NRG ENERGY INC, 10-K405, 1999-03-26

NRG ENERGY INC
10-K405, 1999-03-26
ELECTRIC SERVICES

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

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FORM 10-K

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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NO. 333-33397
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NRG ENERGY, INC.
(Exact name of registrant as specified in its charter)

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DELAWARE 41-1724239
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

1221 NICOLLET MALL, SUITE 700 55403
MINNEAPOLIS, MINNESOTA (Zip Code)
(Address of principal executive offices)
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(612) 373-5300
(Registrant's telephone number, including area code)

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

Securities registered pursuant to Section 12(g) of the Act: None

Indicated by check mark whether the Registrant (1) has filed all reports 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 Registrant was 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 Regulations S-K is not contained herein, and will not be contained, to the
best of the 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.

Yes X No ____

As of March 26, 1999, there were 1,000 shares of common stock, $1.00 par value,
outstanding, all of which were owned by Northern States Power Company. No other
voting or non-voting common equity is held by non-affiliates of the Registrant.

The Registrant meets the conditions set forth in General Instruction I(1)(a) and
(b) of Form 10-K and is therefore filing this Form with the reduced disclosure
format. Documents Incorporated by Reference: None
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CONSOLIDATED STATEMENTS OF INCOME

NRG ENERGY, INC. AND SUBSIDIARIES

INDEX

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PAGE NO.
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PART I
Item 1 Business.................................................... 1
Item 2 Properties.................................................. 13
Item 3 Legal Proceedings........................................... 16
Item 4 Submission of Matters to a Vote of Security
Holders -- Omitted per General Instruction I(2)(c)........ --
PART II
Item 5 Market Price of & Dividends on the Registrant's Common
Equity and Related Stockholder Matters.................... 17
Item 6 Selected Financial Data -- Omitted per General Instruction
I(2)(a)................................................... --
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 18
Item 8 Financial Statements and Supplementary Data................. 22
Item 9 Changes in & Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 45
PART
III
Item 10 Directors and Executive Officers of the Registrant Omitted
per General Instruction I(2)(c)........................... --
Item 11 Executive Compensation -- Omitted per General Instruction
I(2)(c)................................................... --
Item 12 Security Ownership of Certain Beneficial Owners and
Management -- Omitted per General Instruction I(2)(c)..... --
Item 13 Certain Relationships and Related Transactions -- Omitted
per General Instruction I(2)(c)........................... --
PART IV
Item 14 Exhibits, Financial Statements Schedules and Reports On Form
8-K....................................................... 46
SIGNATURES............................................................. 48
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PART I

ITEM 1 -- BUSINESS

GENERAL

NRG Energy, Inc. (NRG) is one of the leading participants in the
independent power generation industry. Established in 1989 and wholly-owned by
Northern States Power Company (NSP), NRG is principally engaged in the
acquisition, development and operation of, and ownership of interests in,
independent power production and co-generation facilities, thermal energy
production and transmission facilities and resource recovery facilities. The
power generation facilities in which NRG has interests (including those under
construction) as of December 31, 1998 have a total design capacity of 10,605
megawatts (MW), of which NRG has or will have total or shared operational
responsibility for 6,966 MW, and net ownership of, or leasehold interests in
3,300 MW. In addition, NRG has substantial interests in district heating and
cooling systems and steam generation and transmission operations. As of December
31, 1998, these thermal businesses had a steam capacity of approximately 3,750
million British thermal units (mmBtus). NRG's refuse-derived fuel (RDF) plants
processed more than 1.35 million tons of municipal solid waste into
approximately 1.1 million tons of RDF during 1998.

NRG has experienced significant growth in the last year, expanding from
2,650 MW of net ownership interests in power generation facilities (including
those under construction) as of December 31, 1997 to 3,300 MW of net ownership
interests as of December 31, 1998. This growth resulted primarily from a number
of domestic and international investments and acquisitions. NRG's total
operating revenues and equity in earnings of projects changed from $118.3
million and $26.2 million, respectively, in 1997 to $182.1 million and $81.7
million, respectively, in 1998.

NRG's headquarters and principal executive offices are located at 1221
Nicollet Mall, Suite 700, Minneapolis, Minnesota 55403. Its telephone number is
(612) 373-5300.

STRATEGY

NRG intends to continue to grow through a combination of acquisition and
greenfield development of power generation and thermal energy production and
transmission facilities and related assets in the United States and abroad. In
the United States, NRG's near-term focus will be primarily on the acquisition of
existing power generation capacity and thermal energy production and
transmission facilities, particularly in situations in which its expertise can
be applied to improve the operating and financial performance of the facilities.
In the international market, NRG will continue to pursue greenfield development
and acquisition opportunities in those countries in which it believes that the
legal, political and economic environment is conducive to increased foreign
investment. In addition to acquiring and developing power production, thermal
and RDF projects, NRG continually monitors the performance and strategic fit of
its growing portfolio of projects and, based thereon, expects that it will
decrease its ownership interest in projects from time to time, including the
complete divestiture of its interests in projects where appropriate.

RECENT EVENTS -- PROPOSED MERGER

On March 24, 1999, Northern States Power Company (NSP), NRG's parent
company, and New Century Energies, Inc., a Delaware corporation (NCE), entered
into an Agreement and Plan of Merger (the "Merger Agreement") providing for a
strategic business combination of NCE and NSP. Pursuant to the Merger Agreement,
NCE will be merged with and into NSP with NSP as the surviving corporation in
the Merger. Subject to the terms of the Merger Agreement, at the time of the
Merger, each share of NCE common stock, par value $1.00 per share ("NCE Common
Stock"), (other than certain shares to be canceled) together with any associated
purchase rights, will be converted into the right to receive 1.55 shares of NSP
common stock, par value $2.50 per share ("NSP Common Stock"). Cash will be paid
in lieu of any fractional shares of NSP Common Stock which holders of NCE Common
Stock would otherwise receive. The Merger is expected to be a tax-free
stock-for-stock exchange for shareholders of both companies and to be accounted
for as a pooling of interests.
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Consummation of the Merger is subject to certain closing conditions,
including, among others, approval by the shareholders of NSP and NCE, approval
or regulatory review by certain state utilities regulators, the Securities and
Exchange Commission under the Public Utility Holding Company Act of 1935, as
amended, the Federal Energy Regulatory Commission, the Nuclear Regulatory
Commission, the Federal Communications Commission and expiration or termination
of the waiting period applicable to the Merger under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended. Each of NCE and NSP have agreed
to certain undertakings and limitations regarding the conduct of their
businesses prior to the closing of the transaction. The Merger is expected to
take from 12 to 18 months to complete.

SIGNIFICANT INVESTMENTS, ACQUISITIONS AND DIVESTITURES IN 1998

In March 1998, NRG together with its 50% partner, Dynegy, Inc. (Dynegy)
acquired the Long Beach Generating Station from Southern California Edison for
$29.8 million. The Long Beach Station is a gas-fired plant comprised of seven
gas turbine generators and two steam turbines totaling 530 MW in the aggregate.

In April 1998, NRG together with its 50% partner, Dynegy, acquired the El
Segundo Generating Station from Southern California Edison Company for $87.8
million. The El Segundo Generating Station is a gas-fired plant with a capacity
rating of 1,020 MW.

Also during April 1998, NRG exercised its option to acquire 16.8 million
convertible, non-voting preference shares of Energy Development Limited (EDL)
for AUS $37.0 million (U.S. $24.8 million), bringing NRG's total investment in
EDL to $44.5 million or approximately a 34 percent ownership interest. The
preference shares do not become convertible into EDL's common stock unless a
takeover bid is made for EDL by a person who is not an affiliate of the owner of
the preference shares and such person is, or becomes, entitled to purchase more
than 35% of EDL's outstanding common stock. In such event, if EDL fails to
comply with an obligation to appoint directors nominated by the owner of the
preference shares, the preference shares convert at the option of the owner to
common shares of EDL on a share-for-share basis. EDL is a publicly traded
company listed on the Australian Stock Exchange that owns and operates 262 MW of
generation throughout Australia and the United Kingdom. Its closing share price
as of March 23, 1999 was AUS$ 3.59.

In June 1998, NRG sold its interest in Wind Power Partners 1987 LP and Wind
Power Partners 1988 LP for $9.2 million. These companies were acquired as a part
of NRG's November 1997 acquisition of the Pacific Generation Company from
Pacificorp, Inc. There was no gain or loss recorded from the sale.

In August 1998, NRG commenced plans to sell-down its ownership in the
Enfield Energy Center project located in North London, England. Discussions with
potential partners took place in September and October 1998 culminating in the
sale in late December of one half of NRG's 50% interest in the project to an
affiliate of El Paso International for a $26.2 million gain. NRG continues to
own 25% of the Enfield project.

In October 1998, NRG sold its remaining 50% interest in Mid-Continent Power
Company, a facility in Pryor Oklahoma, to Cogeneration Corporation of America,
an affiliate of NRG, for a $2.1 million gain, after elimination of affiliate
interest. Also in October, 1998, NRG sold a 13.35% interest in ECK Generating
for a gain of $1.6 million. NRG continues to own 44.5% of the ECK Generating
project.

SIGNIFICANT EQUITY INVESTMENTS

LOY YANG POWER

NRG has a 25.4% interest in Loy Yang Power (Loy Yang) which owns and
operates a 2,000 MW brown coal fired thermal power station (the Power Station)
and the adjacent Loy Yang coal mine (the Mine) located in Victoria, Australia.
The Power Station has four generating units, each with a 500 MW boiler and turbo
generator, which commenced commercial operation between July 1984 and December
1988. In addition, Loy Yang manages the common infrastructure facilities which
are located on the Loy Yang site, which services not only the Power Station, but
also the adjacent Loy Yang B 1000 MW power station (Loy Yang B), a pulverized
dried brown coal plant, and several other nearby power stations.

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Loy Yang is required by law to sell its entire output of electricity
(subject to certain narrow exemptions, including output used in the Power
Station and the Mine) through the competitive wholesale market for electricity
operated and administered by the Victorian Power Exchange (the Pool). There are
two components to the wholesale electricity market in Victoria. The first is the
Pool. The second is the price hedging contracts, known as Contracts for
Differences (or CFDs), that are entered into between electricity sellers and
buyers in lieu of traditional power purchase agreements, which are not available
in Victoria because of the Pool system.

Under the Victorian regulatory system, all electricity generated in
Victoria must be sold and purchased through the Pool. All licensed generators
and suppliers, including Loy Yang, are signatories to a pooling and settlement
agreement, which governs the constitution and operation of the Pool and the
calculation of payments due to and from generators and suppliers. The Pool also
provides centralized settlement of accounts and clearing. Prices for electricity
are set by the Pool daily for each half hour of the following day based on the
bids of the generators and a complex set of calculations matching supply and
demand and taking account of system stability, security and other costs. Under a
new national electricity market, the grid in Victoria has been interconnected
with that of New South Wales and limited trading is already taking place between
those states. Over the long term, there are plans for the interconnection of the
eastern seaboard states to establish what will be known as a national power
pool.

In a Pool system, it is not possible for a generator such as Loy Yang to
enter into traditional power purchase agreements. In order to provide a hedge
against Pool price volatility and to support their financings, most of the
Victorian generators have entered into CFDs with the Victorian distribution
companies, Victorian government entities and industrial users (customers). These
CFDs are financial hedging instruments, which have the effect of fixing the
price for a specified quantity of electricity for a particular seller and
purchaser over a defined period. They establish a "strike price" for a certain
volume of electricity purchased by the user during a specified period;
differences between that "strike price" and the actual price set by the Pool
give rise to "difference payments" between the parties at the end of the period.
Even if Loy Yang is producing less than its contracted quantity it will still be
required to make and will be entitled to receive difference payments for the
amounts set forth in its CFDs.

Loy Yang's current CFDs with the Victorian distribution companies and other
Victorian government entities in respect of regulated customer load (which are
called vesting contracts) cover approximately 61% of Loy Yang's forecast revenue
from generation, thus providing considerable stability in its income over that
period. Loy Yang also enters into CFDs with its unregulated or contestable
customers; these CFDs are known as hedging contracts and, together with the
vesting contracts with the regulated customers, they cover approximately 86% of
Loy Yang's forecast load at December 31, 1998. Each of the vesting contracts
expires at the end of the franchise period (December 31, 2000), by which time
all retail customers will have become contestable customers by operation of law.
Loy Yang's hedging contracts are generally for a term of one to two years, and
the volume of load covered by these contracts will increase as retail customers
progressively become contestable. Loy Yang's goal is to cover 85% of its
forecast load with hedging contracts.

Loy Yang and the State Electricity Commission of Victoria (SECV) have been
issued a joint mining license for the Mine. Under the terms of the
privatization, Loy Yang is required to mine coal to supply not only its own
Power Station but also the neighboring Loy Yang B, a nearby plant, and an
additional future power station that could be developed on a nearby site. This
requirement extends to 2027, but may be extended for an additional 30 years at
the SECV's option. Loy Yang receives a fixed capacity charge and a variable
energy charge for these services, coupled with a system of initiatives and
penalties. Loy Yang has over 70 years of economically viable coal supply at
current usage rates within its mine license area, even assuming that it is
required to continue supplying coal to the other parties beyond 2026.

On the basis of historical Australian power pool prices, absent project
debt restructuring, the Loy Yang project company will experience difficulty in
servicing its long-term debt obligations. This, in turn, could trigger a senior
debt default under the loan documents on or about June 2002.

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GLADSTONE POWER STATION

The Gladstone Power Station (Gladstone) is a 1,680 MW coal-fired power
generation facility located in Gladstone, Australia. NRG acquired a 37.5%
ownership interest in Gladstone when the facility was privatized in March 1994.
The other participants in this acquisition are subsidiaries or affiliates of
Comalco Limited, Marubeni Corporation, Sumitomo Corporation and Sumitomo Light
Metal Industries, Mitsubishi Corporation and Mitsubishi Materials Corporation,
and Yoshida Kogyo (the Participants). NRG Gladstone Operating Services Pty.
Ltd., a wholly-owned subsidiary of NRG (NRG Gladstone), operates Gladstone under
an operations and maintenance agreement expiring in 2011.

Gladstone sells electricity to the Queensland Power Trading Corporation
("QPTC") and also to Boyne Smelters Limited located at Boyne Island, Queensland
(the Smelter). Pursuant to an Interconnection and Power Pooling Agreement (the
IPPA), the Participants have the right to interconnect Gladstone to the QPTC
system and QPTC is obligated to accept all electricity generated by the facility
(subject to merit order dispatch), for an initial term of 35 years. QPTC also
has agreed under the IPPA to permit the Smelter to interconnect to the QPTC
system and to provide sufficient generating capacity on its system in order to
provide an uninterrupted supply of power to the Smelter in most circumstances.
The Participants are obligated to maintain a 35% reserve margin for the Smelter
design load, but the QPTC is obligated to provide capacity support to the
Participants to make up any shortfall between the available capacity from
Gladstone and the Smelter demand at any given time.

The QPTC also entered into a 35 year Capacity Purchase Agreement (CPA) with
each of the Participants for its percentage of the capacity of Gladstone,
excluding that sold directly to the Smelter. Under the CPAs, the Participants
are paid both a capacity and an energy charge by the QPTC. The capacity charge
is designed to cover the projected fixed costs allocable to the QPTC, including
debt service and an equity return, and is adjusted to reflect variations in
interest rates. A capacity bonus is also available if the equivalent
availability factor exceeds 88% on a rolling average basis, and damages are
payable by the Participants if it is less than 82% on that same basis. As of
December 31, 1998, the two-year average equivalent availability factor was
90.1%. The QPTC also pays an energy charge, which is intended to cover fuel
costs.

The owners of the Smelter (BSL) have also entered into a Block A Power
Purchase Agreement (PPA) and Block B PPA with each Participant, providing for
the sale and purchase of such Participant's percentage share of capacity
allocated to the existing Smelter. The term of each of these PPAs is 35 years.
BSL is obligated to pay to each Participant a demand charge that is intended to
cover the fixed costs of supplying capacity to the existing Smelter and the
Smelter expansion, including debt service and return on equity. BSL also is
obligated to pay an energy charge based on the fuel cost associated with the
production of energy from the facility. The Smelter expansion resulted in an
increase in Gladstone capacity utilization from approximately 41% in 1994 to 65%
in 1998. NRG anticipates that the capacity utilization will increase to 71% in
1999 when the Smelter expansion is completed.

NRG Gladstone is responsible for operation and maintenance of Gladstone
pursuant to a 17 year operation and maintenance agreement that commenced in
1994. NRG Gladstone is entitled to a base fee of AUS$ 1.25 million per year
indexed in accordance with the Australian Consumer Price Index (ACPI)
(approximately U.S. $.850 million, based on exchange rates and ACPI in effect at
December 31, 1998), and an annual bonus based on the capacity bonuses to which
the Participants are entitled under the CPAs. NRG Gladstone is obligated to pay
liquidated damages for shortfalls in availability in an amount calculated by
reference to the liquidated damages payable by the Participants under the CPAs
and the PPAs. NRG Gladstone's obligations under the operation and maintenance
agreement are unconditionally guaranteed by NRG, subject to an aggregate
liability cap of AUS$ 25 million indexed in accordance with ACPI (approximately
U.S. $15.3 million, based on exchange rates and ACPI in effect at December 31,
1998).

COLLINSVILLE POWER STATION

The Collinsville Power Station (Collinsville) is a 189 MW coal-fired power
generation facility located in Collinsville, Australia. In March 1996, NRG
acquired a 50% ownership interest in Collinsville when it was privatized by the
Queensland State government. NRG's partner in this acquisition is Transfield
Holdings Pty
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Ltd (Transfield), an Australian infrastructure contractor, with which NRG formed
an unincorporated joint venture to refurbish this plant. The joint venture
contracted with an affiliate of Transfield to complete the refurbishment of the
facility under a turn-key contract. The operation and maintenance of the
facility will be undertaken by Collinsville Operations Pty Ltd. (COPL), a 50%
owned subsidiary of NRG. COPL has entered into a maintenance contract with
Transfield to perform required maintenance on the facility and a technical
services agreement with NRG for staffing and assistance with certain operational
functions.

Collinsville Power Station commenced operations on August 11, 1998. NRG and
Transfield have entered into an 18 year Power Purchase Agreement (PPA) with
QPTC. Under this agreement QPTC will pay both a capacity and an energy charge to
the participants. The capacity charge is designed to cover the projected fixed
costs allocable to QPTC, including debt service and equity return. The energy
charge is based on the fuel costs associated with the production of energy from
the facility.

The Collinsville Power Station failed to achieve its scheduled commercial
operation date of March 1, 1998. The joint venture is liable to QPTC under the
PPA for liquidated damages of approximately AUS $27,000 per day until the
commercial operation date of August 11, 1998 up to a maximum of AUS$ 5 million
(indexed in April 1995 dollars). In late 1998 the joint venture settled the
liquidated damages with QPTC for AUS$ 4.57 million. The joint venture's remedies
under the turn-key refurbishment contract with Transfield's affiliate included a
reduction in the contract price of AUS$ 110,000 per day from March 1, 1998 to
August 11, 1998. In late 1998, NRG negotiated a settlement with Transfield,
pursuant to which Transfield agreed to pay AUS$ 12.24 million for liquidated
damages relating to the late commencement date of operations.

MIBRAG

NRG owns an indirect 33 1/3% interest in the equity of Mitteldeutsche
Braunkohlengesellschaft mbH (MIBRAG) which owns coal mining, power generation
and associated operations, all of which are located south of Leipzig, Germany.
MIBRAG is a corporation formed by the German government following the
reunification of East and West Germany, to hold two open-cast brown coal
(lignite) mining operations, a lease on an additional mine, three lignite-fired
industrial cogeneration facilities and briquette manufacturing and coal dust
plants, all located in the former East Germany. In connection with the
acquisition, NRG and its partners agreed to invest (from cash flow from MIBRAG
operations) in excess of DM 1 billion (US $599.3 million based on the exchange
rate as of December 31, 1998) by December 31, 2004 to modernize the existing
mines and power generation facilities and to develop new open-pit mines. The
German government is obligated to provide certain guarantees of bank loans to
MIBRAG relating to capital improvements to the Schleenhain mine. MIBRAG also
agreed to operate the three power generation facilities until 2005, to operate
the briquette plants in accordance with market demand until 2005, and to operate
the lignite mines until continued operation of the mines is no longer
economically justifiable. In addition, MIBRAG has made certain employee
retention commitments until 2000. Under the provisions of the sale and purchase
agreement, NRG and its partners agreed to make a deferred payment of DM 40
million to the German government in the year 2009. Under the terms of the
agreement, the obligation will be reduced by certain transportation costs
incurred by MIBRAG. As of December 31, 1998 MIBRAG had accumulated
transportation costs which fully offset the DM 40 million.

MIBRAG's cogeneration operations consist of the 110 MW Mumsdorf facility,
the 86 MW Deuben facility and the 37 MW Wahlitz facility. These facilities
provide power and thermal energy for MIBRAG's coal mining operations and its
briquette manufacturing plants. All power not consumed by MIBRAG's internal
operations is sold under an eight-year power purchase agreement with
Westsachsische Energie Aktiengesellschaft (WESAG), a recently privatized German
electric utility. NRG and PowerGen jointly, through Saale Energie Services GmbH,
provide consulting services for a fee for the operation of the MIBRAG steam and
power generation facilities, the associated electrical and thermal transmission
and distribution system and the briquette manufacturing plants, under a power
consultancy agreement with MIBRAG for the life of the facilities. After some
retrofitting was completed by MIBRAG, NRG believes that all three of these
cogeneration facilities now satisfy the current European Union environmental
regulations. MIBRAG leases these cogeneration facilities under a 13-year lease
pursuant to which MIBRAG has operating control of, and a 1% interest, in the
facilities.
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MIBRAG's lignite mine operations include Profen, Zwenkau and Schleenhain
(which is under construction but has not yet commenced operations), with total
estimated reserves of 776 million metric tons. Morrison Knudsen, an
international mining company, provides consulting services to the mines under a
consultancy agreement with MIBRAG for the life of the mines. In addition to
providing approximately 3 million tons of lignite per year for MIBRAG's three
cogeneration facilities and one briquette facility, output from these mines
supplies lignite to the Schkopau power station and other facilities. The total
output of the new Schleenhain mine will be dedicated to the new 1730 MW
Lippendorf power station. MIBRAG is currently supplying coal for the existing
Lippendorf and Thierbach power generation facilities, which are expected to
close at the end of 1999. The first unit of the new Lippendorf facility is
scheduled to commence initial operation in May of 2000.

