNDS, a government agency,
for 90% of the loss amount and will be entitled to a tariff increase to cover
the remaining 10% of the losses.

      Another regulatory change has revised the fuel price pass-through
mechanism, which will be potentially beneficial to RGE. Under prior regulations,
the fuel pass-through component of the tariff charged to consumers did not cover
losses due to currency devaluations. Under the new regulations, RGE will be able
to track the difference between the tariff and the actual fuel costs. The
difference along with interest applicable to the difference will be covered in
the next year's tariff adjustment.

                                      -12-
<PAGE>

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

      On January 9, 2002, President Enrique Cardozo met with his Crisis Cabinet
to propose changes to the energy sector for the purpose of stimulating private
investment. The measures to be implemented as of that date include the
following:

      1. Changes in dispatch procedures of plants and price setting in the
         energy spot market;

      2. Substitution of computer set spot market prices for market-defined
         prices;

      3. Exclusion from the free market of energy produced by state owned
         generators. The sale conditions will be regulated when the volumes
         defined in the initial contracts start to phase-out;

      4. Stimulation of investment in environmentally safe sources of energy by
         offering preferred financing;

      5. Making distributors responsible for providing electric service in areas
         where it currently does not exist;

      6. Elimination of the floating spot market and the implementation of the
         Brazilian Energy Market under the regulatory control of ANEEL;

      7. Reorganization and transfer of more activities from ANEEL to the
         Ministry of Energy; and

      8. The dismantling of vertical integration by requiring all companies to
         separate their activities into generation, distribution and
         transmission.


      The ultimate impact of the above eight regulatory changes is still being
investigated by RGE. In addition, the Crisis Cabinet has also promulgated
several other modifications to the electricity sector which will be subject to
public hearings during the course of 2002.

   Chile and Peru
   --------------

      Chilquinta Energia

      Global together with its partner, Sempra, jointly own 99.99% of the shares
of Chilquinta Energia, S.A. (Chilquinta), an energy distribution company with
numerous energy holdings, based in Valparaiso, Chile. In addition, Global and
Sempra jointly own 87.9% of Luz del Sur, which owns electric distribution
facilities in Peru.

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

      In 2001, Chilquinta sold approximately 1,608 GWH to approximately 400,000
customers in Chile and generated approximately $131 million in gross revenues.
Chilquinta operates under a non-exclusive perpetual franchise within Chile's
Region V which is located just north and west of Santiago. Global believes that
direct competition for distribution customers would be 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 a population of approximately 3.2 million. In 2001, Luz del
Sur sold approximately 3,697 GWH to approximately 690,000 customers and
generated gross revenues of approximately $311 million. 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 (CNE), a national governmental regulatory
authority. The Chilean regulatory framework has been in existence since 1982,
with rates set every four years based on a model company. The tariff which
distribution companies charge to regulated customers consists of two components:
the actual cost of

                                      -13-
<PAGE>

energy purchased plus an additional amount to compensate for the value added in
distribution (DVA tariff). The DVA tariff considers allowed losses incurred in
the distribution of electricity, administrative costs of providing service to
customers, costs of maintaining and operating the distribution systems, and an
annual real return on investment of 8% to 14% based on the new replacement cost
of distribution assets. Changes in electricity distribution companies' cost of
energy are passed through to customers, with no impact on the distributors'
margins (equal to the DVA tariff). Therefore, distributors, including
Chilquinta, are not affected by changes in the generation sector which affect
prices. The most recent tariff adjustment occurred in November 2000. Chilquinta
received a 2% tariff increase as a result of this process. The DVA tariff index
provides for monthly adjustments based on variations in certain economic
indicators whenever the component costs increase by more than 3% over prior
levels. This index provides inflation adjustments and indirect partial
devaluation protection. The CNE concluded a profitability review of Chilean
distribution companies in January 2002, with no resulting adverse effects to
Chilquinta's tariff rates. The next tariff review is scheduled for November
2004. The CNE expects to conduct annual profitability reviews (similar to the
one recently completed) which may result in adverse effects on tariffs for
Chilquinta.

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

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

     SAESA

     In August 2001, Global purchased a 94% equity stake in Sociedad Austral de
Electricidad S.A., (SAESA) and all of its subsidiaries from Compania de
Petroleos de Chile S.A. (COPEC). The SAESA group of companies consists of four
distribution companies and one transmission company that provide electric
service to 390 cities and towns over 1,500 km between Bulnes in the VIII Region
and Cochrane in the XI Region of southern Chile. Additionally, Global purchased
from COPEC approximately 14% of Empresa Electrica de la Frontera S.A. (Frontel)
not owned by SAESA. SAESA also owns a 50% interest in the Argentine distribution
company Empresa de Rio Energia Negro S.A. (EDERSA). In 2001 Global spent $447
million (net of $16 million in cash acquired) to acquire a 94% interest in SAESA
and a 14% interest in Frontel. In October 2001, Global completed a tender offer
for an additional 6% of publicly traded SAESA shares, for approximately $25
million.

     SAESA, along with its related companies, have approximately 490,000
customers in Chile and have an 8% share of energy sales among Chilean
distribution companies.

     Through its affiliated company STS, SAESA provides transmission services to
electrical generation facilities that have power purchase arrangements with
distributors in Regions VIII, IX and X. STS currently owns and maintains 203 km
of 66 kV and 20 MVA transmission lines installed in High Tension and Medium
Tension substations.

     The distribution companies in Chile, including those of SAESA, are subject
to rate regulation by the CNE. For a comprehensive discussion of rate regulation
in Chile, see "Chilquinta Energia." The next tariff review for SAESA's Chilean
distribution companies is scheduled in 2004.

     SAESA's subsidiary in Argentina, EDERSA, provides generation, transmission
and distribution services to an additional 140,000 customers in 66 communities
in the Province of Rio Negro, which is located close to Argentina's principal
oil and gas reserves and has more than 600,000 residents.

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

                                      -14-
<PAGE>

     During 2001, SAESA's energy sales reached 1,119 GWH which represents an
increase of 13.7% from the previous year. At the close of the year, SAESA served
243,000 customers representing an increase of 4.2% from 2000. These increases
are due in large part to SAESA's drive to promote electrification in rural areas
located in Region X and Chiloe Island. SAESA also made significant investments
in its distribution infrastructure in 2001 in order to extend service to remote
areas of Region X. The most significant investment was the extension of urban
and rural networks to existing service areas and to new service areas.
Accordingly, SAESA's assets currently include 8,764 kilometers of medium tension
lines, 5,134 kilometers of low tension lines and 299 MVA installed in both
medium tension and low tension.


RESOURCES

Business Description

      Resources invests in energy-related financial transactions and manages a
diversified portfolio of assets, including leveraged leases, operating leases,
leveraged buyout funds, limited partnerships and marketable securities.
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.

      As of December 31, 2001 and December 31, 2000, Resources had approximately
$2.8 billion and $2.3 billion, respectively, invested in leveraged lease
transactions, which represented approximately 92% and 88% of Resources' total
assets of $3.0 billion and $2.6 billion, respectively. Leveraged leases of
energy-related plant and equipment totaled approximately $2.4 billion and $1.8
billion or 86% and 79% of the lease portfolio and 79% and 70% of Resources'
assets as of December 31, 2001 and December 31, 2000, respectively. The
remainder of Resources' portfolio is further diversified across a wide spectrum
of asset types and business sectors including leveraged leases of aircraft,
railcars and real estate, limited partnership interests in project finance
transactions, and leveraged buyout and venture funds. Approximately 95% of the
lease investments in Resources' portfolio are with lessees that have investment
grade credit ratings.

Strategic Overview

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

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

                                      -15-
<PAGE>

Portfolio

      The major components of Resources' investment portfolio as a percent of
its total assets as of December 31, 2001 and December 31, 2000 were:
<TABLE>
<CAPTION>

                               SCHEDULE OF ASSETS

                                                As of December 31, 2001                 As of December 31, 2000
                                           -----------------------------------    ------------------------------------
                                                                    % of                                   % of
                                                                 Resources'                             Resources'
                                              Amount            Total Assets          Amount           Total Assets
                                           --------------      ---------------    ---------------    -----------------
<S>                                            <C>                 <C>               <C>              <C>
                                                                     (Millions of Dollars)
Leveraged Leases
    Energy-Related
      Foreign.........................        $ 1,214                  40%           $   973                 38%
      Domestic........................          1,181                  39%               816                 32%
    Real Estate
      Foreign.........................             --                  --                 --                 --
      Domestic........................            188                   6%               172                  7%
    Aircraft
      Foreign.........................             64                   2%               133                  5%
      Domestic........................             44                   2%                66                  3%
    Commuter Railcars
      Foreign.........................             85                   3%                83                  3%
      Domestic........................             --                  --                 --                 --
    Industrial
      Foreign.........................             --                  --                 --                 --
      Domestic........................              8                  --                  9                 --
                                           ----------------    ---------------    ---------------    -----------------
    Total Leveraged Leases, Net                 2,784                  92%             2,252                 88%
                                           ----------------    ---------------    ---------------    -----------------

Limited Partnerships
    Leveraged Buyout
      Funds ..........................            130                   5%               213                  8%
      Other                                        33                   1%                26                  1%
                                           ----------------    ---------------    ---------------    -----------------
    Total Limited Partnerships.........           163                   6%               239                  9%
                                           ----------------    ---------------    ---------------    -----------------

Marketable Securities..................             6                  --                  6                 --
Other Investments......................             5                  --                  4                 --
Owned Property........................             62                   2%                58                  3%
Current and Other Assets...............             6                  --                  5                 --
                                           ----------------    ---------------    ---------------    -----------------
Total Resources' Assets................       $ 3,026                 100%           $ 2,564                100%
                                           ================    ===============    ===============    =================
</TABLE>

      As of December 31, 2001, no single investment represented more than 7% of
Resources' total assets.

Leveraged Lease Investments

      Resources' equity investments in leveraged leases help to diversify our
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.

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

                                      -16-
<PAGE>

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

      Energy-Related Leases

      The Resources' portfolio contains 29 separate leveraged leases of
energy-related assets. The total amount invested in such transactions was
approximately $2.4 billion, and $1.8 billion as of December 31, 2001 and
December 31, 2000, respectively, which represented approximately 79% and 70%
respectively, of Resources' assets. This portion of the portfolio, along with
anticipated new investments of this type, is expected to contribute
approximately 80% to 90% of Resources' revenues over the next five years. Over
95% of this portion of the lease portfolio represents investment grade credit
risk. The energy-related sector is expected to be the primary focus of
Resources' future investment activity.

      Included in Resources' energy-related leveraged lease portfolio are
transactions with United States utilities and independent power producers for
peaking and base-load plants and a reservoir storage facility. Resources has
also structured leveraged lease investments for electric generation plants,
electric and gas distribution networks and a waste-to-energy facility for
lessees in Austria, Belgium, Germany, the Netherlands, the United Kingdom, and
New Zealand. As of December 31, 2001, Resources owns interests in electric
generation plants totaling approximately 9,599 MW of generation capacity, of
which 1% is nuclear.

      Real Estate Leases

      The real estate leveraged lease portion of the portfolio is expected to
generate revenue of approximately $9 million per annum on average over the next
five years. This represents approximately 3% of Resources' average annual
revenue. Real estate leveraged leases represented approximately 6% and 7% of
Resources' assets at December 31, 2001 and December 31, 2000, respectively, and
totaled approximately $188 million and $172 million, respectively. The portfolio
consists of separate leases on 44 properties with six lessees. Resources is not
currently planning to invest in any new leveraged leases of real property.

      Aircraft Leases

      The aircraft leveraged lease portion of the portfolio totaled
approximately $108 million and $199 million as of December 31, 2001 and December
31, 2000, respectively, which represented approximately 4% and 8%, respectively,
of Resources' assets. Revenue associated with these investments is expected to
be less than 1% of Resources' revenue or approximately $1 million per annum on
average over the next five years. The current portfolio contains seven aircraft
leased to five 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 $93 million as of December 31, 2001 is expected to contribute
revenue of less than $2 million per annum on average over the next five years.

      Leveraged Buyout Funds/Limited Partnerships

      As of December 31, 2001 and December 31, 2000, approximately 5% and 8%,
respectively, of Resources' assets were invested in leveraged buyout funds and
1% in other limited partnerships and venture funds. Approximately $163 million
and $239 million was invested in this segment of the portfolio

                                      -17-
<PAGE>

as of December 31, 2001 and December 31, 2000, respectively. Approximately $34
million included in the leveraged buyout funds represents the fair value of
Resources' share of publicly traded common stock in four companies as of
December 31, 2001. The leveraged buyout funds and limited partnership
investments in Resources' portfolio are expected to contribute, excluding
distributions associated with asset sales, approximately 2% of total revenue in
2002 and nothing thereafter. Resources is not currently planning to make
investments of this nature in the future.

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

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

ENERGY TECHNOLOGIES

      Energy Technologies is an energy management company that 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. As of December 31, 2001 and December 31,
2000, Energy Technologies had assets of $290 million and $312 million,
respectively.

      We are evaluating the future prospects of Energy Technologies' business
model and its fit in our portfolio given the slower pace of retail energy
deregulation in the markets in which we are active, as well as, the substandard
performance of Energy Technologies since its inception.

OTHER SUBSIDIARIES

      Enterprise Group Development Corporation (EGDC), a commercial real estate
property management business, has been conducting a controlled exit from the
real estate business since 1993. EGDC has investments in seven commercial real
estate properties (one of which is developed) in several states. EGDC's strategy
is to preserve the value of its assets to allow for the controlled disposition
of its properties as favorable sales opportunities arise. As of December 31,
2001 and December 31, 2000, EGDC's consolidated assets aggregated $65 million.

      PSEG Capital Corporation (PSEG Capital) has served as the financing
vehicle, borrowing on the basis of a minimum net worth maintenance agreement
with PSEG. As of December 31, 2001 and December 31, 2000, PSEG Capital had debt
outstanding of $480 million and $650 million, respectively. Existing debt
matures in 2002 and 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".

RISK FACTORS

      The following factors should be considered when reviewing our business and
are relied upon by us in issuing any forward-looking statements. Such factors
could affect actual results and cause such results to differ materially from
those expressed in any forward-looking statements made by, or on behalf of us.
Some or all of these factors may apply to us and our subsidiaries.

Because a Portion of Our Business is Conducted Outside the United States,
Adverse International Developments Could Negatively Impact Our Business

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

      Operations in foreign countries also present risks associated with
currency exchange and convertibility, inflation and repatriation of earnings. In
some countries in which Global may develop or acquire projects in the future,
economic and monetary conditions and other factors could affect Global's

                                      -18-
<PAGE>

ability to convert its cash distributions to United States Dollars or other
freely convertible currencies, or to move funds offshore from such countries.
Furthermore, the central bank of any such country may have the authority to
suspend, restrict or otherwise impose conditions on foreign exchange
transactions or to approve distributions to foreign investors. Although Global
generally seeks to structure power purchase contracts and other project revenue
agreements to provide for payments to be made in, or indexed to, United States
Dollars or a currency freely convertible into United States Dollars, its ability
to do so in all cases may be limited.

Credit, Commodity, and Financial Market Risks May Have an Adverse Impact

      The revenues generated by the operation of our generating stations are
subject to market risks that are beyond our control. Our generation output will
either be used to satisfy our wholesale contracts or be sold into the
competitive power markets or under other bilateral contracts. Participants in
the competitive power markets are not guaranteed any specified rate of return on
their capital investments through recovery of mandated rates payable by
purchasers of electricity. Generation revenues and results of operations will be
dependent upon prevailing market prices for energy, capacity and ancillary
services in the markets we serve.

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

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

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

         o  prevailing market prices for natural gas and associated
            transportation costs;

         o  fluctuating weather conditions;

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

         o   changes in regulations applicable to Independent System Operators
             (ISO).

The Electric Energy Industry is Undergoing Substantial Change

      The electric energy industry across the country and around the world is
undergoing major transformations. As a result of deregulation and the unbundling
of energy supplies and services, the electric energy markets are now open to
competition from other suppliers in most markets. Increased competition from
these suppliers could have a negative impact on our wholesale and retail sales.
We are affected by many issues that are common to the electric industry such as:

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

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

         o  energy sales retention and growth;

         o  revenue stability and growth;

         o  increased capital investments attributable to environmental
            regulations;

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

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

         o  exposure to market price fluctuations and volatility;

         o  regulatory restrictions on affiliate transactions; and

         o  debt and equity market concerns.

                                      -19-
<PAGE>

Generation Operating Performance May Fall Below Projected Levels

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

         o  breakdown or failure of equipment or processes;

         o  disruptions in the transmission of electricity;

         o  labor disputes;

         o  fuel supply interruptions;

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

         o  permit limitations; and

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

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

If Our Operating Performance or Cash Flow from Minority Interests Falls Below
Projected Levels, We May Not Be Able to Service Our Debt

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

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

      Our ability to control investments in which we own a minority interest is
limited. Assuming a minority ownership role presents additional risks, such as
not having a controlling interest over operations and material financial and
operating matters or the ability to operate the assets more efficiently. As
such, neither we nor Global are able to unilaterally 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.

Failure to Obtain Adequate and Timely Rate Relief May Have an Adverse Impact

      Certain electric and gas distribution facilities of Global 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. However, in Argentina, we face considerable fiscal
and cash uncertainties, including potential asset impairments, due to the
current economic, political and social crisis. We can give no assurances that
rates will, in the future, be sufficient to cover such costs and provide a
return on Global's investment. In addition, future rates may not be adequate to
provide cash flow to pay principal and interest on Global's subsidiaries' and
affiliates' debt and to enable such subsidiaries and affiliates to comply with
the terms of debt agreements.

                                      -20-
<PAGE>

We and Our Subsidiaries are Subject to Substantial Competition From Well
Capitalized Participants in the Worldwide Energy Markets

      We and our subsidiaries are subject to substantial competition in the
United States and in international markets from merchant generators, 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
short-term debt.

      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 competitors could become active
in the merchant generation business. Resources faces competition from numerous
well-capitalized investment and finance company affiliates of banks, utilities
and industrial companies. Energy Technologies faces substantial competition from
utilities and their affiliates, and HVAC and mechanical contractors.

Our Ability to Service Our Debt Could Be Limited

      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 our debt or to make any funds available to us to pay
such amounts. As a result, our debt will effectively be subordinated to all
existing and future debt, trade creditors, and other liabilities of our
subsidiaries and project affiliates and our rights and hence the rights of our
creditors 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. The project-related debt
agreements of subsidiaries and project affiliates generally restrict their
ability to pay dividends, make cash distributions or otherwise transfer funds to
us. These restrictions may include achieving and maintaining financial
performance or debt coverage ratios, absence of events of default, or priority
in payment of other current or prospective obligations.

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

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

Power Transmission Facilities May Impact Our Ability to Deliver Our Output to
Customers

      If transmission is disrupted, or if transmission capacity is inadequate,
our ability to sell and deliver our electric energy products and grow our
business may be adversely impacted. If a region's power transmission
infrastructure is inadequate, our ability to generate revenues may be limited.

Regulatory Issues Significantly Impact Our Operations

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

                                      -21-
<PAGE>

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

Environmental Regulation May Limit Our Operations

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

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

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

         o  obtain any necessary modifications to existing environmental
            approvals;

         o   maintain compliance with all applicable environmental laws,
             regulations and approvals; or recover any resulting costs through
             future sales.

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

Insurance Coverage May Not Be Sufficient

      We have insurance for our facilities, including all-risk property damage
insurance, commercial general public liability insurance, boiler and machinery
coverage, in amounts and with deductibles that we consider appropriate. We can
give no assurance that such insurance coverage will be available in the future
on commercially reasonable terms nor that the insurance proceeds received for
any loss of or any damage to any of our facilities will be sufficient to permit
us to continue to make payments on our debt. Additionally, certain properties
that we own may not be insured in the event of a terrorist activity.

Acquisition, Construction and Development Activities May Not Be Successful

      We may seek to acquire, develop and construct new energy projects, the
completion of any of which is subject to substantial risk. Such activity
requires a significant lead time and requires us to expend significant sums for
preliminary engineering, permitting, fuel supply, resource exploration, legal
and other development expenses in preparation for competitive bids or before it
can be established whether a project is economically feasible.

      The construction, expansion or refurbishment of a generation, transmission
or distribution facility may involve equipment and material supply
interruptions, labor disputes, unforeseen engineering, environmental and
geological problems and unanticipated cost overruns. The proceeds of any
insurance, vendor warranties or performance guarantees may not be adequate to
cover lost revenues, increased expenses or payments of liquidated damages. In
addition, some power purchase contracts permit the customer to terminate the
related contract, retain security posted by the developer as liquidated damages
or change the payments to be made to the subsidiary or the project affiliate in
the event certain milestones, such as commencing commercial operation of the
project, are not met by specified dates. If project start-up is delayed and the
customer exercises these rights, the project may be unable to fund principal and
interest payments under its project financing agreements. We can give no
assurance that

                                      -22-
<PAGE>

we will obtain access to the substantial debt and equity capital
required to develop and construct new generation projects or to refinance
existing projects to supply anticipated future demand.

Changes in Technology May Make our Power Generation Assets Less Competitive

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

Recession, Acts of War or Terrorism Could Have an Adverse Impact

      Consequences of the September 11, 2001 terrorist attacks on the United
States are difficult to predict. The consequences of a prolonged recession and
market conditions may include the continued uncertainty of energy prices and the
capital and commodity markets. We cannot predict the impact of any continued
economic slowdown or fluctuating energy prices; however, such impact could have
a material adverse effect on its financial condition, results of operations and
net cash flows.

      Like other operators of major industrial facilities, our generation
plants, fuel storage facilities and transmission and distribution facilities may
be targets of terrorist activities that could result in disruption of our
ability to produce or distribute some portion of our energy products. Any such
disruption could result in a significant decrease in revenues and/or significant
additional costs to repair, which could have a material adverse impact on our
financial condition, results of operation and net cash flows.

COMPETITIVE ENVIRONMENT

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

REGULATORY ISSUES

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

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

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

      For a discussion of the implications of the BPU's 1992 Focused Audit of
the impact of PSEG's non-utility businesses, including Energy Holdings, on
Public Service Electric and Gas Company, see, Management's Discussion and
Analysis - Liquidity and Capital Resources.

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

                                      -23-
<PAGE>

 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 by the SEC under PUHCA.

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

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

      Global's electric 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 it to comply with the terms of our debt agreements. For
a discussion of rate regulation with respect to specific distribution
facilities, see "Electric Distribution Operations."

      Global is 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.

      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. We are not able to predict what action, if
any, the BPU may take concerning consolidation of tax benefits in future rate
proceedings. An unfavorable resolution may adversely impact Resources'
investment strategy.


     INCOME TAXES

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

CUSTOMERS

      Global

      Global has ownership interests in eight distribution companies which serve
approximately 3.6 million customers and has developed or acquired interests in
electric generation facilities which sell energy, capacity and ancillary
services to numerous customers through power purchase agreements (PPAs) as well
as into the wholesale market.


Energy Technologies

      Energy Technologies currently provides services to approximately 8,500
customers.

                                      -24-
<PAGE>

EMPLOYEE RELATIONS

      As of December 31, 2001, we had a total of 2,590 employees. Energy
Technologies had a total of 1,875 employees who are represented by various
construction trade unions. Energy Technologies and its operating subsidiaries
are parties to agreements with various trade unions through multi-employer
associations. We believe that we maintain satisfactory relationships with our
employees.


ENVIRONMENTAL MATTERS

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


ITEM 2:  PROPERTIES

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

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

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


ITEM 3:  LEGAL PROCEEDINGS

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

      See Information on the following proceeding at the pages indicated.

      (1) Pages 6 and 71. Complaint filed with the Federal Energy Regulatory
Commission addressing contract terms of certain Sellers of Energy and Capacity
under Long-Term Contracts with the California Department of Water Resources.
Public Utilities Commission of the State of California v. Sellers of Long Term
Contracts to the California Department of Water Resources FERC Docket No.
EL02-60-000. California Electricity Oversight Board v. Sellers of Energy and
Capacity Under Long-Term Contracts with the California Department of Water
Resources FERC Docket No. EL02-62-000.

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

      NOT APPLICABLE

                                      -25-
<PAGE>

                                     PART II


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

      All outstanding equity interests in Energy Holdings are owned by PSEG.

                                      -26-
<PAGE>

ITEM 6:           SELECTED FINANCIAL DATA

     The following table sets forth our summary selected historical consolidated
financial data. The historical consolidated financial data as of December 31,
2001 and 2000 and for the three years ended December 31, 2001 have been derived
from our audited financial statements included herein. The historical
consolidated financial data as of December 31, 1999, 1998 and 1997 and for the
two years ended December 1998, has been derived from audited financial
statements not included herein. The information set forth below should be read
in conjunction with Management's Discussion and Analysis of Financial
Conditional and Results of Operations (MD&A) and the Consolidated Financial
Statements and accompanying Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
                                                                    Years Ended December 31,
                                            --------------------------------------------------------------------------
                                               2001            2000            1999            1998           1997
                                            ------------    ------------    -----------     -----------    -----------
<S>                                           <C>              <C>              <C>           <C>            <C>
                                                              (Millions of Dollars, except ratios)
Operating Data:
Total Revenues...........................    $ 1,135         $   794         $   687         $   450        $   342
Total Operating Expenses.................        709             502             424             258            196
Interest, Net of Capitalized
     Interest............................        190             137              95              92             72
Taxes....................................         57              45              69              30             26
Income Before Extraordinary Item and
    Cumulative Effect of a Change in
    Accounting Principle.................        176             114             108              69             48
Extraordinary Loss on
    Early Retirement of Debt.............         (2)             --              --              --             --
Cumulative Effect of a Change in
     Accounting Principle................          9              --              --              --             --
Net Income...............................        183             114             108              69             48
Preferred Stock Dividends (A)............         22              24              25              17              1
Earnings Available to PSEG...............    $   161         $    90         $    83         $    52        $    47
</TABLE>

<TABLE>
<CAPTION>
                                                                          December 31,
                                            --------------------------------------------------------------------------
                                               2001            2000            1999           1998            1997
                                            -----------     ------------    -----------    ------------    -----------
<S>                                           <C>             <C>             <C>           <C>              <C>
Balance Sheet Data:
Total Assets.............................    $ 7,439         $ 5,195         $ 4,114        $ 3,169         $ 3,023
Total Liabilities........................      1,682           1,264           1,037            959             963
Capitalization:
     Debt (E)............................      3,533           2,182           1,702            968           1,275

     Common Equity (A)...................      1,715           1,240             866            733             710
     Preferred Equity (A)................        509             509             509            509              75
                                            -----------     ------------    -----------    ------------    -----------
     Total Stockholder's Equity..........      2,224           1,749           1,375          1,242             785
                                            -----------     ------------    -----------    ------------    -----------
Total Capitalization.....................    $ 5,757         $ 3,931         $ 3,077        $ 2,210         $ 2,060
</TABLE>

<TABLE>
<CAPTION>
                                                                     Years Ended December 31,
                                             -------------------------------------------------------------------------
                                               2001            2000            1999           1998            1997
                                             ----------     ------------    -----------    ------------    -----------
<S>                                           <C>             <C>             <C>            <C>             <C>
Other Data:
Earnings Before Interest
     and Taxes (EBIT)....................     $   427        $   295         $   271        $   190         $   146
Cash Flows from:
     Operating...........................     $   371        $   243         $   289        $   205         $   160
     Investing...........................      (1,717)          (855)         (1,157)          (312)         (1,021)
     Financing...........................       1,380            591             902            105             722
</TABLE>

<TABLE>
<CAPTION>
                                                                           For Years Ended December 31,
                                                              --------------------------------------------------------
                                                               2001        2000        1999        1998        1997
                                                              --------    --------    --------    --------    --------
<S>                                                            <C>         <C>         <C>         <C>         <C>
Earnings to Fixed Charges (B)..............................    1.6x        1.9x        2.7x        2.4x        1.4x
EBIT to Interest Expense (C) (G)...........................    2.3x        2.2x        2.9x        2.1x        2.0x
EBITDA to Interest Expense (D) (G).........................    2.4x        2.3x        3.1x        2.4x        2.2x
Consolidated Debt to Capitalization (E)....................     61%         56%         55%         44%         62%
Consolidated Recourse Debt to Recourse Capitalization (F)       53%         51%         50%         38%         57%
</TABLE>
----------
(A)  All outstanding preferred and common stock is owned by PSEG.

(B)  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 our 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.

(C)  EBIT includes operating income plus other income. For this ratio, interest
     expense is net of capitalized interest, $16 million, $21 million, $8
     million, $1 million, and $5 million for the years ended December 31, 2001,
     2000, 1999, 1998, and 1997, respectively.

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

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

(F)  Excludes consolidated debt that is non-recourse to Global, Resources,
     Energy Technologies and Energy Holdings of $1.07 billion, $354 million,
     $327 million, $220 million and $232 million as of December 31, 2001, 2000,
     1999, 1998 and 1997, respectively. There was no consolidated non-recourse
     debt outstanding prior to 1997.

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

                                      -27-
<PAGE>

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

Energy Holdings

      This discussion should be read in conjunction with the Consolidated
Financial Statements and related notes of PSEG Energy Holdings Inc. (Energy
Holdings). Unless the context otherwise indicates, all references to "Energy
Holdings," "we," "us" or "our" herein mean PSEG Energy Holdings Inc. and its
consolidated subsidiaries. We participate in three energy-related reportable
segments through our 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.

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
us. At the same time, competitive pressures are increasing.

      We are a major part of Public Service Enterprise Group Incorporated
(PSEG's) growth strategy. In order to achieve this strategy, Global will focus
on generation and distribution investments within targeted high-growth regions.
Resources will utilize its market access, industry knowledge and transaction
structuring capabilities to expand its energy-related financial investment
portfolio. We are evaluating the future prospects of Energy Technologies'
business model and its fit in our portfolio given the slower pace of retail
deregulation in the markets in which we operate. Resources' assets generate cash
flow and earnings in the near term, while investments at Global generally have a
longer time horizon before achieving expected cash flow and earnings. Also,
Resources' passive lower-risk assets serve to balance the higher risk associated
with operating assets at Global and Energy Technologies. Global's more recent
activities have been concentrated on developing generation internationally and
in acquiring distribution businesses, principally in South America, that have
been privatized by the local governments. As Global has grown, its objective has
evolved from being a minority or equal partner to seeking to be the majority or
sole owner of many of its investments. Global's business depends on the ability
to negotiate or obtain favorable prices and terms for the output of its
generating facilities nationally and internationally, and to obtain favorable
governmental and regulatory treatment for its distribution assets in foreign
countries. Global undertakes investments where the expected return is
commensurate with the market, regulatory, international and currency risks that
are inherent with its investments. Since these risks are priced in the original
investment decision, to the extent that market, regulatory international or
currency conditions evolve differently than originally forecasted, the
investment performance of Global's assets will differ from the expected
performance. Thus, the expected investment returns from Global's projects are
priced to produce relatively high returns to compensate for the high level of
risk associated with this business.

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

      Future revenue growth will be partially offset by the reduction of
revenue, anticipated in 2002 from certain generation facilities in California
and Texas due to lower energy prices, and distribution facilities in Argentina
due to the current economic, political and social crisis. Global has investment
exposure of $632 million in four distribution companies and two generation
plants in Argentina. For a further discussion of the California power market,
see "California Power Market." For further discussion of the Argentine economic
crisis and our $632 million investment exposure, see Argentine economic crisis.
For further discussion of the Texas power market, see "Business Environment."

      Resources invests in energy-related financing transactions, principally
leveraged leases. Revenues from Resources' existing leveraged lease investments
are based upon fixed rates of return. As such, it is designed to produce
predictable earnings at reasonable levels with relatively low risk. The modest
risks faced by Resources are the credit risk of its counterparties and changes
of substantive tax law. Resources' revenues in the future are expected to be
earned primarily from energy-related leveraged leases with a decrease in
contribution from leveraged buyout funds, other partnership investments and
non-energy-related leveraged leases. Revenues from Resources' investments in
leveraged buyout funds are subject to the share price performance and dividend
income of the securities held by these funds.

                                      -28-
<PAGE>

      Energy Technologies is a business that principally constructs and installs
heating, ventilating and air conditioning equipment (HVAC) and related services.
It has not produced profitable operations due to the extremely competitive
nature of the business and the failure of the retail energy market to develop.
The principal risks of this business are to be able to reduce internal costs to
become profitable in this market and to obtain revenues to cover the carrying
value of its assets.

      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. We continuously evaluate our plans and
capital structure in light of available investment opportunities and seek to
maintain the flexibility to pursue strategic growth investments. Depending upon
the level of investment activity, we anticipate obtaining additional equity
contributions from PSEG as necessary to maintain our growth objectives and
targeted capital structure. The availability of equity capital from PSEG cannot
be assured since it is dependent upon our performance and the needs of PSEG and
PSEG's other subsidiaries.

      ARGENTINE ECONOMIC CRISIS

      As of December 31, 2001, approximately $737 million or 10% of our assets
were invested in Argentina. This includes the consolidated assets of a
distribution company, Empresa Distribuidora de Electricidad de Entre Rios S.A.
(EDEERSA), and our minority interests in three distribution companies, Empresa
Distribuidora de Energia Norte S.A. (EDEN), Empresa Distribuidora de Energia Sur
S.A. (EDES) and Empresa Distribuidora La Plata S.A. (EDELAP) and two generating
companies, Central Termica San Nicolas (CTSN) and Parana under contract for sale
to a subsidiary of the AES Corporation. Our aggregate investment exposure in
Argentina is approximately $632 million, including $212 million of investment
exposure for EDEERSA, and $420 million of investment exposure for the assets
under contract. Goodwill related to our investment in EDEERSA is approximately
$63 million. For a discussion of the pending sale of certain investments in
Argentina, see Note 19. "Subsequent Events" of the Notes to Consolidated
Financial Statements.

      The Argentine economy has been in a state of recession for approximately
four years. Continued deficit spending in the 23 Argentine provinces coupled
with low growth and high unemployment has precipitated an economic, political
and social crisis. Toward the end of 2001, a liquidity crisis ensued causing the
Argentine government to default on $141 billion of national debt. The economic
crisis was fueled by political instability and social unrest as the new year
began. The present administration is in the process of developing an economic
plan to avert a return to the economic instability and hyperinflationary economy
of the 1980s. In early January 2002, the decade old convertibility formula, that
maintained the Peso at a 1:1 exchange rate with the US Dollar, was abandoned. In
early February 2002, the Peso was floated freely with the US Dollar. In the
first day of the free floating formula, the currency weakened to a rate of
approximately 2 Pesos per 1 US Dollar. On February 28, 2002, the currency
weakened further to a rate of approximately 2.15 Pesos per 1 US Dollar.

      As of December 31, 2001, the functional currency of Global's Argentine
distribution company, EDEERSA, was the US Dollar, as all revenues, most expenses
and all financings were denominated in US Dollars or were US Dollar linked. As a
US Dollar reporting entity, EDEERSA's monetary accounts in Pesos, such as
short-term receivables or payables, were re-measured into the US Dollar with a
minimal impact to the Income Statement. We have US Dollar denominated debt at
EDEERSA, our 90% share of which is approximately $76 million. This debt is
non-recourse to us and Global. For a discussion of the impacts of a potential
change in functional currency to the Argentine Peso, see Note 19. "Subsequent
Events" of the Notes to Consolidated Financial Statements.

      In the Province of Entre Rios, where EDEERSA is located, the electricity
law provided for a pass-through of devaluation to the end user customer.
Customers' bills are first computed in the US Dollar and converted into the Peso
for billing. This mechanism assures that devaluation will not impact the level
of US Dollar revenues an electric distribution company receives. However, in
January 2002, the Argentine federal government implemented a new law that
prohibits any foreign price or other indexation and any US Dollar or other
foreign currency adjustment clauses relating to public service tariffs, thus
prohibiting the pass through of the costs of devaluation to customers. The
provincial governments have been requested to adopt this provision. The Province
of Entre Rios has recently adopted this provision as well as a law that requires
public service companies within the Province such as EDEERSA to accept payment
for all billed services in a provincial promissory note, the "Federal". The
terms of the "Federal" require principal payment at maturity in an equal amount
of Argentine Pesos. However, the "Federal" is not freely convertible in the
financial markets to Argentine Peso or US Dollars. There are ongoing
negotiations to remedy this situation, although no assurances can be given.
While we continue to operate EDEERSA, there has been an adverse impact to the
financial condition and cash flows of EDEERSA due to its inability to pass
through the costs of devaluation to customers and its receipt of an illiquid
provincial currency. We are pursuing remedies on several fronts, including
holding discussions with the Province and United States politicians both
individually and collectively with a coalition of international investors, and
shall be pursuing legal recourse under the Bilateral Investment Treaty between
the United States and Argentina. We have been notified by lenders of the
occurrence of events of default related to the Parana, EDEN and EDES credit
facilities, all of which are under contract to be sold to AES. For additional
information regarding Global's equity commitments, see "Disclosures about
Contractual Obligations and Commercial Obligations." If Argentine conditions do
not improve, Global's other Argentina properties may also default on
non-recourse obligations in connection with other financings. Currently, we
cannot predict the outcome of our ongoing negotiations with the lenders.

      Other potential impacts of the Argentine economic, political and social
crisis include increased collection risk, further devaluation of the Peso,
potential nationalization of assets, foreclosure of our assets by lenders, and
an inability to complete the pending sale of certain Argentine assets to a
subsidiary of AES. We cannot predict the outcome of these events and accordingly
cannot predict the impact to our financial condition, results of operations or
net cash flows, although such impact may be material, and could include a
write-down of our investment exposure.

      The events leading to the Argentine economic crisis contributed to
downward pressure on the Brazilian and Chilean currencies in 2001. The Brazilian
Real devalued approximately 15% since year-end 2000 from 1.951 to 1 US Dollar to
2.308 to 1 US Dollar as of December 31, 2001 and the Chilean Peso devalued
approximately 13% since year-end 2000 from 573.90 to 1 US Dollar to 660.45 to 1
US Dollar as of December 31, 2001.

      Net foreign currency devaluations, caused primarily by the Brazilian Real,
have reduced Stockholder's Equity by the net of tax amounts of $258 million and
$203 million, as of December 31, 2001 and December 31, 2000, respectively (see
Consolidated Statements of Stockholder's Equity).



                                      -29-
<PAGE>

Results of Operations - 2001 compared to 2000

      Our earnings improved $71 million from $90 million to $161 million in
2001, as compared to 2000.

Revenues

      Our revenues increased $341 million or 43% from $794 million to $1,135
million in 2001, as compared to 2000.

      Revenues at Global increased $283 million or 167% from $169 million to
$452 million in 2001 as compared to 2000 primarily attributable to $196 million
of consolidated Electric Generation and Distribution and Other revenues recorded
in connection with the acquisitions of Elektrocieplownia Chorzow Sp. z o.o.
(ELCHO) in the third quarter of 2000, EDEERSA in the second quarter of 2001,
Sociedad Austral de Electricidad S.A., (SAESA) in the third quarter of 2001, and
the commencement of operations at Tanir Bavi Power Company Private Ltd. (Tanir
Bavi) in the second quarter of 2001. Revenues further increased from the gain of
$75 million on the withdrawal and sale of Global's interest in the Eagle Point
Cogeneration Partnership (Eagle Point) and were partially offset by a loss of
equity in earnings of $26 million, which were recorded in 2000 and not recorded
in 2001, as a result of the withdrawal. In addition, revenues benefited from an
increase of $45 million in Interest Income recorded in connection with the note
received as consideration for the withdrawal from its interest in Eagle Point;
the loans to Texas Independent Energy, L.P. (TIE); and the payment agreement
associated with the pending sale of Global's interest in EDEN, EDES, EDELAP,
CTSN and Parana to a subsidiary of AES. For a discussion of the loans to TIE,
see "Business Environment". Revenues increased an additional $11 million from
increased earnings at Chilquinta Energia, S.A. (Chilquinta) and Luz del Sur, and
a net increase of $6 million from certain other projects. These increases were
partially offset by lower revenues of $12 million due to a reduction in earnings
at RGE primarily related to the adverse effect of exchange rate changes in the
Brazilian Real and $9 million due to project closing fees from ELCHO and TIE
recorded in 2000, while none were earned in 2001.

      Revenues at Resources increased $9 million or 4% from $206 million to $215
million in 2001 as compared to 2000 primarily due to improved revenues of $45
million from new leveraged lease transactions. This increase was partially
offset by lower Net Investment (Losses) Gains of $37 million, of which $22
million resulted from lower gains on sales of leveraged leases and $12 million
resulted from a net decrease in the carrying value and sale of publicly traded
equity securities within certain leveraged buyout funds.

                                      -30-
<PAGE>

      Revenues at Energy Technologies increased $50 million or 12% from $417
million to $467 million in 2001 as compared to 2000 due to increased sales in
its mechanical contracting business partially offset by a decrease of energy
supply revenues.


Operating Expenses

      Our operating expenses increased $207 million or 41% from $502 million to
$709 million in 2001, as compared to 2000.

      Operating expenses at Global increased $144 million, primarily
attributable to the consolidated operating results from the acquisitions of
SAESA, ELCHO, EDEERSA, and the commencement of operations at Tanir Bavi. Energy
Technologies' operating expenses increased $63 million, primarily due to an
increase in the volume and cost of mechanical contract sales, cost overruns of
mechanical contracts and the increased cost of outside services due to the
continued integration of its mechanical contracting business. These increased
costs at Energy Technologies were partially offset by a restructuring charge of
$7 million recorded in 2000. There were no restructuring charges recorded in
2001.

Other Income

      Other Income decreased by $2 million in 2001, as compared to 2000. Other
income declined in 2001 primarily related to foreign currency transaction losses
recorded in connection with Global's investment in RGE.

Net Financing Expenses

      Interest expense increased $53 million or 39% from $137 million to $190
million in 2001 as compared to 2000. Our Interest expense associated with
recourse financing activities increased $45 million primarily due to additional
borrowings incurred as a result of equity investments in distribution and
generation facilities. Interest expense associated with non-recourse debt
increased by $8 million primarily due to project interest expense incurred at
Tanir Bavi and SAESA.

Income Taxes

      Income taxes increased $12 million or 27% from $45 million to $57 million
in 2001 as compared to 2000, primarily attributable to increased pre-tax income.

Results of Operations - 2000 compared to 1999

      Our earnings improved $7 million or 8% from $83 million to $90 million in
2000, as compared to 1999.

Revenues

      Revenues increased $107 million or 16% from $687 million to $794 million
in 2000, as compared to 1999, primarily due to an increase of $26 million at
Resources due to higher leveraged lease income from new leveraged lease
investments and a $120 million increase in revenues at Energy Technologies due
to the addition of revenues from acquisitions of various HVAC companies in 2000
and 1999. These increases were partially offset by a reduction in revenues of
$42 million at Global primarily due to a gain on the sale of its interest in
Newark Bay recorded in 1999 as compared to no significant gain on sale of assets
in 2000.

Operating Expenses

      Operating expenses increased $78 million or 18% from $424 million to $502
million in 2000, as compared to 1999, primarily due to the addition of $123
million in operating expenses from the HVAC and mechanical service contracting
companies acquired by Energy Technologies in 2000 and 1999. A pre-tax charge of
approximately $55 million, to reduce the carrying value of certain assets was
recorded in 1999. For further discussion of the $44 million charge to reduce the
carrying value of certain assets in 1999 at Global, see Note 5. "Investments in
Global's Assets". For further discussion of the $11 million charge to reduce the
carrying value of certain assets in 1999 at EGDC, see Note 6. "Other
Investments." There was no similar adjustment recorded in 2000.

                                      -31-
<PAGE>

Other Income

      Other Income decreased by $5 million or 63% from $8 million to $3 million
in 2000, as compared to 1999. Other income in 1999 was favorably impacted by a
reduction in reserves recorded in connection with the 1996 sale of Energy
Development Corporation. There was no similar adjustment recorded in 2000.

Net Financing Expenses

      Interest expense increased $42 million or 44% from $95 million to $137
million in 2000 as compared to 1999. Our interest expense associated with
recourse financing activities increased $51 million primarily due to additional
borrowings incurred as a result of equity investments in distribution and
generation facilities and the repayments of non-recourse debt. Interest expense
associated with non-recourse debt financing decreased by $9 million due to the
repayment of approximately $157 million of non-recourse debt.

Income Taxes

      Income taxes decreased $24 million or 35% from $69 million to $45 million
in 2000 as compared to 1999. The year ended December 31, 2000 reflects a lower
effective tax rate due to a decrease in the foreign tax liability from foreign
investments at Global recorded under the equity method. Under such accounting
method, Global reflects in revenues its pro rata share of the investment's net
income and the foreign income taxes are a component of equity in earnings rather
than in the income tax provision. During 1999, there was an increase in state
income taxes at Resources totaling $11 million due to the early termination of a
leveraged lease.

EBIT Contribution

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

EBIT Contribution
Energy Holdings'
Subsidiaries
-----------------
                                          Years Ended December 31,
                            ----------------------------------------------------
                                2001               2000                1999
                            -------------     ---------------     --------------
                                           (Millions of Dollars)
Global.....................   $    253          $    123            $    117
Resources..................        200               190                 169
Energy Technologies........        (22)              (11)                 (8)
Other......................         (4)               (7)                 (7)
                            -------------     ---------------     --------------
Total Consolidated EBIT....   $    427          $    295            $    271
                            =============     ===============     ==============

      Global

      Global develops, acquires, owns and operates electric generation and
distribution facilities and engages in power production and distribution,
including wholesale and retail sales of electricity in selected domestic and
international markets. Global has ownership interests in 31 operating generation
projects totaling 4,922 MW (2,047 MW net of other partners' interests) located
in the United States, Argentina, China, India, Italy, Peru, Poland and
Venezuela. Global has ownership interests in 13 projects totaling 3,205 MW
(1,399 MW net) in construction or advanced development that are located in the
United States, Argentina, China, Italy, Oman, Poland, Taiwan, Tunisia and
Venezuela. For a discussion of the pending sale of certain projects located in
Argentina, see Note 19. "Subsequent Events" of the Notes to Consolidated
Financial Statements.

      Until the fourth quarter of 2000, Global's investments consisted primarily
of minority ownership positions in projects and joint ventures. Other than fees
collected for providing operations and maintenance services, Global's revenues
represented its pro-rata ownership share of net income generated by project
affiliates which are accounted for by the equity method of accounting. The
expenses in the table below were those required to develop projects and general
and administrative expenses required to operate the business as a whole. In the
fourth quarter of 2000, Global increased its interest in Carthage Power Company,
an electric generation facility under construction in Rades, Tunisia from 35% to
60% and completed project financing for a 55% economic interest in ELCHO, a
power plant in Poland with the expectation of an increase to a 90% economic
interest by 2003.

                                      -32-
<PAGE>

      In the first quarter of 2001, Global increased its interest in Tanir Bavi,
an electric generation facility in India from 49% to 74%. In the second quarter
of 2001, Global increased its interest in EDEERSA, an electric distribution
facility in Argentina from 41% to 90%. In the third quarter of 2001, Global
purchased a 94% interest in SAESA, a group of companies consisting of four
distribution companies and one transmission company that provide electric
service in Chile and a distribution company in Argentina. In the fourth quarter
of 2001, Global acquired Empresa de Electricidad de los Andes S.A.
(Electroandes), a hydroelectric generation and transmission company in Peru. The
accounts of Global include the assets, liabilities, revenues and expenses of
majority-owned subsidiaries over which Global exercises control and for which
control is other than temporary.

Summary Results
Global
---------------
                                            Years Ended December 31,
                                    ------------------------------------------
                                      2001            2000            1999
                                    ----------     -----------      ----------
                                              (Millions of Dollars)
Revenues...........................   $ 452          $ 169            $ 211
Expenses...........................     193             49               97
                                    ----------     ----------       ----------
Operating Income...................     259            120              114
Other Income (Loss)................      (6)             3                3
                                    ----------     ----------       ----------
EBIT...............................   $ 253          $ 123            $ 117
                                    ==========     ==========       ==========

      Global's EBIT increased $130 million or 106% in 2001 as compared to 2000.