SCHKOPAU POWER STATION

In 1993, NRG and PowerGen plc of the United Kingdom each acquired a 50%
interest in a German limited liability company, Saale Energie GmbH (Saale).
Saale then acquired a 41.9% interest in a 960 MW coal-fired power plant that was
under construction in the city of Schkopau, which is located in the former East
Germany. PreussenElecktra Kraftwerke Ag (PE), a German energy company, owns the
remaining 58.1% interest in Schkopau and operates the plant. The partnership of
Saale and PE that owns the plant is called Kraftwerk Schkopau GbR (KS).

The first 425 MW unit of the Schkopau plant began operation in January
1996, the 110 MW turbine went into commercial operation in February 1996, and
the second 425 MW unit came on line in July 1996. Acceptance testing of all of
the individual pieces of equipment has been completed.

PE operates and maintains the Schkopau facility under an operation and
maintenance contract with Kraftwerk Schkopau Betriebsgesellschaft mbH, a German
limited liability company (KSB), in which Saale and PE hold interests of 44.4%
and 55.6% respectively, and which is responsible for the operation and
maintenance of the facility pursuant to certain agreements with each of Saale
and PE. PE is paid a management fee made up of several variable components that
will be adjusted according to changes in, among other things, labor costs,
producer prices for light fuel oil and prices for electricity. Pursuant to the
KSB partnership agreement between Saale and PE and the Saale shareholders
agreement between NRG and PowerGen, NRG has the right to participate in the
oversight of facility operations and in the approval and oversight of facility
budgets and policies. The plant is fueled by brown coal which will be provided
under a long-term contract by MIBRAG's Profen lignite mine.

Pursuant to the KS partnership agreement between Saale and PE, each partner
has been allocated a share of capacity and energy generated by the facility.
Saale sells its allocated 400 MW portion of the plant's capacity under a 25-year
contract with VEAG, a major German utility which controls the high-voltage
transmission of electricity in the former East Germany. VEAG pays a price that
is made up of three components, the first of which is designed to recover
installation and capital costs, the second to recover operating and other
variable costs, and the third to cover fuel supply and transportation costs. NRG
receives 50% of the net profits from these VEAG payments through its ownership
interest in Saale.

COBEE

In December 1996, NRG acquired an interest in Compania Boliviana de Energia
Electrica S.A.-Bolivian Power Company Limited (COBEE), the second largest
generator of electricity in Bolivia. The acquisition was consummated through a
Netherlands corporation, Tosli Investments B.V. (Tosli), which is equally owned
by subsidiaries of NRG and Vattenfall AB of Sweden (Vattenfall). In December
1996, Tosli completed a successful tender offer for the shares of COBEE, which
were listed on the New York Stock Exchange, acquiring 96.6% of COBEE's
outstanding common shares for a total purchase price of $175 million. COBEE
shares were delisted in January 1997. The COBEE board of directors consists of
three designees of NRG, three designees of Vattenfall and three directors
appointed jointly by NRG and Vattenfall.

COBEE has entered into an electricity supply contract with Electricidad de
La Paz S.A., a Bolivian distribution company, (Electropaz) which provides that
COBEE shall supply Electropaz with all of the
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electricity that COBEE can supply, up to the maximum amount of electricity
required by Electropaz to supply the requirements of its distribution
concession. This electricity supply contract expires in December 2008. COBEE has
entered into a substantially similar contract with Empresa de Luz Fuerza
Electricade Oruro, another Bolivian distribution company, S.A. (ELF). All
payments by Electropaz and ELF are in local currency, tied to the value of the
U.S. dollar.

COBEE operates its electric generation business under a 40-year concession
granted by the Government of Bolivia in 1990, as most recently amended in March
1995. Under this concession, COBEE is entitled to earn a return of 9% after all
operating expenses, depreciation, taxes and interest expense, calculated on its
U.S. dollar rate base, consisting of net fixed assets at historical cost in U.S.
dollars and working capital and materials up to certain limits. The Bolivian
Electricity Code also provides for the adjustment of rates to compensate COBEE
for any shortfall or to recapture any excess in COBEE's actual rate of return
during the previous year. COBEE periodically applies to the Superintendent of
Electricity for rate increases sufficient to provide its 9% rate of return based
on COBEE's current operating results and its projection of future revenues and
expenses.

COGENERATION CORPORATION OF AMERICA

On January 18, 1996, the U.S. Bankruptcy Court for the District of New
Jersey awarded NRG the right to acquire a 41.86% equity interest in O'Brien
Environmental Energy, Inc. (O'Brien), which emerged from bankruptcy on April 30,
1996 and was renamed "NRG Generating (U.S.) Inc." (NRGG). On July 20, 1998,
NRGG's name was changed to Cogeneration Corporation of America (CogenAmerica).
NRG currently holds 45.21% of the common stock of CogenAmerica. The remaining
54.79% of the common stock is held publicly. CogenAmerica has interests in six
domestic operating projects with an aggregate capacity of approximately 575 MW.
CogenAmerica's principal operating projects include: (a) the 54 MW Newark
Boxboard Project (which is owned 100% by a wholly-owned project subsidiary of
CogenAmerica), a gas-fired cogeneration facility that sells electricity to
Jersey Central Power & Light (JCP&L) and steam to Newark Group Industries, Inc.;
(b) the 122 MW E.I. du Pont Parlin Project (which is owned 100% by a
wholly-owned project subsidiary of CogenAmerica), a gas-fired cogeneration
facility that sells electricity to JCP&L and steam to E.I. du Pont de Nemours
and Company; (c) an 83% interest in a 22 MW standby/peak sharing facility which
provides electricity and standby capabilities for the Philadelphia Municipal
Authority; (d) a 33.33% interest in the 150 MW Grays Ferry project, a gas-fired
cogeneration project located in Philadelphia, Pennsylvania, which sells
electricity to Philadelphia Electricity Company (PECO). PECO recently attempted
to terminate the PPA with respect to the Grays Ferry project. The Grays Ferry
partnership in turn commenced litigation claiming there is no basis for
termination of such agreement. (See "Item 3 -- Legal Proceedings."); (e) the 117
MW Morris project, a gas-fired cogeneration project located in Morris, Illinois,
which sells electricity and steam to Equistar Chemicals; (f) the 110 MW MCPC
project, a gas-fired cogeneration project located in Pryor, Oklahoma, which
sells electricity to Oklahoma Gas and Electric and steam to a number of
industrial users.

On October 9, 1998, CogenAmerica acquired NRG's 50% interest in MCPC, a 110
MW cogeneration project located in Pryor, Oklahoma. CogenAmerica also acquired
the remaining 50% interest in this project from Decker Energy International.
Inc., and associated entities. The project sells electricity to Oklahoma Gas and
Electric and steam to a number of industrial users. The purchase price was
approximately $23.9 million. NRG loaned CogenAmerica approximately $23.9 million
to finance the acquisition. The loan is a six-year term facility requiring
interest and variable principal and interest payments on a quarterly basis,
based on project cash flows.

On December 30, 1997 CogenAmerica acquired from NRG 100% of the membership
interests in NRG (Morris) Cogen, LLC which was building a 117 MW cogeneration
plant on the site of the Equistar Chemicals, LP (Equistar) manufacturing
facility in Morris, Illinois. In connection with the sale, NRG committed to
finance the acquisition price pursuant to a loan agreement between NRG and
CogenAmerica and NRG guaranteed the obligation of CogenAmerica to invest equity
into the project company. At December 31, 1998, CogenAmerica had borrowed $12
million from NRG to partially fund its equity investment for the project.
7
<PAGE> 10

CogenAmerica's Morris facility experienced two unscheduled outages in
January 1999, which resulted in service and business interruptions to Equistar.
NRG, as a provider of construction management services and operation and
maintenance services to the Morris facility has participated with CogenAmerica
and Equistar in an investigation into this matter. This investigation, which
includes an examination of the respective rights and obligations of the parties
with respect to one another and with respect to potentially responsible third
parties, including insurers, is continuing. Although it is not possible at the
present time to assess NRG's potential exposure related to the two outages, NRG
does not believe that any claims which may be brought against it will have a
material financial impact on NRG.

NRG employees serve as NRG's designees on the board of directors of
CogenAmerica. NRG and CogenAmerica also entered into a "Co-Investment
Agreement", pursuant to which NRG granted CogenAmerica a right of first offer
until April 30, 2003 to acquire from NRG each energy development project first
developed or acquired by NRG for which a co-investor is required because of
federal or state regulatory restrictions on NRG's ownership. In addition, NRG
has agreed that, prior to May 1, 1999, a minimum of one or more such projects,
having an aggregate equity value of at least $60 million or a minimum power
generation capacity of 150 MW, will be so offered. NRG has fulfilled the minimum
requirements of the Co-Investment Agreement. To facilitate CogenAmerica's
ability to acquire projects under the Co-Investment Agreement, NRG is obligated
to provide financing on Co-Investment projects to CogenAmerica to the extent
that they are unable to obtain funds on comparable terms from other sources.

NRG has also agreed to certain provisions designed to protect the rights of
the holders of the equity in CogenAmerica that is not owned by NRG. These
provisions include super-majority voting requirements with respect to a merger
or sale of all or substantially all of CogenAmerica's assets and certain
additional issuances of CogenAmerica stock, the creation of an independent
committee of the board of directors of CogenAmerica with authority to, among
other things, determine whether CogenAmerica will exercise its right of first
offer under the Co-Investment Agreement and a commitment that, for a seven-year
period following NRG's investment in CogenAmerica, NRG will not remove or vote
down the re-election to CogenAmerica's board of directors of any of the three
directors who constitute the independent directors committee.

During the third quarter of 1998, NRG solicited proxies and written
consents in favor of the removal of Mr. Robert Sherman as a member of the Board
of Directors of CogenAmerica. On October 26, 1998, NRG delivered consents for
the holders of more than 50% of CogenAmerica's shares in favor of removing Mr.
Sherman from the CogenAmerica Board. At a CogenAmerica Board meeting held on
October 27, 1998, Michael O'Sullivan, an employee of NRG, was appointed to fill
the vacancy created by the removal of Mr. Sherman. At the same meeting, Julie A.
Jorgensen, also an employee of NRG, was elected as Interim President and CEO of
CogenAmerica, replacing Mr. Sherman. At a Special Meeting of the CogenAmerica
stockholders held on November 12, 1998, the stockholders approved the removal of
Mr. Sherman as a director of CogenAmerica, with 77.3% of the outstanding shares
voting in favor of such removal. On the same day, the CogenAmerica Board
confirmed the appointment of Mr. O'Sullivan to fill the vacancy created by the
removal of Mr. Sherman. A search for a permanent President and CEO for
CogenAmerica is ongoing.

CogenAmerica and NRG have entered into various loan agreements. At December
31, 1998, the loan balance due to NRG was $40.4 million with a maturity dates
from 2001 to 2005.

CogenAmerica's shares are traded on The NASDAQ National Market under the
symbol "CGCA". CogenAmerica's closing share price as of March 23, 1999 was
$8.25.

SIGNIFICANT WHOLLY-OWNED OPERATIONS

MINNEAPOLIS ENERGY CENTER (MEC)

MEC provides steam and chilled water to customers in downtown Minneapolis,
Minnesota. MEC currently provides 91 customers with 1.6 billion pounds of steam
per year and 37 customers with 43.5 million ton hours of chilled water per year.
NRG acquired MEC in August 1993 for approximately $110 million. MEC's assets
include two combined steam and chilled water plants, three chilled water plants,
two steam

8
<PAGE> 11

plants, six miles of steam and two miles of chilled water distribution lines.
The MEC plants have a combined steam capacity of 1,323 mmBtus per hour (388 MWt)
and cooling capacity of 35,550 tons per hour.

MEC provides steam and chilled water to its customers pursuant to energy
supply agreements, which expire at varying dates from December 1998 to March
2018. Historically, MEC has renewed its energy supply agreements as they near
expiration. With minor exceptions, these agreements are standard form contracts
providing for a uniform rate structure consisting of three components: a demand
charge designed to recover MEC's fixed capital costs, a consumption charge
designed to provide a per unit margin, and an operating charge designed to pass
through to customers all fuel, labor, maintenance, electricity and other
operating costs. The demand and consumption charges are adjusted in accordance
with the Consumer Price Index every five years.

ROCK-TENN

The Rock-Tenn process steam operation, which is owned and operated by NRG,
consists of a five-mile closed-loop steam/condensate line that delivers steam to
the Rock-Tenn Company (RTC) (formerly Waldorf Corporation), a paper manufacturer
in St. Paul, Minnesota, and has a peak steam capacity of 430 mmBtus per hour
(126 MWt). As a result of the settlement of a 1987 dispute between RTC and
NORENCO Corporation (a predecessor of NRG), RTC prepaid revenues for future
steam service. As of December 31, 1998, deferred revenues remaining were $3.4
million.

NRG delivers steam to RTC under a steam sales agreement, pursuant to which
RTC is obligated to purchase its total energy needs for its St. Paul, Minnesota
facility through June 30, 2007. The agreement does not obligate RTC to purchase
a minimum quantity of energy. Instead, RTC failure to acquire a certain quantity
of energy during a given contract year triggers an NRG right to terminate the
agreement, unless RTC elects to compensate NRG for the deficit energy usage
amount.

NEO CORPORATION (NEO)

NEO is a wholly-owned project subsidiary of NRG that was formed to develop
small power generation facilities, ranging in size from 1 to 50 MW, in the
United States. NEO is currently focusing on the development and acquisition of
landfill gas projects and the acquisition of small hydroelectric projects.

Through the investment vehicle Northbrook Energy, L.L.C. (Northbrook), NEO
has a 50% interest in eighteen small operating hydroelectric projects, ranging
in size from 1 MW to 6 MW and having a total capacity of 39.3 MW. As of December
31, 1998, NEO's total investment in these projects was $3.6 million.

NEO has a 50% interest in 21 operating landfill gas projects, as of
December 31, 1998, ranging in size from 1 MW to 11 MW. As of December 31, 1998,
NEO's equity investment in these projects totaled $7.7 million and loans to fund
development, construction and start-up amounted to $23.7 million. In addition,
NEO has 11 landfill gas projects under construction. NEO expects its total
funding requirements to be approximately $136 million and total capacity of the
portfolio is expected to reach 100 MW in 1999.

On September 24, 1997, certain affiliates of NEO entered into a
Construction, Acquisition and Term Loan Agreement with Lyon Credit Corporation
(Lyon) for $92 million to fund the construction of the landfill gas collection
systems and generation facilities for certain NEO landfill gas projects in
development. The construction loan for each project will convert to a term loan
containing a maximum maturity date of ten years. NRG has agreed to provide Lyon
with a guarantee during the construction loan period. In addition, NRG has
agreed to guarantee the monetization and use of the Section 29 tax credits
generated from the landfill gas projects financed by Lyon through the year 2007.

An important factor in the after tax return of the landfill gas projects is
the eligibility of these projects for Section 29 tax credits. The Section 29 tax
credit is available only to projects that produce "qualified fuels". Landfill
gas is a qualified fuel for purposes of the Section 29 credit. To qualify for
the credit, the facility for producing gas must have been placed in service no
later than June 30, 1998. Congress has not renewed the Section 29 credit for new
landfill gas projects.

9
<PAGE> 12

RESOURCE RECOVERY FACILITIES

NRG's Newport resource recovery facility, located in Newport, Minnesota,
can process over 1,500 tons of Municipal Solid Water, (MSW) per day, 92% of
which is recovered as refuse derived fuel (RDF) or other recyclables and reused
in power generation facilities in Red Wing and Mankato, Minnesota. The Newport
facility, which was originally constructed and operated by NSP, was transferred
to NRG in 1993. NRG owns 100% of and operates and maintains the Newport
facility.

Pursuant to service agreements with Ramsey and Washington Counties,
(Counties), which expire in 2007, NRG processes a minimum of 280,800 tons of MSW
per year at the Newport facility and receives service fees based on the amount
of waste processed, pass-through costs and certain other factors. NRG is also
entitled to an operation and maintenance fee, which is designed to recover fixed
costs and to provide NRG a guaranteed amount for operating and maintaining the
Newport facility for the processing of 750 tons per day of MSW, whether or not
the Counties deliver such waste for processing.

Since 1989, NRG has operated the Elk River resource recovery facility
located in Elk River, Minnesota, which can process over 1,500 tons of MSW per
day, 90% of which is recovered as RDF or other recyclables and reused in power
generation facilities in Elk River and Mankato, Minnesota. NSP owns 85% of the
Elk River facility, and United Power Association owns the remaining 15%.

NRG also provides ash storage and disposal for the Elk River facility at
NSP's Becker ash disposal facility, an approved ash deposit site adjacent to
NSP's Sherburne County generating facility near Becker, Minnesota. NRG operates
the Becker facility on behalf of NSP. Pursuant to an ash management services
agreement between NSP and the NSP Service Counties, NSP receives an ash disposal
fee based on the amount of ash disposal, pass-through costs and certain other
factors.

RDF projects, such as NRG's Newport facility and NSP's Elk River facility,
historically were assured adequate supply of waste through state and local flow
control legislation, which directed that waste be disposed of in certain
facilities. In May 1994, the United States Supreme Court held that such waste
was a commodity in interstate commerce and, accordingly, that flow control
legislation that prohibited shipment of waste out of state was unconstitutional.
Since this ruling, the RDF facilities have faced increased competition from
landfills in surrounding states in obtaining MSW; however, this has not impacted
NRG's MSW volumes to date.

SIGNIFICANT PENDING ACQUISITIONS, DISPOSITIONS AND PROJECTS UNDER DEVELOPMENT

In October 1998, the Company executed a binding agreement to purchase the
Somerset power station for approximately $55 million from Eastern Utilities
Association (EUA). The Somerset station located in Somerset, Massachusetts,
includes two coal-fired generating facilities supplying a total of 181 megawatts
and two aeroderivative combustion turbine peaking units supplying a total of 48
megawatts. In addition, a total of 69 megawatts is on deactivated reserve. The
Company will hold a 100% interest in the project and will own, operate and
maintain the units. Consummation of the transaction is expected to occur on or
before March 31, 1999, but is contingent on receipt of regulatory approvals and
consents from a number of governmental and private parties. There can be no
assurances that these approvals and consents will be received.

In December 1998, NRG and Dynegy signed agreements with San Diego Gas &
Electric Company to jointly acquire 1,218 megawatts of power generation
facilities located near Carlsbad and San Diego California for $356 million. NRG
and Dynegy will each own 50% interest in these facilities. This transaction is
expected to close in second quarter of 1999 pending regulatory approval.

In December 1998, NRG signed agreements with Niagara Mohawk Power to
purchase two coal fired power generation facilities located near Buffalo with a
combined summer capacity rating of 1,360 MW for $355 million. This transaction
is expected to close in the second quarter of 1999 pending regulatory approval.

In January 1999, NRG executed a binding agreement with Consolidated Edison
Company of New York (ConEdison) to acquire the Astoria gas turbines facility and
the Arthur Kill Generating Station for $505 million. These facilities, which are
located in New York, have a combined summer capacity rating of 1,456 MW. This
transaction is expected to close in the second quarter of 1999 pending
regulatory approval.

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<PAGE> 13

In February 1999, NRG purchased from Thermal Ventures, Inc. (TVI) the
remaining 50.1% limited partnership interests held by TVI in San Francisco
Thermal Limited Partnership and Pittsburgh Thermal Limited Partnership for $12.3
million. In addition, upon receipt of California and Pennsylvania regulatory
approval, NRG will acquire TVI's 50% member interest in North America Thermal
Systems, LLC (the entity holding the general partnership interest in the San
Francisco and Pittsburgh partnerships) for $500,000.

ENFIELD

In December 1996, NRG reached an agreement with Indeck Energy Services
(Europe) (Indeck) to sell a 50% interest in the Enfield Energy Center, a 350 MW
gas-fired project in the North London borough of Enfield. The power station is
scheduled to begin commercial operations in late 1999. In December 1998, NRG
sold one-half of its 50% interest in the Enfield project to an affiliate of El
Paso International.

ESTONIA

In December 1996, representatives of the Estonian Government, the
state-owned Eesti Energia ("EE"), and NRG signed a development and cooperation
agreement (DCA). The DCA defines the terms under which the parties are to
establish a plan to develop and refurbish the Balti and Eesti Power Plants.
Pursuant to the DCA, a business plan for the joint project was submitted in June
1997. In September 1997, the Estonian Government rejected NRG's business plan.
However, early in 1998 the Estonian Government and EE agreed to work on a new
business plan with NRG, which was submitted in May 1998. NRG has stated its
willingness to invest up to $67.25 million of equity into the project and to
assist the joint project in obtaining non-recourse debt to fund the required
capital improvements to the Balti and Eesti Power Plants. A commission has been
established to negotiate all terms and agreements between NRG, EE and the
Estonian Government relating to the purchase of the Balti and Eesti Power
Plants. The negotiation process is expected to be complete by late 1999.

NRG has a policy of expensing all costs until there is a signed contract
and Board of Directors approval. All such costs with respect to Estonia have
been expensed.

CAJUN

NRG, together with two other parties and the Chapter 11 Trustee, have filed
a reorganization plan with the United States Bankruptcy Court for the Middle
District of Louisiana to acquire the fossil generating assets of Cajun Electric
Power Cooperative of Baton Rouge, Louisiana (Cajun) for approximately $1.2
billion. The NRG consortium has the support of the Chapter 11 trustee and
Cajun's secured creditors. On February 11, 1999, the Court issued an order
denying confirmation of NRG's plan and the reorganization plan proposed by a
competing bidder. NRG along with its partners and the Trustee are contemplating
submitting a revised plan on April 16, 1999 to accommodate the issues raised in
the Court's February 11, 1999 decision. The court has scheduled hearings and
activities to review the new plans in May and June of 1999.