      The Global EBIT increase in 2001 was primarily realized from the gain of
$75 million on the withdrawal and sale of its interest in Eagle Point and was
partially offset by a loss of equity in earnings of $26 million, which was
recorded in 2000 and not recorded in 2001, as a result of the withdrawal. A net
$62 million increase in EBIT was realized from the earnings related to the
acquisitions of EDEERSA in the second quarter of 2001, SAESA in the third
quarter of 2001, Electroandes in the fourth quarter of 2001 and the commencement
of operations at Tanir Bavi in the second quarter of 2001. In addition, EBIT
benefited from an increase of $45 million in Interest Income recorded in
connection with the payment agreement associated with the pending sale of
Global's interest in three Argentine distribution companies, EDEN, EDES and
EDELAP, and two generation stations, CTSN and Parana, to a subsidiary of AES;
the loans to TIE; and the note received as consideration for the withdrawal from
its interest in Eagle Point. EBIT increased an additional $11 million from
increased earnings at Chilquinta and Luz del Sur. These increases were partially
offset by lower revenues of $12 million due to a reduction in earnings at RGE
primarily related to the adverse effect of exchange rate changes in the
Brazilian Real and a $9 million increase in corporate operating expenses
primarily due to a $7 million write-off of a foreign investment. Other Income
decreased by $9 million primarily due to $6 million of foreign currency
transaction losses recorded in 2001 as compared to foreign currency transaction
gains of $3 million in 2000.

      The Global EBIT increased by $6 million or 5% from $117 million to $123
million in 2000, as compared to 1999. This increase was primarily due to the
favorable performance by its domestic generation assets and by its investments
made in Latin America distribution assets in June and September of 1999.
Global's operating expenses in 1999 were negatively impacted by a write-down of
$44 million to reduce the carrying value of certain assets. Revenues in 1999
were favorably impacted by a gain of $69 million from the sale of its 50%
interest in Newark Bay.

      Resources

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

                                      -33-
<PAGE>

Summary Results
Resources
---------------
                                            Years Ended December 31,
                                     ---------------------------------------
                                       2001           2000          1999
                                     ----------     ----------    ----------
                                             (Millions of Dollars)
Revenues............................  $  215         $  206        $  179
Expenses............................      15             16            10
                                     ----------     ----------    ----------
Operating Income and EBIT...........  $  200         $  190        $  169
                                     ==========     ==========    ==========

     Resources' EBIT increased $10 million or 5% in 2001 as compared to 2000.

      The Resources' EBIT increase in 2001 was due to improved revenues of $9
million or 4% primarily attributable to higher leveraged lease income of $44
million from new leveraged lease transactions, partially offset by lower Net
Investment Gains (Losses) of $37 million, of which $22 million resulted from a
net decrease in the gains from the sale of properties subject to leveraged
leases and $12 million resulted from a net decrease carrying value of publicly
traded equity securities within certain leveraged buyout funds.

      Resources' EBIT increased $21 million or 12% from $169 million to $190 in
2000 as compared to 1999 due primarily to higher leveraged lease income of $51
million from the continued investment by Resources in such financing
transactions. Further augmenting EBIT was other increased revenues of $4 million
primarily related to gains from the sales of properties subject to leveraged
leases. Offsetting the above benefits were lower gains of $28 million from the
sales of securities and lower revenues of $6 million related to lower income
from certain limited partnerships.

      Energy Technologies

      Energy Technologies derives its revenues from constructing, operating and
maintaining heating, ventilating and air conditioning (HVAC) systems and
providing energy-related engineering, consulting and mechanical contracting
services to industrial and commercial customers in the Northeastern and Middle
Atlantic United States.

Summary Results
Energy Technologies
-------------------
                                             Years Ended December 31,
                                      ----------------------------------------
                                      ---------- ---- ---------- -- ----------
                                        2001            2000          1999
                                      ----------      ----------    ----------
                                               (Millions of Dollars)
Revenues............................  $ 467           $ 417         $ 297
Expenses............................    491             428           305
                                      ----------      ----------    ----------
Operating Loss......................    (24)            (11)           (8)
Other Income........................      2              --            --
                                      ----------      ----------    ----------
EBIT................................  $ (22)          $ (11)        $ (8)
                                      ==========      ==========    ==========

     Energy Technologies' EBIT decreased $11 million for the year ended December
31, 2001 as compared to 2000.

      Energy Technologies' EBIT decrease in 2001 resulted primarily from cost
overruns of mechanical contracts and lower margins on increased sales recorded
in 2001. Energy Technologies also experienced an increase in the cost of outside
services due to the continued integration of its mechanical contracting
business. The EBIT contribution decrease was partially offset by a restructuring
charge of $7 million in 2000. There were no restructuring charges recorded in
2001.

      Energy Technologies' EBIT decreased $3 million or 38% in 2000 as compared
to 1999. Revenues increased $120 million and operating expenses increased $123
million primarily due to acquisitions of HVAC and mechanical service contracting
companies in 2000 and 1999. Also included in the increased operating expenses,
Energy Technologies recognized a pre-tax restructuring charge of approximately
$7 million for the year ended December 31, 2000. Of this amount approximately $2
million was related to employee severance costs for the termination of
approximately 60 employees, $2 million was related to deferred transportation
costs and $3 million was related to the write-off of computer hardware and
software. As of December 31, 2000, all severance costs had been paid related to
the terminations.

                                      -34-
<PAGE>

Liquidity and Capital Resources

      The following discussion of our liquidity and capital resources is on a
consolidated basis, noting the uses and contributions of our three direct
operating subsidiaries in 2001, Global, Resources and Energy Technologies.

      Our capital requirements and those of our subsidiaries are met and
liquidity provided by internally generated cash flow and external financings. We
make equity contributions from time to time to our subsidiaries to provide for
part of their capital and cash requirements, generally relating to long-term
investments. At times, we utilize inter-company dividends and inter-company
loans to satisfy various subsidiary needs and efficiently manage our and our
subsidiaries' short-term cash needs. Any excess funds are invested in accordance
with guidelines adopted by our Board of Directors.

      External funding to meet our needs is comprised of corporate finance
transactions. The debt incurred is our direct obligation. We use some of the
proceeds of this debt to make equity investments in our subsidiaries.

      All of our publicly traded debt and debt of PSEG Capital has received
investment grade ratings from each of the three major credit rating agencies.
The changes in the energy industry and the recent bankruptcy of Enron Corp. are
attracting increased attention from the rating agencies, which regularly assess
business and financial matters. Given the changes in the industry, attention to
and scrutiny of our performance, capital structure and competitive strategies by
rating agencies will likely continue. These changes could affect the bond
ratings, cost of capital and market prices of our securities. We will continue
to evaluate our capital structure, financing requirements, competitive
strategies and future capital expenditures to maintain our current credit
ratings.

      The current ratings of securities of us and PSEG Capital are shown below
and reflect the respective views of the rating agencies, from whom an
explanation of the significance of their ratings may be obtained. There is no
assurance that these ratings will continue for any given period of time or that
they will not be revised or withdrawn entirely by the rating agencies, if, in
their respective judgments, circumstances so warrant. Any downward revision or
withdrawal may adversely effect the market price of our securities or those of
PSEG Capital and serve to increase those companies' cost of capital.

                        Moody's        Standard & Poor's            Fitch
                     ------------     -------------------        ------------
Energy Holdings
---------------
Senior Notes              Baa3                BBB-                   BBB-

PSEG Capital
------------
Medium Term Notes         Baa2                BBB                 Not Rated

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

      Financing for Global's projects and investments is generally provided by
non-recourse project financing transactions. These consist of loans from banks
and other lenders that are typically secured by project and special purpose
subsidiary assets and/or cash flows. Non-recourse transactions generally impose
no obligation on the parent-level investor to repay any debt incurred by the
project borrower. However, in some cases, certain obligations relating to the
investment being financed, including additional equity commitments, are
guaranteed by Global and/or us. Further, the consequences of permitting a
project-level default could include loss of any invested equity by us or any of
our subsidiaries.

      Our debt indenture and credit agreements and those of our subsidiaries and
PSEG contain cross-default provisions under which a default by us or by
specified subsidiaries of PSEG involving specified levels of indebtedness in
other agreements would result in a default and the potential acceleration of
payment under such indentures and credit agreements. For example, a default for
a specified amount with respect to any indebtedness of Global including
obligations in non-recourse transactions, as set forth in various credit
agreements, could cause a cross-default in one of our or our subsidiaries'
credit agreements.

                                      -35-
<PAGE>

      Such lenders, or the debt holders under our indenture or any of our or our
subsidiaries' credit agreements could determine that debt payment obligations
may be accelerated as a result of a cross-default. These occurrences could
severely limit our liquidity and restrict our ability to meet our debt, capital
and, in extreme cases, operational cash requirements. Any inability to satisfy
required covenants and/or borrowing conditions would have a similar impact. This
would have a material adverse effect on our financial condition, results of
operations and net cash flows, and those of our subsidiaries.

      In addition, our credit agreements and those of PSEG and our subsidiaries
generally contain provisions under which the lenders could refuse to advance
loans in the event of a material adverse change in the borrower's, and as may be
relevant, our, business or financial condition. In the event that we or the
lenders in any of our or our subsidiaries' credit agreements determine that a
material adverse change has occurred, loan funds may not be advanced.

      Some of these credit agreements also contain maximum debt to equity
ratios, minimum cash flow tests and other restrictive covenants and conditions
to borrowing. Compliance with applicable financial covenants will depend upon
our future financial position and the level of earnings and cash flow, as to
which no assurances can be given. As part of our financial planning forecast, we
perform stress tests on our financial covenants. These tests include a
consideration of the impacts of potential asset impairments, foreign currency
fluctuations, and other items. Our current analyses and projections indicate
that, even in a worst-case scenario with respect to our investments in Argentina
and considering other potential events, we will still be able to meet our
financial covenants.

      Our debt indenture and credit agreements and those of our subsidiaries do
not contain any "ratings triggers" that would cause an acceleration of the
required interest and principal payments in the event of a ratings downgrade.
However, in the event of a downgrade we and/or our subsidiaries may be subject
to increased interest costs on certain bank debt. We and Global may have to
provide collateral for certain of our and their equity commitments if our
ratings should fall below investment grade. This would increase our costs of
doing business.

      PSEG Capital has a $750 million MTN program which provides for the private
placement of MTNs. This MTN program is supported by a minimum net worth
maintenance agreement between PSEG Capital and PSEG which provides, among other
things, that PSEG (1) maintain its ownership, directly or indirectly, of all
outstanding common stock of PSEG Capital, (2) cause PSEG Capital to have at all
times a positive tangible net worth of at least $100,000 and (3) make sufficient
contributions of liquid assets to PSEG Capital in order to permit it to pay its
debt obligations. At December 31, 2001 and December 31, 2000, total debt
outstanding under the MTN program was $480 million and $650 million,
respectively maturing in 2002 and 2003.

      Capital resources and investment requirements could be affected by the
outcome of proceedings by the BPU pursuant to its Energy Master Plan and Energy
Competition Act and the requirements of the 1992 Focused Audit conducted by the
BPU, of the impact of our non-utility businesses, owned by us, on PSE&G. As a
result of the Focused Audit, the BPU ordered that, among other things:

      (1)  We will not permit Energy Holdings' investments to exceed 20% of our
           consolidated assets without prior notice to the BPU;

      (2)  PSE&G's Board of Directors would provide an annual certification that
           the business and financing plans of Energy Holdings will not
           adversely affect PSE&G;

      (3)  We will (a) limit debt supported by the minimum net worth maintenance
           agreement between us 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 PSE&G an affiliation fee of up to $2 million
           a year which is to be used to reduce customer rates.


      In the Final Order the BPU noted that, due to significant changes in the
industry and, in particular, PSEG's corporate structure as a result of the Final
Order, modifications to or relief from the Focused Audit order might be
warranted. PSE&G has notified the BPU that PSEG will eliminate PSEG Capital debt
by the end of the second quarter of 2003 and that it believes that the Final
Order otherwise supercedes the requirements of the Focused Audit. While we
believe that this issue will be satisfactorily resolved, no assurances can be
given.

                                      -36-
<PAGE>

      In addition, if PSEG were no longer to be exempt under the Public Utility
Holding Company Act of 1935 (PUHCA), we and our subsidiaries would be subject to
additional regulation by the SEC with respect to financing and investing
activities, including the amount and type of non-utility investments. We believe
that this would not have a material adverse effect on our financial condition,
results of operations and net cash flows.

      Over the next several years, we and our subsidiaries 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 our financial condition,
results of operations and net cash flows.

      We have the following credit facilities for various funding purposes and
to provide us liquidity These agreements are with a group of banks and provide
for borrowings with maturities of up to one year. The following table summarizes
our various facilities as of December 31, 2001.
<TABLE>
<CAPTION>
                                                   Total         Primary          Amount
Energy Holdings               Maturity Date       Facility       Purpose       Outstanding
                             ---------------     ----------    -----------    -------------
<S>                          <C>                 <C>          <C>          <C>
                                                          (Millions of Dollars)
364-day Credit Facility         May 2002           $  200        Funding          $    -
5-year Credit Facility          May 2004              495        Funding             250
Bilateral Credit Agreement         N/A                100        Funding              50
                                                 ----------                   -------------
       Total                                       $  795                         $  300
                                                 ==========                   =============
</TABLE>

      The five-year facility also permits up to $250 million of letters of
credit to be issued of which $57 million are outstanding as of December 31,
2001.

      Financial covenants contained in these facilities include the ratio of
cash flow available for debt service (CFADS) to fixed charges. At the end of any
quarterly financial period such ratio shall not be less than 1.50x for the
12-month period then ending. As a condition of borrowing, the pro-forma CFADS to
fixed charges ratio shall not be less than 1.75x as of the quarterly financial
period ending immediately following the first anniversary of each borrowing or
letter of credit issuance. CFADS includes, but is not limited to, operating cash
before interest and taxes, pre-tax cash distributions from all asset
liquidations and equity capital contributions from PSEG to the extent not used
to fund investing activity. In addition, the ratio of consolidated recourse
indebtedness to recourse capitalization, 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 by the total recourse capitalization.
This ratio excludes the debt of PSEG Capital which is supported by PSEG. As of
December 31, 2001, the latest 12 months CFADS coverage ratio was 4.4 and the
ratio of recourse indebtedness to recourse capitalization was 0.45 to 1.00.

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

      In October 2001, $135 million of 6.74% Medium-Term Notes (MTN) matured
under the PSEG Capital MTN program and were refinanced with funds from our
issuance of short-term debt.

      In October 2001, PSEG Chile Holding S.A., a wholly-owned subsidiary of
Global and a US Dollar functional currency entity closed on $150 million of
project financing related to its investment in SAESA, a Chilean Peso functional
currency entity. The debt is variable and is based on LIBOR. In connection with
this project financing, PSEG Chile Holding S.A. entered into two foreign
currency forward exchange contracts with a total notional amount of $150
million. The two contracts were entered into to hedge the Chilean Peso/US Dollar
exposure on the net investment. This transaction qualifies for hedge accounting
under SFAS 133.

     In March 2001, $160 million of non-recourse bank debt originally incurred
to fund a portion of the purchase price of Global's interest in Chilquinta was
refinanced. The private placement offering by Chilquinta Energia Finance Co.
LLC, a Global affiliate, of senior notes was structured in two tranches: $60
million due 2008 at an interest rate of 6.47% and $100 million due 2011 at an
interest rate of 6.62%.

                                      -37-
<PAGE>

An extraordinary loss of $2 million (after-tax) was recorded in connection with
the refinancing of the $160 million non-recourse bank debt.

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

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

                                           Years Ended December 31,
                                -----------------------------------------------
                                    2001            2000              1999
                                -------------    ------------     -------------
                                            (Millions of Dollars)

Total Operating Activities......  $    371         $    243         $    289
                                  ========         ========         ========
Total Investing Activities......  $ (1,717)        $   (855)        $ (1,157)
                                  ========         ========         ========
Financing Activities
  Debt..........................  $  1,006         $    328         $    731
  Equity........................       374              263              171
                                       ---              ---              ---
Total Financing Activities......  $  1,380         $    591         $    902
                                  ========         ========         ========

      Operating Activities

      Cash flow from operating activities increased $128 million or 53% from
$243 million to $371 million in 2001 as compared to 2000. Global's cash flow
from operations increased $96 million, primarily attributable to proceeds
received from the withdrawal and sale by Global of its interest in the Eagle
Point Cogeneration Partnership. Resources' cash flow from operations increased
$34 million, primarily due to increased proceeds from the sales of properties
subject to leveraged leases and the sales of its interest in certain equity
securities held in its leveraged buyout funds.

      Cash flow from operating activities decreased $46 million or 16% from $289
million to $243 million in 2000 as compared to 1999. This decrease of $46
million was primarily due to the proceeds that Global received as consideration
from the sale of Newark Bay in 1999 while no such sales were recorded in 2000.
Additionally, operating activities were negatively impacted in 2000 from an
increase in working capital requirements of Energy Technologies and reduced
proceeds from sales of properties subject to leveraged leases by Resources.
These decreases were partially offset by increased dividends received in 2000 by
Global from affiliates of its equity method investments and increased rents
received by Resources from the continued investments in leveraged leases.

      Investing Activities

      In 2001, Global invested $810 million to acquire majority interests in
EDEERSA, Electroandes, Salalah, SAESA, Tanir Bavi and made additional
investments of $136 million in existing domestic and international facilities.
In addition, Global invested an additional $271 million in property, plant, and
equipment and other assets. In 2001, Resources invested approximately $460
million in six leveraged lease transactions including electric and gas
distribution assets in Austria, Belgium and the Netherlands and electric power
plants in the United States.

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

      In 1999, Global invested $722 million to acquire interests in two energy
distribution companies in Chile and Peru and additional investments in existing
domestic and international facilities. Resources invested approximately $380
million primarily in six leveraged leases of energy facilities: two gas
distribution networks in the Netherlands, three cogeneration plants in Germany,
two generation plants in the United States and a liquefied natural gas plant in
the United States. Energy Technologies acquired six HVAC and mechanical service
contractors for a total cost of approximately $49 million.

                                      -38-
<PAGE>

     Financing Activities

      As of December 31, 2001 and December 31, 2000, PSEG had $2.5 billion and
$2.0 billion of equity, respectively, (including retained earnings of
approximately $510 million and $353 million, respectively) invested in Energy
Holdings. In 2001, PSEG invested $400 million of additional equity in Energy
Holdings.

      In July and February 2001, we issued $550 million of 8.50% Senior Notes
due 2011 and $400 million of 8.625% Senior Notes due 2008, respectively. The
proceeds were used to repay certain short-term debt and for general corporate
purposes. Additionally, non-recourse project debt increased $718 million related
to construction financings at Global's consolidated projects. At December 31,
2001, our consolidated capital structure consisted of 30% common equity, 9%
preferred stock and 61% debt. Approximately $1.07 billion, or 19% of our total
invested capital represented debt consolidated on the balance sheet that is
non-recourse to Global and Energy Holdings.

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

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

Capital Requirements

      We plan to continue the growth of Global and Resources. We will assess the
growth prospects and opportunities for Energy Technologies' business before
committing substantial amounts of additional capital. In 2001, our subsidiaries
made investments totaling approximately $1.7 billion. These investments included
leveraged lease investments totaling $460 million by Resources, and acquisitions
of international generation and distribution facilities totaling $810 million by
Global. Global also made additional investments of $136 million in existing
generation and distribution projects.

      In 2002, capital expenditures to fund Global's anticipated acquisitions
and existing generation and distribution projects are expected to approximate
$200 million and includes $70 million of equity for projects currently under
construction. This amount is included in the discussion of "Contractual
Obligation and Commercial Obligations" shown below. The remaining $130 million
is discretionary and depends on the availability of projects, and the timing and
success of our development efforts. Capital expenditures to fund Resources'
investments are expected to approximate $250 million. Resources' anticipated
expenditures are discretionary and are dependent upon availability of potential
investments meeting certain profit thresholds. We have $270 million of long-term
debt due within one year, including $228 million of Medium-Term Notes maturing
in 2002.

      We expect funds available, in 2002, from the following sources:
approximately $495 million of borrowing capacity, estimated operating cash flow
of $475 million and estimated equity contributions from PSEG of $400 million.
Significant factors that may negatively impact operating cash flow in 2002
include the inability of Global to close on its intended sale of certain
Argentine assets to a subsidiary of AES and additional adverse impacts from the
Argentine economic, political and social crisis. The Argentine crisis may create
significant uncertainty with respect to operational performance, cash flow and
potential for profitability of the electricity industry in Argentina, including
EDEERSA. For a more comprehensive discussion, see "Argentine Economic Crisis",
shown above.

                                      -39-
<PAGE>

      Our capital expenditures in 2003-2006 are expected to average
approximately $600 million per year comprised of investments in generation and
distribution facilities and projects and leveraged lease transactions. Such
amounts include $75 million of equity for generation and distribution projects,
currently under construction which are expected to be funded by 2003 and are
included in the discussion of "Contractual Obligations and Commercials
Obligations" shown below. The remaining capital expenditures are discretionary
and depend on the availability of projects, and the timing and success of our
development efforts. Investment activity will be subject to periodic review and
revision and may vary significantly depending upon the opportunities presented.
Factors affecting actual expenditures and investments include availability of
capital and suitable investment opportunities, market volatility and local
economic trends. The anticipated sources of funds for such growth opportunities
are additional equity from PSEG, cash flow from operations and external
financings.

      For an analysis of certain contractual and commercial obligations in
2002-2006, see "Disclosures about Contractual Obligations and Commercial
Obligations and Certain Investments", shown below.

Disclosures about Contractual Obligations and Commercial Obligations

      The following tables reflect the contractual cash obligations and other
commercial commitments in the respective periods in which they are due.
<TABLE>
<CAPTION>
                                            Total           Less
                                            Amounts         Than
Contractual Cash Obligations              Committed        1 year        1 - 3 years    4 - 5 years    Over 5 years
----------------------------------------------------------------------------------------------------------------------
                                                                     (Millions of Dollars)
<S>                                        <C>            <C>             <C>             <C>            <C>
Long-Term Debt                             $   2,916      $     270       $     727       $      80      $   1,839
Operating Leases                                  28              7              11               6              4
----------------------------------------------------------------------------------------------------------------------
Total Contractual Cash Obligations         $   2,944      $     277       $     738       $      86      $   1,843
----------------------------------------------------------------------------------------------------------------------
</TABLE>

      Energy Holdings, Global and/or PSEG have guaranteed certain obligations of
Global's affiliates, including the successful completion, performance or other
obligations related to certain of the projects in an aggregate amount of
approximately $241 million, as of December 31, 2001. A substantial portion of
such guarantees is eliminated upon successful completion of construction,
performance of certain obligations and/or refinancing of construction debt with
non-recourse project term debt. The Administrative Agent for the Parana power
facility notified Global that the project was in default and our $30 million
equity commitment would be accelerated. Such payment is expected to occur in
March 2002 and is included in our Argentine investment exposure of $632 million.

      In the normal course of business, Energy Technologies secures construction
obligations with performance bonds issued by insurance companies. In the event
that Energy Technologies' tangible equity falls below $100 million, Energy
Holdings would be required to provide additional support for the performance
bonds. Tangible equity is defined as net equity less goodwill. As of December
31, 2001, Energy Technologies had tangible equity of $114 million and
performance bonds outstanding of $124 million. The performance bonds are not
included in the table below.
<TABLE>
<CAPTION>
                                            Total          Less
                                           Amounts         Than
Other Commercial Commitments              Committed       1 year        1 - 3 years     4 - 5 years    Over 5 years
----------------------------------------------------------------------------------------------------------------------
                                                                  (Millions of Dollars)
<S>                                        <C>           <C>             <C>             <C>             <C>
Standby Letters of Credit                  $     54      $     45        $      5        $      4        $      -
Guarantees                                      187            27             118               0              42
----------------------------------------------------------------------------------------------------------------------
Total Commercial Commitments               $    241      $     72        $    123        $      4        $     42
----------------------------------------------------------------------------------------------------------------------
</TABLE>

Off Balance Sheet Arrangements

      Global has certain investments that are accounted for under the equity
method in accordance with generally accepted accounting principles. Accordingly,
an amount is recorded on our balance sheet which is primarily our equity
investment and is increased for our pro-rata share of earnings less any dividend
distribution from such investments. The companies in which we invest that are
accounted for under the equity method have an aggregate $1.88 billion of debt on
their combined, consolidated financial statements. Our pro-rata share of such
debt is $737 million and is non-recourse to us, Global and PSEG. We are
generally not required to support the debt service obligations of these
companies.