SUNNYSIDE

In 1994, NRG, through a wholly-owned subsidiary, purchased a 50% ownership
interest in Sunnyside Cogeneration Associates, a Utah joint venture, which owns
and operates a 58 MW waste coal plant in Utah. The waste coal plant is currently
being operated by a partnership that is 50% owned by an NRG affiliate. NRG and
its partner's effort to restructure the debt of the Sunnyside project have not
been successful. Due to the lack of progress in restructuring the debt, NRG
wrote down its investment in the Sunnyside project by $8.9 million in 1997 and
wrote off the $1.9 million balance of its investment in 1998. In March 1999, NRG
and its partner executed an agreement to sell the Sunnyside project to an
affiliate of Baltimore Gas & Electric for a purchase price of $2.0 million. The
sale is expected to close during the second quarter of 1999.

Because of the many complexities inherent in the acquisition, development
and financing of projects, there can be no assurance that any of NRG's pending
acquisitions and projects under development, including those described above,
will be consummated.

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<PAGE> 14

PROJECT AGREEMENTS

In the past, virtually all of NRG's operating power generation facilities
have sold electricity under long-term power purchase agreements. A facility's
revenue from a power purchase agreement usually consists of two components:
energy payments and capacity payments. Energy payments, which are intended to
cover the variable costs of electric generation (such as fuel costs and variable
operation and maintenance expense), are normally based on a facility's net
electrical output measured in kilowatt hours, with payment rates either fixed or
indexed to the fuel costs of the power purchaser. Capacity payments, which are
generally intended to provide funds for the fixed costs incurred by the project
subsidiary or project affiliate (such as debt service on the project financing
and the equity return), are normally calculated based on the net electrical
output or the declared capacity of a facility and its availability.

A number of the more recent projects in which NRG has acquired or is
acquiring an interest do not have long-term power purchase agreements. For
example, Loy Yang does not have such agreements because under the new Australian
regulatory process, all generators must sell their output to a grid, where the
price is established by a neutral regulator based on the market prices during
each defined period. The same will be true of Enfield, since the United Kingdom
has adopted a similar regulatory process. Similarly, the El Segundo and Long
Beach projects are merchant plants, selling power through a newly established
independent system operator. In the case of the Kladno project, where there is a
long-term agreement, the energy price is tied to the market price of electricity
rather than to the costs incurred by the project, so the contract does not
provide the traditional level of certainty and protection. While these
"merchant" projects introduce new risks and uncertainties, and require careful
advance analysis of the local power markets, NRG believes that merchant projects
are becoming increasingly accepted in the independent power market.

REGULATION

NRG is subject to a broad range of federal, state and local energy and
environmental laws and regulations applicable to the development, ownership and
operation of its United States and international projects. These laws and
regulations generally require that a wide variety of permits and other approvals
be obtained before construction or operation of a power plant commences and
that, after completion, the facility operate in compliance with their
requirements. NRG strives to comply with the terms of all such laws,
regulations, permits and licenses and believes that all of its operating plants
are in material compliance with all such applicable requirements. No assurance
can be given, however, that in the future all necessary permits and approvals
will be obtained and all applicable statutes and regulations complied with. In
addition, regulatory compliance for the construction of new facilities is a
costly and time-consuming process, and intricate and rapidly changing
environmental regulations may require major expenditures for permitting and
create the risk of expensive delays or material impairment of project value if
projects cannot function as planned due to changing regulatory requirements or
local opposition. Furthermore, there can be no assurance that existing
regulations will not be revised or that new regulations will not be adopted or
become applicable to NRG which would have an adverse impact on its operations.

EMPLOYEES

At December 31, 1998, NRG had 439 employees, approximately 341 of whom are
employed directly by NRG and approximately 98 of whom are employed by its
wholly-owned subsidiaries.

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<PAGE> 15

ITEM 2 -- PROPERTIES

Listed below are descriptions of NRG's interests in facilities, operations
or projects under construction as of December 31, 1998.

INDEPENDENT POWER PRODUCTION AND COGENERATION FACILITIES (1)

<TABLE>
<CAPTION>
LATER OF DATE OF
ACQUISITION OR NRG'S
DATE OF PERCENTAGE
COMMERCIAL CAPACITY OWNERSHIP
NAME AND LOCATION OF FACILITY OPERATION (MW)(2) INTEREST POWER PURCHASER
- ----------------------------- ---------------- -------- ---------- ---------------
<S> <C> <C> <C> <C>
INTERNATIONAL PROJECTS:
Loy Yang Power (3),
Australia................. 1997 2,000 25.37 Victorian Pool
Gladstone Power Station,
Australia................. 1994 1,680 37.50 QTSC; BSL
Collinsville, Australia..... 1998 189 50.00 QTSC
Energy Developments Limited,
Australia................. 1997 262 33.97 Various
Kladno Czech Republic,
existing project.......... 1994 28 36.32 STE/Industrials
Kladno Czech Republic,
expansion project......... 1999 345 44.5 STE
Schkopau Power Station,
Germany................... 1996 960 20.95 VEAG
MIBRAG mbH(3), (Mumsdorf)
Germany................... 1994 110 33.33 WESAG
MIBRAG mbH(3), (Deuben)
Germany................... 1994 86 33.33 WESAG
MIBRAG mbH(3), (Wahlitz)
Germany................... 1994 37 33.33 WESAG
COBEE, Bolivia.............. 1996 217(4) 48.30 Electropaz/ELF
Latin Power (Mamonal),
Colombia.................. 1994 90 6.45 Proelectrica
Latin Power (Termovalle),
Colombia.................. 1998 199 4.88 EPSA
Latin Power (Termotasajero),
Columbia.................. 1998 150 7.93 Columbia Grid
Latin Power (ELCOSA),
Honduras.................. 1994 80 7.65 Empresa Nacional de Energia Electrica
Latin Power (Dr. Bird),
Jamaica................... 1995 74 8.78 Jamaica Public Service Company, Ltd.
Latin Power (Orzumil),
Guatemala................. 1999 24 12.25 INDE
Latin Power (Aguaytia),
Peru...................... 1998 155 3.28 Central Peruvian Electricity Grid
Enfield (London) UK......... 1999 396 25.00 U.K. Electricity Grid
DOMESTIC PROJECTS:
Energy Investors Fund, 1 and
3......................... 1997 436 3.69 Various
El Segundo Power............ 1998 1,020 50.00 California ISO
Long Beach Generating....... 1998 530 50.00 California ISO
Camas Power................. 1997 25(5) 100.00 Ref Steam Purchase by Fort James Corporation
Crockett Cogeneration....... 1997 240 24.87 PG&E
Curtis-Palmer Hydro......... 1997 58 8.50 NIMO
Kingston Cogeneration....... 1997 110 25.00 Ontario Hydro
Mt. Poso Cogeneration....... 1997/1998 50 39.10 PG&E(6)
</TABLE>

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<PAGE> 16

- ---------------
(1) Does not include the small hydroelectric and landfill gas-fired power
generation facilities owned by NEO with an aggregate capacity of 110 MW, of
which NEO has net ownership of 58 MW. In addition, NEO has landfill gas
projects under construction with an aggregate capacity of 28 MW, of which
NEO has net ownership of 14 MW.

(2) Capacity shown is without deduction for internally consumed power.

(3) Each of Loy Yang and MIBRAG also owns coal mines which sell coal both to its
respective power plant and to third parties.

(4) Includes the Huaji (29 MW) expansion project which is expected to be fully
operational in 1999.

(5) The project does not generate electricity but its steam sales are the
equivalent of 25 MW of electric power.

(6) Operations of the project are currently suspended pursuant to an agreement
with this power purchaser.

(7) Operations suspended following buy-out of power purchase contracts and
pending negotiation of new power purchase agreements or sale of such
facilities. PG&E has agreed to a buy-out of related power purchase
agreements, but retains a right of first refusal with respect to output of
facilities.

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<PAGE> 17

THERMAL ENERGY PRODUCTION AND TRANSMISSION FACILITIES
AND RESOURCE RECOVERY FACILITIES

<TABLE>
<CAPTION>
NRG'S
PERCENTAGE THERMAL ENERGY
DATE OF OWNERSHIP PURCHASER/MSW
NAME AND LOCATION OF FACILITY ACQUISITION CAPACITY(1) INTEREST SUPPLIER
----------------------------- ----------- ----------- ---------- --------------
<S> <C> <C> <C> <C>
THERMAL ENERGY PRODUCTION AND
TRANSMISSION FACILITIES
Minneapolis Energy Center
(MEC), Minnesota................ 1993 Steam: 1,323 mmBtu/hr. 100.00 Approximately 91 steam
(388 MWt) Chilled customers and 37 chilled
water: 35,550 tons/hr. water customers
North American Thermal Systems
(NATS), Pennsylvania &
California(2)................... 1995 Pittsburgh: steam-240 49.40 Approximately 23
mmBtu/hr. (70 MWt) customers in Pittsburgh
chilled water-10,180 and 158 customers in San
tons/hr. San Francisco
Francisco: steam-490
mmBtu/hr. (144 MWt)
San Diego Power & Cooling,
California...................... 1997 Chilled Water: 5,250 100.00 Approximately 13
tons/hr. customers
Rock-Tenn, Minnesota............ 1992 Steam: 430 mmBtu/hr. 100.00 Rock-Tenn Company
(126 MWt)
Washco, Minnesota............... 1992 160 mmBtu/hr. (47 MWt) 100.00 Andersen Corporation
Minnesota Correctional
Facility
Grand Forks Air Force Base,
North Dakota.................... 1992 105 mmBtu/hr. (31 MWt) 100.00 Grand Forks Air Force
Base
Energy Center Kladno, Czech
Republic(3)..................... 1994 512 mmBtu/hr. (150 36.32 City of Kladno
MWt)
RESOURCE RECOVERY FACILITIES
Newport, Minnesota.............. 1993 MSW: 1,500 tons/day 100.00 Ramsey and Washington
Counties
Elk River, Minnesota............ (4) MSW: 1,500 tons/day 0.00 Anoka, Hennepin, and
Sherburne Counties;
Tri-County Solid Waste
Management Commission
Penobscot Energy Recovery,
Maine........................... 1997 MSW: 800 tons/day 28.71 Bangor Hydroelectric
Company
Maine Energy Recovery, Maine.... 1997 MSW: 680 tons/day 16.25 CMP
</TABLE>

- ---------------
(1) Thermal production and transmission capacity is based on 1,000 Btus per
pound of steam production or transmission capacity. The unit mmBtu is equal
to one million Btus.

(2) Includes 0.5% general partnership interests in each of PTLP and SFTLP. In
January 1999, the Company signed a purchase agreement to acquire the
remaining interest in the projects.

(3) Kladno also is included in the Independent Power Production and Cogeneration
Facilities table on the preceding page.

(4) NRG operates the Elk River resource recovery facility on behalf of NSP.

15
<PAGE> 18

OTHER PROPERTIES

In addition to the above, NRG leases its offices at 1221 Nicollet Mall,
Suite 700, Minneapolis, Minnesota 55403, under a five-year lease that expires in
June 2002.

ITEM 3 -- LEGAL PROCEEDINGS

There are no material legal proceedings pending, other than ordinary
routine litigation incidental to NRG's business, to which NRG is a party. There
are no material legal proceedings to which an officer or director is a party or
has a material interest adverse to NRG or its subsidiaries. There are no
material administrative or judicial proceedings arising under environmental
quality or civil rights statutes pending or known to be contemplated by
governmental agencies to which NRG is or would be a party.

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<PAGE> 19

PART II

ITEM 5 -- MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS

This is not applicable as the Company is a wholly-owned subsidiary of
Northern States Power Company.

17
<PAGE> 20

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

Management's Discussion and Analysis of Financial Condition and Results of
Operations is omitted per conditions as set forth in General Instructions I (1)
(a) and (b) of Form 10-K for wholly owned subsidiaries. It is replaced with
management's narrative analysis of the results of operations set forth in
General Instructions I (2) (a) of Form 10-K for wholly-owned subsidiaries
(reduced disclosure format). This analysis will primarily compare NRG's revenue
and expense items for the year ended December 31, 1998 with the year ended
December 31, 1997.

RESULTS OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31,
1997

Net income for the year ended December 31, 1998, was $41.7 million, an
increase of $19.7 million or 90%, compared to net income of $22.0 million in the
same period in 1997. This increase was due to the factors described below.

REVENUES

For the year ended December 31, 1998, NRG had total revenues of $182.1
million, compared to $118.3 million for the year ended December 31, 1997, an
increase of $63.8 million or 54%. NRG's operating revenues from wholly owned
operations for the twelve months ended December 31, 1998 were $100.4 million, an
increase of $8.4 million, or 9.1%, over the same period in 1997. The increase in
revenues was due primarily to new projects, including certain Pacific Generation
operations. This increase was partially offset by lower revenues from certain
heating and cooling subsidiaries due to the unusually mild weather. For the
twelve months ended December 31, 1998, revenues from wholly owned operations
consisted primarily of revenue from heating, cooling and thermal activities
(46.0%), electrical generation (46.2%) and technical services (7.8%).

Equity in earnings of unconsolidated affiliates was $81.7 million for the
year ended December 31, 1998, compared to $26.2 million for the year ended
December 31, 1997, an increase of $55.5 million or 212%. The increase was due to
new projects including El Segundo, Long Beach and certain Pacific Generation
operations, an increase in the Company's holdings in EDL as well as improved
performance from Loy Yang. Since the increase in revenues is primarily the
result of new projects, the rate of revenue increase may not be sustained unless
new projects are acquired at the same rate.

OPERATING COSTS AND EXPENSES

Cost of wholly owned operations was $52.4 million for the year ended
December 31, 1998. This is an increase of $5.7 million or 12% over the same
period in 1997. The increase was due primarily to new projects. Cost of
operations, as a percentage of revenues from wholly owned operations for the
year, was 52% which is 1% higher than the same period in 1997. The increase in
cost of operations was due to new NEO projects and Thermal fixed expenses that
could not be recovered due to the mild weather conditions.

Depreciation and amortization costs were $16.3 million for the year ended
December 31, 1998, compared to $10.3 million for the year ended December 31,
1997. The depreciation and amortization increase was due primarily to increased
amortization of intangible assets related to the Pacific Generation acquisition
and additional NEO project depreciation.

General, administrative and development costs were $56.4 million for the
year ended December 31, 1998, compared to $43.1 million for the year ended
December 31, 1997. The increase was due primarily to increased business
development activities and increased legal, technical, and accounting expenses
resulting from expanded operations. As a percent of total revenues,
administrative and general expenses declined to 31% from 36% during the same
period one-year earlier.

18
<PAGE> 21

OTHER INCOME (EXPENSE)

Minority interest in projects was $2.3 million for the twelve month period
compared to $.1 million for the same period in 1997. Minority interest relates
to certain Pacific Generation projects that were acquired in November 1997.

NRG recorded a total gain of $29.9 million in 1998 related to project
sales. In October, NRG sold its 50% owned 110 MW Mid-Continent Power Company
facility in Oklahoma to Cogeneration Corporation of America (CogenAmerica), an
affiliate of NRG for a $2.1 million gain. Also in October, NRG sold 13.35% of
its interest in ECK Generating for a gain of $1.6 million. NRG continues to own
44.5% of the ECK Generating project. In December, NRG sold one-half of its 50%
interest in its Enfield project to an affiliate of El Paso International for a
$26.2 million gain. Additionally, NRG sold Wind Power Partners 1987 LP and Wind
Power Partners 1988 LP for $9.2 million. There was no gain or loss recorded from
the sale of the Wind Power projects which were acquired as part of the Pacific
Generation acquisition.

NRG recorded $26.7 million in total project write-downs during the year. In
September, NRG recorded a $20.1 million charge to write-down its West Java,
Indonesia project due to uncertainties surrounding all infrastructure projects
in Indonesia. NRG recorded an additional $1.9 million charge in December to
bring its remaining investment in the project to zero. In addition, NRG wrote
off its $1.9 million investment in the Sunnyside project (U.S.) and $2.8 million
of accumulated project development expenditures related to the Alto Cachopoal
project (Chile).

Other income was $8.4 million for the twelve months ended December 31, 1998
compared with $11.8 million for the twelve months ended December 31, 1997. The
$3.4 million decline was due primarily to a reduction in interest income from
loans to affiliates.

Interest expense was $50.3 million for the twelve months ended December 31,
1998 compared with $31.0 million for the twelve months ended December 31, 1997.
The increase in interest expense was due primarily to the issuance of the $250
million Senior Notes at the end of June 1997, interest on NRG's revolving line
of credit, new debt obtained for certain NEO projects and the purchase of
Pacific Generation.

INCOME TAX

NRG has recognized an income tax benefit due to the recognition of certain
tax credits. The net income tax benefit for the year ended December 31, 1998,
increased by $2.2 million to $25.7 million as compared to $23.5 million in the
same period one year earlier. The increase in tax benefits for the twelve months
period was due to increased interest expense on corporate debt and an $8.3
million increase in Section 29 credits, which was partially offset by higher
earnings.

YEAR 2000

To the extent allowed, the information in the following section is
designated as a "Year 2000 Readiness Disclosure." NRG is incurring costs to
modify or replace existing technology, including computer software, for
uninterrupted operation in the year 2000 and beyond. A committee made up of
senior management is leading NRG's initiatives to identify Y2K related issues
and remediate business processes as necessary. NRG is also partnering with its
parent, NSP, to ensure a consistent overall company process in addressing the
Y2K issue.

NRG Y2K programs cover not only NRG's internal computer applications, but
also the thousands of hardware and embedded system components in use at NRG's
projects throughout the world. Embedded systems perform mission-critical
functions in all parts of operations, including power generation, transmission,
distribution, communications and business operations. NRG has implemented a
methodology consistent with NSP that includes state-of-the-art best practices
and standards within the energy industry. This seven-step process includes:

- Discovery of possible date-related logic in components, systems and
processes

- Assessment of potential problems

- Development of a plan to address the problem
19
<PAGE> 22

- Attempt to resolve the problem

- Testing to verify that the solutions are workable

- Implementation of the solution to production

- Closure through re-testing and documentation and review by the Y2K senior
committee.

NRG's timetable for Y2K completion is:

- Assessment/discovery -- November 1, 1998

- Analysis/testing -- May 1, 1999

- Y2K Ready -- July 1, 1999

NRG is communicating with its key suppliers and business partners regarding
their Y2K progress, particularly in software and embedded components areas, to
determine the areas in which NRG's operations may be vulnerable to those
parties' failure to complete their redemption efforts. NRG is currently
evaluating and initiating follow-up actions regarding the responses from these
parties as appropriate.

NRG has made significant progress implementing its Y2K plan. Based upon the
information currently known regarding its internal operations and assuming
successful and timely completion of its redemption plan, NRG does not anticipate
significant business disruptions from its internal systems due to the Y2K issue.
However, NRG may possibly experience limited interruptions to some aspects of
its activities, relating to information technology, operations and
administrative functions. NRG is considering such potential occurrences in
planning for its most reasonably likely worst case scenarios.

In addition, risk exists regarding the noncompliance of third parties with
key business or operational importance to NRG. Y2K problems affecting key
customers, interconnected utilities, fuel suppliers and transporters,
telecommunication providers or financial institutions could result in lost power
or gas sales, reduction in power production or transmission, or internal
functional and administrative difficulties on the part of NRG. NRG is not
presently aware of any such situations; however occurrences of this type, if
severe, could have a material adverse impact upon the business, operating
results or financial condition of NRG. Consequently, there can be no assurance
that NRG will be able to identify and correct all aspects of the Y2K problem
that affect it in sufficient time, or that the costs of achieving Y2K readiness
will not be material.

NRG is currently updating contingency plans for all material Y2K risk and
is on track to meet the contingency planning schedule set forth by NSP. Among
the areas contingency planning will address are delays in completion of NRG's
remediation plans, failure or incomplete remediation results and failure of key
third party contracts to be Y2K compliant.

Through 1998, NRG had spent approximately $5.8 million for Y2K efforts,
including NRG's share of costs incurred by unconsolidated affiliates. These
costs were primarily expensed as incurred. The additional development and
remediation costs necessary for NRG and its affiliates to prepare for Y2K is
estimated to be approximately $3.2 million.

FORWARD-LOOKING STATEMENTS

In addition to any assumptions and other factors referred to specifically
in connection with the forward-looking statements contained in this Form 10-K,
factors that could cause NRG's actual results to differ materially from those
contemplated in any forward-looking statements include, among others, the
following:

- Economic conditions including inflation rates and monetary fluctuations;

- Trade, monetary, fiscal, taxation, and environmental policies of
governments, agencies and similar organizations in geographic areas where
NRG has a financial interest;

- Customer business conditions including demand for their products or
services and supply of labor and materials used in creating their
products and services;

20
<PAGE> 23

- Financial or regulatory accounting principles or policies imposed by the
Financial Accounting Standards Board, the Securities and Exchange
Commission, the Federal Energy Regulatory Commission and similar entities
with regulatory oversight;

- Availability or cost of capital such as changes in: interest rates;
market perceptions of the power generation industry, NRG or any of its
subsidiaries; or security ratings;

- Factors affecting power generation operations such as unusual weather
conditions; catastrophic weather-related damage; unscheduled generation
outages, maintenance or repairs; unanticipated changes to fossil fuel, or
gas supply costs or availability due to higher demand, shortages,
transportation problems or other developments; environmental incidents;
or electric transmission or gas pipeline system constraints;

- Employee workforce factors including loss or retirement of key
executives, collective bargaining agreements with union employees, or
work stoppages;

- Increased competition in the power generation industry;

- Cost and other effects of legal and administrative proceedings,
settlements, investigations and claims;

- Technological developments that result in competitive disadvantages and
create the potential for impairment of existing assets;

- Factors associated with various investments including conditions of final
legal closing, foreign government actions, foreign economic and currency
risks, political instability in foreign countries, partnership actions,
competition, operating risks, dependence on certain suppliers and
customers, domestic and foreign environmental and energy regulations;

- Limitations on NRG's ability to control the development or operation of
projects in which NRG has less than 100% interest;

- Other business or investment considerations that may be disclosed from
time to time in NRG's Securities and Exchange Commission filings or in
other publicly disseminated written documents, including NRG's
Registration Statement No. 333-33397, as amended.