                                      -40-
<PAGE>

      Resources has investments in leveraged leases that are accounted for in
accordance with SFAS 13 "Accounting for Leases." Leveraged lease investments
generally involve three parties: an owner/lessor, a creditor, and a lessee. In a
typical leveraged lease financing, the lessor purchases an asset to be leased.
The purchase price is typically financed 80% with debt provided by the creditor
and the balance comes from equity funds provided by Resources. The creditor
provides long term financing to the transaction, and is secured by the property
subject to lease. Such long term financing is non-recourse to Resources. As
such, in the event of default the creditor may only look to the leased asset as
security on the loan. As a lessor, Resources has ownership rights to the
property and rents the property to the lessee for use in its business operation.
As of December 31, 2001 Resources' equity investment in leased assets was
approximately $1.6 billion, net of deferred taxes of approximately $1.2 billion.

      In the event that collectibility of the minimum lease payments to be
received by the lessor is no longer reasonably predictable, the accounting
treatment for some of the leases may change. In such cases, Resources may deem
that a lessee has a high probability of defaulting on the lease obligation. In
many instances, Resources has protected its equity investment in such
transactions by providing for the direct right to assume the debt obligation.
Debt assumption would be at Resources' sole discretion, and normally only occur
if an appraisal of the leased property yielded a value that exceeds the present
value of the debt outstanding. Should Resources ever directly assume a debt
obligation, the fair value of the underlying asset and the associated debt would
be recorded on the balance sheet instead of the net equity investment in the
lease. In the events described above, the lease essentially changes from being
classified as a capital lease to a conventional operating lease.


Discussion of Critical Accounting Policies

      The accounting policies listed below are policies that involve the use
both objectively and subjectively derived information to record financial
statement transactions in accordance with Generally Accepted Accounting
Principles (GAAP) applied in the United States. The use of subjective judgment
and estimates by management is a critical element in the application of GAAP.
The principles below were determined to be most significant in the determination
of our financial statements for the years presented, and will impact our
financial statements prospectively.

      Leveraged Leases

      A leveraged lease is recorded by applying cash flows to lease income and
amortization on a constant return basis throughout the lease term. A key
assumption in our lease transactions is the residual value at the end of the
lease term. The residual value is estimated at the beginning of the lease term,
and is reviewed annually for adequacy. If management were to determine that
there is a permanent impairment to the residual value of an asset subject to
lease, the reduction must be recorded immediately. Appreciation in residual
value is not booked immediately, but is deferred until termination of the lease
transaction normally through the purchase of the asset by the lessee.

      Lease accounting also includes estimates of the likelihood of a borrower's
ability to pay the rent contractually derived in the transaction. If significant
uncertainty exists over the level of rent to be received, or rent is deferred to
future periods, the income accrual must be reduced to reflect lower estimates of
future lease income. In the event of default by a lessee, the leased asset may
be recorded on the balance sheet along with the related non-recourse debt.

      Lease accounting also includes estimates of future tax rates. Changes in
statutory rates could affect the level of lease income recorded, as tax cash
flow is a key component of income in a lease transaction.

      Percentage of Completion Accounting

      Percentage of completion accounting is applied to construction and service
contracts by Energy Technologies. This method involves estimates of gross profit
percentage at the inception of a contract term. As contract work is complete,
the gross profit is recognized in our Income Statement. If there is a change in
the expected contract gross profit, the change is recognized immediately in the
Consolidated Statements of Income. The determination of gross profit includes
significant use of contract estimates, both of variables that are directly
within our control, and those that are not.

      Measurement of Derivative Financial Instruments

      We use financial instruments to hedge floating interest rate and foreign
currency exposure in many markets where we invest. Derivative financial
instruments must be valued and recorded as assets or liabilities in the
financial statements. The derivation of value includes estimates of future
interest rates and exchange rates that are often quite volatile. For a complete
discussion of the application of Statement

                                      -41-
<PAGE>

of Financial Accounting Standards, SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133), see Note 2. "Summary of
Significant Policies" of the Notes to Consolidated Financial Statements.

      Use of Fair Value Accounting

      Resources applies fair value accounting for certain securities held in
Limited Partnership interests that have quotable market prices on liquid
exchanges. For other securities in the portfolio that do not trade on liquid
exchanges, securities are carried at cost unless a valuation report prepared by
the fund manager indicates a permanent impairment in value below cost. While
objectively derived, the volatility of securities markets over the past few
years has caused significant fluctuations in security prices. For example, we
recorded net pretax (losses)/gains from fair value adjustments or security sales
totaling $(16) million, ($4) million and $24 million for the three years ended,
December 31, 2001, December 31, 2000 and December 31, 1999, respectively. While
the carrying value of the trading portfolio was only $34 million as of December
31, 2001, it is possible that a volatile market could cause significant
fluctuations in our reported income in prospective periods.

      Impairment Testing

      Under SFAS 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of", (SFAS 121), we test our long-lived assets
for impairment periodically using a non-discounted cash flow test to determine
if cash flows are sufficient to recover asset or investment balances. Tests are
also performed when industry, regulatory or significant changes in market
dynamics cause a change in the relative level of income or cash flow projected
to be earned from an asset. Our equity investments are tested periodically using
the principles of APB 18 "The Equity Method of Accounting for Investments in
Common Stock" (APB 18). Impairment testing involves the use of financial models
that project asset or investment cash flows in future periods, inclusive of a
terminal value. Other assumptions include customer sales growth, inflation, and
fuel and labor costs. In 2002, we will apply SFAS 141, "Business Combinations"
(SFAS 141) and SFAS 142, "Goodwill and Other Intangible Assets" (SFAS 142). The
goodwill impairment testing involves the use of estimates to derive the fair
value of a reporting unit inclusive of the goodwill. Also in 2002, we will apply
SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS
144), which includes a non-discounted cash flow test similar to SFAS 121.
Although management believes its assumptions are the best available and in
accordance with industry standards, actual results will likely differ from these
assumptions and could have a material adverse impact on our financial condition,
results of operations and net cash flows.

      Foreign Currency Accounting

      Our financial statements are prepared using the US Dollar as the reporting
currency. In accordance with SFAS 52 "Foreign Currency Translation", foreign
operations whose functional currency is deemed to be the local (foreign)
currency, asset and liability accounts are translated into US 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 (OCI). Gains and losses on transactions
denominated in a currency other than the functional currency are included in the
results of operations as incurred.

      The determination of an entity's functional currency requires management's
judgment. It is based on an assessment of the primary currency in which
transactions in the local environment are conducted, and whether the local
currency can be relied upon as a stable currency in which to conduct business.
As economic and business conditions change, we are required to reassess the
economic environment and determine the appropriate functional currency. The
impact of foreign currency accounting could have a material adverse impact on
our financial condition, results of operation and net cash flows.


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, Pennsylvania and Texas), Argentina, Brazil, Chile,
China, India, Italy, Oman, Peru, Poland, Taiwan, 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.

                                      -42-
<PAGE>

      As Global pursues new opportunities, they will be required to comply with
applicable environmental laws and regulations. Global attempts to take such
expenditures into consideration when considering an investment; however, there
can be no assurance that environmental laws and regulations will not change. If
environmental laws or regulations change in the future, there can be no
assurance that our financial condition, results of operations and net cash flows
will not be materially and adversely affected. We are committed to operating its
businesses cleanly, safely and reliably and strive 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 our financial condition, results of operations and net cash flows.

      We do not anticipate any material capital expenditures for environmental
control facilities or in connection with compliance with federal, state or local
environmental laws and regulations in 2002 or in connection with the generation
projects currently in construction or advanced development. We do not believe
that compliance with federal, state and local environmental laws and regulations
will have a material adverse effect on its financial condition, results of
operations and net cash flows.

Business Environment

      We continue to evaluate the economic consequences of the September 11,
2001 terrorist attacks on the United States and subsequent developments,
particularly their impact on accelerating the continued economic slowdown in the
United States and worldwide. The consequences of a prolonged recession may
include the continued weakening of certain Latin American currencies, including
the Argentine Peso, Brazilian Real, the Chilean Peso, the Peruvian Sol, and the
Venezuelan Bolivar, lower energy prices in power markets, including power
markets where Global invests in merchant generation assets, and further credit
rating downgrades of certain airlines in the United States and worldwide. As of
December 31, 2001, $2.5 billion or 34% of our assets were invested in Latin
America, specifically in Argentina, Brazil, Chile, Peru and Venezuela and $108
million or 1% of our assets were comprised of leveraged leases of seven aircraft
leased to five separate lessees.

      As of December 31, 2001, Global had $281 million invested in two 1000 MW
gas-fired combined-cycle electric generating facilities in Texas, including
approximately $165 million of loans earning an annual rate of 12%. Of the $165
million outstanding at December 31, 2001, $88 million was repaid in February
2002. TIE's funding for these payments to Global were made from equity
contributions of $44 million from Global and $44 million from Panda Energy.
Earnings and cash distributions from TIE during 2001 were $15 million and $25
million, respectively, below expectations due to lower energy prices, resulting
from the over-supply of energy in the Texas power market and mild summer
temperatures suppressing demand in the region. Global expects this trend to
continue until the 2004-2005 time frame when market prices are expected to
increase, as older less efficient plants in the Texas power market are expected
to be retired and the demand for electricity is expected to increase. However,
no assurances can be given as to the accuracy of these estimates. Current
projections of future cash flows for each plant, using independent market
studies for estimating gas and electricity prices, market heat rates and
capacity prices, do not indicate the investment to be impaired. We believe that
those independent market studies are the best available for estimating future
prices. This impairment test was done in accordance with SFAS 121 at the project
level and no assurance can be given as to the accuracy of the projections used
in the analysis.

      We cannot predict the impact of any further currency devaluations,
continued economic slowdown, lower energy prices and potential lessee payment
defaults; however, such impact could have a material adverse effect on its
financial condition, results of operations and net cash flows.


Qualitative and Quantitative Disclosures About Market Risk

      The risk inherent in our market risk sensitive instruments and positions
is the potential loss arising from adverse changes in commodity prices, equity
security prices, interest rates and foreign currency exchange rates as discussed
below. Our policy is to use financial instruments to manage risk consistent with
our 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 us and our
subsidiaries.

      Counterparties expose us to credit losses in the event of nonperformance
or nonpayment. We have 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
our financial condition, results of operations and net cash flows.

                                      -43-
<PAGE>

      Commodity Risk

      We are subject to commodity price risk related to the selling prices of
electricity at our merchant generation facilities, particularly in the Texas
power market. For a comprehensive discussion of our generation plants in Texas
and the Texas power market, see "Business Environment", shown below.

      Equity Securities

      Resources has investments in equity securities and limited partnerships
which invest in equity securities. Resources carries its investments in equity
securities at their approximate fair value. Consequently, the carrying value of
these investments is affected by changes in the fair value of the underlying
securities. Fair value is determined by adjusting the market value of the
securities for liquidity and market volatility factors, where appropriate. The
aggregate fair values of such investments, which had available market prices at
December 31, 2001 and December 31, 2000, were $34 million and $115 million,
respectively. The decrease in the recorded amount of investments was primarily
due to the sales of its interests in equity securities which had a fair value of
$66 million on December 31, 2000 and a decline in the valuation of publicly
traded equity securities held within its limited partnerships. A sensitivity
analysis has been prepared to estimate our exposure to market volatility of
these investments. The potential change in fair value resulting from a
hypothetical 10% change in quoted market prices of these investments would
result in a $3 million and a $9 million change in revenues for the years ended
December 31, 2001 and 2000, respectively.

      Interest Rates

      We are subject to the risk of fluctuating interest rates in the normal
course of business. Our policy is to manage interest rates through the use of
fixed rate debt, floating rate debt and interest rate swaps. As of December 31,
2001 and December 31, 2000, a hypothetical 10% change in market interest rates
would result in a $2 million and a $6 million respectively, change in interest
costs related to short-term and floating rate debt. For a description of
interest rate swaps, see Note 12. "Financial Instruments and Risk Management" of
the Notes to Consolidated Financial Statements.

      Foreign Currencies

      We conduct our business on a multinational basis in a wide variety of
foreign currencies. Our objective for foreign currency risk management policy is
to preserve the economic value of cash flows in currencies other than the US
Dollar. Our policy is to hedge significant cash flows, which are probable of
occurring, and identified as subject to significant foreign currency
variability. In addition, we typically hedge a portion of our exposure resulting
from identified anticipated cash flows, providing the flexibility to deal with
the variability of longer-term forecasts as well as changing market conditions,
in which the cost of hedging may be excessive relative to the level of risk
involved. Our foreign currency hedging activities to date include hedges of US
Dollar debt arrangements in operating companies that conduct business in
currencies other than the US Dollar.

      California Power Market

      As a result of the California energy crisis, Pacific Gas & Electric
Company (PG&E) filed for protection under Chapter 11 of the US Bankruptcy Code
on April 6, 2001. GWF, Hanford and Tracy had combined pre-petition receivables
due from PG&E, for all plants amounting to approximately $62 million. Of this
amount, approximately $25 million had been reserved as an allowance for doubtful
accounts as of December 21, 2000, resulting in a net receivable balance of
approximately $37 million. Global's pro-rata share of this gross receivable and
net receivable was approximately $30 million and $18 million, respectively.

      In December 2001, GWF, Hanford and Tracy reached an agreement with PG&E
which stipulates that PG&E will make full payment of the $62 million in 12 equal
installments, including interest by the end of 2002. On December 31, 2001, PG&E
paid GWF $8 million, representing the initial installment payment and all
accrued interest due, pursuant to the agreement. As a result of this agreement,
GWF, Hanford and Tracy reversed the reserve of $25 million which increased
operating income by $25 million (of which Global's share was $11 million).

      As of December 31, 2001, GWF, Hanford and Tracy still had combined
pre-petition receivables due from PG&E for all plants amounting to approximately
$57 million. Global's pro-rata share of this receivable was $27 million.


Accounting Issues

      For a discussion of significant accounting matters, see Notes 2. "Summary
of Significant Accounting Policies" and 3. "Accounting Matters" of the Notes to
Consolidated Financial Statements.

                                      -44-
<PAGE>

Impact of New Accounting Pronouncements

      For a discussion of SFAS 133 and related Derivative Implementation Group
issues, see Note 2. "Summary of Significant Accounting Policies." For a
discussion of SFAS 141, SFAS 142, SFAS 143, and SFAS 144, see Note 3.
"Accounting Matters" of the Notes to Consolidated Financial Statements.

FORWARD LOOKING STATEMENTS

      Except for the historical information contained herein, certain of the
matters discussed in this report constitute "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are subject to risks and uncertainties which could
cause actual results to differ materially from those anticipated. Such
statements are based on management's beliefs as well as assumptions made by and
information currently available to management. When used herein, the words
"will", "anticipate", "intend", "estimate", "believe", "expect", "plan",
"hypothetical", "potential", variations of such words and similar expressions
are intended to identify forward-looking statements. We undertake no obligation
to publicly update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise. The following review of factors
should not be construed as exhaustive or as any admission regarding the adequacy
of our disclosures prior to the effective date of the Private Securities
Litigation Reform Act of 1995.

      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:

        o   because a significant portion of our business is conducted outside
            the United States, adverse international developments could
            negatively impact our business;

        o   credit, commodity, and financial market risks may have an adverse
            impact;

        o   the electric industry is undergoing substantial change;

        o   generation operating performance may fall below projected levels;

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

        o   our ability to service debt could be limited;

        o   if our operating performance or cash flow from minority interests
            falls below projected levels, we may not be able to service our
            debt;

        o   power transmission facilities may impact our ability to deliver our
            output to customers;

        o   government regulation affects many of our operations;

        o   environmental regulation significantly impacts our operations;

        o   insurance coverage may not be sufficient;

        o   acquisition, construction and development may not be successful; and

        o   changes in technology may make our power generation assets less
            competitive

         o  recession, acts of war or terrorism could have an adverse impact.


ITEM 7A: QUALITATIVE AND QUANTITATIVE DISCLOSURES
         ABOUT MARKET RISK

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


ITEM 8:  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                                      -45-
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                 For The Years Ended December 31,
                                                                         ---------------------------------------------------
                                                                             2001              2000               1999
                                                                         -------------     -------------      --------------
<S>                                                                         <C>               <C>                 <C>
OPERATING REVENUES
     Energy Service Revenues                                                    $ 443             $ 319               $ 184
     Income from Capital and Operating Leases                                     215               170                 112
     Electric Generation and Distribution Revenues                                172                 -                   -
     Income from Joint Ventures and Partnerships                                  144               158                 135
     Gain on Withdrawal from/Sale of Partnerships                                  75                 -                  69
     Interest and Dividend Income                                                  48                 7                   4
     Other                                                                         40                38                  36
     Energy Supply Revenues                                                         -                67                  86
     Net Investment (Losses) Gains                                                 (2)               35                  61
                                                                         -------------     -------------      --------------
         Total Operating Revenues                                               1,135               794                 687
                                                                         -------------     -------------      --------------
OPERATING EXPENSES
     Operation and Maintenance                                                    447               292                 182
     Administrative and General                                                   143               121                 109
     Electric Energy Costs                                                         85                 -                   -
     Depreciation and Amortization                                                 27                13                   7
     Cost of Energy Sales                                                           -                69                  82
     Write-down of Project Investments                                              7                 -                  44
     Restructuring Charge                                                           -                 7                   -
                                                                         -------------     -------------      --------------
           Total Operating Expenses                                               709               502                 424
                                                                         -------------     -------------      --------------
OPERATING INCOME                                                                  426               292                 263
OTHER INCOME                                                                        1                 3                   8
INTEREST EXPENSE - NET                                                            190               137                  95
                                                                         -------------     -------------      --------------
INCOME BEFORE INCOME TAXES,
  EXTRAORDINARY ITEM AND CUMULATIVE
  EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE                                      237               158                 176
INCOME TAXES
     Current                                                                     (101)             (129)                 11
     Deferred                                                                     152               175                  59
     Other                                                                          6                (1)                 (1)
                                                                         -------------     -------------      --------------
           Total Income Taxes                                                      57                45                  69
Minority Interests                                                                  4                (1)                 (1)
                                                                         -------------     -------------      --------------
INCOME BEFORE EXTRAORDINARY ITEM AND
  CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
  PRINCIPLE                                                                       176               114                 108
Extraordinary Loss on Early Retirement of Debt (net of tax)                        (2)                -                   -
Cumulative Effect of a Change in Accounting Principle (net of tax)                  9                 -                   -
                                                                         -------------     -------------      --------------
NET INCOME                                                                        183               114                 108
Preferred Stock Dividend Requirements                                              22                24                  25
                                                                         -------------     -------------      --------------
EARNINGS AVAILABLE TO PUBLIC SERVICE

  ENTERPRISE GROUP                                                              $ 161              $ 90                $ 83
                                                                         =============     =============      ==============
</TABLE>


See Notes to Consolidated Financial Statements.

                                       46
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                               December 31,
                                                                                 ------------------------------------------
                                                                                        2001                   2000
                                                                                 --------------------   -------------------
CURRENT ASSETS
<S>                                                                               <C>                   <C>
  Cash and Cash Equivalents                                                                     $ 56                  $ 22
  Accounts Receivable:
    Trade (net of doubtful accounts of $7 and $5,  respectively)                                 244                   132
    Other Accounts Receivable                                                                     21                     4
    Affiliated Companies                                                                           -                    64
  Assets Held for Sale                                                                           422                    48
  Cost and Estimated Earnings in Excess of Billings on Uncompleted Contracts                      19                    27
  Notes Receivable                                                                                26                    21
  Inventory                                                                                       18                     1
  Prepayments                                                                                      3                     4
  Other Current Assets                                                                             -                     2
                                                                                 --------------------   -------------------
       Total Current Assets                                                                      809                   325
                                                                                 --------------------   -------------------

PROPERTY, PLANT AND EQUIPMENT
  Real Estate (net of valuation allowance of $0 and $5,  respectively)                           115                   103
  Property and Equipment                                                                          88                    59
  Electric Generation and Distribution Assets                                                    863                    10
  Construction in Progress                                                                       345                   172
                                                                                 --------------------   -------------------
       Total                                                                                   1,411                   344
  Accumulated Depreciation and Amortization                                                     (190)                  (51)
                                                                                 --------------------   -------------------
       Net Property, Plant and Equipment                                                       1,221                   293
                                                                                 --------------------   -------------------

INVESTMENTS
 Capital Leases-Net                                                                            2,784                 2,253
 Corporate Joint Ventures                                                                      1,111                 1,584
 Partnership Interests                                                                           659                   575
 Other Investments                                                                                63                    70
                                                                                 --------------------   -------------------
       Total Investments                                                                       4,617                 4,482
                                                                                 --------------------   -------------------

OTHER ASSETS
 Goodwill                                                                                        628                    56
 Deferred Project Costs                                                                           84                    13
 Other                                                                                            80                    26
                                                                                 --------------------   -------------------
       Total Other Assets                                                                        792                    95
                                                                                 --------------------   -------------------

TOTAL ASSETS                                                                                 $ 7,439               $ 5,195
                                                                                 ====================   ===================
</TABLE>



See Notes to Consolidated Financial Statements.

                                       47
<PAGE>

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


<TABLE>
<CAPTION>

                                                                                                 December 31,
                                                                                   -----------------------------------------
                                                                                         2001                    2000
                                                                                   ------------------      -----------------
<S>                                                                                  <C>                    <C>
CURRENT LIABILITIES
  Long-Term Debt Due Within One Year                                                           $ 270                  $ 267
  Short-Term Borrowings Due to Public Service Enterprise Group Incorporated                       38                      -
  Accounts Payable:
     Trade                                                                                       100                     54
     Taxes                                                                                        21                      5
     Interest                                                                                     49                     31
     Other                                                                                        66                     31
     Affiliated Companies                                                                         49                      3
  Borrowings Under Lines of Credit                                                               300                    392
  Notes Payable                                                                                  285                     91
  Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts                     19                     18
                                                                                   ------------------      -----------------
       Total Current Liabilities                                                               1,197                    892
                                                                                   ------------------      -----------------

NONCURRENT LIABILITIES
  Deferred Income Taxes and Investment and Energy Tax Credits                                  1,211                  1,071
  Other Noncurrent Liabilities                                                                   101                     28
                                                                                   ------------------      -----------------
       Total Noncurrent Liabilities                                                            1,312                  1,099
                                                                                   ------------------      -----------------

COMMITMENTS AND CONTINGENT LIABILITIES  (Note 13)

MINORITY INTERESTS                                                                                66                     23

  LONG-TERM DEBT                                                                               2,640                  1,432

STOCKHOLDER'S EQUITY
  Common Stock                                                                                     -                      -
  Preferred Stock                                                                                509                    509
  Additional Paid-in Capital                                                                   1,490                  1,090
  Retained Earnings                                                                              510                    353
  Accumulated Other Comprehensive Loss                                                          (285)                  (203)
                                                                                   ------------------      -----------------
       Total Stockholder's Equity                                                              2,224                  1,749
                                                                                   ------------------      -----------------

TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY                                                   $ 7,439                $ 5,195
                                                                                   ==================      =================
</TABLE>


See Notes to Consolidated Financial Statements.