NRG undertakes no obligation or publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. The foregoing review of factors pursuant to the Act should
not be construed as exhaustive.

21
<PAGE> 24

ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Report of Independent Accountants........................... 23
Consolidated Statement of Income............................ 24
Consolidated Statement of Cash Flows........................ 25
Consolidated Balance Sheet.................................. 26
Consolidated Statement of Stockholders' Equity.............. 27
Notes to Consolidated Financial Statements.................. 28
</TABLE>

22
<PAGE> 25

REPORT OF INDEPENDENT ACCOUNTANTS

The Board of Directors and Stockholder
of NRG Energy, Inc.

In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of stockholder's equity and of cash
flows present fairly, in all material respects, the financial position of NRG
Energy, Inc (a wholly-owned subsidiary of Northern States Power Company) and its
subsidiaries at December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.

/s/ PRICEWATERHOUSECOOPERS LLP

PricewaterhouseCoopers LLP
Minneapolis, Minnesota
March 19, 1999

23
<PAGE> 26

NRG ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1998 1997 1996
---- ---- ----
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
OPERATING REVENUES
Revenues from wholly-owned operations..................... $100,424 $ 92,052 $ 71,649
Equity in earnings of unconsolidated affiliates........... 81,706 26,200 32,815
-------- -------- --------
Total operating revenues............................... 182,130 118,252 104,464
-------- -------- --------
OPERATING COSTS AND EXPENSES
Cost of wholly-owned operations........................... 52,413 46,717 36,562
Depreciation and amortization............................. 16,320 10,310 8,378
General, administrative and development................... 56,385 43,116 39,248
-------- -------- --------
Total operating costs and expenses..................... 125,118 100,143 84,188
-------- -------- --------
OPERATING INCOME............................................ 57,012 18,109 20,276
-------- -------- --------
OTHER INCOME (EXPENSE)
Minority interest in earnings of consolidated
subsidiary............................................. (2,251) (131) --
Gain on sale of interest in projects...................... 29,950 8,702 --
Write-off of project investments.......................... (26,740) (8,964) --
Other income, net......................................... 8,420 11,764 9,477
Interest expense.......................................... (50,313) (30,989) (15,430)
-------- -------- --------
Total other income (expense)........................... (40,934) (19,618) (5,953)
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES........................... 16,078 (1,509) 14,323
INCOME TAX (BENEFIT)........................................ (25,654) (23,491) (5,655)
-------- -------- --------
NET INCOME.................................................. $ 41,732 $ 21,982 $ 19,978
======== ======== ========
</TABLE>

See notes to consolidated financial statements.

24
<PAGE> 27

NRG ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
---- ---- ----
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................... $ 41,732 $ 21,982 $ 19,978
Adjustments to reconcile net income to net cash provided
by operating activities
Undistributed equity in earnings of unconsolidated
affiliates.......................................... (23,391) 6,481 (17,827)
Depreciation and amortization......................... 16,320 10,310 8,378
Deferred income taxes and investment tax credits...... 7,618 3,107 (776)
Minority interest..................................... (5,019) -- --
Investment write-downs................................ 26,740 8,964 1,500
Gain on sale of investments........................... (29,950) (8,702) --
Cash provided (used) by changes in certain working
capital Items, net of effects from acquisitions and
dispositions
Accounts receivable................................. 297 (2,859) (2,728)
Accounts receivable-affiliates...................... 21,657 (19,963) (2,068)
Accrued income taxes................................ (24,861) 1,762 (5,436)
Other current assets................................ 441 (2) (3,401)
Accounts payable.................................... (8,082) 7,791 917
Accrued salaries, benefits, and related costs....... 4,735 3,826 1,381
Accrued interest.................................... 1,050 1,215 3,902
Other current liabilities........................... (2,219) 7,729 3,110
Cash used by changes in other assets and
liabilities...................................... (5,070) (7,155) (1,284)
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES.................. 21,998 34,486 5,646
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Investments in projects............................... (132,379) (318,149) (142,090)
Acquisition, net of liabilities assumed............... -- (148,830) --
Cash from sale of project investment.................. 18,053 19,158 --
Decrease (increase) in notes receivable............... 16,858 (37,431) (36,617)
Capital expenditures.................................. (31,719) (26,936) (24,588)
Cash distribution from project termination
settlement.......................................... -- -- 15,671
(Increase) decrease in restricted cash................ (2,433) 16,100 (7,915)
Other, net............................................ -- 10,114 (4,486)
--------- --------- ---------
NET CASH USED BY INVESTING ACTIVITIES...................... (131,620) (485,974) (200,025)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under line of credit agreement......... 2,000 122,000 --
Capital contributions from parent..................... 100,000 80,900 80,000
Proceeds from issuance of long-term debt.............. 23,169 254,061 122,671
Principal payments on long-term debt.................. (21,152) (5,925) (2,893)
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES.................. 104,017 451,036 199,778
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS....... (5,605) (452) 5,399
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............. 11,986 12,438 7,039
========= ========= =========
CASH AND CASH EQUIVALENTS AT END OF YEAR................... $ 6,381 $ 11,986 $ 12,438
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid (net of amount capitalized)............. $ 49,089 $ 30,890 $ 11,527
Income taxes paid (benefits received), net............ (6,797) (24,577) 1,164
</TABLE>

See notes to consolidated financial statements.

25
<PAGE> 28

NRG ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1997
---- ----
(THOUSANDS OF DOLLARS)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 6,381 $ 11,986
Restricted cash........................................... 4,021 1,588
Accounts receivable-trade, less allowance For doubtful
accounts of $100........................................ 15,223 15,520
Accounts receivable-affiliates............................ 7,324 29,162
Taxes Receivable.......................................... 21,169 --
Current portion of notes receivable -- affiliates......... 4,460 48,816
Current portion of notes receivable....................... 26,200 3,729
Inventory................................................. 2,647 2,619
Prepayments and other current assets...................... 4,533 5,002
---------- ----------
Total current assets.................................... 91,958 118,422
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, AT ORIGINAL COST
In service................................................ 291,558 255,433
Under construction........................................ 5,352 9,758
---------- ----------
Total property, plant and equipment..................... 296,910 265,191
Less accumulated depreciation............................. (92,181) (79,300)
---------- ----------
Net property, plant and equipment....................... 204,729 185,891
---------- ----------
OTHER ASSETS
Investments in projects................................... 800,924 694,655
Capitalized project costs................................. 13,685 17,791
Notes receivable, less current portion -- affiliates...... 101,887 71,759
Notes receivable, less current portion.................... 3,744 4,624
Intangible assets, net of accumulated amortization of
$2,984 and $2,012....................................... 22,507 21,414
Debt issuance costs, net of accumulated amortization of
$1,675 and $779......................................... 7,276 6,569
Other assets, net of accumulated amortization of $7,350
and $4,782.............................................. 46,716 46,977
---------- ----------
Total other assets...................................... 996,739 863,789
---------- ----------
TOTAL ASSETS................................................ $1,293,426 $1,168,102
---------- ----------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Current portion of long-term debt......................... $ 8,258 $ 7,676
Accounts payable-trade.................................... 7,371 16,101
Accrued income taxes...................................... -- 3,692
Accrued property and sales taxes.......................... 3,251 3,804
Accrued salaries, benefits and related costs.............. 15,733 10,998
Accrued interest.......................................... 7,648 6,310
Other current liabilities................................. 8,289 10,508
---------- ----------
Total current liabilities............................... 50,550 59,089
OTHER LIABILITIES:
Minority interest......................................... 13,516 19,818
Revolving line of credit.................................. 124,000 122,000
Consolidated project-level, long-term, non-recourse
debt.................................................... 113,437 113,473
Corporate level long-term debt, less current portion...... 380,781 377,706
Deferred Revenues......................................... 7,748 9,577
Deferred Income Taxes..................................... 19,841 11,968
Deferred Investment Tax Credits........................... 1,343 1,598
Deferred Compensation..................................... 2,878 2,175
---------- ----------
Total liabilities....................................... 714,094 717,404
---------- ----------
STOCKHOLDER'S EQUITY
Common stock; $1 par value; 1,000 shares authorized; 1,000
shares issued and outstanding........................... 1 1
Additional paid-in capital................................ 531,913 431,913
Retained earnings......................................... 130,015 88,283
Accumulated other comprehensive income.................... (82,597) (69,499)
---------- ----------
Total Stockholder's Equity.............................. 579,332 450,698
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY.................. $1,293,426 $1,168,102
========== ==========
</TABLE>

See notes to consolidated financial statements.

26
<PAGE> 29

NRG ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY

<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE STOCKHOLDER'S
STOCK CAPITAL EARNINGS INCOME EQUITY
------ ---------- -------- ------------- -------------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1995.......... $1 $271,013 $ 46,323 $ 2,427 $319,764
== ======== ======== ======== ========
Net Income............................. 19,978 19,978
Currency translation adjustments....... 2,172 2,172
--------
Comprehensive income for 1996.......... 22,150
Capital contributions from parent...... 80,000 80,000
-- -------- -------- -------- --------
BALANCES AT DECEMBER 31, 1996.......... $1 $351,013 $ 66,301 $ 4,599 $421,914
== ======== ======== ======== ========
Net Income............................. 21,982 21,982
Currency translation adjustments....... (74,098) (74,098)
--------
Comprehensive income for 1997.......... (52,116)
Capital contributions from parent...... 80,900 80,900
-- -------- -------- -------- --------
BALANCES AT DECEMBER 31, 1997.......... $1 $431,913 $ 88,283 $(69,499) $450,698
== ======== ======== ======== ========
Net Income............................. 41,732 41,732
Currency translation adjustments....... (13,098) (13,098)
--------
Comprehensive income for 1998.......... 28,634
Capital contributions from parent...... 100,000 100,000
-- -------- -------- -------- --------
BALANCES AT DECEMBER 31, 1998.......... $1 $531,913 $130,015 $(82,597) $579,332
== ======== ======== ======== ========
</TABLE>

Other comprehensive income is shown net of tax expenses (benefits) which
were $0 in 1998, $5.9 million in 1997 and ($1.0) million in 1996.

See notes to consolidated financial statements.

27
<PAGE> 30

NOTE 1 -- ORGANIZATION

NRG Energy, Inc. (the Company), a Delaware Corporation, was incorporated on
May 29, 1992, as a wholly owned subsidiary of Northern States Power Company
(NSP). Beginning in 1989, the Company was doing business through its predecessor
companies, NRG Energy, Inc. and NRG Group, Inc., Minnesota corporations which
were merged into the Company subsequent to its incorporation. The Company and
its subsidiaries and affiliates develop, build, acquire, own and operate
non-regulated energy-related businesses.

NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION

The consolidated financial statements include the accounts of the Company
and its subsidiaries (referred to collectively herein as NRG). All significant
intercompany transactions and balances have been eliminated in consolidation. As
discussed in Note 5, NRG has investments in partnerships, joint ventures and
projects for which the equity method of accounting is applied. Earnings from
equity in international investments are recorded net of foreign income taxes.

CASH EQUIVALENTS

Cash equivalents include highly liquid investments (primarily commercial
paper) with a remaining maturity of three months or less at the time of
purchase.

RESTRICTED CASH

Restricted cash consists primarily of cash collateral for letters of credit
issued in relation to project development activities and funds held in trust
accounts to satisfy the requirements of certain debt agreements.

INVENTORY

Inventory is valued at the lower of average cost or market and consists
principally of spare parts and raw materials used to generate steam.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are capitalized at original cost. Significant
additions or improvements extending asset lives are capitalized, while repairs
and maintenance are charged to expense as incurred. Depreciation is computed
using the straight-line method over the following estimated useful lives:

<TABLE>
<S> <C>
Facilities and improvements................................. 10-45 years
Machinery and equipment..................................... 7-30 years
Office furnishings and equipment............................ 3-5 years
</TABLE>

CAPITALIZED INTEREST

Interest incurred on funds borrowed to finance projects expected to require
more than three months to complete is capitalized. Capitalization of interest is
discontinued when the project is completed and considered operational.
Capitalized interest is amortized using the straight line method over the useful
life of the related project. Capitalized interest was $172,000 and $98,000 in
1998 and 1997, respectively.

DEVELOPMENT COSTS AND CAPITALIZED PROJECT COSTS

These costs include professional services, dedicated employee salaries,
permits, and other costs which are incurred incidental to a particular project.
Such costs are expensed as incurred until a sales agreement or letter of intent
is signed, and the project has been approved by NRG's Board of Directors.
Additional costs incurred after this point are capitalized. When project
operations begin, previously capitalized project costs are

28
<PAGE> 31

reclassified to investment in projects and amortized on a straight-line basis
over the lesser of the life of the project's related assets or revenue contract
period.

DEBT ISSUANCE COSTS

Costs to issue long-term debt have been capitalized and are being amortized
over the terms of the related debt.

INTANGIBLES

Intangibles consist principally of the excess of the cost of investment in
subsidiaries over the underlying fair value of the net assets acquired and are
being amortized using the straight-line method over 20 to 30 years. The Company
periodically evaluates the recovery of goodwill and other intangibles based on
an analysis of estimated undiscounted future cash flows.

OTHER LONG TERM ASSETS

Other long-term assets consist primarily of service agreements and
operating contracts. These assets are being amortized over the remaining terms
of the individual contracts, which range from seven to twenty-eight years.

INCOME TAXES

The Company is included in the consolidated tax returns of NSP. NRG
calculates its income tax provision on a separate return basis under a tax
sharing agreement with NSP as discussed in Note 9. Current federal and state
income taxes are payable to or receivable from NSP. NRG records income taxes
using the liability method. Income taxes are deferred on all temporary
differences between pretax financial and taxable income and between the book and
tax bases of assets and liabilities. Deferred taxes are recorded using the tax
rates scheduled by law to be in effect when the temporary differences reverse.
Investment tax credits are deferred and amortized over the estimated lives of
the related property. NRG's policy for income taxes related to international
operations is discussed in Note 9.

REVENUE RECOGNITION

Under fixed-price contracts, revenues are recognized as deliveries of
products or services are made. Revenues and related costs under cost
reimbursable contract provisions are recorded as costs are incurred. Anticipated
future losses on contracts are charged against income when identified.

FOREIGN CURRENCY TRANSLATION

The local currencies are generally the functional currency of NRG's foreign
operations. Foreign currency denominated assets and liabilities are translated
at end-of-period rates of exchange. The resulting currency adjustments are
accumulated and reported as a separate component of stockholder's equity.
Income, expense, and cash flows are translated at weighted-average rates of
exchange for the period.

USE OF ESTIMATES

In recording transactions and balances resulting from business operations,
NRG uses estimates based on the best information available. Estimates are used
for such items as plant depreciable lives, tax provisions, uncollectible
accounts and actuarially determined benefit costs. As better information becomes
available (or actual amounts are determinable), the recorded estimates are
revised. Consequently, operating results can be affected by revisions to prior
accounting estimates.

RECLASSIFICATIONS

Certain reclassifications have been made to the 1997 financial statements
to conform to the 1998 presentation. These reclassifications had no effect on
net income or stockholder's equity as previously reported.
29
<PAGE> 32

NOTE 3 -- BUSINESS ACQUISITIONS AND DIVESTITURES

In March 1998, the Company along with its 50% partner, Dynegy, Inc.
(Dynegy) acquired the Long Beach Generating Station from Southern California
Edison for $29.8 million. The Long Beach Station is a gas-fired plant comprised
of seven gas turbine generators and two steam turbines totaling 530 megawatts
(MW) in the aggregate.

In April 1998, the Company along with its 50% partner, Dynegy, acquired the
El Segundo Generating Station from Southern California Edison Company for $87.8
million. The El Segundo Generating Station is a gas-fired plant with a capacity
rating of 1,020 MW.

In April 1998, the Company exercised its option to acquire 16.8 million
convertible, non-voting preference shares of Energy Development Limited (EDL)
for $24.8 million, bringing the Company's total investment in EDL to $44.5
million or approximately a 34 percent ownership interest. EDL is a listed
Australian company that owns and operates 262 MW of generation throughout
Australia and the United Kingdom.

In June 1998, the Company sold its interest in Wind Power Partners 1987 LP
and Wind Power Partners 1988 LP for $9.2 million. These companies were acquired
as part of the Pacific Generation acquisition. There was no gain or loss
recorded from the sale.

In 1996, the Company formed a joint venture with Ansaldo Energia SpA, a
major Italian industrial company ("Ansaldo"), and P.T. Kiani Metra, an
Indonesian industrial company ("PTKM") to develop a 400-megawatt coal-fired
power generation facility in West Java, Indonesia, through P.T. Dayslistrik
Pratama ("PTDP"), a limited liability company created by the joint venturers.
The Company and Ansaldo each have an ownership interest of 45 percent in PTDP,
with the remaining 10% held in PTKM. During 1998, the Company recorded a $22.0
million write-down of its investment in the West Java project due to the
continuing political and economic instability in Indonesia.

In September 1998, the Company announced plans to start direct negotiations
with the government of Estonia to form a joint venture with Eesti Energia for
ownership of two of Estonia's largest power plants (Narva Power). Eesti Energia
is Estonia's national electricity generator and distributor.

In October 1998, the Company sold its interest in the Mid-Continent Power
Company (MCPC) to Cogeneration Corporation of America (CogenAmerica) for a $2.1
million gain after elimination of affiliate interest. The MCPC facility is a
110-MW, gas-fired power generation station located near Pryor, Oklahoma. NRG
owns 45.21 percent of the outstanding stock of CogenAmerica.

In December 1998, NRG and Dynegy signed agreements with San Diego Gas &
Electric Company to jointly acquire 1,218 MW of power generation facilities
located near Carlsbad and San Diego California for $356 million. NRG and Dynegy
will each own a 50% interest in these facilities. These transactions are
expected to close in the second quarter of 1999, pending regulatory approval.

In December 1998, the Company sold one half of its 50% interest in Enfield
Energy Center Limited (EECL) to El Paso International for $26.2 million
resulting in an after tax gain of $16.6 million. The Company continues to hold a
25% interest in EECL.

30
<PAGE> 33

NOTE 4 -- PROPERTY, PLANT AND EQUIPMENT

The major classes of property, plant and equipment at December 31 were as
follows:

<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Facilities and equipment, including construction work
in progress of $5,352 and $9,758..................... $280,876 $250,358
Land and improvements.................................. 10,397 10,397
Office furnishings and equipment....................... 5,637 4,436
-------- --------
Total property, plant and equipment............... 296,910 265,191
Accumulated depreciation............................... (92,181) (79,300)
-------- --------
Net property, plant and equipment...................... $204,729 $185,891
======== ========
</TABLE>

NOTE 5 -- INVESTMENTS ACCOUNTED FOR BY THE EQUITY METHOD

NRG has investments in various international and domestic energy projects.
The equity method of accounting is applied to such investments in affiliates,
which include joint ventures and partnerships, because the ownership structure
prevents NRG from exercising a controlling influence over operating and
financial policies of the projects. Under this method, equity in pretax income
or losses of domestic partnerships and, generally, in the net income or losses
of international projects are reflected as equity in earnings of unconsolidated
affiliates.

A summary of NRG's significant equity-method investments which were in
operation at December 31, 1998 is as follows:

<TABLE>
<CAPTION>
ECONOMIC PURCHASED OR
NAME GEOGRAPHIC AREA INTEREST PLACED IN SERVICE
- ---- --------------- -------- -----------------
<S> <C> <C> <C>
Loy Yang A............................... Australia 25.37% May 1997
Energy Developments Limited.............. Australia 33.97% February 1997
ECK Generating........................... CzechRepublic 44.5% December 1994
Pacific Generation Company Projects...... USA/Canada 3.7% - 39.1% November 1997
MIBRAG mbH............................... Germany 33.3% January 1994
Gladstone Power Station.................. Australia 37.5% March 1994
Schkopau Power Station................... Germany 20.55% January and July 1996
Scudder Latin American Projects.......... Latin America 25.0% June 1993
Long Beach Generating.................... USA 50.00% April 1998
El Segundo Power......................... USA 50.00% April 1998
Bolivian Power Company (Cobee)........... Bolivia 48.3% December 1996
Cogeneration Corp. of America............ USA 45.21% April 1996
</TABLE>

31
<PAGE> 34

Summarized financial information for investments in unconsolidated
affiliates accounted for under the equity method as of and for the year ended
December 31, is as follows:

<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Operating revenues....................................... $1,491,197 $1,612,897 $ 886,947
Costs and expenses....................................... 1,346,569 1,522,727 794,255
---------- ---------- ----------
Net income............................................. $ 144,628 $ 90,170 $ 92,692
---------- ---------- ----------
Current assets........................................... $ 710,159 $ 713,390 $ 647,213
Noncurrent assets........................................ 7,938,841 7,733,886 3,420,950
---------- ---------- ----------
Total assets........................................... $8,649,000 $8,447,276 $4,068,163
---------- ---------- ----------
Current liabilities...................................... $ 527,196 $ 472,980 $ 365,905
Noncurrent liabilities................................... 5,854,284 6,042,102 2,732,922
Equity................................................... 2,267,520 1,932,194 969,336
---------- ---------- ----------
Total liabilities and equity........................... $8,649,000 $8,447,276 $4,068,163
NRG's share of equity.................................... $ 800,924 $ 694,655 $ 365,749
NRG's share of income.................................... 81,706 26,200 32,815
</TABLE>

In accordance with Financial Accounting Standards No. 121 "Accounting for
Impairment of Long-lived Assets to be Disposed of," (SFAS 121), the Company
reviews long lived assets, investments and certain intangibles for impairment
whenever events or circumstances indicate the carrying amounts of an asset may
not be recoverable. During 1998, the Company wrote down accumulated project
development expenditures of $26.7 million. The Company's West Java, Indonesia,
project totaling $22.0 million was written off due to the uncertainties
surrounding all infrastructure projects in Indonesia. Also during 1998, the
Company wrote off its $1.9 million investment in the Sunnyside project and its
$2.8 million investment in Alto Cachopoal. The charge represents the difference
between the carrying amount of the investment and the fair value of the asset,
determined using discounted cash flow model. In December 1997, the Company
reviewed the carrying amount of the Sunnyside project that failed to restructure
its debt and recorded a charge of $8.9 million. The charge represents the
difference between the carrying amount of the investment and the fair value of
the asset, determined using a discounted cash flow model.

NOTE 6 -- RELATED PARTY TRANSACTIONS

SALE TO AFFILIATE

During October 1998, the Company sold its interest in the MCPC facility to
CogenAmerica for a $2.1 million gain after elimination of affiliate interest.
The MCPC facility is a 110 MW, gas-fired generation station located near Pryor,
Oklahoma. NRG owns 45.21 percent of the outstanding stock of CogenAmerica.

During December 1997, the Company sold its interest in the Millenium
facility, a 117 MW cogeneration plant under construction near Morris, Illinois
to CogenAmerica for $4.0 million.

OPERATING AGREEMENTS

NRG has two agreements with NSP for the purchase of thermal energy. Under
the terms of the agreements, NSP charges NRG for certain costs (fuel, labor,
plant maintenance, and auxiliary power) incurred by NSP to produce the thermal
energy. NRG paid NSP $5.1 million in 1998 and $4.6 million in 1997 under these
agreements.

NRG has a renewable 10-year agreement with NSP, expiring on December 31,
2001, whereby NSP agrees to purchase refuse-derived fuel for use in certain of
its boilers and NRG agrees to pay NSP a burn incentive. Under this agreement,
NRG received $1.4 million and $1.3 million from NSP, and paid $3.1 million and
$2.8 million to NSP in 1998 and 1997, respectively.

32
<PAGE> 35

ADMINISTRATIVE SERVICES AND OTHER COSTS

NRG and NSP have entered into an agreement to provide for the reimbursement
of actual administrative services provided to each other, an allocation of NSP
administrative costs and a working capital fee. Services provided by NSP to NRG
are principally cash management, legal, accounting, employee relations, benefits
administration and engineering support. In addition, NRG employees participate
in certain employee benefit plans of NSP as discussed in Note 10. During 1998
and 1997, NRG paid NSP $5.2 million and $.7 million, respectively, as
reimbursement under this agreement.

In 1996, NRG and NSP entered into an agreement for NRG to provide
operations and maintenance services for NSP's Elk River resource recovery
facility and Becker ash landfill. During 1998 and 1997, NSP paid NRG $1.7
million and $1.1 million, respectively, as compensation under this agreement.

NOTE 7 -- NOTES RECEIVABLE

Notes receivable consists primarily of fixed and variable rate notes
secured by equity interests in partnerships and joint ventures. The notes
receivable at December 31, are as follows:

<TABLE>
<CAPTION>
1998 1997
---- ----
(THOUSANDS OF DOLLARS)
<S> <C> <C>
NEO notes to various affiliates due primarily 1999, prime
+2% to 12.5%.............................................. $ 27,445 $ 49,921
Southern MN Municipal Power Association note receivable due
2003, 7%.................................................. 1,441 1,709
Various secured notes due 1999 and later, non-interest
bearing................................................... 723 724
Thermal Ventures, Inc. note due 1999, 11%................... 1,500 1,500
Mid-Continent Power Notes., various notes due 1998, 12%..... -- 18,820
COGENERATION CORPORATION OF AMERICA:
Note due 2001, 9.5%....................................... 2,539 2,624
Grays Ferry note due 2005, LIBOR plus 4.0%
(9.31%@12/98).......................................... 1,900 1,900
Morris note due 2004, prime + 3.5% (11.25%@12/98)......... 12,027 --
MCPC note due 2004, prime +3.5% (11.25%@12/98)............ 23,947 --
TOSLI, various notes due 1998, LIBOR plus 4.0%
(9.31%@12/98)............................................. 132 31,088
NRGenerating International BV notes to various affiliates,
non-interest bearing...................................... 34,234 6,713
El Paso note, due January 1999, non interest bearing........ 26,200 --
Pacific Generation, various notes, prime +2% to 14%......... -- 4,434
Maine Energy Recovery note due 2008, 12%.................... 4,203 9,495
-------- --------
Total................................................ $136,291 $128,928
======== ========
</TABLE>

33
<PAGE> 36

NOTE 8 -- LONG-TERM DEBT

Long-term debt consists of the following at December 31:

<TABLE>
<CAPTION>
1998 1997
---- ----
(THOUSANDS OF DOLLARS)
<S> <C> <C>
NRG Energy Center, Inc. senior secured notes due June 15,
2013, 7.31%............................................... $ 71,783 $ 74,481
Note payable to NSP, due December 1, 1995-2006
5.40%-6.75%............................................... 7,174 7,811
NRG Energy senior notes, due February 1, 2006 7.625%........ 125,000 125,000
NRG Energy senior notes, due June 15, 2007 7.50%............ 250,000 250,000
NRG San Diego, Inc. promissory note, due June 25, 2003
8.0%...................................................... 2,141 2,521
NEO Landfill Gas, Inc. term loan, due October 30, 2007
9.35%..................................................... 9,847 2,636
NEO Landfill Gas Inc. construction loan due October 30, 2007
LIBOR + 1% (6.31 @ 12/98)................................. 6,550 2,982
NEO Landfill Gas, Inc. City of L.A. term loan, due December
2019 non-interest bearing................................. 1,395 --
Pacific Generation Co. senior secured notes, due December
31, 2000 9.93%............................................ -- 2,636
Camas Power Boiler LP, revenue bonds, due August 1, 2007
4.65%..................................................... 11,010 11,855
Camas Power Boiler LP, unsecured term loan, due June 30,
2007 7.65%................................................ 17,576 18,933
-------- --------
502,476 498,855
Less current maturities..................................... (8,258) (7,676)
-------- --------
Total................................................ $494,218 $491,179
======== ========
</TABLE>

The NRG Energy Center, Inc. notes are secured principally by long-term
assets of the Minneapolis Energy Center (MEC). In accordance with the terms of
the note agreement, MEC is required to maintain compliance with certain
financial covenants primarily related to incurring debt, disposing of MEC
assets, and affiliate transactions. MEC was in compliance with these covenants
at December 31, 1998.

The note payable to NSP relates to long-term debt assumed by the Company in
connection with the transfer of ownership of a RDF processing plant by NSP to
the Company in 1993.

The NRG Energy $125 million and $250 million senior notes are unsecured and
are used to support equity requirements for projects acquired and in
development. The interest is paid semi-annually and the ten-year senior notes
mature in February 2006 and June 2007.

The NRG San Diego, Inc. promissory note is secured principally by long-term
assets of the San Diego Power & Cooling Company.

The NEO Landfill Gas, Inc. notes are term and construction loans. The loans
are secured principally by long-term assets of NEO Landfill Gas collection
system. NEO Landfill Gas is required to maintain compliance with certain
covenants primarily related to incurring debt, disposing of the NEO Landfill Gas
assets, and affiliate transactions. NEO Landfill Gas was in compliance with
these covenants at December 31, 1998.

The Camas Power Boiler LP notes are secured principally by long-term
assets. In accordance with the terms of the note agreements, Camas Power Boiler
LP is required to maintain compliance with certain

34
<PAGE> 37

financial covenants primarily related to incurring debt, disposing of assets,
and affiliate transactions. Camas Power Boiler was in compliance with these
covenants at December 31, 1998.

Annual maturities of long-term debt for the years ending after December 31,
1998 are as follows:

<TABLE>
<CAPTION>
(THOUSANDS OF DOLLARS)
----------------------
<S> <C>
1998...................................................... $ 8,258
1999...................................................... 9,063
2000...................................................... 9,699
2001...................................................... 10,390
2002...................................................... 9,980
Thereafter................................................ 455,086
--------
Total................................................ $502,476
========
</TABLE>

The Company has a credit agreement for $250 million of which $124 million
was outstanding at December 31, 1998. On March 17, 1998 NRG amended its existing
3-year, $175 million Revolving Credit facility to allow NRG additional borrowing
capacity under its covenant ratios. Also on that date, NRG entered into an
additional $75 million, 364-day facility with its existing bank group with ABN
as agent. The new facility is being used for general corporate purposes and for
funding future growth opportunities.

The Company had $33.6 million and $48.4 million in outstanding letters of
credit as of December 31, 1998 and 1997, respectively.

In March 1999, NRG filed a shelf registration with the SEC for up to $500
million in debt securities. The net proceeds will be used for general corporate
purposes, which may include financing the development and construction of new
facilities, working capital, debt reduction and pending or potential
acquisitions.

NOTE 9 -- INCOME TAXES

NRG and its parent, NSP, have entered into a federal and state income tax
sharing agreement relative to the filing of consolidated federal and state
income tax returns. The agreement provides, among other things, that (1) if NRG,
along with its subsidiaries, is in a taxable income position, NRG will be
currently charged with an amount equivalent to its federal and state income tax
computed as if the group had actually filed separate federal and state returns,
and (2) if NRG, along with its subsidiaries, is in a tax loss position, NRG will
be currently reimbursed to the extent its combined losses are utilized in a
consolidated return, and (3) if NRG, along with its subsidiaries, generates tax
credits, NRG will be currently reimbursed to the extent its tax credits are
utilized in a consolidated return.

35
<PAGE> 38

The provision for income taxes consists of the following:

<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Current
Federal................................................... $(10,773) $ (8,516) $ 633
State..................................................... (3,940) (1,274) 253
Foreign................................................... 2,358 236 616
-------- -------- -------
(12,355) (9,554) 1,502
Deferred
Foreign................................................... (7,736) (2,703) --
Federal................................................... 8,828 (958) (3,655)
State..................................................... 1,541 (439) (1,498)
-------- -------- -------
2,633 (4,100) (5,153)
Tax credits recognized...................................... (15,932) (9,837) (2,004)
-------- -------- -------
Total income tax (benefit)........................... $(25,654) $(23,491) $(5,655)
======== ======== =======
Effective tax rate.......................................... (160)% (1,557)% (39.5)%
</TABLE>

The components of the net deferred income tax liability at Decemner 31
were:

<TABLE>
<CAPTION>
1998 1997
---- ----
(THOUSANDS OF
DOLLARS)
<S> <C> <C>
Deferred tax liabilities
Differences between book and tax basis of property........ $29,712 $24,623
Investments in projects................................... 14,911 11,574
Goodwill.................................................. 978 915
Other..................................................... 6,212 5,396
------- -------
Total deferred tax liabilities....................... 51,813 42,508
Deferred tax assets
Deferred revenue.......................................... 1,402 1,963
Deferred compensation, accrued vacation and other
reserves............................................... 6,514 4,638
Development costs......................................... 9,241 17,213
Deferred investment tax credits........................... 661 661
Steam capacity rights..................................... 910 976
Foreign tax benefit....................................... 12,425 4,233
Other..................................................... 819 856
------- -------
Total deferred tax assets............................ 31,972 30,540
------- -------
Net deferred tax liability........................... $19,841 $11,968
======= =======
</TABLE>

The effective income tax rate for the years 1998, 1997 and 1996 differs
from the statutory federal income tax rate of 35% primarily due to income and
expenses from foreign operations not subject to U.S. taxes (as discussed below)
and due to state tax, foreign tax, and tax credits as shown above.

Income before income taxes includes equity in net foreign investment income
of $29 million, $27 million and $28.0 million in 1998, 1997, and 1996
respectively. NRG's management intends to reinvest the earnings of foreign
operations indefinitely. Accordingly, U.S. income taxes and foreign withholding
taxes have not been provided on the earnings of foreign subsidiary companies.
The cumulative amount of undistributed earnings of foreign subsidiaries upon
which no U.S. income taxes or foreign withholding taxes have been provided is
approximately $158 million at December 31, 1998. The additional U.S. income tax
and foreign withholding tax on the unremitted foreign earnings, if repatriated,
would be offset in whole or in part by foreign tax credits. Thus, it is
impracticable to estimate the amount of tax that might be payable.

36
<PAGE> 39

NOTE 10 -- BENEFIT PLANS AND OTHER POSTRETIREMENT BENEFITS

PENSION BENEFITS

NRG participates in NSP's noncontributory, defined benefit pension plan
that covers substantially all employees. Benefits are based on a combination of
years of service, the employee's highest average pay for 48 consecutive months,
and Social Security benefits. Plan assets principally consist of the common
stock of public companies, corporate bonds and U.S. government securities. NRG's
net annual periodic pension cost includes the following components:

COMPONENTS OF NET PERIODIC BENEFIT COST

<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Service cost benefits earned................................ $ 1,303 $ 1,127 $1,115
Interest cost on benefit obligation......................... 1,417 1,187 1,013
Expected return on plan assets.............................. (2,226) (1,029) (764)
Amortization of prior service cost.......................... 172 5 5
Recognized actuarial (gain) loss............................ (1,878) (3) 34
------- ------- ------
Net periodic benefit cost................................. $(1,212) $ 1,287 $1,403
======= ======= ======
</TABLE>

NRG discontinued funding its pension costs in 1998 due to the effects of
funding limitations from employee benefit and tax laws on NSP's plan. Plan
assets consist principally of common stock of public companies, corporate bonds
and U.S. government securities. The funded status of the pension plan in which
NRG employees participate is as follows at December 31:

RECONCILIATION OF FUNDED STATUS

<TABLE>
<CAPTION>
1998 1997
-------------------------- -------------------------
NSP PLAN NRG PORTION NSP PLAN NRG PORTION
-------- ----------- -------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Benefit obligation at Jan. 1................. $ 1,048,251 $ 17,410 $ 993,821 $14,253
Service cost................................. 31,643 1,303 27,680 1,127
Interest cost................................ 78,839 1,417 72,651 1,187
Plan amendments.............................. 102,315 3,045 -- --
Actuarial (gain) loss........................ (41,635) (2,278) 30,431 1,204
Benefit payments............................. (75,949) (785) (76,332) (361)
----------- -------- ---------- -------
Benefit obligation at Dec. 31.............. $ 1,143,464 $ 20,112 $1,048,251 $17,410
=========== ======== ========== =======
Fair value of plan assets at Jan. 1.......... $ 1,978,538 $ 18,795 $1,634,696 $12,986
Actual return on plan assets................. 319,230 21,069 420,174 6,170
Benefit payments............................. (75,949) (785) (76,332) (361)
----------- -------- ---------- -------
Fair value of plan assets at Dec. 31....... $ 2,221,819 $ 39,079 $1,978,538 $18,795
=========== ======== ========== =======
Funded status at Dec. 31 -- excess of assets
over obligation............................ $ 1,078,355 $ 18,967 $ 930,287 $ 1,385
Unrecognized transition (asset) obligation... (387) -- (463) --
Unrecognized prior service cost.............. 114,305 2,954 18,663 81
Unrecognized net (gain) loss................. (1,167,340) (22,486) (953,825) (3,243)
----------- -------- ---------- -------
Accrued (prepaid) benefit obligation at Dec.
31......................................... $ 24,933 $ (565) $ (5,338) $(1,777)
=========== ======== ========== =======
</TABLE>

37
<PAGE> 40

AMOUNT RECOGNIZED IN THE BALANCE SHEET

<TABLE>
<CAPTION>
1998 1997
----------------------- -----------------------
NSP PLAN NRG PORTION NSP PLAN NRG PORTION
-------- ----------- -------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Prepaid benefit cost............................. $24,933 $ -- $ -- $ --
Accrued benefit liability........................ -- (565) (5,338) (1,777)
------- ----- ------- -------
Net amount recognized -- asset
(liability)............................... $24,933 $(565) $(5,338) $(1,777)
======= ===== ======= =======
</TABLE>

The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation was 6.5% for December 31, 1998
and 7.0% for December 31, 1997. The rate of increase in future compensation
levels used in determining the actuarial present value of the projected
obligation was 4.5% in 1998 and 5.0% in 1997. The assumed long-term rate of
return on assets used for cost determinations was 8.5% for 1998 and 9.0% for
1997 and 1996.

Effective Jan. 1, 1998, NSP changed its method of accounting for subsidiary
pension costs under SFAS No. 87. The new method, which now allocates plan assets
based on subsidiary benefit obligations, was adopted to better match earnings on
total plan assets with the corresponding subsidiary benefit obligations. The
effect of this change decreased periodic pension costs by $2.9 million in 1998
from 1997 levels, including $1.3 million related to periods prior to the change.
The effects of this change have not been reported separately on the income
statement and prior periods have not been restated due to immateriality.

POSTRETIREMENT HEALTH CARE

NRG participates in NSP's contributory health and welfare benefit plan that
provides health care and death benefits to substantially all employees after
their retirement. The plan, which will terminate for nonbargaining employees
after 1998, is intended to provide for sharing of costs of retiree health care
between NRG and retirees. In 1994, NSP implemented a cost-sharing strategy, with
1997 and 1998 nonbargaining retirees paying 40 percent of total health care
costs. Cost-sharing for bargaining employees is governed by the terms of the
collective bargaining agreement.

Postretirement health care benefits for NRG are determined and recorded
under the provisions of SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions." SFAS No. 106 requires the actuarially determined
obligation for postretirement health care and death benefits to be fully accrued
by the date employees attain full eligibility for such benefits, which is
generally when they reach retirement age.

NRG's net annual periodic benefit cost under SFAS No. 106 includes the
following components:

COMPONENTS OF NET PERIODIC BENEFIT COST

<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Service cost benefits earned................................ $165 $223 $257
Interest cost on benefit obligation......................... 145 246 233
Amortization of transition (asset) obligation............... 17 70 --
Amortization of prior service cost.......................... (40) -- 70
Recognized actuarial (gain) loss............................ 2 -- 26
---- ---- ----
Net periodic benefit cost................................. $289 $539 $586
==== ==== ====
</TABLE>

Plan assets as of December 31, 1998 consisted of investments in equity
mutual funds and cash equivalents. NRG's funding policy is to contribute to NSP
benefits actually paid under the plan.

38
<PAGE> 41

The following table sets forth the funded status of the health care plan in
which NRG employees participate at December 31:

RECONCILIATION OF FUNDED STATUS

<TABLE>
<CAPTION>
1998 1997
------------------------ ------------------------
NSP PLAN NRG PORTION NSP PLAN NRG PORTION
-------- ----------- -------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Benefit obligation at Jan. 1................... $ 279,230 $ 3,893 $ 268,683 $ 3,211
Service cost................................... 3,247 165 5,095 223
Interest cost.................................. 15,896 145 18,872 246
Plan amendments................................ (51,456) (1,872) -- --
Actuarial (gain) loss.......................... (9,732) (814) 2,164 213
Benefit payments............................... (17,423) -- (15,584) --
--------- ------- --------- -------
Benefit obligation at Dec. 31............. $ 219,762 $ 1,517 $ 279,230 $ 3,893
========= ======= ========= =======
Fair Value of plan assets at Jan. 1............ $ 19,783 $ -- $ 15,514 $ --
Actual return on plan assets................... 2,471 -- 1,461 --
Employer contributions......................... 29,683 -- 18,392 --
Benefit payments............................... (17,423) -- (15,584) --
--------- ------- --------- -------
Fair value of plan assets at Dec. 31...... $ 34,514 $ -- $ 19,783 $ --
========= ======= ========= =======
Funded status at Dec. 31 -- unfunded
obligation................................... $ 185,248 $ 1,517 $ 259,447 $ 3,893
Unrecognized transition obligation............. (104,482) -- (161,700) (1,063)
Unrecognized prior service cost................ 2,399 786 -- --
Unrecognized net gain (loss)................... (3,790) 237 (14,406) (579)
--------- ------- --------- -------
Accrued benefit liability recorded at Dec.
31........................................... $ 79,375 $ 2,540 $ 83,341 $ 2,251
========= ======= ========= =======
</TABLE>

The assumed health care cost trend rates used in measuring the accumulated
projected benefit obligation (APBO) at December 31, 1998 and 1997, were 8.1% and
9.2% for those under age 65, and 6.1 % and 6.8% for those over age 65,
respectively. The assumed cost trends are expected to decrease each year until
they reach 5.0% for both age groups in the year 2004, after which they are
assumed to remain constant. A one percent increase in the assumed health care
cost trend rate would increase the APBO by approximately $357 thousand as of
December 31, 1998. Service and interest cost components of the net periodic
postretirement cost would increase by approximately $78 thousand with a similar
one percent increase in the assumed health care cost trend rate. The assumed
discount rate used in determining the APBO was 6.5% for December 31, 1998 and
7.0% for December 31, 1997, compounded annually. The assumed long-term rate of
return on assets used for cost determinations under SFAS No. 106 was 8% for
1998, 1997 and 1996.

NRG EQUITY PLAN

Employees are eligible to participate in the NRG Equity Plan (the Plan).
The Plan grants phantom equity units to employees based upon performance and job
grade. NRG's equity units are valued based upon NRG's growth and financial
performance. The primary financial measures used in determining the equity
units' value are revenue growth, return on investment and cash flow from
operations. The units are awarded to employees annually at the respective year's
calculated share price (grant price). The Plan provides employees with a cash
pay out for the unit's appreciation in value over the vesting period. The Plan
has a seven year vesting schedule with actual payments beginning after the end
of the third year and continuing at 20% each year for the subsequent five years.

The Plan includes a change of control provision, which allow all shares to
vest if the ownership of NRG were to change.

NOTE 11 -- SALES TO SIGNIFICANT CUSTOMERS

NRG and the Ramsey/Washington Resource Recovery Project have a service
agreement for waste disposal, which expires in 2006. Approximately 26.5% in 1998
and 23.9% in 1997 of NRG's operating revenues

39
<PAGE> 42

were recognized under this contract. In addition, sales to one thermal customer
amounted to 10.3% of operating revenues in 1998 and 9.9% of operating revenues
in 1997.

NOTE 12 -- FINANCIAL INSTRUMENTS

The estimated December 31 fair values of NRG's recorded financial
instruments are as follows:

<TABLE>
<CAPTION>
1998 1997
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ----- -------- -----
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Cash and cash equivalents........................... $ 6,381 $ 6,381 $ 11,986 $ 11,986
Restricted cash..................................... 4,021 4,021 1,588 1,588
Notes receivable, including current portion......... 136,291 136,291 129,687 129,687
Long-term debt, including current portion........... 502,476 519,418 498,855 489,332
</TABLE>

For cash, cash equivalents and restricted cash, the carrying amount
approximates fair value because of the short-term maturity of those instruments.
The fair value of notes receivable is based on expected future cash flows
discounted at market interest rates. The fair value of long-term debt is
estimated based on the quoted market prices for the same or similar issues.