                                       48
<PAGE>

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

<TABLE>
<CAPTION>
                                                                             For The Years Ended December 31,
                                                                     ---------------------------------------------------
                                                                         2001              2000                1999
                                                                     --------------    --------------    ---------------
<S>                                                                  <C>               <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net Income                                                         $          183    $          114    $           108
  Adjustments to reconcile net income to net cash flows from
   operating activities:
    Depreciation and Amortization                                                28                25                 18
    Deferred Income Taxes (Other than Leases)                                   (20)              (11)               (32)
    Leveraged Lease Income, Adjusted for Rents Received                          (6)               74                  6
    Investment Distributions                                                     74                51                134
    Undistributed Earnings from Affiliates                                     (111)              (28)               (53)
    Net Gains on Investments                                                    (74)              (35)              (116)
    Write-down of Project Investments                                             7              --                   44
    Proceeds from Sales of Capital Leases                                       104                89                126
    Proceeds from Withdrawal from/Sale of Partnerships                           75              --                   71
    Non-Cash Portion of Restructuring Charge                                   --                   5               --
    Net Changes in certain current assets and liabilities:
       Accounts Receivable                                                      (56)             (107)               (33)
       Accounts Payable                                                         109                46                (10)
       Other Current Assets and Liabilities                                      51                11                 29
    Other                                                                         7                 9                 (3)
                                                                     --------------    --------------    ---------------
       Net Cash Provided By Operating Activities                                371               243                289
                                                                     --------------    --------------    ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
  Investments in Joint Ventures and Partnerships                               (151)             (368)              (725)
  Investments in Capital Leases                                                (460)             (460)              (378)
  Acquisitions, Net of Cash Acquired                                           (810)              (14)               (49)
  Additions to Property, Plant and Equipment                                   (169)              (56)                (9)
  Return of Capital from Partnerships                                             2                87                 11
  Additions to Deferred Project Costs                                           (31)               (8)                (7)
  Other                                                                         (98)              (36)              --
                                                                     --------------    --------------    ---------------
       Net Cash Used In Investing Activities                                 (1,717)             (855)            (1,157)
                                                                     --------------    --------------    ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from Additional Paid-in Capital                                      400               300                200
  Net Increase in Short-Term Debt                                               139               146                145
  Net Increase in Short-Term Intercompany Borrowings                             40              --                 --
  Cash Dividends Paid                                                           (26)              (37)               (29)
  Repayment of Long-Term Debt                                                  (422)             (155)              (250)
  Proceeds from Long-Term Debt                                                1,291               334                847
  Other                                                                         (42)                3                (11)
                                                                     --------------    --------------    ---------------
       Net Cash Provided By Financing Activities                              1,380               591                902
                                                                     --------------    --------------    ---------------
Net Change In Cash And Cash Equivalents                                          34               (21)                34
Cash And Cash Equivalents At Beginning Of Year                                   22                43                  9
                                                                     --------------    --------------    ---------------
Cash And Cash Equivalents At End Of Year                             $           56    $           22    $            43
                                                                     ==============    ==============    ===============

Supplemental Disclosure of Cash Flow Information
   Cash Payments (Receipts)  for:
       Income Taxes (Benefits)                                       $         (173)   $         (105)   $             3
       Interest Expense                                              $          152    $           87    $            74

Non-Cash Investing and Financing Activities:
       Issuance of PSEG Stock for Companies Acquired                 $         --      $         --      $            11
       Fair Value of Property, Plant and Equipment Acquired          $          727    $          182    $             5
       Debt Assumed from Companies Acquired                          $          256    $          161    $            11
</TABLE>


See Notes to Consolidated Financial Statements.


                                       49
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                        Accumulated
                                                                                Additional                 Other           Total
                                                          Common    Preferred    Paid-in      Retained  Comprehensive  Stockholder's
                                                          Stock       Stock      Capital      Earnings  Income (Loss)     Equity
                                                          -------  -----------  -----------  ---------  ------------   -------------
<S>                                                       <C>      <C>          <C>          <C>        <C>            <C>
Balance as of January 1, 1999                             $    --  $       509  $       579  $     197  $        (43)  $     1,242
    Net Income                                                 --         --           --          108          --             108
    Other Comprehensive Income (Loss), net of tax:
    Currency Translation Adjustment, net of tax of $(17)       --         --           --         --            (157)         (157)
                                                                                                                       -----------
        Other Comprehensive Loss                               --         --           --         --            --            (157)
                                                                                                                       -----------
    Comprehensive Loss                                         --         --           --         --            --             (49)
    Additional Paid-in Capital                                 --         --            211       --            --             211
    Preferred Stock Dividends                                  --         --           --          (25)         --             (25)
    Common Stock Dividends                                     --         --           --           (4)         --              (4)
                                                          -------  -----------  -----------  ---------  ------------   -----------
Balance as of December 31, 1999                                --          509          790        276          (200)        1,375
                                                          -------  -----------  -----------  ---------  ------------   -----------
    Net Income                                                 --         --           --          114          --             114
    Other Comprehensive Income (Loss), net of tax:
    Currency Translation Adjustment, net of tax of $0          --         --           --         --              (3)           (3)
                                                                                                                       -----------
        Other Comprehensive Loss                               --         --           --         --            --              (3)
                                                                                                                       -----------
    Comprehensive Income                                       --         --           --         --            --             111
    Additional Paid-in Capital                                 --         --            300       --            --             300
    Preferred Stock Dividends                                  --         --           --          (24)         --             (24)
    Common Stock Dividends                                     --         --           --          (13)         --             (13)
                                                          -------  -----------  -----------  ---------  ------------   -----------
Balance as of December 31, 2000                                --          509        1,090        353          (203)        1,749
                                                          -------  -----------  -----------  ---------  ------------   -----------
    Net Income                                                 --         --           --          183          --             183
    Other Comprehensive Income (Loss), net of tax:
    Currency Translation Adjustment, net of tax of $(6)        --         --           --         --             (55)          (55)
    Cumulative Effect of a Change in Accounting Principle
        (net of tax of $14 and minority interest of $12)       --         --           --         --             (15)          (15)
    Current Period Declines in Fair Value of Derivative

        Instruments-Net                                        --         --           --         --             (16)          (16)
    Reclassification Adjustments for Net Amounts Included
        in Net Income                                          --         --           --         --               4             4
                                                                                                                       -----------
        Other Comprehensive Loss                               --         --           --         --            --             (82)
                                                                                                                       -----------
    Comprehensive Income                                       --         --           --         --            --             101
    Additional Paid-in Capital                                 --         --            400       --            --             400
    Preferred Stock Dividends                                  --         --           --          (22)         --             (22)
    Common Stock Dividends                                     --         --           --           (4)         --              (4)
                                                          -------  -----------  -----------  ---------  ------------   -----------
Balance as of December 31, 2001                           $    --  $       509  $     1,490  $     510  $       (285)  $     2,224
                                                          =======  ===========  ===========  =========  ============   ===========
</TABLE>




See Notes to Consolidated Financial Statements.

                                      -50-
<PAGE>

                            PSEG ENERGY HOLDINGS INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1.  ORGANIZATION

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

      Unless the context otherwise indicates, all references to "Energy
Holdings," "we," "us" or "our" herein mean PSEG Energy Holdings Inc. and its
consolidated subsidiaries.


NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      Consolidation

      The consolidated financial statements include our accounts and all direct
and indirect subsidiaries in which we have a controlling interest. All
significant intercompany accounts and transactions have been eliminated in
consolidation. For a discussion of recent acquisitions by Global, including
those that are majority-owned subsidiaries, see Note 5. "Investments in Global's
Assets."

      Reclassifications

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

      Cash and Temporary Cash Investments

      We classify cash and investments, with original or purchased maturities of
three months or less, as cash and temporary cash investments.

      Property, Plant and Equipment

      The estimated useful lives for purposes of computing depreciation, on a
straight-line basis are from 3 to 12 years for furniture and equipment and 20
years for buildings. The estimated useful lives for purposes of computing
depreciation, on a straight-line basis are up to 40 years for Electric
Generation and Distribution Assets. Equipment used by Public Service
Conservation Resources Corporation (PSCRC), a wholly-owned subsidiary of Energy
Technologies, is depreciated on a straight line basis over 10 to 15 years and
such depreciation is included in Operations and Maintenance expense in the
Consolidated Statement of Income. Maintenance and repairs are expensed when
incurred.

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

      Assets Held for Sale

      For a discussion of the pending sale of certain investments in Argentina,
see Note 19. "Subsequent Events."

                                      -51-
<PAGE>

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


      EGDC has been conducting a controlled exit from the real estate business
since 1993. In 1999, a pre-tax charge of $11 million was recorded for a property
held for sale. This amount is recorded in operations and maintenance expense.
Since EGDC has been conducting a controlled exit from the real estate business,
gains and losses from property sales are considered to be in the normal course
of business of EGDC. As of December 31, 2001 and December 31, 2000, EGDC has
three properties and four properties, respectively, reported as Assets Held for
Sale amounting to $23 million and $13 million, respectively.

      Impairment of Long-lived Assets

      Statement of Financial Accounting Standards 121 (SFAS 121), "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of", requires that long-lived assets and certain intangible assets be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If undiscounted expected
future cash flows are less than the carrying value of the asset, an impairment
loss is to be recognized based on the fair value of the asset.

      The application of SFAS 121 relates to long-lived assets of consolidated
affiliates as well as long-lived generation assets of affiliates accounted for
under the equity method. Should an impairment loss be recognized at one of our
affiliates, its pro-rata share of the loss after taxes would be reflected in our
consolidated statements of income. For the years ended December 31, 2001, 2000,
and 1999, no such impairment losses were recognized against the long-lived
assets of our affiliates.

      Capital Leases

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

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

      Investments in Corporate Joint Ventures and Partnerships

      Global's and Resources' interests in active joint ventures and
partnerships are accounted for under the equity method of accounting where its
ownership interest is 50% or less and significant influence over joint venture
or partnership operating and management decisions exist. The pro-rata share of
income or loss is recorded in the Income from Joint Ventures and Partnerships
Line of the Consolidated Statements of Income with a corresponding increase in
the investment amount on the Consolidated Balance Sheets. Cash distributions are
recorded as reductions to the investment balance on the Consolidated Balance
Sheets. For investments in which significant influence does not exist, the cost
method of accounting is applied. Interest is capitalized on investments during
the construction and development of qualifying assets. The capitalized interest
is amortized over the operating lives of the projects beginning on the date of
commercial operation. The amount of interest capitalized was $16 million, $21
million, and $8 million for the years ended December 31, 2001, 2000, and 1999,
respectively.

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

      Income Taxes

      We and our subsidiaries file a consolidated Federal income tax return with
PSEG. We and our subsidiaries have entered into tax allocation agreements with
PSEG which provide that we and our subsidiaries will record our tax liabilities
as though we 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

                                      -52-
<PAGE>

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


depreciation for tax purposes and the recognition of fair value accounting for
book purposes. We defer and amortize investment and energy tax credits over the
lives of the related properties. Energy Holdings' effective tax rate differs
from the statutory federal income tax rate of 35% primarily due to the
imposition of state taxes and the fact that Global accounts for most of its
foreign investments using the equity method of accounting. Under such accounting
method, Global reflects in revenues its pro-rata share of the investment's net
income and the foreign income taxes are a component of our equity in earnings
rather than included as a component of our income tax provision.

      DERIVATIVE FINANCIAL INSTRUMENTS

      We and our subsidiaries use derivative financial instruments to manage
risk from changes in interest rates and foreign currency exchange rates,
pursuant to its business plans and prudent practices.

      On January 1, 2001, we adopted SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 established accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and hedging activities. The standard
requires an entity to recognize the fair value of derivatives held as assets or
liabilities on the balance sheet. The change in the fair value of the effective
portion of the gain or loss on a derivative instrument designated as a cash flow
hedge is reported in Other Comprehensive Income (OCI), net of tax. Amounts in
accumulated OCI are ultimately recognized in earnings when the related hedged
forecasted transaction occurs. The change in the fair value of the ineffective
portion of the gain or loss on a derivative instrument is recorded in earnings.
Derivative instruments that have not been designated as hedges are adjusted to
fair value through earnings. Energy Holdings and its subsidiaries have not
utilized any derivative instruments for fair value hedging purposes.

      Effective January 1, 2001, we recorded a cumulative effect from adopting
SFAS 133 as follows:

                                                                    Other
                                                                Comprehensive
                                               Earnings            Income
                                            ---------------    ----------------
                                                  (Millions of Dollars)
Adjustment to fair value of derivatives....     $   23             $  (41)
Income tax effects.........................         (8)                14
Minority interests effects.................         (6)                12
                                            ---------------    ----------------
Total......................................     $    9             $  (15)
                                            ---------------    ----------------

      The cumulative effect on earnings was comprised of one significant element
associated with a Power Purchase Agreement (PPA) that Carthage Power Company, a
Global affiliate, entered into that provides for indexation of foreign
currencies to the US Dollar over the tariff collection period. The indexation
provides for an increased amount of foreign currency to be provided to the
affiliated entity in the event of a devaluation in the foreign currency.

      The indexation portion of the PPA is considered an embedded derivative and
has been recognized and valued separately as a derivative instrument. As
currencies devalue/revalue in relation to the US Dollar, the derivative
increases/decreases in value equal to the discounted present value of additional
units of foreign currency (measured in US Dollars) over the life of the PPA.
This increased/decreased value is reported on the balance sheet as an
asset/liability. To the extent that such indexation is provided to hedge foreign
currency debt exposure, the offsetting amount is recorded in OCI. Amounts will
be reclassed from OCI to Earnings over the life of the debt beginning on the
date of commercial operation of the project, expected to occur in 2002. To the
extent such indexation is provided to hedge an equity return in US Dollars, the
offsetting amount is recorded in Earnings. The total value of this embedded
derivative was recorded on January 1, 2001 as a transition adjustment to
Earnings as required by SFAS 133. All changes in fair value of this embedded
derivative recorded subsequent to January 1, 2001 impact both OCI and Earnings.

      The cumulative effect on OCI was attributable to marking to market
interest rate swaps used to hedge variable-rate borrowings. Decreases in the
fair values of these instruments were attributable to declines in interest rates
since inception of the hedging arrangements and will be recognized
contemporaneously in Earnings in future periods by offsetting lower interest
expense associated with the hedged items.

                                      -53-
<PAGE>

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


      The fair value of the derivative instruments is determined by reference to
quoted market prices, listed contracts, published quotations or quotations from
counterparties. In the absence thereof, we utilized mathematical models based on
current and historical data.

      The Financial Accounting Standards Board (FASB) Derivative Implementation
Group (DIG) issued guidance, effective January 1, 2002, regarding the normal
purchases and normal sales exception for option-type contracts and forward
contracts in electricity. In addition, the FASB DIG issued amended guidance,
effective April 1, 2002, regarding the normal purchases and normal sales
exception to contracts that combine a forward contract and a purchased option
contract. We are currently evaluating this guidance in light of its potential
impacts, and cannot predict the impact on its financial position of results of
operations, however, such impact could be material.

      We do not enter into derivative financial instruments for trading
purposes.

      See Note 12. "Financial Instruments and Risk Management", for additional
information.

      Foreign Currency

      Our financial statements are prepared using the US 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 US
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 OCI (See the Consolidated Statements of Stockholder's
Equity).

      The exchange rate is the ratio between a unit of one currency and the
amount of another currency for which that unit can be exchanged at a particular
time. If exchangeability between two currencies is temporarily lacking at
balance sheet date, the first subsequent rate at which exchanges can be obtained
are used for translation.

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

      Net Investment Gains or Losses

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

      Energy Service Revenues and Expenses

      Energy Technologies' revenues from fixed price and other long-term
construction contracts are recognized on the percentage-of-completion method of
accounting determined by the ratio of costs incurred to management's estimates
of final total anticipated costs. Revenues from cost-plus-fee and time and
material contracts are recognized on the basis of costs incurred during the
period plus the fee earned, measured by the cost-to-cost method and are included
in Energy service revenues in the consolidated statements of income. Contract
costs include all direct labor and benefits, material purchased for or installed
in the project, subcontract costs and allocations of indirect construction
costs, and are recorded as a component of Operation and Maintenance expenses. 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.

                                      -54-
<PAGE>

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


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


      Energy Supply

      Prior to February 2000, Energy Technologies recorded revenues from the
sale of natural gas and electricity to customers. These sales were recorded in
Energy Supply Revenues in the consolidated statements of income and related
supply costs were recorded in cost of energy sales.

      As a result of exiting from the electric and gas commodity business,
Energy Technologies recognized a pre-tax restructuring charge of approximately
$7 million for the year ended December 31, 2000. Of this amount approximately $2
million related to employee severance costs for the termination of approximately
60 employees, $2 million related to deferred natural gas transportation costs
and $3 million was related to the write-off of computer hardware and software.
As of December 31, 2000, all severance costs had been paid related to the
terminations.


      Deferred Project Costs

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

      Deferred Debt Issuance Costs

      Deferred debt issuance costs are amortized over the term of the related
indebtedness using the interest method. Such costs are recorded as a component
of Other Long Term Assets.

      Goodwill

      We classified the cost in excess of fair value of the net assets as
goodwill (including tax attributes) of companies acquired in purchase business
transactions. Goodwill recorded in connection with acquisitions that occurred
prior to July 1, 2001 was amortized on a straight-line method over 20 years. For
a discussion of recent accounting standards with respect to recent business
combinations and goodwill, see Note 3. "Accounting Matters".

      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.

                                      -55-
<PAGE>

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


NOTE 3.  ACCOUNTING MATTERS

      In July 2001, the FASB issued SFAS 141, "Business Combinations" (SFAS
141), and SFAS 142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001, as well as all purchase method
business combinations completed after June 30, 2001. SFAS 142 requires that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually in accordance
with the provisions of SFAS 142. SFAS 142 also requires that intangible assets
with estimable useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS 121. We are required to adopt the provisions of SFAS 141
immediately, and SFAS 142 effective January 1, 2002. A transitional goodwill
impairment test will be completed and will require us to perform an assessment
of whether there is an indication that goodwill [and equity method goodwill] is
impaired as of the date of adoption. An impairment loss, as of the date of
adoption, will be recognized as the cumulative effect of a change in accounting
principle in the first interim period, if applicable. If certain events or
changes in circumstance indicate that goodwill might be impaired before
completion of the transitional goodwill impairment test, goodwill shall be
tested for impairment and any impairment loss shall be recorded as a component
of income from continuing operations.

      For a discussion of the potential goodwill impairment, see Note 13.
"Commitments and Contingencies."

      Also in July 2001, the FASB issued SFAS 143, "Accounting for Asset
Retirement Obligations" (SFAS 143). Under SFAS 143, the fair value of a
liability for an asset retirement obligation should be recorded in the period in
which it is incurred. Upon settlement of the liability, an entity either settles
the obligation for its recorded amount or incurs a gain or loss upon settlement.
SFAS 143 is effective for fiscal years beginning after June 15, 2002. We are
currently evaluating this guidance and cannot determine the impact on our
financial position, results of operations, or net cash flows.

      In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 modifies the rules for
accounting for the impairment or disposal of long-lived assets. The new rules
become effective for fiscal years beginning after December 15, 2001, with
earlier application encouraged. We are currently evaluating this guidance and
cannot determine the impact on our financial position, results of operations, or
net cash flows, however, such impact could be material.


NOTE 4.  CAPITAL LEASES

      Resources' net investment in leveraged leases is composed of the following
elements:
<TABLE>
<CAPTION>
                                                                        December 31,
                                                              ----------------------------------
                                                                    2001              2000
                                                              ------------------ ---------------
<S>                                                              <C>                 <C>
                                                                    (Millions of Dollars)
Lease rents receivable (net of principal and interest
on non-recourse debt)........................................   $    3,644          $    3,175
Estimated residual value of leased assets....................        1,414               1,040
                                                              ---------------     --------------
                                                                     5,058               4,215
Less - unearned and deferred income..........................        2,274               1,962
                                                              ---------------     --------------
Investment in leveraged leases...............................        2,784               2,253
Less - deferred taxes arising from leveraged leases..........        1,175               1,031
                                                              ---------------     --------------
Net investment in leveraged leases...........................   $    1,609          $    1,222
                                                              ===============     ==============
</TABLE>

                                      -56-
<PAGE>

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

      Resources' pre-tax income and income tax effects related to investments in
leveraged leases are as follows:
<TABLE>
<CAPTION>
                                                                           Years Ended December 31,
                                                         -------------------------------------------------------------
                                                               2001                  2000                  1999
                                                         ------------------    ------------------    -----------------
<S>                                                      <C>                    <C>                  <C>
                                                                            (Millions of Dollars)
Pre-tax income.........................................     $      206            $      163            $      112
                                                         ==================    ==================    =================
Income tax effect on pre-tax income....................     $       62            $       58            $       41
Amortization of investment tax credits.................     $       (1)           $       (1)           $       (1)
</TABLE>

      Resources' leases property and equipment, through leveraged leases, with
terms ranging from 8 to 45 years. The leveraged lease portfolio consisted of the
following types of property:
<TABLE>
<CAPTION>
                                                                                              DECEMBER 31,
                                                                                    ----------------------------------
                                                                                         2001               2000
                                                                                    ---------------     --------------
<S>                                                                                 <C>                 <C>
Energy-related..................................................................          86%                 79%
Aircraft........................................................................           4%                  9%
Real Estate.....................................................................           7%                  7%
Commuter rail cars..............................................................           3%                  4%
Industrial......................................................................           -                   1%
</TABLE>

      Resources' initial investment in leveraged leases represents approximately
15% to 20% of the purchase price of the leveraged leased property; the balance
is provided by third-party financing in the form of non-recourse long-term debt
which is secured by the property.

      In 2001, Resources negotiated the early termination of nine leveraged
leases and received cash proceeds of $104 million and recognized a pre-tax gain
of $15 million.

      In 2000, Resources negotiated the early termination of four leveraged
leases and received cash proceeds of $89 million and recognized a pre-tax gain
of $38 million.

      In 1999, Resources negotiated the early termination of three leveraged
leases and received cash proceeds of $126 million and recognized a pre-tax gain
of $22 million. The pre-tax gains were recorded in Net investment gains.


NOTE 5. INVESTMENTS IN GLOBAL'S ASSETS

      Global's investments include domestic qualifying facilities (QFs) under
the Public Utility Regulatory Policies Act of 1978, exempt wholesale generators
(EWGs) under the 1992 amendments to the Public Utility Holding Company Act of
1935 and foreign utility companies (FUCOs). Global's investments are generally
financed through debt that is non-recourse to Global and Energy Holdings.
Global's investments in QF projects have been undertaken with other participants
because Global, together with other utility affiliates, may not own more than
50% of a QF subsequent to its in-service date. Projects involving EWGs are not
restricted to a 50% investment limitation.

      As of December 31, 2001, Global's portfolio consisted of investments in 31
cogeneration or independent power projects (and 13 under construction or
advanced development) which range in gross production capacities from 15 to
1,000 megawatts (MW) of electricity, and eight electric distribution companies.
As of December 31, 2001 and December 31, 2000, Global's assets, which include
equity and consolidated projects, and share of project MW by region were as
follows:

                                      -57-
<PAGE>

                            PSEG ENERGY HOLDINGS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
                                                      2001               MW                2000                MW
                                               -------------------    ----------     ------------------    -----------
<S>                                                 <C>                 <C>               <C>                <C>
                                                  (Millions of                         (Millions of
                                                    Dollars)                             Dollars)
GENERATION
North America...............................       $       476          1,350          $       321           1,294
Latin America...............................               391            685                  115             501
Asia Pacific................................               131            246                  111             161
Europe (1)..................................               478            774                  287             593
India (2)...................................               335            391                   51             560
DISTRIBUTION
Latin America...............................             2,081            N/A                1,221             N/A
OTHER
Other (3)...................................               182            N/A                  165             N/A
                                                 ----------------     ----------     ------------------    -----------
Total Investment............................       $     4,074          3,446          $     2,271           3,109
                                                 ================     ==========     ==================    ===========
</TABLE>
  (1)   Europe and Africa.
  (2)   India and the Middle East.
  (3)   Assets not allocated to a specific project, including corporate
receivables.

      INVESTMENTS IN AND ADVANCES TO AFFILIATES

      Investments in net assets of affiliated companies accounted for under the
equity method of accounting by Global amounted to $1.5 billion and $1.9 billion
at December 31, 2001 and December 31, 2000, respectively. During the three years
ended December 31, 2001, 2000 and 1999, the amount of dividends from these
investments was $48 million, $107 million, and $83 million respectively.
Global's share of income and cash flow distribution percentages currently range
from 16% to 50%. Interest is earned on loans made to various projects. Such
loans earned rates of interest ranging from 7.5% to 14% during 2001 and 2000.