DERIVATIVE FINANCIAL INSTRUMENTS

To preserve the U.S. dollar value of projected foreign currency cash flows,
NRG hedges, or protects, those cash flows if appropriate foreign hedging
instruments are available. NRG hedges foreign currency transactions by using
forward foreign currency exchange agreements with terms of less than one to
three years. The gains and losses on those agreements offset the effect of
exchange rate fluctuations on NRG's known cash flows and anticipated cash flows.
NRG defers gains on agreement that hedge firm commitments of cash flows, and
accounts for them as part of the relevant foreign currency transaction when the
transaction occurs. NRG defers losses on these agreements the same way, unless
it appears that the deferral would result in recognizing a loss later.

While NRG is not currently hedging investments involving foreign currency,
NRG will hedge such investments when it believes that preserving the U.S. dollar
value of the investment is appropriate. NRG is not hedging currency translation
adjustments related to future operating results. NRG does not speculate in
foreign currencies. Before July 1997, NRG hedged investments involving foreign
currency as they were made to preserve their U.S. dollar value. Gains and losses
on those agreements offset the effects of exchange rate fluctuations on the
value of the investments underlying the hedges. Hedging gains and losses on
those agreements were reported, net of income tax effects, with other currency
translation adjustments as a separate component of stockholders' equity.

From time to time NRG also uses interest rate hedging instruments to
protect against increases in the cost of borrowing at both the corporate and
project level. NRG defers gains and losses on interest rate hedging instruments,
which are included and reported as part of the underlying equity investments.

As of December 31, 1998, NRG had one contract with a notional value of $2.8
million to hedge, or protect, foreign currency denominated future cash flows.
The effect of this contract on 1998 earnings was immaterial. This foreign
currency exchange contract expires in 1999. Management believes that NRG's
exposure to credit risk due to nonperformance by the counterparties to its
forward exchange contracts is insignificant, based on the investment grade
rating of the counterparties.

NRG has one interest rate swap agreement with a notional amount of $17.5
million. This swap was entered into with an existing variable rate debt issue.
The swap effectively converts the variable rate debt into fixed rate debt at
7.65 percent. If the swap had been discontinued on December 31, 1998, NRG would
have had to pay the counterparty approximately $0.9 million. The swap expires on
September 30, 2002.

40
<PAGE> 43

NOTE 13 -- COMMITMENTS AND CONTINGENCIES

CONTINGENT REVENUES

NRG and its partner Dynegy each own a 50% interest in the Long Beach and El
Segundo generating stations ("California Projects"). During 1998, the first year
of deregulation of the state of California power industry, the California
Projects accrued certain receivables related to contingent revenues. These
revenues have been deferred pending resolution of the contingency. Such amounts
relate to items that are subject to contract interpretations, compliance with
processes and filed market disputes. The California Projects are actively
pursuing resolution and/or collection of these amounts, which totaled
approximately $60 million (NRG's share approximates $30 million) as of December
31, 1998. Upon any final resolution and/or collection of these amounts, such
deferred revenues will be recognized in NRG's equity income.

OPERATING LEASE COMMITMENTS

The Company leases certain of its facilities and equipment under operating
leases, some of which include escalation clauses, expiring on various dates
through 2010. Rental expense under these operating leases was $1.7 million in
1998 and $1.2 million in 1997. Future minimum lease commitments under these
leases for the years ending after December 31, 1998 are as follows:

<TABLE>
<CAPTION>
(THOUSANDS OF
DOLLARS)
-------------
<S> <C>
1999....................................................... $ 1,807
2000....................................................... 1,693
2001....................................................... 1,631
2002....................................................... 1,097
2003....................................................... 652
Thereafter................................................. 6,791
-------
Total.................................................... $13,671
=======
</TABLE>

CAPITAL COMMITMENTS -- INTERNATIONAL

NRG signed a Joint Development Agreement for the acquisition, upgrading,
expansion and development of Energy Center Kladno in Kladno, Czech Republic. The
acquisition of the existing facility is the first phase of a development project
that will include upgrading the existing plant and developing a new power
generation facility. NRG has made a $7.4 million commitment for the additional
facilities.

NRG is contractually committed to an additional equity investment of $7
million to Scudder Latin American Power II as of December 31, 1998.

NRG has a $10.6 million outstanding equity commitment for the Enfield
Energy Centre, a 396 MW power project under development in the North London
Borough of Enfield, England.

CAPITAL COMMITMENTS -- DOMESTIC

In 1998, NEO entered into Site Development and Coordination (SOC)
Agreements with a 50% owned affiliate. The SOC agreements provide for NEO to pay
the affiliate a flat, quarterly fee for operation, maintenance and development
support. Variable incentive payments based upon project performance are also
provided. The agreements are typically twenty years in duration with the bulk of
the payments for services being made prior to 2008. Total commitments under SOC
agreements amount to $36.5 million as of December 31, 1998.

In 1998, NEO entered into a Construction Management Services Agreement with
an affiliate. The agreement provides for NEO to manage the construction and/or
acquisition of nineteen electric generation facilities in the U.S. The agreement
provides for the payment of a management fee to NEO based upon the anticipated
future cash flows from the completed projects. If a project does not meet
certain performance

41
<PAGE> 44

criteria, NEO will be required to purchase the project from the affiliate at an
agreed upon price. The total capital cost of the nineteen projects is expected
to be $127 million. As of December 31, 1998, ten of the projects with a capital
cost of $74 million had been completed and accepted by the affiliate. The
remaining projects are scheduled for completion in 1999.

In October 1998, NRG executed a binding purchase and sale agreement for $55
million with Eastern Utilities Associates to purchase the 229 MW Somerset
Station, of which 69 MW is on deactivated reserve. The project is expected to
financially close in the first quarter of 1999.

In February 1999, NRG purchased from Thermal Ventures, Inc. (TVI) the
remaining 50.1% limited partnership interests held by TVI in San Francisco
Thermal Limited Partnership and Pittsburgh Thermal Limited Partnership for $12.3
million. In addition, upon receipt of California and Pennsylvania regulatory
approval, NRG will acquire TVI's 50% member interest in North American Thermal
Systems LLC (the entity holding the general partnership interest in the San
Francisco and Pittsburgh partnerships) for $500,000.

NRG, together with two other parties and the Chapter 11 Trustee, have filed
a reorganization plan with the United States Bankruptcy Court to acquire the
fossil generating assets of Cajun Electric Power Cooperative of Baton Rouge,
Louisiana (Cajun) for approximately $1.2 billion. On February 11, 1999, the
Court issued an order denying confirmation of NRG's plan and the reorganization
plan proposed by a competing bidder. NRG along with its partners and the Trustee
are contemplating submitting a revised plan on April 16, 1999 to accommodate the
issues raised in the Court's February 11, 1999 decision. The Court has scheduled
hearings and activities to review the new plans in May and June 1999.

In December 1997, NRG entered into a supplemental loan agreement to provide
up to $22.0 million to CogenAmerica to fund its capital contribution to a
project that was under construction. During 1998, NRG provided $12.0 million
under this agreement and expects to fund the remaining $10.0 million in 1999.

Also in 1996, NRG entered into an agreement requiring that it provide
CogenAmerica power generation investment opportunities in the United States over
a period of seven years. During the first three years of the seven-year term,
NRG is obligated to offer projects to CogenAmerica having aggregate, equity
value of at least $60 million or a minimum power generation capacity of 150 net
megawatts. In addition, NRG has committed to finance these "Co-Investment
Agreement" projects to the extent funds are not available to CogenAmerica on
comparable terms from other sources. During 1997, NRG provided CogenAmerica with
a 117 MW project and offered a 17 net MW project that CogenAmerica did not
purchase. During 1998 NRG provided CogenAmerica with a 110 MW project; thus
fulfilling the minimum requirements of the agreement.

NRG has guaranteed the repayment of certain affiliate borrowings under a
construction loan facility. The facility, which terminates in February 1999,
will fund construction of landfill gas collection and electric generation
projects. The loan facility commitment is $74.0 million. Accounts outstanding
under the facility at December 31, 1998, which could be subject to the NRG
guarantee if unpaid by affiliate, were $17.8 million.

NRG has contractually agreed to the monetization of certain tax credits
generated from landfill gas sales through the year 2007.

42
<PAGE> 45

Future capital commitments related to projects are as follows:

<TABLE>
<CAPTION>
(MILLIONS OF DOLLARS)
<S> <C>
1999........................................................ $1,264
2000........................................................ 2
2001........................................................ 2
2002........................................................ 2
2003........................................................ --
------
Total.................................................. $1,270
======
</TABLE>

SOURCE OF CAPITAL

NRG anticipates funding its ongoing capital commitments through the
issuance of debt, additional equity from NSP, and operating cash flows.

CLAIMS AND LITIGATION

In the normal course of business, NRG is a party to routine claims and
litigation arising from current and prior operations. NRG is actively defending
these matters and does not feel the outcome of such matters would materially
impact the results of operation.

NOTE 14 -- SEGMENT REPORTING

Effective December 31, 1998, NRG adopted SFAS No. 131 -- Disclosures about
Segments of an Enterprise and Related Information. NRG conducts its business
within three segments: Independent Power Generation, Alternative Energy
(Resource Recovery and Landfill Gas) and Thermal projects. These segments are
distinct components of NRG with separate operating results and management
structures in place. The "Other" category includes operations that do not meet
the threshold for separate disclosure and corporate charges that have not been
allocated to the operating segments.

43
<PAGE> 46

<TABLE>
<CAPTION>
INDEPENDENT
POWER ALTERNATIVE
GENERATION ENERGY THERMAL OTHER TOTAL
----------- ----------- ------- ----- -----
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
1997
OPERATING REVENUES
Revenues from wholly-owned operations(a)..... $ 5,339 $27,257 $48,604 $ 9,926 $91,126
Intersegment revenues........................ -- 926 -- -- 926
Equity in earnings of unconsolidated
affiliates(b).............................. 26,206 (192) 186 -- 26,200
-------- ------- ------- -------- -------
Total operating revenues.............. 31,545 27,991 48,790 9,926 118,252
-------- ------- ------- -------- -------
OPERATING COSTS AND EXPENSES
Cost of wholly-owned operations.............. 1,693 17,730 24,902 2,392 46,717
Depreciation and amortization................ 483 2,842 6,623 362 10,310
General, administrative, and development..... 8,186 6,111 2,403 26,416 43,116
-------- ------- ------- -------- -------
Total operating costs and expenses.... 10,362 26,683 33,928 29,170 100,143
-------- ------- ------- -------- -------
OPERATING INCOME............................... 21,183 1,308 14,862 (19,244) 18,109
-------- ------- ------- -------- -------
OTHER INCOME (EXPENSE)
Minority interest in earnings of consolidated
Subsidiary................................. (131) -- -- -- (131)
Write-off of investment...................... (8,964) -- -- -- (8,964)
Gain on sale of interest in projects......... 1,559 -- -- 7,143 8,702
Other income, net............................ 5,888 2,618 (14) 3,272 11,764
Interest expense............................. (653) (529) (5,958) (23,849) (30,989)
-------- ------- ------- -------- -------
Total other income (expense).......... (2,301) 2,089 (5,972) (13,434) (19,618)
-------- ------- ------- -------- -------
INCOME (LOSS) BEFORE INCOME TAXES.............. 18,882 3,397 8,890 (32,678) (1,509)
INCOME TAX (BENEFIT)........................... (6,502) (4,888) 3,165 (15,266) (23,491)
-------- ------- ------- -------- -------
NET INCOME..................................... $ 25,384 $ 8,285 $ 5,725 $(17,412) $21,982
1996
OPERATING REVENUES
Revenues from wholly-owned operations(a)..... $ 111 $26,195 $42,721 $ 1,077 $70,104
Intersegment revenues........................ -- 1,545 -- -- 1,545
Equity in earnings of unconsolidated
affiliates(b).............................. 32,657 207 (41) (8) 32,815
-------- ------- ------- -------- -------
Total operating revenues.............. 32,768 27,947 42,680 1,069 104,464
-------- ------- ------- -------- -------
OPERATING COSTS AND EXPENSES
Cost of wholly-owned operations.............. 396 12,893 23,251 22 36,562
Depreciation and amortization................ 22 1,983 5,848 525 8,378
General, administrative, and development..... 6,093 8,158 2,083 22,614 39,248
-------- ------- ------- -------- -------
Total operating costs and expenses.... 6,511 23,334 31,182 23,161 84,188
-------- ------- ------- -------- -------
OPERATING INCOME............................... 26,257 4,613 11,498 (22,092) 20,276
-------- ------- ------- -------- -------
OTHER INCOME (EXPENSE)
Other income, net............................ 3,474 644 -- 5,359 9,477
Interest expense............................. 951 (336) (5,792) (10,253) (15,430)
-------- ------- ------- -------- -------
Total other income (expense).......... 4,425 308 (5,792) (4,894) (5,953)
-------- ------- ------- -------- -------
INCOME (LOSS) BEFORE INCOME TAXES.............. 30,682 4,921 5,706 (26,986) 14,323
INCOME TAX (BENEFIT)........................... 91 2,106 2,360 (10,212) (5,655)
-------- ------- ------- -------- -------
NET INCOME..................................... $ 30,591 $ 2,815 $ 3,346 $(16,774) $19,978
</TABLE>

- ---------------
(a) Revenues from wholly-owned operations are from external customers located in
the United States.

(b) NRG has significant equity investments for non-regulated projects outside of
the United States. Equity earnings of consolidated affiliates, primarily
independent power projects, includes $29.3 million in 1998, $27.1 million in
1997 and $29.5 million in 1996 from non-regulated projects located outside
of United States. NRG's equity investments in projects outside of the United
States were $591 million in 1998, $517 million in 1997 and $295 million in
1996.

44
<PAGE> 47

ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES

None.

45
<PAGE> 48

PART IV

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

(a)(1) Consolidated Financial Statements
Included in Part II.

(a)(2) Supplemental Financial Statement Schedules

Exhibit 99.1 contains the financial statements of Mitteldeutsche
Braunkohlengesell Schaft mbH ("MIBRAG").

Exhibit 99.2 contains the financial statements of Saale Energie GmbH
("Saale").

Exhibit 99.3 contains the financial statements of Sunshine State
Power BVI and Sunshine State Power BVII (the "Sunshines").

Exhibit 99.4 contains the financial statements of El Segundo Power
LLC.

All other financial statement schedules have been omitted because
either they are not required or the information required to be set
forth therein is included in the Consolidated Financial Statements
or in the Notes thereto.

(a)(3) Exhibits

3.1 Certificate of Incorporation. (Incorporated herein by
reference to Exhibit 3.1 to the Registrants' Registration
Statement on Form S-1, as amended, File No. 333-33397.)
("Form S-1")
3.2 By-Laws. (Incorporated herein by reference to Exhibits 3.2
to the Form S-1.)
4.1 Indenture, dated as of June 1, 1997, between NRG and Norwest
Bank Minnesota, National Association. (Incorporated herein
by reference to Exhibit 4.1 to the Form S-1).
4.2 Form of Exchange Notes. (Incorporated herein by reference to
Exhibit 4.2 to the Form S-1).
10.1 Employment Contract, dated as of June 28, 1995, between NRG
and David H. Peterson. (Incorporated herein by reference to
Exhibit 10.1 to the Form S-1.)
10.2 Indenture, dated as of January 31, 1996, between NRG and
Norwest Bank Minnesota, National Association, As Trustee.
(Incorporated herein by reference to Exhibit 10.2 to the
Form S-1).
10.3 Revolving Credit Agreement, dated as of March 17, 1997,
("ABN Credit Agreement") among NRG, the banks party thereto
and ABN AMRO Bank, N.V. as Agent. (Incorporated herein by
reference to Exhibit 10.3 to the Form S-1).
10.4 Note Agreement, dated August 20, 1993, among NRG Energy
Center, Inc. and each of the purchasers named therein.
(Incorporated herein by reference to Exhibit 10.4 to the
Form S-1).
10.5 Master Shelf and Revolving Credit Agreement, dated August
20, 1993 among NRG Energy Center, Inc., The Prudential
insurance Registrants of America and each Prudential
Affiliate which becomes party thereto. (Incorporated herein
by reference to Exhibit 10.5 to the Form S-1).
10.6 Energy Agreement, dated February 12, 1988 between NRG
(formerly known as Norenco Corporation) and Waldorf
Corporation (the "Energy Agreement"). (Incorporated herein
by reference to Exhibit 10.6 to the Form S-1).
10.7 First Amendment to the Energy Agreement, dated August 27,
1993. (Incorporated herein by reference to Exhibit 10.7 to
the Form S-1)
10.8 Second Amendment to the Energy Agreement, dated August 27,
1993. (Incorporated herein by reference to Exhibit 10.8 to
the Form S-1).
10.9 Third Amendment to the Energy Agreement, dated August 27,
1993. (Incorporated herein by reference to Exhibit 10.9 to
the Form S-1).
10.10 Construction, Acquisition, and Term Loan Agreement, dated
September 2, 1997 by and among NEO Landfill Gas, Inc , as
Borrower, the lenders named on the signature pages, Credit
Lyonnais New York Branch, as Construction/Acquisition Agent
and Lyon Credit Corporation as Term Agent. (Incorporated
herein by reference to Exhibit 10.10 to the Form S-1).

46
<PAGE> 49

<TABLE>
<C> <S>
10.11 Guaranty, dated September 12, 1997 by NRG in favor of Credit Lyonnais New York Branch as agent for the
Construction/Acquisition Lenders. (Incorporated herein by reference to Exhibit 10.11 to the Form S-1).
10.12 Construction, Acquisition, and Term Loan Agreement, dated September 2, 1997 by and among Minnesota
Methane LLC, as Borrower, the lenders named on the signature pages, Credit Lyonnais New York Branch, as
Construction/Acquisition Agent and Lyon Credit Corporation as Term Agent. (Incorporated herein by
reference to Exhibit 10.12 to the Form S-1).
10.13 Guaranty, dated September 12, 1997 by NRG in favor of Credit Lyonnais New York Branch as agent for the
Construction/Acquisition Lenders. (Incorporated herein by reference to Exhibit 10.14 to the Form S-1).
10.14 Non Operating Interest Acquisition Agreement dated as of September 12, 1997, by and among NRG and NEO
Corporation. (Incorporated herein by reference to Exhibit 10.14 to the Form S-1).
10.15 First Amendment to ABN Credit Agreement, dated as of March 17, 1998. (Incorporated by reference to
Exhibit 10.15 of Form 10-K for the year ended December 31, 1997).
10.16 364-Day Revolving Credit Agreement dated as of March 17, 1998, among NRG Energy, Inc., the Banks party
thereto and ABN AMRO Bank N.V. as Agent. (Incorporated by reference to Exhibit 10.16 of Form-10K for the
year ended December 31, 1997).
10.17 Employment Agreements between the Company and certain officers dated as of April 15, 1998. (Incorporated
herein by reference to Exhibit 10.17 on Form 10-Q for the quarter ended March 31, 1998).
23.1 Consent of PricewaterhouseCoopers LLP.
24 Power of Attorney (included on signature page).
27 Financial Data Schedule.
99.1 Financial Statements of "MIBRAG".
99.2 Financial Statements of "Saale" (upon amendment).
99.3 Financial Statements of "Sunshines" (upon amendment).
99.4 Financial Statements of "El Segundo".
</TABLE>

(b) Reports on Form 8-K

On October 6, 1998, NRG filed a Form-8K reporting under Item 5 -- Other
Events. NRG announced that it will write down its $20.0 million pre-tax
accumulated project development expenditures for its West Java,
Indonesia project due to the uncertainties surrounding all
infrastructure projects in Indonesia.

On December 22, 1999, NRG filed a Form 8-K reporting under Item
5 -- Other Events. NRG announced that it sold one-half of its interest
in Enfield Energy Centre Ltd. project resulting in a pre-tax gain of
approximately $26.2 million.

47
<PAGE> 50

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, on March 25, 1999.

NRG ENERGY, INC.

By: /s/
------------------------------------
Leonard A. Bluhm
Executive Vice President and Chief
Financial Officer

POWER OF ATTORNEY

Each person whose signature appears below constitutes and appoints David H.
Peterson and Leonard A. Bluhm, each or any of them, such person's true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution for such person and in such person's name, place and stead, in
any and all capacities, to sign any and all amendments to this report on Form
10-K, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing necessary or desirable to be done in
and about the premises, as fully to all intents and purposes as such person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
any of them or his or their substitute or substitutes, may lawfully do or cause
to be done by virtue hereof.

In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant in the capacities indicated on
March 25, 1999:

<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>

/s/ Chairman of the Board, President and Chief Executive
- --------------------------------------------- Officer (Principal Executive Officer)
David H. Peterson

/s/ Executive Vice President and Chief Financial Officer
- --------------------------------------------- (Principal Financial Officer)
Leonard A. Bluhm

/s/ Controller (Principal Accounting Officer)
- ---------------------------------------------
David E. Ripka

/s/ Director
- ---------------------------------------------
Gary R. Johnson

/s/ Director
- ---------------------------------------------
Cynthia L. Lesher

/s/ Director
- ---------------------------------------------
Edward J. McIntyre

/s/ Director
- ---------------------------------------------
John A. Noer
</TABLE>

48
<PAGE> 51

SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT.

An annual report will be sent to security holders and will be
supplementally filed with the Commission. Such annual report to security holders
shall not be deemed "filed" with the Commission or otherwise subject to the
liabilities of Section 18 of the Securities Exchange Act of 1934. No proxy
material will be sent to security holders.

<PAGE> 1
EXHIBIT 23.1

Consent of Independent Accountants

We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 333-33397) of
NRG Energy, Inc. of our report dated March 19, 1999 appearing on page 23 of
this Annual Report on Form 10-K.

/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
March 25, 1999

<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
December 31, 1998 Financial Statements included in the Company's Form 10-K
and is qualified in its entirety by reference to such Form 10-K.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 6,381
<SECURITIES> 0
<RECEIVABLES> 45,267
<ALLOWANCES> 100
<INVENTORY> 2,647
<CURRENT-ASSETS> 91,958
<PP&E> 296,910
<DEPRECIATION> 92,181
<TOTAL-ASSETS> 1,293,426
<CURRENT-LIABILITIES> 50,550
<BONDS> 626,476
0
0
<COMMON> 1
<OTHER-SE> 579,331
<TOTAL-LIABILITY-AND-EQUITY> 1,293,426
<SALES> 100,424
<TOTAL-REVENUES> 182,130
<CGS> 52,413
<TOTAL-COSTS> 125,118
<OTHER-EXPENSES> 40,934
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 50,313
<INCOME-PRETAX> 16,078
<INCOME-TAX> (25,654)
<INCOME-CONTINUING> 41,732
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 41,732
<EPS-PRIMARY> 0
<EPS-DILUTED> 0

</TABLE>

<PAGE> 1

[DELOITTE & TOUCHE LETTERHEAD]

Halle, March 12, 1999

MITTELDEUTSCHE BRAUN-
KOHLENGESELLSCHAFT MBH,
THEISSEN

Report on the audit of the financial
statement for the years ended
December 31, 1998, 1997 and 1996
in accordance with German GAAP and
on the audit of the respective U.S. GAAP
reconciliations

<PAGE> 2
[DELOITTE & TOUCHE LETTERHEAD]

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE

<S> <C>
Report of Independent Auditors 1

Consolidated Financial Statements

Consolidated Statements of Operations for the years
ended December 31, 1998, 1997, 1996 2

Consolidated Balance Sheets at December 31, 1998, 1997 3

Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997, 1996 4

Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1998, 1997, 1996 5

Notes to Consolidated Financial Statements 6
</TABLE>

<PAGE> 3
[DELOITTE & TOUCHE LETTERHEAD]

REPORT OF INDEPENDENT AUDITORS

To the Shareholders of
MIBRAG mbH
Theissen, Germany

We have audited the accompanying consolidated balance sheets of Mitteldeutsche
Braunkohlengesellschaft mbH and its subsidiaries (MIBRAG or Group) as of
December 31, 1998 and 1997, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1998. These financial statements are the
responsibility of the Group's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in Germany and 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, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of MIBRAG
as of December 31, 1998 and 1997, and the consolidated results of its operations
and cash flows for each of the years in the three-year period ended December 31,
1998, in conformity with accounting principles generally accepted in Germany.

Generally accepted accounting principles in Germany vary in certain significant
respects from generally accepted accounting principles in the United States of
America. Application of generally accepted accounting principles in the United
States of America would have affected the results of operations for each of the
years in the three-year period ended December 31, 1998 and shareholders' equity
as of December 31, 1998 and 1997 to the extent summarized in Note C to the
consolidated financial statements.

[SIG]
Deloitte & Touche GmbH
Wirtschaftsprufungsgesellschaft

Halle, Germany
March 15, 1999

1
<PAGE> 4
MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS DM)
<TABLE>
<CAPTION>

YEAR ENDED DECEMBER 31,
-----------------------------------------------------

1998 1997 1996
-------------- --------------- --------------
<S> <C> <C> <C>
Sales revenue 470,411 533,025 621,439
Changes in inventories 5,073 23,826 -3,719
Capitalized own services 16,002 11,046 4,249
Other operating income 66,785 49,520 84,904

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

TOTAL PERFORMANCE 558,271 617,417 706,873
-------------- --------------- --------------

Cost of materials 108,866 125,266 138,468
Personnel expenses 209,997 227,632 249,437
Depreciation on intangible
and tangible fixed assets 148,413 166,949 201,362
Other operating expenses 147,131 169,557 264,998

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

TOTAL OPERATING EXPENSES 614,407 689,404 854,265
-------------- --------------- --------------

OPERATING RESULT -56,136 -71,987 -147,392
-------------- --------------- --------------

Income from associated company
and from companies in which
participations are held 3,384 10,046 5,224
Income from financial assets 6,339 8,392 7,035
Depreciation on financial assets
and short term investments -195 - -
Interest expense (income) net -10,771 -1,405 3,906
-------------- --------------- --------------

NET LOSS FROM ORDINARY ACTIVITIES -57,379 -54,954 -131,227
-------------- --------------- --------------

Property and other taxes 2,086 1,086 825
-------------- --------------- --------------

NET LOSS -59,465 -56,040 -132,052
============== =============== ==============
</TABLE>

See accompanying Notes to Consolidated Financial Statements

2
<PAGE> 5

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS DM)
<TABLE>
<CAPTION>

AT DECEMBER 31,
-------------------------------------------------------

Note 1998 1997
------------ ------------- -----------
<S> <C> <C> <C>
ASSETS
NON-CURRENT ASSETS

Intangible assets
Concessions, trade marks, patents and licenses B, E 19,896 20,722

Property, plant and equipment
1. Land B, E 73,886 67,837
2. Buildings B, E 113,971 104,676
3. Strip mines B, E 81,549 47,154
4. Technical equipment and machinery B, E 327,124 289,378
5. Factory and office equipment B, E 37,324 38,974
6. Payments on account and assets under construction 102,378 96,734
------------- ------------
736,232 644,753
Financial assets
1. Participations (including associated company) B, F 26,201 26,276
2. Loans granted to participation B, G 15,400 16,133
3. Long-term investments B, H - 20,010
4. Other loans B, I 75,700 80,400
------------ -----------
117,301 142,819

TOTAL NON-CURRENT ASSETS 873,429 808,294
------- -------

Overburden B, J 298,938 327,001
----------

CURRENT ASSETS
Inventories
1. Raw materials and supplies B 8,041 10,105
2. Finished and trade goods B 1,816 3,743
------------ -----------

9,857 13,848
Receivables and other assets
1. Trade receivables B, K 67,490 72,994
2. Receivables from enterprises in which
participations are held B 2,997 4,669
3. Other assets B 39,331 38,589

------------ -----------
109,818 116,252
Investments
Other investments B, L 245,813 218,550

Cash B 40,023 103,579
----

TOTAL CURRENT ASSETS 405,511 452,229
------- -------

Prepaid expenses B 6,642 6,781
----------------

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

TOTAL ASSETS 1,584,520 1,594,305
============ ===========
<CAPTION>

AT DECEMBER 31,
--------------------------------------------

Note 1998 1997
------------ ------------- ------------
SHAREHOLDERS' EQUITY AND LIABILITIES
SHAREHOLDERS' EQUITY

Subscribed capital 60,000 60,000
- ------------------

Capital reserve 631,346 689,649
- ---------------

Balance sheet profit DM 5,000,000 each year 50 50
- -------------------------------------------
thereof distributed: DM 4,950,000 in 1998 and 1997;

Minority interest -83,516 -63,213

TOTAL SHAREHOLDERS' EQUITY 607,880 686,486
------- -------

Special item for investment subsidies and incentives B 40,691 45,115
- ----------------------------------------------------

Provisions
- ----------
1. Accruals for pensions and similar obligations M 9,714 5,277
2. Taxation accruals N 3,936 2,761
3. Environmental ("Altlasten") and mining provisions B, O 334,872 378,836
4. Other accruals P 46,973 38,912
--------- ------------
395,495 425,786

Liabilities
- -----------
1. Liabilities to banks B, Q, R 445,958 345,277
2. Trade payables B, Q, R 51,501 42,499
3. Payables to companies in which
participations are held B, R 2,843 1,984
4. Other payables B, Q, R 40,144 47,142
--------- ------------
540,446 436,902

Deferred income 8 16
- ---------------

--------------- ------------
1,584,520 1,594,305
=============== ============
</TABLE>

TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES

See accompanying Notes to Consolidated Financial Statements

3
<PAGE> 6

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH
CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS DM)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------

1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss for the year -59,464 -56,040 -132,052
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization intangible and tangible assets 148,413 166,949 201,362
Planned release of the special item for investment subsidies
and incentives -4,423 -10,439 -8,979
Loss on disposal of non-current assets 1,075 770 1,997
Change in assets and liabilities:
Overburden -7,000 -22,090 3,488
Inventories 3,991 -3,483 -1,186
Receivables and other assets 6,434 26,389 8,209
Accruals -30,291 -11,640 -612
Liabilities -7,608 -37,009 -28,563
Other prepaid and deferred items 133 -239 -78
--------- ----------- ----------

CASH PROVIDED BY OPERATING ACTIVITIES 51,260 53,168 43,586
--------- ----------- ----------

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures -198,566 -148,512 -192,313
Additions to the special item for investment subsidies and
incentives - 10,540 13,499
Proceeds from disposal of long-term investments and other non-
current assets
30,254 41,668 12,451
Increase in long-term and other investments -27,263 -28,272 -230,549
--------- ----------- ----------

CASH USED FOR INVESTING ACTIVITIES -195,575 -124,576 -396,912
--------- ----------- ----------

CASH FLOWS FROM FINANCING ACTIVITIES:
Change in equity:
Distributions -4,950 -4,950 -5,000
Withdrawal by MI KG investors -14,191 -23,775 -18,259
MI KG Investors capital contribution - - 43,674
Capital contribution - 50 15,942
Increase in loans 121,249 34,523 110,792
Redemption of loans -21,348 -14,552 -16,018
--------- ----------- ----------

CASH USED FOR/PROVIDED BY FINANCING ACTIVITIES 80,760 -8,704 131,131
--------- ----------- ----------

NET DECREASE IN CASH -63,555 -80,112 -222,195
CASH AT BEGINNING OF YEAR 103,578 183,690 405,885
--------- ----------- ----------

CASH AT YEAR-END 40,023 103,578 183,690
========= =========== ==========
</TABLE>

See accompanying Notes to Consolidated Financial Statements

4
<PAGE> 7

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS DM)

<TABLE>
<CAPTION>
Subscribed Capital Balance Minority
Capital reserve sheetprofit interest Total
---------- ------------ -------------- ------------ -----------

<S> <C> <C> <C> <C> <C>
BALANCE AS OF JANUARY 1, 1996 60,000 778,170 - 28,726 866,896

Net loss 1996 -58,904 -73,148 -132,052
Transfer from capital reserve -63,904 63,904 0
Distributions -5,000 -5,000
Contributions by minority shareholders 43,674 43,674
Withdrawals by minority shareholders -18,259 -18,259
Capital contribution - settlement
agreement 15,942 15,942

------------ --------- ---------- -------- -----------
BALANCE AS OF DECEMBER 31, 1996 60,000 730,208 - -19,007 771,201
============ ========= ========== ======== ==========

Net loss 1997 -35,609 -20,431 -56,040
Transfer from capital reserve -40,609 40,609 0
Distributions -4,950 -4,950
Contributions 50 50
Withdrawals by minority shareholders -23,775 -23,775

------------ --------- ---------- -------- ----------
BALANCE AS OF DECEMBER 31, 1997 60,000 689,649 50 -63,213 686,486
============ ========= ========== ======== ==========

Net loss 1998 -53,353 -6,112 -59,465
Transfer from capital reserve -58,303 58,303 0
Distributions -4,950 -4,950
Withdrawals by minority shareholders -14,191 -14,191

------------ --------- ---------- -------- ----------
BALANCE AS OF DECEMBER 31, 1998 60,000 631,346 50 -83,516 607,880
============ ========= ========== ======== ==========
</TABLE>

See accompanying Notes to Consolidated Financial Statements

<PAGE> 8
[DELOITTE & TOUCHE LETTERHEAD]

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DM)

NOTE A ORIGINATION AND NATURE OF BUSINESS

ORIGINATION: Mitteldeutsche Braunkohlengesellschaft mbH ("MIBRAG" or "MIBRAG
mbH") was created from split-up of MIBRAG AG, previously owned by the
Treuhandanstalt (the German government privatization agency), into three
separate entities. Effective January 1, 1994 a consortium comprised of NRG
Energy, Inc., Morrison Knudsen Corporation, and PowerGen plc. jointly acquired
99 % of the active mining, power generation and related assets and liabilities
from the Treuhandanstalt through its Dutch holding company, MIBRAG B.V.. The
remaining 1 % was transferred on December 18, 1996 from the German government
privatization agency to Lambique Beheer B.V., Amsterdam, a subsidiary of NRG
Energy, Inc., Morrison Knudsen B.V., Amsterdam, and PowerGen Netherlands B.V.,
Amsterdam in equal portions (1/3 %) for each partner.

NATURE OF BUSINESS: The operations of MIBRAG mbH include two open-cast brown
coal mines in Profen and Schleenhain, a lease on a third mine in Zwenkau, and
rights to future mining reserves. The operations also include over 200 MW of
power generation and one coal briquetting plant. A significant portion of the
sales of MIBRAG is made pursuant to long-term coal and energy supply contracts.

NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements of Mitteldeutsche Braunkohlengesellschaft
mbH and subsidiaries have been prepared in accordance with the German Commercial
Code, which represents accounting principles generally accepted in Germany
("German GAAP"). German GAAP varies in certain significant respects from
accounting principles generally accepted in the United States of America ("U.S.
GAAP"). Application of U.S. GAAP would have affected the results of operations
for each of the years in the three-year period ended December 31, 1998 and
stockholders' equity as of December 31, 1998 and 1997 to the extent summarized
in note C to the consolidated financial statements. All amounts herein are shown
in thousands of Deutsche Mark ("DM") unless otherwise noted.

PRINCIPLES OF CONSOLIDATION: All material companies in which MIBRAG has legal or
effective control are fully consolidated. In 1998, MIBRAG consolidated 5 (1997:
5, 1996: 5) domestic subsidiaries.

One significant investment, MUEG, in which MIBRAG has an ownership interest of
50 % is accounted for in accordance with the equity method. This investment is
referred to as an associated company in these financial statements.

6
<PAGE> 9
[DELOITTE & TOUCHE LETTERHEAD]

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DM)

All other investments are included at cost and referred to as participations in
these financial statements.

All significant intercompany accounts and transactions have been eliminated in
consolidation.

USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles necessarily requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the balance
sheet dates and the reported amounts of revenues and expenses during the
reported periods. Actual results could differ from those estimates.

TOTAL COST METHOD: The income statement has been presented according to the
total cost (or type of expenditure) format as commonly used in Germany.
According to this format, production and all other expenses incurred during the
period are classified by type of expenses.

REVENUE RECOGNITION: Revenue is recognized when title passes or services are
rendered, net of discounts, customer bonuses and rebates granted.

INTANGIBLE ASSETS: Intangible assets are valued at acquisition cost and are
amortized over their respective useful lives (5 to 15 years).

PROPERTY, PLANT, AND EQUIPMENT: Property, plant, and equipment acquired is
recorded on the basis of acquisition or manufacturing cost, including
capitalized mine development costs and subsequently reduced by scheduled
depreciation charges over the assets' useful lives as follows: buildings - 3 to
25 years, technical facilities and machinery - 4 to 33 years; and facilities,
factory and office equipment - 5 to 10 years. Maintenance and repair costs are
expensed as incurred. Depreciation is computed principally by the straight-line
method over the expected useful lives of the assets. The amortization of mine
development costs is provided on the basis of tonnage mined in relation to total
estimated recoverable tonnage. Depreciation on additions during the first or the
second half of the year are estimated using full-year or half-year rates,
respectively. Low value items are expensed in the year of acquisition.
Opportunities for special tax deductible depreciation are utilized for both book
and tax purposes.

<PAGE> 10
[DELOITTE & TOUCHE LETTERHEAD]

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DM)

INVESTMENTS: The long-term loans and investments are recorded at cost.

OVERBURDEN: Overburden represents the costs of removing the surface above a coal
field subsequent to the initial opening of the field to the extent that the
removal exceeds what is needed for the current year's coal extraction. These are
costs incurred in advance in respect of future coal production. The overburden
is valued on an average cost basis.

INVENTORY: Inventories are carried at the lower of average cost or market.
Obsolescence provisions are made to the extent that inventory risks are
determinable.

RECEIVABLES AND OTHER ASSETS: All receivables are valued at cost, reduced for
appropriate valuation allowances.

CASH: Cash includes cash-on-hand, checks, bank accounts and time deposits.

INVESTMENT GRANTS: To support the acquisition of certain tangible assets,
investment allowances and subsidies were granted by the German federal
government and the states of Saxony and Saxony-Anhalt. The application,
conditions and payments of investment grants are ruled by German law and several
regulations and statements. Investment allowances and subsidies received and
formally claimed are credited to the special item account. The special item is
amortized into income over the normal operating useful lives of the underlying
assets to which the allowances and subsidies relate.

ENVIRONMENTAL AND MINING PROVISIONS: Accruals for environmental and
mining-related matters are recorded when it is probable that a liability has
been incurred and the amount of the liability can be reasonably estimated, based
on current law and existing technologies. These accruals are adjusted
periodically as assessment and remediation efforts progress or as additional
technical or legal information becomes available.

LIABILITIES: Liabilities are shown at their repayment amounts.

FAIR VALUE OF FINANCIAL INSTRUMENTS: The fair value of cash, accounts payable
and receivable, short term borrowings approximates book value because of the
short maturity period and interest rates approximating market rates.

SUPPLEMENTARY CASH FLOW INFORMATION: The company paid DM 0 income taxes in 1998,
1997 and 1996. Interest paid amounted to DM 26,523, DM 17,657 and DM 14,178 in
1998, 1997 and 1996, respectively.

8
<PAGE> 11
[DELOITTE & TOUCHE LETTERHEAD]

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DM)

PER SHARE AMOUNTS: Per share amounts are not disclosed in the financial
statements. MIBRAG is a nonpublic enterprise.

RECLASSIFICATIONS: Certain reclassifications have been made for consistent
presentation.

NOTE C SIGNIFICANT DIFFERENCES BETWEEN GERMAN AND UNITED
STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

The MIBRAG consolidated financial statements comply with German GAAP, which
differs in certain significant respects from U.S. GAAP. The significant
differences that affect the consolidated net income and stockholders' equity of
MIBRAG are set out below.

I. APPLICATION OF THE PURCHASE METHOD OF ACCOUNTING
------------------------------------------------

The German GAAP financial statements include the historical cost book values of
assets transferred from a predecessor company.

The acquisition of 99 % of the shares in MIBRAG mbH on January 1, 1994 by MIBRAG
B.V. was accounted for using the purchase method of accounting and the purchase
price adjustments to the historical cost basis have been pushed down to MIBRAG
mbH for purposes of the reconciliation to U.S. GAAP. The excess (DM 757.3
million) of the fair value of the net assets acquired over the purchase price
was proportionally allocated to reduce the value assigned to non-current assets,
excluding long-term investments.

The US GAAP financial statements also recognize purchase price adjustments for
certain incremental transportation costs incurred by MIBRAG for lignite
transportation to one of its major customers.

9
<PAGE> 12
[DELOITTE & TOUCHE LETTERHEAD]

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DM)

II. NOTES TO SIGNIFICANT U.S. GAAP ADJUSTMENTS
------------------------------------------

1. Fixed assets other than financial investments
---------------------------------------------

The differences relate primarily to the following:

- - In the U.S. opening balance sheet as of January 1, 1994, according to
purchase accounting, fixed asset balances, other than financial assets, were
adjusted to their fair market values. Related unamortized investment
subsidies were also included in these adjustments as of January 1, 1994.
- - As of January 1, 1994, the assets were reduced by the allocation of the
difference between the net acquisition costs for the MIBRAG shares and the
net fair market value of MIBRAG's assets and liabilities.
- - Special accelerated depreciation for tax purposes is recorded in the German
financial statements.
- - The depreciation period of long term assets are based upon lives acceptable
for German tax purposes, which differ from the useful lives for U.S.
accounting purposes.

Upon disposal, the above differences also resulted in differing gains or losses
on disposition.

Financial investment in MUEG
- ----------------------------

For German GAAP purposes, MIBRAG accounted for the investment in MUEG as of
January 1, 1994 using the cost method. Under U.S. GAAP the book value was
increased to account for the equity earnings that were not distributed to MIBRAG
as of that date.

2. Relocation accruals
-------------------

The US GAAP results recognized liabilities and deferred costs of DM 273 million
at January 1, 1994 relocate four villages. The deferred costs are amortized in
accordance with quantities of coal extracted. In accordance with German
accounting principles such reserves and accruals for the relocation of villages
can not be accrued earlier than 2 years prior to the relocation and such costs
are not deferred.

10
<PAGE> 13
[DELOITTE & TOUCHE LETTERHEAD]

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DM)

3. Investment in power plants
--------------------------

In 1995 and 1996, third party investors paid in DM 216 million into a MIBRAG
subsidiary, MIBRAG Industriekraftwerke GmbH & Co. KG ("MI"), which operates
three lignite-fired power plants. The investment is structured such that the
third party investors obtain accelerated tax depreciation while retaining a put
option to sell their investments back to MIBRAG at predetermined prices. The
third party investments are considered additions to equity as minority interests
for German GAAP, while these arrangements are accounted for as a financing in
accordance with U.S. GAAP.

4. Transportation credits
----------------------

An acquisition related liability for US GAAP purposes is reduced by the amount
of excess incremental transportation costs incurred by MIBRAG for certain
lignite shipments. The acquisition related liability is not reflected in
MIBRAG's German financial statements.

5. Interest capitalization
-----------------------

Interest is expensed in the German financial statements, however interest
expense related to qualified assets is capitalized and depreciated for U.S. GAAP
purposes.

6. Receivables/payables at non-market interest rates
-------------------------------------------------

Certain accounts receivables or loans payable are recorded in the German GAAP
financial statements at their nominal values. Because these carry non-market
interest rates, such receivables and payables were adjusted to their market
values.

7. Overburden
----------

Overburden in the German financial statements includes capitalized depreciation
based upon the historical costs. Because of the purchase accounting adjustments,
a different amount of depreciation is capitalized in overburden in the U.S. GAAP
financial statements. Additionally, overburden as of January 1 ,1994 was written
down to fair value.

<PAGE> 14
[DELOITTE & TOUCHE LETTERHEAD]

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DM)

8. Environmental and mining provisions
-----------------------------------

The ratable accrued end-lake provision was reduced in 1998 based upon a new
estimate of total costs to be incurred. For US purposes, this adjustment is
accounted for prospectively.