                                      -58-
<PAGE>

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


      Summarized results of operations and financial position of all affiliates
in which Global uses the equity method of accounting are presented below:
<TABLE>
<CAPTION>
                                                                  Foreign            Domestic              Total
                                                              -----------------    --------------     ----------------
<S>                                                              <C>                 <C>                  <C>
                                                                               (Millions of Dollars)
December 31, 2001
Condensed Income Statement Information
Revenue..................................................       $      819           $      473         $    1,292
Gross Profit.............................................              317                  165                482
Minority Interest........................................              (20)                  --                (20)
Net Income...............................................              141                   91                232
Condensed Balance Sheet Information
Assets:
 Current Assets..........................................       $      341           $      131         $      472
 Property, Plant & Equipment.............................            1,198                1,406              2,604
 Goodwill................................................              863                   50                913
 Other  Non-current Assets...............................              616                   23                639
                                                              -----------------    --------------     ----------------
Total Assets.............................................       $    3,018           $    1,610         $    4,628
                                                              -----------------    --------------     ----------------
Liabilities:
 Current Liabilities.....................................       $      415           $      109         $      524
 Debt*...................................................              761                  658              1,419
 Other Non-current Liabilities...........................              132                  212                344
 Minority Interest.......................................               25                   --                 25
                                                              -----------------    --------------     ----------------
Total Liabilities........................................            1,333                  979              2,312
Equity...................................................            1,685                  631              2,316
                                                              -----------------    --------------     ----------------
Total Liabilities & Equity...............................       $    3,018           $    1,610         $    4,628
                                                              -----------------    --------------     ----------------
</TABLE>

<TABLE>
<CAPTION>

                                                                  Foreign            Domestic              Total
                                                              -----------------    --------------     ----------------
<S>                                                             <C>                    <C>               <C>
                                                                               (Millions of Dollars)
December 31, 2000
Condensed Income Statement Information
Revenue..................................................       $    1,059           $      452         $    1,511
Gross Profit.............................................              434                  256                690
Minority Interest........................................              (25)                  --                (25)
Net Income...............................................              156                  162                318
Condensed Balance Sheet Information
Assets:
 Current Assets..........................................       $      504           $      130         $      634
 Property, Plant & Equipment.............................            2,355                1,349              3,704
 Goodwill................................................            1,201                   --              1,201
 Other Non-current Assets................................              464                   77                541
                                                              -----------------    --------------     ----------------
Total Assets.............................................       $    4,524           $    1,556         $    6,080
                                                              -----------------    --------------     ----------------
Liabilities:
 Current Liabilities.....................................       $      818           $       99         $      917
 Debt*...................................................              696                  732              1,428
 Other Non-current Liabilities...........................              174                   90                264
 Minority Interest.......................................              129                    1                130
                                                              -----------------    --------------     ----------------
Total Liabilities........................................            1,817                  922              2,739
Equity...................................................            2,707                  634              3,341
                                                              -----------------    --------------     ----------------
Total Liabilities & Equity...............................       $    4,524           $    1,556         $    6,080
                                                              -----------------    --------------     ----------------
</TABLE>

<TABLE>
<CAPTION>

                                                                  Foreign            Domestic              Total
                                                              -----------------    --------------     ----------------
<S>                                                                <C>               <C>                <C>
                                                                               (Millions of Dollars)
December 31, 1999
Condensed Income Statement Information
Revenue..................................................         $ 1,184              $   423            $ 1,607
Gross Profit.............................................             416                  265                681
Minority Interest........................................             (23)                  --                (23)
Net Income...............................................             110                  155                265
</TABLE>

    (*) Debt is non-recourse to Global and us.

Purchase Business Combinations/asset Acquisitions

                                      -59-
<PAGE>

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


      In December 2001, Global acquired Empresa de Electricidad de los Andes
S.A. (Electroandes) for $227 million, subject to certain purchase price
adjustments pending completion in April 2002. Electroandes is the sixth largest
electric generator in Peru with a 6% market share. Electroandes' main assets
include four hydroelectric facilities with a combined installed capacity of 183
MW and 460 miles of transmission lines located in the Central Andean region
(northeast of Lima). In addition, Electroandes has a temporary concession to
develop a 100 MW expansion of an existing station and a 150 MW greenfield
hydroelectric facility for a period of two years from March 15, 2001. In 2000,
Electroandes generated 1,150 GWH of electrical energy, of which 97% was sold
through power purchase agreements to mining companies in the region. We have not
finalized the allocation of the purchase price as of December 31, 2001. An
estimation of this allocation was prepared and included as part of our
consolidated financial statements. The purchase price was allocated $15 million
to Current Assets, $78 million to Property, Plant and Equipment, $164 million to
Goodwill, and $30 million to Current Liabilities.

      In August 2001, Global purchased a 94% equity stake in Sociedad Austral de
Electricidad S.A., (SAESA) and all of its subsidiaries from Compania de
Petroleos de Chile S.A. (COPEC). The SAESA group of companies consists of four
distribution companies and one transmission company that provide electric
service in the southern part of Chile. Additionally, Global purchased from COPEC
approximately 14% of Empresa Electrica de la Frontera S.A. (Frontel) not owned
by SAESA. SAESA also owns a 50% interest in the Argentine distribution company
Empresa Electrica del Rio Negro S.A. (EDERSA). In 2001 Global spent $447 million
(net of $16 million in cash acquired) to acquire a 94% interest in SAESA and a
14% interest in Frontel. In October 2001, Global completed a tender offer for an
additional 6% of publicly traded SAESA shares, for approximately $25 million. We
have not finalized the allocation of the purchase price as of December 31, 2001.
An estimation of this allocation was prepared and included as part of our
consolidated financial statements. The total purchase price of $488 million was
allocated $55 million to Current Assets, $210 million to Property, Plant and
Equipment, $315 million to Goodwill, $10 million to Other Non-Current Assets,
$46 million to Current Liabilities, $39 million to Long-Term Debt, and $17
million to Deferred Taxes and Other Non-Current Liabilities.

      In June 2001, Global exercised its option to acquire an additional 49% of
Empresa Distribuidora de Electricidad de Entre Rios S.A. (EDEERSA), an electric
distribution company providing electric service to more than 230,000 customers
in the Province of Entre Rios, Argentina, bringing its total ownership of
EDEERSA to 90%. The additional ownership was purchased for $110 million. An
estimation of this allocation was prepared and included as part of our
consolidated financial statements. The purchase price was allocated
approximately $22 million to Current Assets, $114 million to Property, Plant and
Equipment, $30 million to Goodwill, $15 million to Current Liabilities, and $41
million to Long-Term Debt. We have not finalized the allocation of the purchase
price as of December 31, 2001.

      In 2000, Global closed the project financing for ELCHO, a combined heat
and power plant consisting of 220 MW of electricity and 500 MW of thermal energy
capacity located in Poland. Total project cost is estimated at $324 million with
Global's equity investment not expected to exceed $105 million. The plant is
under construction and commercial operation is targeted for 2003.

      In 2000, Global acquired a 49% interest in Tanir Bavi Power Company
Private Ltd., which was constructing a 220 MW barge mounted, combined-cycle
generating facility located near Mangalore in the state of Karnataka, India. In
January 2001, Global acquired an additional 25% interest in the project bringing
its total ownership interest to 74%. In November 2001, the facility achieved
full commercial operation. Power from the facility will be sold to the Karnataka
Electricity Board pursuant to a seven-year fixed price power purchase agreement
with a five-year renewal term.

      In 2000, Global and its 50% partner completed a $329 million project
financing for a 1,000 MW gas-fired combined-cycle electric generation facility
to be located near Odessa, Texas. The facility commenced full commercial
operations in August 2001.

Other

      As part of a comprehensive review of assets and development activities,
Global recognized a $44 million write-down in the third quarter of 1999, related
to equity investments in generation facilities in California and in development
companies in the Philippines and Thailand.

      In California, Global owns a 50% equity interest in seven generating
facilities totaling 153 MW (71 MW net) known as GWF, Hanford and Tracy. The
facilities began operations between 1989 and 1991. Electricity is sold to a
utility under a pricing structure that provided for fixed rate energy prices for
the first

                                      -60-
<PAGE>

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


10 year period coupled with capacity payments over the entire power
purchase contract terms which range from 20 to 30 years. In the 11th year of the
contracts, the energy component of the price is based on Short Run Avoided Cost
(SRAC) which is a formula based pricing mechanism that takes into account the
cost of fuel, plant efficiency and other factors. This price is correlated to
market pool prices on the exchange. The market prices and correspondingly, the
SRAC prices, are driven by many factors including, but not limited to, demand,
availability of generation supply and cost of the supply. Market prices are most
volatile during the summer when high temperatures cause a higher demand for
power often increasing the cost. In 1999, as part of a review of all equity
investments, Global assessed the carrying value of GWF and Hanford taking into
account the future cash flows expected from these investments after review of
the most current SRAC prices which were significantly lower than fixed rate
prices paid in the first 10 years. Global determined that there was a permanent
loss in value of its equity investment and recognized a pre-tax charge to income
of $31 million in accordance with APB 18, "The Equity Method of Accounting for
Investments in Common Stock". For a discussion of recent developments in the
California power market, see Note 12. "Financial Instruments And Risk
Management."

      Interests in two power development companies in Thailand and the
Philippines were acquired in 1997 for a total cost of approximately $22 million.
The Asian financial crisis, which began in 1997, significantly impacted
development prospects in the region having an impact on the financial condition
of the companies which consistently recognized losses over the reported periods.
In the third quarter of 1999, management made a decision to cease providing an
operating and financial commitment to the development ventures. A pre-tax charge
to income of $8 million was recognized to write-off the equity investment in the
development company in Thailand. Global sold its investment later in the year
for $5,000. A pre-tax charge to income of $5 million was recognized to reduce
the value of Global's equity investment in the development company in the
Philippines to the remaining cash and land value of approximately $3 million.

NOTE 6.   OTHER INVESTMENTS

      Resources has limited partnership investments in two leveraged buyout
funds, a collateralized bond obligation structure, a clean air facility and
solar electric generating systems. Resources' total investment in limited
partnerships was $163 million, and $239 million at December 31, 2001 and 2000,
respectively.

      Included in the amounts above are limited partnership interests in two
leveraged buyout funds that hold publicly traded securities, which are managed
by KKR Associates L.P., (KKR). The book value of the investment in the leveraged
buyout funds was $130 million and $213 million as of December 31, 2001 and
December 31, 2000, respectively. The largest single investment in the funds held
indirectly by Resources is the investment in approximately 16,847,000 shares of
common stock of Borden Inc., having a book value of $81 million and $83 million
as of December 31, 2001 and December 31, 2000, respectively. Borden is in the
consumer products industry.

      Resources applies fair value accounting to investments in the funds where
publicly traded market prices are available as described in Note 2. "Summary of
Significant Accounting Policies." Approximately $34 million and $115 million
represent the fair value of Resources' share of the publicly traded securities
in the funds as of December 31, 2001 and December 31, 2000, respectively.

      During January and February 2001, KKR sold its interest in FleetBoston
Financial Corporation. Resources received cash proceeds of $35 million and
recorded a $4 million pre-tax gain as a result of this transaction. In August
2001, KKR sold its interest in Gillette Corporation. Resources received cash
proceeds of $30 million from the sale, which had a book value of $31 million.

      EGDC has been conducting a controlled exit from the real estate business
since 1993. In 1999, a pre-tax charge of $11 million was recorded for a property
held for sale. This amount is recorded in operations and maintenance expense.
Since EGDC has been conducting a controlled exit from the real estate business,
gains and losses from property sales are considered to be in the normal course
of business of EGDC.

NOTE 7.  FOREIGN INVESTMENTS AND OPERATIONS

      As of December 31, 2001, Global and Resources had approximately $3.4
billion and $1.3 billion, respectively, of international assets. As of December
31, 2001, foreign assets represented 64% of our consolidated assets and the
revenues related to those foreign assets contributed 37% to consolidated
revenues for the year ended December 31, 2001.

                                      -61-
<PAGE>

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


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

<TABLE>
<CAPTION>
                                                                     Years Ended December 31
                                              ------------------------------------------------------------------------
                                                  2001         %            2000         %         1999          %
                                              ------------------------------------------------------------------------
<S>                                             <C>          <C>              <C>           <C>     <C>         <C>
                                                                       (Millions of Dollars)
Revenues from consolidated projects....          $  196                     $   --                 $   --
Income from capital leases.............             131                        109                     89
Income from joint ventures.............              79                         74                     53
Interest and dividends.................              16                          1                     --
Operator/Management fees...............               2                          4                      7
                                              -------------              ------------           ------------
 Total foreign revenues ................          $  424        37%          $  188       24%       $  149       24%
                                              =============              ============           ============
 Foreign assets (A).....................          $4,764        64%          $2,990       58%       $2,420       59%
</TABLE>

(A)   Amount is net of pre-tax foreign currency translation adjustment of $285
      million, $225 million, $222 million as of December 31, 2001, 2000, and
      1999, respectively.

      As of December 31, 2001, Global had approximately $3.4 billion including
deferred project costs, of international investments ($540 million in
construction or advanced development) in projects that generate or distribute
energy primarily in Argentina, Brazil, Chile, China, India, Italy, Oman, Peru,
Poland, Tunisia and Venezuela. Global is expected to continue to make
international investments. Global seeks to structure its investments to manage
the risk associated with project development, including foreign currency
devaluation and fluctuations.

      Net foreign currency devaluations, caused primarily by the Brazilian Real,
have reduced Stockholder's Equity by the net of tax amounts of $258 million and
$203 million, as of December 31, 2001 and December 31, 2000, respectively (see
Consolidated Statements of Stockholder's Equity).

      The net foreign currency transaction gains or (losses) for the years ended
December 31, 2001, 2000 and 1999 were ($6) million, $3 million and $2 million,
respectively, and are recorded in Other Income in the Consolidated Statements of
Income.


NOTE 8.  SHORT-TERM DEBT

      As of December 31, 2001, we had two separate senior revolving credit
facilities with a syndicate of banks; a $495 million five-year revolving credit
and letter of credit facility and a $200 million 364-day revolving credit
facility. In addition, we have an uncommitted credit line of up to $100 million
from a single financial institution, which can be accessed as market conditions
warrant. The revolving credit facilities also permit shorter term base rate
borrowings at the prime rate. The five-year facility also permits up to $250
million of letters of credit to be issued of which $57 million are outstanding
as of December 31, 2001. The 364-day facility and the five-year facility mature
in May 2002 and May 2004, respectively. As of December 31, 2001 and December 31,
2000, we had $300 million and $392 million borrowed under all of our revolving
credit facilities, respectively.

                                      -62-
<PAGE>

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


NOTE 9.  LONG-TERM DEBT

<TABLE>
<CAPTION>
                                                                                             December 31,
                                                                                 -------------------------------------
                                                                   Year Due           2001                 2000
                                                                -------------    ----------------     ----------------
                                                                                        (Millions of Dollars)
<S>                                                             <C>             <C>                  <C>
Energy Holdings
Senior Notes
9.125%.....................................................          2004          $       300          $       300
8.625%.....................................................          2008                  400                    -
10.00%.....................................................          2009                  400                  400
8.50% .....................................................          2011                  550                    -
                                                                                 ----------------     ----------------
Principal amount outstanding...............................                              1,650                  700
Net unamortized discount...................................                                 (6)                  (5)
                                                                                 ----------------     ----------------
      Total long-term debt of Energy Holdings..............                              1,644                  695
                                                                                 ----------------     ----------------
PSEG Capital
Medium-Term Notes (MTNs) (A)
6.73% - 6.74%..............................................          2001                    -                  170
3.12% - 7.72%..............................................          2002                  228                  228
6.25% .....................................................          2003                  252                  252
                                                                                  ----------------     ----------------
Principal amount outstanding...............................                                480                  650
Amounts due in one year....................................                               (228)                (170)
Net unamortized discount...................................                                  -                   (1)
                                                                                 ----------------     ----------------
      Total long-term debt of PSEG Capital.................                                252                  479
                                                                                 ----------------     ----------------
Global
Non-recourse Debt
10.010% - 10.385% - Bank Loan..............................          2001                    -                   96
5.470% - 10.385% - Bank Loan...............................          2002                   41                   64
6.640% - 9.460% Bank Loan..................................       2003-2019                711                  160
14.00% - Minority Shareholder Loan.........................          2027                   10                   10
                                                                                 ----------------     ----------------
Principal amount outstanding...............................                                762                  330
Amounts due in one year....................................                                (41)                 (96)
                                                                                 ----------------     ----------------
      Total long-term debt of Global.......................                                721                  234
                                                                                 ----------------     ----------------

Resources
8.60% - Bank Loan..........................................       2001-2020                 23                   24
                                                                                 ----------------     ----------------
Principal amount outstanding...............................                                 23                   24
Amounts due in one year....................................                                 (1)                  (1)
                                                                                 ----------------     ----------------
      Total long-term debt of Resources....................                                 22                   23
                                                                                 ----------------     ----------------
Energy Technologies
2.90% - 11.65% - Various Loans.............................       2002-2005                  1                    1
                                                                                 ----------------     ----------------
Principal amount outstanding...............................                                  1                    1
Amounts due in one year....................................                                  -                    -
                                                                                 ----------------     ----------------
      Total long-term debt of Energy Technologies..........                                  1                    1
                                                                                 ----------------     ----------------
         Total long-term debt..............................                        $     2,640          $     1,432
                                                                                 ================     ================
</TABLE>
----------
(A)    PSEG Capital's MTN program permits borrowings up to $750 million.
       Effective January 31, 1995, PSEG Capital determined that it will not have
       more than $650 million of debt outstanding at any time and it is expected
       that such debt will be eliminated by the second quarter of 2003.


      Annual Principal Requirements

      The scheduled principal maturities during the years following December 31,
2001 are as follows:
<TABLE>
<CAPTION>
                         Energy           PSEG                                           Energy
                        Holdings        Capital         Global        Resources       Technologies         Total
                       ------------    -----------    -----------    ------------     -------------    --------------
<S>                     <C>                <C>             <C>          <C>              <C>           <C>
                                                           (Millions of Dollars)
2002................    $     --        $    228       $     41       $      1         $     --         $    270
2003................          --             252             56              1                1              310
2004................         300              --            116              1               --              417
2005................          --              --             39              1               --               40
2006................          --              --             39              1               --               40
Thereafter..........       1,350              --            471             18               --            1,839
                       ------------    -----------    -----------    ------------     -------------    --------------
                        $  1,650        $    480       $    762       $     23         $      1         $  2,916
                       ============    ===========    ===========    ============     =============    ==============
</TABLE>

                                      -63-
<PAGE>

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


      Minority Shareholder Loan

      A subsidiary of Global entered into a $10 million minority shareholder
loan (Shareholder Loan) in May 1997, which matures on May 29, 2027. The loan
proceeds were used to partially fund the acquisition of EDEN and EDES in
Argentina in 1997 by a subsidiary of Global. Amounts borrowed under the
Shareholder Loan are unsecured and subordinated to amounts borrowed under
existing credit facilities of EDEN and EDES.

      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.

      For a discussion of the pending sale of certain Argentine assets, to a
subsidiary of AES, see Note 19. "Subsequent Events."


NOTE 10.  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>
                                                                                Years Ended December 31,
                                                                   ---------------------------------------------------
                                                                      2001               2000               1999
                                                                   ------------     ---------------    ---------------
<S>                                                                   <C>               <C>               <C>
                                                                                 (Millions of Dollars)
Federal income tax expense at statutory rate.................        $   83            $   55            $   62
State income taxes, net of Federal income tax benefit........            (2)                4                16
Amortization of investment and energy tax credits............            (1)               (1)               (1)
Dividends received deduction.................................            --                --                (1)
Tax effects attributable to foreign operations...............           (20)              (14)               (7)
Tax credits..................................................            --                (1)               --
Other........................................................            (3)                2                --
                                                                   ------------      --------------    ---------------
Income tax expense...........................................        $   57            $   45            $   69
                                                                   ============      ==============    ===============
</TABLE>

<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                              ----------------------------------------
                                                                                     2001                  2000
                                                                              -------------------    -----------------
<S>                                                                           <C>                        <C>
                                                                                       (Millions of Dollars)
Assets - non-current:
    Development expenses....................................................      $      21              $      17
    Foreign currency translation............................................             29                     23
    Notes receivable reserve................................................              6                      6
    Real estate.............................................................              4                      4
    Discontinued operations.................................................              4                      5
    Derivatives.............................................................             14                     --
    Other...................................................................              6                      9
                                                                              -------------------    -----------------
Total Assets................................................................      $      84              $      64
                                                                              ===================    =================
Liabilities - non-current:
    Leasing activities......................................................      $   1,146              $     987
    Partnership activities..................................................             73                    101
    Income from foreign operations..........................................             41                     14
    Capitalized interest....................................................             14                      4
    State income tax deferrals..............................................             13                     20
                                                                              -------------------    -----------------
Total Liabilities...........................................................          1,287                  1,126
                                                                              -------------------    -----------------
Net Liabilities.............................................................      $   1,203              $   1,062
                                                                              ===================    =================
</TABLE>

      Our effective tax rate differs from the statutory federal income tax rate
of 35% primarily due to the imposition of state taxes and the fact that Global
accounts for most of its foreign investments using the equity method of
accounting. Under such accounting method, Global reflects in operating revenues
its pro-rata share of the investment's earnings, net of tax. Under this
accounting method, the foreign income taxes are a component of our equity in
earnings rather than reflected in the income tax provision.

                                      -64-
<PAGE>

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


NOTE 11.  STOCKHOLDER'S EQUITY

      Common Stock

      We had 100 shares of no-par common stock issued and outstanding as of
December 31, 2001 and December 31, 2000, all of which were held by PSEG. The
total authorized amount as of December 31, 2001 and December 31, 2000 was
1,000,000 shares.

      Preferred Stock

      In October 2000, we exchanged 435 shares of 5.01% Cumulative, 1,467 shares
of 4.80% Series B Cumulative and 1,450 shares of 4.875% Series C Cumulative of
outstanding preferred stock owned by PSEG for a new series of 4.03% Series D
Cumulative preferred stock owned by PSEG. In January 2001, that rate was reset
to 4.47% through June 2008.

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

<TABLE>
<CAPTION>
                                                             Par Value Per                             December 31,
      Date                      Description                      Share           Number of Shares          2000
------------------    --------------------------------     ------------------    -----------------    ----------------
<S>                   <C>                                       <C>                    <C>               <C>
October 2000          4.47% Series D Cumulative                 $100,000               5,092             $509,200,000
</TABLE>

      We paid preferred dividends of $22 million and $24 million in 2001 and
2000, respectively, to PSEG.


      Additional Paid-in Capital

      PSEG invested approximately $400 million and $300 million of equity in
Energy Holdings in 2001 and 2000, respectively. The proceeds were used to fund
additional investments and pay down short term debt.


      Dividends On Common Stock

      We paid $4 million and $13 million in dividends on our common stock to
PSEG in 2001 and 2000, respectively.

NOTE 12.  FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

      Our operations are exposed to market risks from changes in commodity
prices, foreign currency exchange rates, interest rates and equity prices that
could affect our results of operations and financial condition. We manage our
exposure to these market risks through our regular operating and financing
activities and, when deemed appropriate, hedge these risks through the use of
derivative financial instruments. We use the term "hedge" to mean a strategy
designed to manage risks of volatility in prices or rate movements on certain
assets, liabilities or anticipated transactions and by creating a relationship
in which gains or losses on derivative instruments are expected to
counterbalance the losses or gains on the assets, liabilities or anticipated
transactions exposed to such market risks. We use derivative instruments as risk
management tools which are consistent with our business plans and prudent
business practices and not for speculative 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. We limit our exposure to credit-related losses
in the event of nonperformance by counterparties by limiting our transacting
with counterparties to those with high credit ratings. For a discussion of the
adoption of SFAS 133 as amended, see Note 3. "Accounting Matters."

     Credit Risk

      Credit risk relates to the risk of loss that we would incur as a result of
nonperformance by counterparties, pursuant to the terms of their contractual
obligations. We have established credit policies that we believe significantly
minimize our exposure to credit risk. These policies include an evaluation of
potential counterparties' financial condition, including credit ratings.

                                      -65-
<PAGE>

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


     FOREIGN CURRENCIES

      We conduct our business on a multinational basis in a wide variety of
foreign currencies. Our objective for foreign currency risk management policy is
to preserve the economic value of cash flows in currencies other than the US
Dollar. Our policy is to hedge significant cash flows, which are probable of
occurring, and identified as subject to significant foreign currency
variability. In addition, we typically hedge a portion of our exposure resulting
from identified anticipated cash flows, providing the flexibility to deal with
the variability of longer-term forecasts as well as changing market conditions,
in which the cost of hedging may be excessive relative to the level of risk
involved. Our foreign currency hedging activities to date include hedges of US
Dollar debt arrangements in operating companies that conduct business in
currencies other than the US Dollar.

      Global holds a 60% ownership interest in Carthage Power Company, a
Tunisian generation facility under construction. The Power Purchase Agreement,
signed in 1999, contains an embedded derivative that indexes the fixed Tunisian
Dinar payments to US Dollar exchange rates. The indexation portion of the PPA is
considered an embedded derivative and has been recognized and valued separately
as a derivative instrument. As currencies devalue/revalue in relation to the US
Dollar, the derivative increases/decreases in value equal to the discounted
present value of additional units of foreign currency (measured in US Dollars)
over the life of the PPA. This increased/decreased value is reported on the
balance sheet as an asset/liability. To the extent that such indexation is
provided to hedge foreign currency debt exposure, the offsetting amount is
recorded in OCI. Amounts will be reclassed from OCI to Earnings over the life of
the debt beginning on the date of commercial operation of the project, expected
to occur in 2002. To the extent such indexation is provided to hedge an equity
return in US Dollars, the offsetting amount is recorded in Earnings. As of
January 1, 2001, a $9 million gain, net of tax and minority interests, was
recorded as the cumulative effect of accounting change for SFAS 133, as amended.
During 2001, an additional gain of $1 million, net of tax and minority
interests, was recorded to earnings as a result of a net increase in the value
of the derivative.

      Global holds a 32% ownership interest in a Brazilian distribution company,
Rio Grande Energia (RGE), whose debt is denominated in US Dollars. As of
December 31, 2001, Global's pro-rata share of such debt was approximately $60
million. A wholly-owned subsidiary of Global entered into a forward exchange
contract in December 2001 to hedge the foreign currency exposure associated with
the outstanding debt principal. The contract expired prior to December 31, 2001
and was not designated as a hedge for accounting purposes. As a result of
unfavorable movements in the US Dollar to Brazilian Real exchange rates, a loss
of $4 million, after-tax was recorded related to this derivative upon maturity
of the contract. This amount was recorded in Other Income on the Consolidated
Statement of Income.

       In order to hedge the risk of fluctuations in the exchange rate between
the two currencies associated with the debt principal payments due in May, June
and July 2002, RGE entered into a series of three forward exchange contracts to
purchase US Dollars for Brazilian Reals in December 2001. Global's share of the
notional value of these contracts, which expire in the same months as the
respective principal payments are due, is approximately $13 million. These
contracts were established as hedges for accounting purposes and the change in
fair value for the year ended December 31, 2001 impacted Global's OCI by $1
million, after-tax. In order to hedge the risk of fluctuations in the exchange
rate between the two currencies associated with the interest payments due in
February and May 2002, RGE entered into two cross currency interest rate swaps
in January 2002. The instruments convert the variable LIBOR-based interest
payments to a variable CDI (the Brazilian inter-bank offered rate) based
payments. As a result, RGE has hedged its foreign currency exposure but is still
at risk for variability in the Brazilian CDI interest rate during the terms of
the instruments. Global's share of the notional value of these two instruments
is approximately $3 million each. In order to hedge the risk of fluctuations in
the exchange rate between the two currencies associated with the principal
payments due in May, June and July of 2003 through 2005, RGE entered into a
series of similar nine cross currency interest rate swaps in January 2002.
Global's share of the notional value of the instruments totals approximately $15
million per year for the instruments maturing in May, June and July of 2003
through 2004 and totals approximately $19 million for the instruments maturing
in May, June and July 2005. For accounting purposes, the fluctuations in the
fair value of the interest rate components of these cross currency swaps will
not be recorded under hedge accounting rules and will be recorded directly to
the Consolidated Statements of Income.

                                      -66-
<PAGE>

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


      Through its 50% joint venture, Meiya Power Company, Global holds a 17.5%
ownership interest in a Taiwanese generation project under construction where
the construction contractor's fees, payable in installments through July 2003,
are payable in Euros. To manage the risk of foreign exchange rate fluctuations
associated with these payments, the project entered into a series of forward
exchange contracts to purchase Euros in exchange for Taiwanese Dollars. As of
December 31, 2001, Global's share of the fair value and aggregate notional value
of these forward exchange contracts was approximately $1 million and $16
million, respectively. These forward exchange contracts were not designated as
hedges for accounting purposes and were marked to market, resulting in an
after-tax gain of approximately $1 million (Global's share). In addition,
after-tax gains of $1 million were recorded during 2001 on similar forward
exchange contracts expiring during the year.

      During 2001, Global purchased approximately 100% of a Chilean distribution
company. In order to hedge final Chilean Peso denominated payments required to
be made on the acquisition, Global entered into a forward exchange contract to
purchase Chilean Pesos for US Dollars. This transaction did not qualify for
hedge accounting, and, as such, upon settlement of the transaction, Global
recognized an after-tax loss of $0.5 million. Furthermore, as a requirement to
obtain certain debt financing necessary to fund the acquisition, and in order to
hedge against fluctuations in the US Dollar to Chilean Peso foreign exchange
rates, Global entered into two forward contracts with notional values of $75
million each to exchange Chilean Pesos for US Dollars. These transactions expire
in October 2002 and are considered hedges for accounting purposes. As of
December 31, 2001, the derivative asset value of $4 million has been recorded to
OCI, net of taxes. In addition, Global holds a 50% interest in another Chilean
distribution company, which was anticipating paying its US investors a return of
capital. In order to hedge the risk of fluctuations in the Chilean Peso to US
Dollar exchange rate, the distribution company entered into a forward exchange
contract to purchase US Dollars for Chilean Pesos. Global's after-tax share of
the loss on settlement of this transaction (recorded by the distribution
company) was $0.3 million.

     Interest Rates

      We are subject to the risk of fluctuating interest rates in the normal
course of business. Our policy is to manage interest rate risk through the use
of fixed rate debt, floating rate debt, interest rate swaps and treasury locks.

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

                                                       December 31,
                                            ------------------------------------
                                                 2001                 2000
                                            ----------------      --------------
                                                   (Millions of Dollars)
Senior Notes-- Energy Holdings.............     $  1,701              $    727
MTNs-- PSEG Capital........................          484                   643
Non-recourse debt-- Global.................          762                   330
Bank Loan-- Resources......................           23                    24
Loans - Energy Technologies................            1                     1

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

      Substantially all non-recourse debt has floating interest rates that are
reset several times during the year to various market indices. As such, carrying
value of such debt approximates its market value.

                                      -67-
<PAGE>

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


      Global is constructing electric generation facilities in Oman, Poland and
Tunisia. The operating companies of these facilities have entered into interest
rate swaps to lock in fixed interest rates on up to $599 million of its
construction loans. Such rate swaps hedge the value of the cash flows of future
interest payments. The gross notional amounts, interest rates and fair values as
of December 31, 2001 are listed below. Global owns 55%, 60%, and 81% of the
Polish, Tunisian, and Oman investments, respectively:

<TABLE>
<CAPTION>

                                             Oman                  Poland                          Tunisia
                                           ----------    ----------------------------    -----------------------------
                                             US $           US $            PLN             US $            Euro
                                            Tranche       Tranche         Tranche         Tranche          Tranche
                                           ----------    -----------    -------------    -----------    --------------
<S>                                         <C>              <C>          <C>               <C>           <C>
                                                                  (Millions, where applicable)
Notional Amount..........................     $18           $85             $38             $60              $67
Pay Rate.................................    6.3%           8.4%           13.2%            6.9%            5.2%
Receive Rate.............................    LIBOR         LIBOR          WIBOR**          LIBOR          EURIBOR*
Fair Value...............................    ($3)          ($30)           ($22)            ($4)            ($2)
</TABLE>
    *  EURIBOR-Euro Area Inter-Bank Offered Rate
    ** WIBOR- Warsaw Inter-Bank Offered Rate

      The ineffective portion of these interest rate swaps is recorded to
earnings. During 2001, an after-tax loss of $1 million was recorded by Global
due to the ineffectiveness of such interest rate swaps.

      Global holds investments in various generation facilities in the United
States that are accounted for under the equity method of accounting and,
therefore, are not consolidated in Global's financial statements. Global holds a
50% ownership in three such investments, two located in Texas and one in Hawaii,
which hold US Dollar denominated debt with variable interest payments tied to
LIBOR rates. In order to lock in fixed interest rates on such debt, the
investees each entered into interest rate swaps to hedge the value of the cash
flows of their future interest payments. As of December 31, 2001, the aggregate
notional balance of these swaps was $415 million, the weighted average fixed
interest rate paid was 7.1% and Global's share of the aggregate fair value of
these swaps was a liability of $12 million. These swaps were designated as
hedges for accounting purposes and, as a result, changes in the fair value of
the hedge were recorded in OCI.

      The fair value of interest rate swaps, designated and effective as cash
flow hedges, are initially recorded in OCI. Reclassification of unrealized gains
or losses on cash flow hedges of variable-rate debt instruments from OCI into
earnings occurs as interest payments are accrued on the debt instrument and
generally offsets the change in the interest accrued on the underlying variable
rate debt. In 2001, we reclassified approximately $4 million of losses from cash
flow hedges, including our pro-rata share from our equity method investees, from
OCI to earnings. In 2002, we anticipate reclassifying approximately $8 million
of losses from cash flow hedges, including our pro-rata share from our equity
method investees, from OCI to earnings.

      In March 2001, $160 million of non-recourse bank debt originally incurred
to fund a portion of the purchase price of Global's interest in Chilquinta
Energia, S.A. was refinanced. The private placement offering by Chilquinta
Energia Finance Co. LLC, a Global affiliate, of senior notes was structured in
two tranches: $60 million due 2008 at an interest rate of 6.47% and $100 million
due 2011 at an interest rate of 6.62%. An extraordinary loss of $2 million
(after-tax) was recorded in connection with the refinancing of the $160 million
non-recourse bank debt.

      Equity Securities

      Resources has investments in equity securities and partnerships, in which
Resources is a limited partner. Resources carries its investments in equity
securities at their approximate fair value as of the reporting date.
Consequently, the carrying value of these investments is affected by changes in
the market prices of the underlying securities. Fair value is determined by
adjusting the market value of the securities for liquidation and market
volatility factors, where appropriate. The aggregate amount of such investments
which have quoted market prices at December 31, 2001, and December 31, 2000 was
$34 million and $115 million, respectively. The decrease in the recorded amount
of investments was primarily due to the sales in 2001 of its interests in equity
securities which had a fair value of $66 million on December 31, 2000 and a
decline in the valuation of publicly traded equity securities held within its
limited partnerships.

                                      -68-
<PAGE>

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

      California Power Market

      As a result of the California energy crisis, Pacific Gas & Electric
Company (PG&E) filed for protection under Chapter 11 of the US Bankruptcy Code
on April 6, 2001. GWF, Hanford and Tracy had combined pre-petition receivables
due from PG&E, for all plants amounting to approximately $62 million. Of this
amount, approximately $25 million had been reserved as an allowance for doubtful
accounts as of December 31, 2000, resulting in a net receivable balance of
approximately $37 million. Global's pro-rata share of this gross receivable and
net receivable was approximately $30 million and $18 million, respectively.

      In December 2001, GWF, Hanford and Tracy reached an agreement with PG&E
which stipulates that PG&E will make full payment of the $62 million in 12 equal
installments, including interest by the end of 2002. On December 31, 2001, PG&E
paid GWF $8 million, representing the initial installment payment and all
accrued interest due, pursuant to the agreement. As a result of this agreement,
GWF, Hanford and Tracy reversed the reserve of $25 million which increased
operating income by $25 million (of which Global's share was $11 million).

      As of December 31, 2001, GWF, Hanford and Tracy still had combined
pre-petition receivables due from PG&E for all plants amounting to approximately
$57 million. Global's pro-rata share of this receivable was $27 million.

NOTE 13.  COMMITMENTS AND CONTINGENCIES

      ARGENTINE ECONOMIC CRISIS

      As of December 31, 2001, approximately $737 million or 10% of our assets
were invested in Argentina. This includes the consolidated assets of a
distribution company, EDEERSA, and our minority interests in three distribution
companies, Empresa Distribuidora de Energia Norte S.A. (EDEN), Empresa
Distribuidora de Energia Sur S.A. (EDES), and Empresa Distribuidora La Plata
S.A. (EDELAP) and two generating companies, Central Termica San Nicolas power
plant (CTSN), and Parana under contract for sale to a subsidiary of the AES
Corporation. Our aggregate investment exposure in Argentina is approximately
$632 million, including $212 million of investment exposure for EDEERSA, and
$420 million of investment exposure for the assets under contract. Goodwill
related to our investment in EDEERSA is approximately $63 million. For a
discussion of the pending sale of certain investments in Argentina, see Note 19.
"Subsequent Events."

      The Argentine economy has been in a state of recession for approximately
four years. Continued deficit spending in the 23 Argentine provinces coupled
with low growth and high unemployment has precipitated an economic, political
and social crisis. Toward the end of 2001, a liquidity crisis ensued causing the
Argentine government to default on $141 billion of national debt. The economic
crisis was fueled by political instability and social unrest as the new year
began. The present administration is in the process of developing an economic
plan to avert a return to the economic instability and hyperinflationary economy
of the 1980s. In early January, the decade old convertibility formula, that
maintained the Peso at a 1:1 exchange rate with the US Dollar, was abandoned. In
early February, the Peso was floated freely with the US Dollar. In the first day
of the free floating formula, the currency weakened to a rate of approximately 2
Pesos per 1 US Dollar. On February 28, 2002, the currency weakened further to a
rate of approximately 2.15 Pesos per 1 US Dollar.

      As of December 31, 2001, the functional currency of Global's Argentine
distribution company, EDEERSA, was the US Dollar, as all revenues, most expenses
and all financings were denominated in US Dollars or were US Dollar linked. As a
US Dollar reporting entity, EDEERSA's monetary accounts in Pesos, such as
short-term receivables or payables, were re-measured into the US Dollar with a
minimal impact to the Income Statement. We have US Dollar denominated debt at
EDEERSA, our 90% share of which is approximately $76 million. This debt is
non-recourse to us and Global. For a discussion of the impacts of a potential
change in the functional currency to the Argentine Peso, see Note. 19
"Subsequent Events."

      In the Province of Entre Rios, where EDEERSA is located, the electricity
law provided for a pass-through of devaluation to the end user customer.
Customers' bills are first computed in the US Dollar and converted into the Peso
for billing. This mechanism assures that devaluation will not impact the level
of US Dollar revenues an electric distribution company receives. However, in
January 2002, the Argentine federal government implemented a new law that
prohibits any foreign price or other indexation and any US Dollar or other
foreign currency adjustment clauses relating to public service tariffs, thus
prohibiting the pass through of the costs of devaluation to customers. The
provincial governments have been requested to adopt this provision. The Province
of Entre Rios has recently adopted this provision as well as a law that requires
public service companies within the Province such as EDEERSA to accept payment
for all billed services in a provincial promissory note, the "Federal". The
terms of the "Federal" require principal payment at maturity in an equal amount
of Argentine Pesos. However, the "Federal" is not freely convertible in the
financial markets to Argentine Peso or US Dollars. There are ongoing
negotiations to remedy this situation, although no assurances can be given.
While we continue to operate EDEERSA, there has been an adverse impact to the
financial condition and cash flows of EDEERSA due to its inability to pass
through the costs of devaluation to customers and its receipt of an illiquid
provincial currency. We are pursuing remedies on several fronts, including
holding discussions with the Province and United States politicians both
individually and collectively with a coalition of international investors, and
shall be pursuing legal recourse under the Bilateral Investment Treaty between
the United States and Argentina. We have been notified by lenders of the
occurrence of events of default related to the Parana, EDEN and EDES credit
facilities, all of which are under contract to be sold to AES. If Argentine
conditions do not improve, Global's other Argentina properties may also default
on non-recourse obligations in connection with other financings. Currently, we
cannot predict the outcome of our ongoing negotiations with the lenders.

      Other potential impacts of the Argentine economic, political and social
crisis include increased collection risk, further devaluation of the Peso,
potential nationalization of assets, foreclosure of our assets by lenders, and
an inability to complete the pending sale of certain Argentine assets to a
subsidiary of AES. We cannot predict the outcome of these events and accordingly
cannot predict the impact to our financial condition, results of operations or
net cash flows, although such impact may be material, and could include a
write-down of our investment exposure.

      The events leading to the Argentine economic crisis contributed to
downward pressure on the Brazilian and Chilean currencies in 2001. The Brazilian
Real devalued approximately 15% since year-end 2000 from 1.951 to 1 US Dollar to
2.308 to 1 US Dollar as of December 31, 2001 and the Chilean Peso devalued
approximately 13% since year-end 2000 from 573.90 to 1 US Dollar to 660.45 to 1
US Dollar as of December 31, 2001.

                                      -69-
<PAGE>

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

      Other

      We are required to adopt SFAS 142 in 2002, which initiates certain
goodwill impairment testing. For a comprehensive discussion of SFAS 142, See
Note. 3 "Accounting Matters."

      As of December 31, 2001, we had recorded unamortized goodwill in the
amount of $628 million, of which $479 million was recorded in connection with
Global's acquisitions of SAESA and Electroandes in Chile and Peru in August and
December of 2001, respectively. The amortization expense related to goodwill was
approximately $3 million for the year ended December 31, 2001.

      As of December 31, 2001, our pro-rata share of goodwill included in equity
method investees totaled $375 million. In accordance with generally accepted
accounting principles, such goodwill is not consolidated on our balance sheet.
Global's share of the amortization expense related to such goodwill was
approximately $8 million.

      We are currently evaluating the effect of adopting SFAS 142 on the
recorded amount of goodwill. Some or all of the goodwill at: RGE totaling $142
million (our share), EDEERSA totaling $63 million and Energy Technologies
totaling $53 million could be impaired upon completion of our evaluation. The
impact of adopting SFAS 142 is likely to be material to our financial position,
results of operations and net cash flows.

                                      -70-
<PAGE>

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


      As of December 31, 2001, our unamortized goodwill and pro-rata share of
goodwill in equity method investees was as follows:

                                                               As of
                                                         December 31, 2001
                                                      ------------------------
                                                       (Millions of Dollars)
                                                      ------------------------
       EDEERSA........................................            $     63
       SAESA..........................................                 315
       Electroandes...................................                 164
       Tanir Bavi.....................................                  27
       ELCHO..........................................                   6
                                                              ----------------
            Total Global..............................                 575
                                                              ----------------
       Energy Technologies............................                  53
                                                              ----------------
            Total On Balance Sheet....................            $    628
                                                              ----------------
       RGE  ..........................................            $    142
       Chilquinta/Luz.................................                 174
       Luz Del Sur....................................                  34
       Kalaeloa.......................................                  25
                                                              ----------------
            Total Off Balance Sheet...................                 375
                                                              ----------------
                  Total Goodwill......................            $  1,003
                                                              ================

      In 2002, we will be implementing SFAS 144. SFAS 144 requires periodic
reviews of long-lived assets for impairment, and supercedes SFAS 121. Review is
generally initiated by a certain event or series of events that causes a change
in the operation or business environment in which we operate. The recent
economic crisis in Argentina will cause us to initiate a review of our Argentine
operations under SFAS 144. As noted above, the impact of implementing SFAS 144
could be material to our financial position, results of operations and net cash
flows.

      As of December 31, 2001, we had $53 million, or 1%, of our assets invested
in the Turboven generation facilities, located in Venezuela. Recently, Venezuela
has been subject to a loss of capital as the country's debt has been subject to
a credit rating downgrade. In February 2002, the government of Venezuela
abandoned the crawling currency peg and allowed the Bolivar to float freely with
the US Dollar. The currency experienced a precipitous drop in value in the first
day of free trading. Global's Venezuelan affiliate, Turboven is a US Dollar
functional currency entity. Its power purchase contracts are indexed to the US
Dollar as are the fuel supply costs. Our near term income statement exposure
relates to our net monetary position in Bolivars. Since we are a US Dollar
functional entity, any receivables and payables in Bolivars must be re-measured
to the US Dollar. The impact of the re-measurement is recorded as a loss or gain
to the income statement. The recent decision to devalue the Venezuelan Bolivar
is not expected to have a material adverse impact on our financial position,
statement of operations or net cash flows, although no assurances can be given.

      Energy Holdings, Global and/or PSEG have guaranteed certain obligations of
Global's affiliates, including the successful completion, performance or other
obligations related to certain of the projects in an aggregate amount of
approximately $241 million, as of December 31, 2001. A substantial portion of
such guarantees is eliminated upon successful completion of construction,
performance or certain obligations and/or refinancing of construction debt with
non-recourse project term debt.

      In the normal course of business, Energy Technologies secures construction
obligations with performance bonds issued by insurance companies. In the event
that Energy Technologies' tangible equity falls below $100 million, Energy
Holdings would be required to provide additional support for the performance
bonds. Tangible equity is defined as net equity less goodwill. As of December
31, 2001, Energy Technologies had tangible equity of $114 million and
performance bonds outstanding of $124 million. The performance bonds are not
included in the table below.

      In May 2001, GWF Energy LLC (GWF Energy), a 50/50 joint venture between
Global and Harbinger GWF LLC, entered into a 10-year power purchase agreement
with the California Department of Water Resources to provide 340 MW of electric
capacity to California from three new natural gas-fired peaker plants that GWF
Energy expects to build and operate in California. Total project cost is
estimated at $325 million. The first plant, a 90 MW facility, was completed and
began operation in August 2001. Global's permanent equity investment in these
plants, including contingencies, is not expected to exceed $100 million after
completion of project financing, expected to occur in 2002.

                                      -71-
<PAGE>

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


      On February 25, 2002 the Public Utilities Commission of the State of
California (CPUC) filed a complaint with the Federal Energy Regulatory
Commission (FERC) under Section 206 of the Federal Power Act against sellers
who, pursuant to long-term, FERC authorized contracts, provide power to the
California Division of Water Resources (DWR). GWF Energy is a named respondent
in this proceeding. The CPUC's complaint, which addresses 44 transactions
embodied in 32 contracts with 22 sellers, alleges that collectively, the
specified long term wholesale power contracts are priced at unjust and
unreasonable levels and requests FERC to abrogate the contracts to enable the
State to obtain replacement contracts as necessary or in the alternative, to
reform the contracts to provide for just and reasonable pricing, reduce the
length of the contracts, and strike from the contracts the specific non-price
and conditions found to be unjust and unreasonable. In the event of an adverse
ruling by the FERC, Energy Holdings and Global would reconsider any plans to
invest in additional generation facilities in California.

      In March 2001, Global, through Dhofar Power Company (DPCO), signed a
20-year concession with the government of Oman to privatize the electric system
of Salalah. A consortium led by Global (81% ownership) and several major Omani
investment groups owns DPCO. The project will enhance the existing network of
generation, transmission and distribution assets and is expected to add 200 MW
of new generating capacity. The project achieved financial closure in September
2001 and construction on the project commenced in the same month. The project is
expected to achieve commercial operation by March 2003. Total project cost is
estimated at $277 million. Global's equity investment, including contingencies,
is expected to be approximately $82 million.

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

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

      We and our subsidiaries and equity method investees are involved in
various legal actions arising in the normal course of business. We do not expect
there will be material adverse effect on its financial statements as a result of
these proceedings, although no assurances can be given.


NOTE 14.  MINIMUM LEASE PAYMENTS

      Energy Holdings and its subsidiaries lease administrative office space and
equipment under operating leases, which expire prior to the end of 2010. Total
future minimum lease payments as of December 31, 2001 are:
                                                           (Millions of Dollars)
       2002....................................................   $    7
       2003....................................................        6
       2004....................................................        5
       2005....................................................        4
       2006....................................................        2
       Thereafter..............................................        4
                                                                 -----------
                Total minimum lease payments...................   $   28
                                                                 ===========
      Rent expense for 2001, 2000 and 1999 was approximately $7 million for all
three years.


NOTE 15.  PENSION AND OTHER POSTRETIREMENT BENEFIT AND SAVINGS PLANS

      Employees of Energy Holdings and its subsidiaries are participants in a
non-contributory pension plan administered by PSEG. See Note 17. "Related Party
Transactions", for Energy Holdings' funding requirements for the years ended
2001, 2000, and 1999.

                                      -72-
<PAGE>

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


      In addition, PSEG sponsors two defined contribution plans. Represented
employees of Energy Holdings are eligible for participation in the PSEG Employee
Savings Plan (Savings Plan) while all other employees of Energy Holdings are
eligible for participation in PSEG's Thrift and Tax-Deferred Savings Plan
(Thrift 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 7% for Savings Plan participants and
up to 8% for Thrift Plan participants are matched with employer contributions of
cash or PSEG common stock equal to 50% of such employee contributions. For
periods prior to March 1, 2002, employer contributions, related to participant
contributions in excess of 5% and up to 7%, were made in shares of PSEG common
stock for Thrift Plan participants. For periods prior to March 1, 2002, employer
contributions, related to participant contributions in excess of 6% and up to
8%, were made in shares of PSEG common stock for Thrift Plan participants.
Beginning on March 1, 2002, and thereafter, all employer contributions will be
made in cash to each plan. PSEG billed Energy Holdings for its portion of
employer contributions. The amount expensed for the matching provision of the
plans was approximately $1 million for the years ended 2001, 2000, and 1999.


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

      Resources

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

      Energy Technologies

      Energy Technologies earns revenues from constructing, operating and
maintaining HVAC systems and providing energy-related engineering, consulting
and mechanical contracting services to industrial and commercial customers in
the Northeastern and Middle Atlantic United States.

                                      -73-
<PAGE>

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


      Other Activities

      Information related to the segments of our business is detailed below:

<TABLE>
<CAPTION>
                                                                                                Other
                                                                              Energy          Activities    Consolidated
                                               Global        Resources      Technologies         (A)           Total
                                            -------------    -----------    ------------     -----------    -------------
<S>                                             <C>            <C>             <C>             <C>              <C>
                                                                       (Millions of Dollars)
For the Year Ended December 31, 2001
  Total revenues..........................   $    452         $    215       $    467         $      1       $  1,135
  Depreciation and amortization(B)........         15                4              8               --             27
  Interest expense-- net..................         84              100              5                1            190
  Income taxes............................         40               30             (9)              (4)            57
  Equity in earnings of unconsolidated
     affiliates(C)........................        143               55             --               --            198
  Income before income taxes..............        169              100            (26)              (6)           237
  EBIT(D).................................        253              200            (22)              (4)           427
Income Before Extraordinary Item and
   Cumulative Effect of a Change in
   Accounting Principle .................         126               70            (18)              (2)           176
Extraordinary Loss on Early Retirement of
   Debt..................................          (2)              --             --               --             (2)
Cumulative Effect of a Change in
   Accounting Principle.................            9               --             --               --              9
Segment earnings (loss) available to PSEG.   $    116         $     64       $    (18)        $     (1)      $    161
                                            =============    ===========    ============     ===========    =============
As of December 31, 2001
  Total assets............................   $  4,074         $  3,026       $    290         $     49       $  7,439
  Investments in equity method affiliates    $  1,541         $    163       $      3         $     19       $  1,726
                                            =============    ===========    ============     ===========    =============
For the Year Ended December 31, 2000
  Total revenues..........................   $    169         $    206       $    417         $      2       $    794
  Depreciation and amortization(B)........          1                5              7               --             13
  Interest expense-- net..................         53               79              3                2            137
  Income taxes............................         12               40             (4)              (3)            45
  Equity in earnings of unconsolidated
    affiliates(C).........................        157               13              2               --            172
  Income before income taxes..............         69              111            (14)              (8)           158
  EBIT(D).................................        123              190            (11)              (7)           295
Segment earnings (loss) available to PSEG.   $     40         $     65       $    (10)        $     (5)      $     90
                                            =============    ===========    ============     ===========    =============
As of December 31, 2000
  Total assets............................   $  2,271         $  2,565       $    312         $     47       $  5,195
  Investments in equity method affiliates.   $  1,900         $    239       $     --         $     15       $  2,154
                                            =============    ===========    ============     ===========    =============
For the Year Ended December 31, 1999
  Total revenues..........................   $    211         $    179       $    297         $     --       $    687
  Depreciation and amortization(B)........          1                1              5               --              7
  Interest expense-- net..................         48               46             --                1             95
  Income taxes............................         24               50             (2)              (3)            69
  Equity in earnings of unconsolidated
    affiliates(C).........................        129               78             --               --            207
  Income before income taxes..............         69              123             (9)              (7)           176
  EBIT(D).................................        117              169             (8)              (7)           271
Segment earnings (loss) available to PSEG.   $     28         $     66       $     (6)        $     (5)      $     83
                                            =============    ===========    ============     ===========    =============
As of December 31, 1999
  Total assets............................   $  1,715         $  2,096       $    252         $     51       $  4,114
  Investments in equity method affiliates.   $  1,629         $    279       $     --         $      7       $  1,915
                                            =============    ===========    ============     ===========    =============
</TABLE>
   (A) Other Activities include amounts applicable to Energy Holdings (the
       parent), EGDC, PSEG Capital and intercompany eliminations.

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

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

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

                                      -74-
<PAGE>

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


      Geographic Information for Energy Holdings is disclosed below.

<TABLE>
<CAPTION>
                                                                                    Revenues (A)
                                                               -------------------------------------------------------
                                                                                    December 31,
                                                               -------------------------------------------------------
                                                                   2001                2000                 1999
                                                               --------------     ----------------     ---------------
<S>                                                            <C>                  <C>                 <C>
                                                                               (Millions of Dollars)
United States.............................................       $     711          $     606            $     538
Foreign Countries:
    Argentina.............................................              85                 14                   17
    Netherlands...........................................              84                 83                   65
    Chile.................................................              77                 21                    9
    India.................................................              60                 --                   --
    Peru..................................................              33                 19                    9
    England...............................................              17                 18                   19
    Australia.............................................              16                  2                    2
    Brazil................................................               7                 18                   20
    Other.................................................              45                 13                    8
                                                               --------------     ----------------     ---------------
    Total Foreign.........................................             424                188                  149
                                                               --------------     ----------------     ---------------
      Total...............................................          $1,135          $     794            $     687
                                                               ==============     ================     ===============
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                               Assets (B)
                                                                                    ----------------------------------
                                                                                              December 31,
                                                                                    ----------------------------------
                                                                                        2001                2000
                                                                                    -------------       --------------
<S>                                                                                  <C>                 <C>
                                                                                          (Millions of Dollars)
United States...................................................................      $   2,675          $   2,205
Foreign Countries:
    Netherlands.................................................................            911                815
    Chile.......................................................................            880                270
    Argentina...................................................................            737                470
    Peru........................................................................            520                250
    India.......................................................................            288                 51
    Brazil......................................................................            282                295
    Tunisia.....................................................................            245                155
    Other.......................................................................            901                684
                                                                                    --------------     ---------------
    Total Foreign...............................................................          4,764              2,990
                                                                                    --------------     ---------------
      Total.....................................................................      $   7,439          $   5,195
                                                                                    ==============     ===============
</TABLE>

(B)  Assets are comprised of investment in corporate joint ventures and
     partnerships that are accounted for under the equity method and companies
     in which we have a controlling interest for which the assets are
     consolidated on our financial statements. Amount is net of pre-tax foreign
     currency translation adjustment of $283 million and $225 million for the
     years ended December 31, 2001 and 2000, respectively.

      The table below reflects our investment exposure in Latin American
countries.

<TABLE>
<CAPTION>
                                                                                         Investment Exposure (C)
                                                                                    ----------------------------------
                                                                                              December 31,
                                                                                    ----------------------------------
                                                                                        2001                2000
                                                                                    -------------       --------------
<S>                                                                                 <C>                   <C>
                                                                                          (Millions of Dollars)
    Argentina...................................................................      $     632          $     622
    Brazil......................................................................            467                462
    Chile.......................................................................            542                180
    Peru........................................................................            387                224
    Venezuela...................................................................             53                 51
</TABLE>
(C)  The investment exposure consists of invested equity plus equity commitment
     guarantees. The investment exposure in these Latin American countries is
     Global's.

                                      -75-
<PAGE>

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


NOTE 17.  RELATED PARTY TRANSACTIONS

      Operation and Maintenance and Development Fees

      Global provides operating, maintenance and other services to and receives
management and guaranty fees from various joint ventures and partnerships in
which it is an investor. Fees related to the development and construction of
certain projects are deferred and recognized when earned. Income from these
services of $3 million, $12 million, and $12 million were included in Revenues
in the Consolidated Statements of Income for the years ended December 31, 2001,
2000, and 1999, respectively.

      Administrative Costs

      PSEG Services Corporation provides and bills administrative services to
Energy Holdings on a monthly basis. These costs amounted to approximately $32
million, $19 million, and $11 million for 2001, 2000, and 1999, respectively. In
addition, we were billed administrative overheads of $2 million by PSEG during
2000 and 1999. We were billed administrative overheads of an immaterial amount
by PSEG during 2001.

      Employees of Energy Holdings and its subsidiaries are participants in a
non-contributory pension plan administered by PSEG and are billed on a monthly
basis based on funding requirements. Such billings amounted to approximately $2
million for the years ended December 31, 2001 and 1999. For the year ended
December 31, 2000, we had no funding requirements of the pension plan.

      Tie Loans

      In April 1999, Global and its partner, Panda Energy International, Inc.,
established Texas Independent Energy, L.P. (TIE), a 50/50 joint venture, to
develop, construct, own, and operate electric generation facilities in Texas. As
of December 31, 2001, Global's investments in the TIE partnership include $165
million of loans that earn interest at an annual rate of 12% of which $88
million was repaid in February 2002 and $77 million will be repaid over the next
12 years. TIE's funding for these payments to Global were made from equity
contributions of $44 million from Global and $44 million from Panda Energy.

      Foster Wheeler Ltd.

      We enter into a number of contracts with various suppliers, customers and
other counterparties in the ordinary course of business. Certain contracts were
entered into with subsidiaries of Foster Wheeler Ltd. E. James Ferland, PSEG
Chairman of the Board, President and Chief Executive Officer, serves on the
Board of Directors of Foster Wheeler. Richard J. Swift, who serves on PSEG's
Board of Directors, was the President and Chief Executive Officer of Foster
Wheeler Ltd. at the time the contract was entered into. The open commitment
under the contracts is for approximately $124 million of engineering,
procurement and construction services related to the development of certain
generating facilities for Global. We believe that the contracts were entered
into on commercial terms no more favorable than those available in an
arms-length transaction from other parties and the pricing is consistent with
that available from other third parties.

NOTE 18.  SELECTED QUARTERLY DATA (UNAUDITED)

      The information shown below, in our opinion, includes all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of such amounts.
<TABLE>
<CAPTION>
                                                                              Quarter Ended
                                                     -----------------------------------------------------------------
2001
                                                      March 31          June 30        September 30(1)    December 31
                                                     ------------     ------------    ----------------    ------------
<S>                                                    <C>              <C>           <C>                <C>
                                                                          (Millions of Dollars)
Operating Revenues.................................   $    225         $    199        $    310          $    401
Operating Income...................................         98               54              96               178
Net Income Before Extraordinary Item
    and Cumulative Effect of a
    Change in Accounting Principle.................         53               17              29                77
Extraordinary Loss on Early Retirement of Debt.....         (2)               -               -                 -
Cumulative Effect of a Change in
    Accounting Principle...........................          9                -               -                 -
Net Income.........................................         60               17              29                77
Earnings/(Losses) Available to PSEG................         54               12              23                72
</TABLE>

                                      -76-
<PAGE>

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

<TABLE>
<CAPTION>
                                                                              Quarter Ended
                                                     -----------------------------------------------------------------
2000
                                                                                        September
                                                      March 31          June 30           30(2)          December 31
                                                     ------------     ------------    -------------     --------------
                                                                          (Millions of Dollars)
<S>                                                   <C>              <C>             <C>               <C>
Operating Revenues.................................   $    217         $    167        $    184          $    226
Operating Income...................................         78               35              68               111
Net Income.........................................         31                1              27                55
Earnings/(Losses) Available to PSEG................         25               (5)             21                49
</TABLE>

(1)   In 2001, revenues include the consolidated results of certain investments
      at Global.

(2)   Second quarter 2000 Earnings/(Losses) Available to PSEG includes a
      write-down to fair value of certain financial instruments, held by
      Resources, totaling $13 million on a pre-tax basis.

NOTE 19.  SUBSEQUENT EVENTS

      ASSETS HELD FOR SALE

      On August 24, 2001, Global entered into a Stock Purchase Agreement to sell
its minority interests in certain assets located in Argentina to The AES
Corporation (AES), the majority owner. The sale has not closed, pending receipt
of certain lender consents and regulatory approvals.

      On February 6, 2002, AES notified Global that it was terminating the Stock
Purchase Agreement. In the Notice of Termination, AES alleged that a Political
Risk Event, within the meaning of the Stock Purchase Agreement, had occurred, by
virtue of certain decrees of the Government of Argentina, thereby giving AES the
right to terminate the Stock Purchase Agreement. Global disagrees that a
Political Risk Event as defined in the Stock Purchase Agreement has occurred,
and has so notified AES. Global will vigorously pursue its rights under the
Stock Purchase Agreement if discussions between the parties do not successfully
resolve the matter. PSEG cannot predict the ultimate outcome.

      As of December 31, 2001, Global had total investment exposure in Argentina
of approximately $632 million. The investments include the following minority
interests, with investment exposure of approximately $420 million, jointly owned
by Global and AES, which are the subject of the Stock Purchase Agreement: a 30%
interest in three Argentine electric distribution companies, EDEN, EDES, and
EDELAP; a 19% share in the 650 MW power plant CTSN and a 33% interest in the 830
MW Parana power plant which began commercial operation in February 2002.

      In addition to these investments, Global also has $212 million of
investment exposure with respect to its 90% interest in another Argentine
company, EDEERSA, inclusive of $63 million of goodwill.

      As of the date of the Notice of Termination by AES, we had approximately
$18 million of interest receivables due from AES, as provided for in the Stock
Purchase Agreement.

      FUNCTIONAL CURRENCY - ARGENTINE OPERATIONS

      As of December 31, 2001, the functional currency of Global's Argentine
distribution company, EDEERSA, was the US Dollar, as all revenues, most expenses
and all financings were denominated in US Dollars or were linked to the US
Dollar. As a US Dollar reporting entity, EDEERSA's monetary accounts denominated
in Pesos, such as short-term receivables or payables, were re-measured into the
US Dollar with a minimal impact to earnings. At December 31, 2001, our 90% share
of EDEERSA's US dollar denominated debt was approximately $76 million. This debt
is non-recourse to us and Global. Certain events, including proposed American
Institute of Certified Public Accountants (AICPA) industry guidance, indicate
that the functional currency of our Argentine operations will likely change to
the Argentine Peso. In such an event, all monetary accounts denominated in US
Dollars would be re-measured to the Argentine Peso, including the US Dollar
denominated debt. This would result in a pre-tax loss of approximately $40
million. This potential loss would reduce our aggregate Argentine investment
exposure of $632 million noted above, and is therefore not incremental. In
addition to such potential impact on our earnings, the recorded amount of our
net investment in EDEERSA would decrease by approximately $100 million due to a
translation adjustment.

     For a further discussion of the potential Impacts of the Argentine social,
political and economic crisis, see Note 13. "Commitments and Contingencies."


                                      -77-
<PAGE>

              FINANCIAL STATEMENT RESPONSIBILITY -- ENERGY HOLDINGS

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

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

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

      The Internal Auditing Department of Services conducts audits and
appraisals of accounting and other operations of PSEG and its subsidiaries and
evaluates the effectiveness of cost and other controls and, where appropriate,
recommends to management improvements thereto. Management has considered the
internal auditors' and Deloitte & Touche's recommendations concerning the
corporation's system of internal accounting controls and has taken actions that,
in its opinion, are cost-effective in the circumstances to respond appropriately
to these recommendations. Management believes that, as of December 31, 2001, the
corporation's system of internal accounting controls was adequate to accomplish
the objectives discussed herein.

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


           Robert J. Dougherty, Jr.                  Miriam E. Gilligan
                 President and              Vice President-Finance and Treasurer
            Chief Operating Officer            (Principal Financial Officer)


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


February 15, 2002


                                      -78-
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

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

      We have audited the consolidated balance sheets of PSEG Energy Holdings
Inc. and its subsidiaries (the "Company") as of December 31, 2001 and December
31, 2000, 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, 2001. Our audits also included the consolidated financial statement schedule
listed in the Index in Item 14(B)(a). These consolidated financial statements
and the consolidated financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and consolidated financial statement schedule
based on our audits.

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

      In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
2001 and 2000, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, such consolidated financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects, the information set forth therein.

      We have also previously audited, in accordance with auditing standards
generally accepted in the United States of America, the consolidated balance
sheets of the Company as of December 31, 1999, 1998, and 1997, and the related
consolidated statements of income, common stockholder's equity and cash flows
for the years ended December 31, 1998 and 1997 (none of which are presented
herein), and we expressed unqualified opinions on those consolidated financial
statements.

      In our opinion, the information set forth in the Selected Financial Data
under the caption "Operating Data", "Balance Sheet Data," and "Cash Flows",
for each of the five years in the period ended December 31, 2001, for the
Company, presented in Item 6, is fairly stated in all material respects, in
relation to the consolidated financial statements from which it has been
derived.

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

DELOITTE & TOUCHE LLP


Parsippany, New Jersey
February 15, 2002
(March 7, 2002 as to Note 19)

                                      -79-
<PAGE>

ITEM 9:  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

     NONE


                                    PART III

ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

      Following are the executive officers and directors of Energy Holdings:

Executive Officers

      E. JAMES FERLAND has been a Director since June 1989 and was elected
Chairman of the Board and Chief Executive Officer of Energy Holdings in June
1989. Age 59. Mr. Ferland has also been Chairman of the Board, President and
Chief Executive Officer of PSEG since July 1986, Chairman of the Board and Chief
Executive Officer of Public Service Electric and Gas Company since September
1991, Chairman of the Board and Chief Executive Officer of Power since June
1999, and Chairman of the Board and President and Chief Executive Officer of
PSEG Services since November 1999.

      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 50. 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 43. 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 47. 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 49. 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.

      MIRIAM E. GILLIGAN was elected Vice President-- Finance and Treasurer of
Energy Holdings in December 2001. Age 50. Ms. Gilligan had been Treasurer of
Energy Holdings since 1997. She was named Assistant Treasurer of Energy Holdings
in 1993. Ms. Gilligan joined Energy Holdings in 1990 as a business development
manager responsible for strategic planning.

      DEREK M. DIRISIO was elected Vice President and Controller of Energy
Holdings in June 1998. Age 37. 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.

                                      -80-
<PAGE>

Directors

      ROBERT E. BUSCH has been a Director since December 2000. Age 55. He was
elected President and Chief Operating Officer of PSEG Services in November 1999.
He was also elected Senior Vice President and Chief Financial Officer of Public
Service Electric and Gas Company in March 1998. Prior to that, Mr. Busch had
been national director of the utility consulting practice of The Hay Group, from
1997 to 1998. He was employed by Northeast Utilities as President of the Energy
Resources Group from 1993 to 1996 and as Chief Financial Officer from 1989 to
1993.

      FRANK CASSIDY has been a Director since January 2000. Age 55. He has been
President of PSEG Power LLC, a subsidiary of PSEG, since July 1999. Previously
he had been President of Energy Technologies from November 1996 to July 1999,
Senior Vice President--Fossil Generation of Public Service Electric and Gas
Company from February 1995 to November 1996 and Vice President--Transmission
Systems of Public Service Electric and Gas Company from November 1989 to
February 1995.

      THOMAS M. O'FLYNN has been a Director since July 2001. Age 42. He was
elected Executive Vice President and Chief Financial Officer of PSEG and
Executive Vice President-Finance of PSEG Services in July 2001. From December
1997 to May 2001, Mr. O'Flynn was a Managing Director of Morgan Stanley's Global
Power and Utility Investment Banking Division Group. From January 1994 through
December 1997, he was a Principal of Morgan Stanley's Global Power and Utility
Investment Banking Division Group.

      R. EDWIN SELOVER has been a Director since January 2000. Age 56. He has
been Vice President and General Counsel of PSEG since April 1988 and Senior Vice
President and General Counsel of Public Service Electric and Gas Company since
January 1988.

ITEM 11: EXECUTIVE COMPENSATION

     NOT APPLICABLE

ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     NOT APPLICABLE

ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     NOT APPLICABLE


                                     PART IV

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

(A)   Financial Statements:

      a.  Energy Holdings Consolidated Statements of Income for the years ended
          December 31, 2001, 2000 and 1999 on page 46.

          Energy Holdings Consolidated Balance Sheets for the years ended
          December 31, 2001 and December 31, 2000 on pages 47 and 48.

          Energy Holdings Consolidated Statements of Cash Flows for the years
          ended December 31, 2001, 2000 and 1999 on page 49.

          Energy Holdings Statements of Stockholder's Equity for the years ended
          December 31, 2001, 2000 and 1999 on page 50.

          Energy Holdings Notes to Consolidated Financial Statements on pages 51
          through 77.

                                      -81-
<PAGE>

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

      a.  Energy Holdings Financial Statement Schedules: Schedule II--Valuation
          and Qualifying Accounts for each of the three years in the period
          ended December 31, 2001 (page 82).

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

(C)   The following exhibits are filed herewith:

      Exhibit 12: Computation of Ratios of Earning to Fixed Charges.
      (See Exhibit Index on page 84).

(D)   The following reports on Form 8-K were filed during the last quarter
      of 2001 and the 2002 period covered by this report under Items
      indicated:

                      Date of Report                    Items Reported
                      --------------                    --------------
                     February 6, 2002                       Item 5


SCHEDULE II

                                 ENERGY HOLDINGS
                Schedule II -- Valuation and Qualifying Accounts
                Years Ended December 31, 2001-- December 31, 1999
<TABLE>
<CAPTION>

                                             Column B              Column C               Column D       Column E
                                           -------------  ----------------------------  -------------  -------------
                                                                   Additions
                                                          ----------------------------
                                            Balance at     Charged to    Charged to      Deductions-     Balance at
                                            beginning      cost and    other accounts      describe        end of
Description                                  of period     expenses      Describe                         Period
----------------------------------------- -------------  ----------------------------  -------------  -------------
<S>                                         <C>             <C>           <C>             <C>             <C>
                                                                    (Millions of Dollars)
2001:
-----
Allowance for Doubtful Accounts..........     $    5         $    3        $    2(A)       $    3(B)      $    7
Other Valuation Allowances...............         22              -             -               -             22

2000:
Allowance for Doubtful Accounts..........     $    5         $    -        $    -          $    -         $    5
Other Valuation Allowances...............         22              -             -               -             22

1999:
Allowance for Doubtful Accounts..........     $    6         $    1        $    -          $    2(B)      $    5
Other Valuation Allowances...............         11             11(C)          -               -             22
</TABLE>

(A)   Valuation allowances consolidated in connection with the acquisitions of
      SAESA and EDEERSA.

(B)   Accounts Receivable written off.

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

                                      -82-
<PAGE>

                                   SIGNATURES

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

                                                PSEG ENERGY HOLDINGS INC.


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

Date: March 8, 2002

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

<TABLE>
<CAPTION>

              Signature                                       Title                               Date
              ---------                                       -----                               ----
<S>            <C>                                           <C>                                  <C>
                                             Chairman of the Board
                                             and Chief Executive Officer
         /s/ E. James Ferland                (Principal Executive Officer)                    March 8, 2002
-------------------------------------------
           E. James Ferland


                                             Vice President-Finance and Treasurer
        /s/Miriam E. Gilligan                (Principal Financial Officer)                    March 8, 2002
-------------------------------------------
          Miriam E. Gilligan


                                             Vice President and Controller
         /s/ Derek M. DiRisio                (Principal Accounting Officer)                   March 8, 2002
-------------------------------------------
           Derek M. Dirisio


         /s/ Robert E. Busch                 Director                                         March 8, 2002
-------------------------------------------
           Robert E. Busch


          /s/ Frank Cassidy                  Director                                         March 8, 2002
-------------------------------------------
            Frank Cassidy


     /s/ Robert J. Dougherty, Jr.            Director                                         March 8, 2002
-------------------------------------------
       Robert J. Dougherty, Jr.


        /s/ Thomas M. O'Flynn                Director                                         March 8, 2002
-------------------------------------------
          Thomas M. O'Flynn


         /s/ R. Edwin Selover                Director                                         March 8, 2002
-------------------------------------------
           R. Edwin Selover
</TABLE>

                                      -83-
<PAGE>

Exhibit Index

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

  Exhibit
   Number                               Description
   ------                               -----------
   3.1        -    Certificate of Incorporation, as amended*
   3.2        -    By-Laws.*
   4.1        -    Indenture dated October 8, 1999 between Energy Holdings and
                   First Union National Bank.*
   12         -    Statement regarding computation of ratios of earnings.
   21         -    Subsidiaries of the Registrant**


*   Incorporated by reference from Registration Statement No. 333-95697

**  Incorporated by reference from Registration Statement No. 333-69232


                                      -84-