9. Accrued liabilities
-------------------

Certain mining and other accruals, which were provided for at January 1, 1994 in
accordance with US GAAP purchase accounting, were not recorded in the German
financial statements.

10. Other
-----

Certain costs and income in the German financial statements are capitalized or
deferred for U.S. GAAP purposes, respectively.

11. Unrealized security gains
-------------------------

Unrealized security gains on available-for-sale securities are not accounted for
under German GAAP, but would be recorded as other comprehensive income for U.S.
GAAP purposes.

12. Deferred taxes
--------------

The differences noted above result in temporary differences which, when combined
with net operating loss carryforwards, would result in a net deferred tax asset
of DM 310,582 and DM 309,600 at December 31, 1998 and 1997, respectively.
Because of available negative evidence, a 100 % valuation allowance would have
been recorded at each year-end. Because no net deferred taxes would be recorded
for German or U.S. GAAP purposes, no adjustment to net income or shareholders'
equity are listed in the following reconciliations.

<PAGE> 15
[DELOITTE & TOUCHE LETTERHEAD]

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DM)

RECONCILIATION TO U.S. GAAP

The following is a summary of the significant adjustments to net income for
1998, 1997 and 1996 and to shareholders' equity at December 31, 1998 and 1997
which would be required if U.S. GAAP had been applied instead of German GAAP.

YEAR ENDED DECEMBER 31,
-------------------------------------------

NOTE 1998 1997 1996

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

<S> <C> <C> <C> <C>
Net loss as reported in the consolidated
statement of operations under
German GAAP -59,465 -56,040 -132,052

Adjustments required to conform with
U.S. GAAP:

Long-term asset valuation (1) 86,971 111,854 143,280
Relocation of villages (2) 7,659 12,044 46,803
Investment in power plants (3) -7,762 -8,330 7,208
Transportation credits (4) 13,581 14,052 12,367
Interest capitalization (5) 1,904 -359 4,549
Receivable / payables at
non-market interest rate (6) -990 -7,497 -8,728
Overburden (7) 9,672 -2,582 -15,201
Environmental and mining provisions (8) -35,507 - -
Other (10) 8,292 5,273 -2,012

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

NET INCOME IN ACCORDANCE WITH U.S. GAAP 24,355 68,415 56,214
====== ====== ======
</TABLE>

13
<PAGE> 16
[DELOITTE & TOUCHE LETTERHEAD]

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DM)

AT DECEMBER 31,

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

NOTE 1998 1997

--------- --------------------- ---------------------
<S> <C> <C> <C>
Shareholders' equity as in the
consolidated balance sheet
under German GAAP 607,880 686,486

Adjustments required to conform with
U.S. GAAP:

Long-term asset valuation (1) 184,244 128,114
Relocation of villages (2) 21,281 10,032
Investment in power plants (3) -169,022 -175,451
Transportation credits (4) - -13,581
Interest capitalization (5) 7,584 5,680
Loan at non-market interest rate (6) 4,011 5,001
Overburden (7) -169,838 -214,573
Environmental and mining provisions (8) -35,507 -
Accrued liabilities (9) -30,153 -30,153
Other (10) -17,346 -17,826
Net unrealized security gains
(net of income tax effects) (11) 7,955 4,363

--------------------- ---------------------
SHAREHOLDERS' EQUITY IN ACCORDANCE
WITH U.S. GAAP 411,089 388,092

</TABLE>

14
<PAGE> 17
[DELOITTE & TOUCHE LETTERHEAD]

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DM)

NOTE D CONCENTRATION OF CREDIT RISK AND LONG-TERM COAL
SALES AGREEMENTS

MIBRAG mbH markets its coal principally to electric utilities in Germany. As of
December 31, 1998 and 1997 accounts receivable from electric utilities totaled
DM 67,490 and DM 72,994, respectively. Credit is extended based on an evaluation
of the customer's financial condition, and collateral is not generally required.
Credit losses are provided for in the financial statements and consistently have
been minimal.

MIBRAG mbH is committed under several long-term contracts to supply raw brown
coal and whirl fine coal to the Schkopau power station and the Lippendorf power
station. Under the terms of the Schkopau Agreement, MIBRAG mbH may deliver
annually up to 5.8 million tons of coal commencing 1995. The agreement will be
in effect until 2010 with an option for the purchaser to extend the agreement
for another 10 years. The price to be paid by the Schkopau power station is a
fixed price adjusted by an annual escalation rate.

The Lippendorf Agreements provide for deliveries of up to 10 million tons per
year from 1999 through 2040 with an option for the MIBRAG customers to extend
for an additional 3 year period. These Agreements were closed with Vereinigte
Energiewerke AG (VEAG), Berlin, and Bayernwerk AG, Munich, and replace the
agreements on deliveries to the old power station at Lippendorf. The price to be
paid by the Lippendorf power station is a base-price with escalation and
adjustment based on quality of the coal delivered. The new Lippendorf power
station is still under construction.

A substantial portion of the Company's coal reserves is dedicated to the
production of coal for such agreements.

Sales to the three largest customers comprise, as a percentage of total sales,
64 %, 56 % and 57% in 1998, 1997 and 1996, respectively. Sales to the six
largest customers comprise, as a percentage of total sales, 82 %, 81 % and 78 %
in 1998, 1997 and 1996, respectively.

15
<PAGE> 18
[DELOITTE & TOUCHE LETTERHEAD]

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DM)

NOTE E INTANGIBLE ASSETS AND PROPERTY, PLANT AND EQUIPMENT

The group depreciation charges are as follows: DM 148,413 (1998), DM 166,949
(1997), and DM 201,362 (1996) including normal depreciation, unplanned
depreciation and special tax depreciation in terms of section 4 of the German
tax law, "Fordergebietsgesetz". According to that law certain tangible assets
can be depreciated up to 50 % of the historical costs in the first five years of
acquisition in addition to the normal depreciation. Special tax depreciation was
DM 45,116, DM 60,509 and DM 97,998 in 1998, 1997 and 1996, respectively.

The major categories of fixed assets follow:

<TABLE>
<CAPTION>
DEC. 31, 1998 DEC. 31, 1997

-------------------- ---------------------
<S> <C> <C>
Concessions, trade marks, patents and licenses
cost 27,398 26,257
less: accumulated amortization (7,503) (5,535)
-------------------- ---------------------

net book value 19,895 20,722
====== ======

Property, plant and equipment
cost - land and land rights 73,886 67,837
- buildings 264,200 236,707
- strip mines 89,522 54,460
- technical equipment and
machinery 1,243,901 1,159,241
- factory and office equipment 205,689 193,348
- payments on account and
assets under construction 102,378 96,734
-------------------- ---------------------
total cost 1,979,576 1,808,327

less: accumulated depreciation
(1,243,344) (1,163,574)
-------------------- ---------------------

net book value 736,232 644,753
======= =======
</TABLE>

16
<PAGE> 19
[DELOITTE & TOUCHE LETTERHEAD]

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DM)

NOTE F PARTICIPATIONS (INCLUDING ASSOCIATED COMPANY)

MIBRAG's investment in MUEG Mitteldeutsche Umwelt- und Entsorgungs GmbH,
Braunsbedra, ("MUEG") is accounted for using the equity method. MUEG was founded
in 1990 and coordinates the waste disposal activities in the Central German
brown coal area. The equity value as of December 31, 1998 is as follows:

<TABLE>
<CAPTION>
TDM
--------------------

<S> <C>
Cost and contributions 12,387
+ Net profit share 1994-1998 11,779
./. Distributed profits share 1994-1997 11,809
./. Proportionate elimination of intercompany profit (1997) 1,089
--------------------

= Carrying amount "at equity" as of December 31, 1998 11,268
====================
</TABLE>

Investments in seven other companies are accounted for at cost.

NOTE G LOANS GRANTED TO PARTICIPATIONS

In 1995, MIBRAG sold its district heating network assets to a company in which
it holds a participation. After deducting a down payment of DM 1.4 million, the
balance is being repaid in equal installments of DM 733 over a period of 25
years. The interest rate is fixed at 5 per cent through 1999 and will be
adjusted to the market rate at that time.

The fair market value of the loan was DM 15,400 and DM 16,133 at December 31,
1998 and 1997, respectively.

NOTE H LONG-TERM INVESTMENTS

At year-end of 1997, the company held marketable debt securities with a cost and
approximate fair value based on quoted market prices of DM 20 million. These
securities were sold in March 1998.

17
<PAGE> 20
[DELOITTE & TOUCHE LETTERHEAD]

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DM)

NOTE I OTHER LOANS

The other loans were granted to the third party investors in a subsidiary of
MIBRAG mbH. These loans were financed by a borrowing from KfW (Kreditanstalt
fuer Wiederaufbau). KfW granted MIBRAG mbH a loan of DM 103,000 due on December
30, 2005 at fixed interest rates between 6.26 % and 6.82 %. The balance of the
loan as of December 31, 1998 amounted to DM 75,700. The loans to the new
investors of the subsidiary of MIBRAG mbH were granted at the same conditions as
those applicable to the loan between MIBRAG mbH and KfW.

NOTE J OVERBURDEN

The reconciliation of the overburden costs is as follows (in million):

Dec.31,1998 Dec.31, 1997
tonnage value tonnage value
metric tons DM metric tons DM
-------------------- --------------- ---------------------- -----------------

<S> <C> <C> <C> <C>
Profen 18.5 146.0 16.7 126.2
Schleenhain 12.8 115.7 15.2 140.7
Zwenkau 4.2 37.2 6.8 60.1
-------------------- --------------- ---------------------- ------------------

35.5 298.9 38.7 327.0
==================== =============== ====================== ==================
</TABLE>

The basis for the determination of the overburden is the total quantity of
partially exposed raw brown coal.

18
<PAGE> 21
[DELOITTE & TOUCHE LETTERHEAD]

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DM)

NOTE K TRADE RECEIVABLES

Trade receivables were disclosed in the balance sheet, net of allowances,
as follows:

Dec. 31,1998 Dec. 31,1997

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

<S> <C> <C>
Trade receivables 68,348 74,017
Less allowances (858) (1,023)

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

67,490 72,994
========== ===========
</TABLE>

NOTE L OTHER INVESTMENTS

At December 31, 1998 other investments were disclosed at an amount of
DM 245.8 million. The balance consists of investment funds of MI
(DM 225.8 million), which were specially set up to reinvest the additional
liquidity resulting from the entry of new investors into MI and of fixed-
interest bonds (DM 20.0 million) purchased by MIBRAG mbH in March 1998.

Net dividends distributed by the investment funds were reinvested in 1997 and
1998. Realized gains of DM 10.1 million and DM 10.6 million were disclosed in
interest income in 1997 and 1998, respectively. The fixed interest bonds were
disposed of at book value in January 1999.

NOTE M ACCRUALS FOR PENSIONS AND SIMILAR OBLIGATIONS

The provision relates primarily to briquette benefit claims of active employees
on the basis of the collective agreement of November 9, 1993 in respect to
allowances in kind. The entitlement does not vest and elapses with early
termination of the working relationship or upon receipt of social plan benefits.

The calculation is based on an actuarial valuation which took into account the
entitlement to the redemption value of DM 185.00 per metric ton of briquettes as
specified in the collective agreement, the employees entitled to benefits as of
December 31, 1998, and official demographic tables published in October 1998.

19
<PAGE> 22
[DELOITTE & TOUCHE LETTERHEAD]

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DM)

In addition, pension obligations for early retirement benefits were accrued.
These amounts have also been calculated on the basis of actuarial valuations.

NOTE N TAXATION ACCRUALS

MIBRAG did not provide for income taxes under German GAAP because of net
operating losses in 1996 through 1998. Deferred tax assets and liabilities have
not been recorded because there are no significant differences between the
German GAAP financial statement and the tax bases of the assets and
liabilities.

The German corporation income tax rate on undistributed income is 45 %.
Trade taxes on income are assessed at a rate of 14.9 %. The company has an
effective tax rate of 0 % because the company has no taxable income and the
recording of a deferred tax benefit for net loss carryforwards is prohibited
under German GAAP.

At December 31, 1998 the Company had approximately DM 427 million net operating
loss carry-forwards, which do not expire and may be applied against future
taxable income.

NOTE O ENVIRONMENTAL AND MINING PROVISIONS

The following is a summary of environmental and mining provisions:

Balance as of Balance as of
Dec. 31,1998 Dec. 31,1997

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

<S> <C> <C>
1) End-lake provision 259,511 291,492
2) Provision for environmental pollution 9,975 9,975
3) Landscaping 15,375 14,040
4) Planting 10,247 11,656
5) Relocation of villages 39,764 51,673

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

334,872 378,836
==================== ======================
</TABLE>

20
<PAGE> 23
[DELOITTE & TOUCHE LETTERHEAD]

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DM)

1) END-LAKE PROVISION

The duty of reclaiming mining fields can be derived from the obligation
specified in section 2 of the Bundesberggesetz (BBergG) - Federal Mining Law. In
terms thereof, a mine closure plan must be prepared (section 53 BBergG) for
termination of surface mining. In this plan the actions must be described to
protect third parties from dangers caused by the mining operation and to ensure
the reusefulness of the earth surface (section 51 BBergG).

The duty of reclaiming of the mining fields applies to MIBRAG in respect to the
mines Profen and Schleenhain. Based on section 4 (3) of the operating lease
agreement dated December 17, 1993 with MBV, a state-owned company responsible
for reclamation of closed mines in the east German region, MIBRAG is exempted
from this duty in respect to the Zwenkau mine.

The mining field reclamation of the Profen and Schleenhain mines after the
ceasing of production is planned for 2029-2046 and 2041-2073, respectively. A
legally binding closure plan laying down the principles for action plans in
accordance with the BBergG is normally approved two years in advance to the
commencement of production by the relevant mining authorities. The liability to
reclaim the area exists from the start of mining activities. In each year of
coal extraction the reclamation costs are accrued ratably using the relation of
the coal mined to the total coal mine volume.

The calculation of the total cost for reclaiming mining fields has been made on
the basis of an expert opinion and estimations on the basis of current prices.
During the current year a new expert opinion on to the reclamation costs of the
end-lake Schleenhain was completed with cost lower than originally estimated.
The overaccrued amount was released to income this year.

The end-lake costs consist mainly of cost for reconstruction, bank
reinforcement, dewatering and watering.

21
<PAGE> 24
[DELOITTE & TOUCHE LETTERHEAD]

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DM)

2) PROVISION FOR ENVIRONMENTAL POLLUTION ("ALTLASTEN")

This provision for the clean-up/safeguarding of "Altlasten" is determined in
respect to disposals sites and old locations of MIBRAG mbH in refinement and
mining areas on which waste deposits can be found.

The duty for clean-up results from the waste disposal laws of Saxony and
Saxony-Anhalt, in terms of which the subsequent use of the mine area must be
possible without problems. The obligation to avoid danger results from the
general applicable law of Germany and the individual states. A danger in terms
of definitions established by police authorities exists when a danger affects
the surrounding area.

The company has listed areas that are suspect to contamination in a land
register.The obligation at the accrued amount is derived from article 19.3 of
the purchase and sales agreement. Qualifying costs that exceed the provision are
to be reimbursed by the Bundesanstalt fuer vereinigungsbedingte Sonderaufgaben
(BvS)

3) LANDSCAPING

This provision includes costs for reclaiming disposal areas and leveling the
area outside the embankments. These costs relate solely to continuous
landscaping, while cost for closing down landscaping are included in the
end-lake provision.

The duty results from the "Bundesberggesetz", which states that land must be
made reusable during production and after production has ended (sections 55, 2,
4 BBergG).

The provision for landscaping has been recalculated as of December 31, 1998 and
1997, based on the special strategic plans, recultivation plans for Profen and
Schleenhain, the strategic plan for the Zwenkau mine, internal budget
documentation as well as documentation prepared by the cost accounting
department.

The strategic plans categorize the disposal areas according to future usage
plans, e.g. agricultural or foresting uses and special uses (roads, flood areas,
recreation etc.). The cost estimation has been prepared by the recultivation
department based on use, technology, period of recultivation and expenses for
material, personnel and equipment utilizing generally used market prices.

<PAGE> 25
[DELOITTE & TOUCHE LETTERHEAD]

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DM)

4) PLANTING

Provision is made for costs in connection with temporary planting as of
December 31, 1998 and 1997.

The duty for planting results from the environmental protection clauses
contained in the general and mine closure strategic plans. Legal basis are the
"Bundesberggesetz" (sections 55 and 66) and the "Bundesimmissionsschutzgesetz"
(Federal Emission Law). The "Bundesberggesetz" determines that preventative
measures must also be taken at the time of mining and the
"Bundesimmissionsschutzgesetz" determines that mines have to be operated in such
a way that harmful environmental effects are avoided, if prevention is
technologically practicable.

The quantification results from the surveyed areas that have been used for
disposal purposes and that have not been finally planted and the border
embankments that have not been planted. Open cast areas have to be planted at
the difference between actual and technically required areas. Temporary planting
reduces dust pollution and earth erosion.

5) RELOCATION OF VILLAGES

The provision for relocation of villages is in respect to the relocation of
municipalities, which is necessary for the expansion of the Profen and
Schleenhain mines.

The obligation is determined by agreements that have been reached with the
relevant municipalities. In addition the company has expressed through its
appearance in the public that the relocations will take place at a specified
date, which has created a factual obligation to fulfill.

The calculation of the provision is based on a method that has been accepted by
the taxation authorities in western Germany for the Rhine brown coal area. This
method takes into account the cost for project planning, infrastructural
development, cemetery relocation, demolition and landmark preservation. The
provision is built up in equal annual amounts, commencing two years before the
relocation starts and ending in the middle of the relocation year.

23
<PAGE> 26
[DELOITTE & TOUCHE LETTERHEAD]

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DM)

NOTE P OTHER ACCRUALS

Accrued liabilities are as follows:

Balance as of Balance as of
Dec. 31, 1998 Dec. 31, 1997

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

<S> <C> <C>
1) Severance payments 24,220 25,700

------------------- ---------------------
2) Personnel expenses
- Employment anniversaries 2,566 2,188
- Vacation, contractually agreed free shifts and credits on
annual work-time accounts outstanding at year-end 850 417
- Equalization amount in terms of the
Act on Handicapped Persons 244 211
------------------- ---------------------

3,660 2,816

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

3) Remaining accruals 19,092 10,395

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

46,972 38,911
================== ====================
</TABLE>

1) SEVERANCE PAYMENTS

Basis for the provisions are the social plan framework agreements in which the
measures for the personnel adjustments are defined. The provisions relate
primarily to payments to 414 employees, who have been terminated as of March 31,
1998.

The employees are entitled to a one-time severance payment if the company
initiates termination or in the case of retrenchments. The severance payments
are limited to DM 50 per person. Employees participating in early retirement
programs are entitled to additional compensation, mainly for the reduction in
statutory pension payments due to early retirement.

24
<PAGE> 27
[DELOITTE & TOUCHE LETTERHEAD]

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DM)

2) PERSONNEL EXPENSES

MIBRAG mbH grants awards in recognition of long service in the company, based on
the collective bargaining agreement dated January 1, 1992 and the company
agreement dated October 1, 1995. The employees are entitled to financial awards,
which increase in proportion to their employment periods. The valuations of the
benefits were based on actuarial valuations taking into account commercial
principles. Since a reduction in the personnel force is anticipated, the
obligation has only been accrued for if the person has been employed by MIBRAG
mbH for at least 10 years.

The liability for vacation and contractually agreed free shifts arises from the
days and shifts outstanding at balance sheet dates, which have been determined
for each employee.

25
<PAGE> 28
[DELOITTE & TOUCHE LETTERHEAD]

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DM)

3) REMAINING PROVISIONS

Composition:
Balance as of Balance as of
Dec. 31, 1998 Dec. 31, 1997

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

<S> <C> <C>
Outstanding invoices 5,498 2,459
Mine damages 3,500 3,500
Water usage fees 2,509 2,271
Compensation to municipalities 2,500 -
Professional service and litigation 1,803 704
Deferred maintenance 1,392 -
Others 1,890 1,461
--------------------- ---------------------

19,092 10,395
==================== ====================

NOTE Q LONG-TERM DEBT

Long-term debt consists of the following:
Dec. 31, 1998 Dec. 31, 1997
-------------------- -------------------
<S> <C> <C>
a) Loans to finance the power stations
- construction of the power station of Waehlitz 132,269 139,230
- modernization of the power stations in Deuben and Mumsdorf
- finance the additional paid-in capital by the 110,768 120,000
investors of MI
b) Loans to finance the Schleenhain mine investments 75,700 80,400
c) Loans for home construction 120,000 -
d) Deferred interest 6,441 5,647
779 -
-------------------- -------------------

445,958 345,277
=================== ==================
</TABLE>

26
<PAGE> 29
[DELOITTE & TOUCHE LETTERHEAD]

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DM)

To a)

These liabilities refer on one hand to three loans from the Kreditanstalt fur
Wiederaufbau, Frankfurt/Main:

The first loan was granted by contract, dated December 9, 1992, for the
construction of a raw brown coal powered industrial power station in Waehlitz of
DM 139,230. The interest rate has been fixed at 7 % p.a. until December 9, 2002,
5 % thereof is borne by the Federal Department of Environmental Affairs, for the
first 5 years. The loan period is 25 years. The repayments in 40 equal amounts
commence from June 30, 1998.

On April 3, 1995 two additional loan agreements were closed with Kreditanstalt
fur Wiederaufbau (KfW).

One of these contracts was granted for partially financing the modernization
and reshaping of both industrial power plants in Deuben and Mumsdorf. DM
120,000 of the total loan amount of DM 134,000 have been called up as of
December 31, 1998. The loan period is 16 years, thereof the first three
years without repayments. The redemption period is 13 years starting on
December 31, 1998.

The interest rates are as follows:

Amount Interest rate (%) Fixed until

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

<S> <C> <C>
64,615 6.80 January 12, 2006
18,461 6.18 January 30, 2007
18,461 6.25 January 20, 2007
9,231 6.04 December 30, 2007

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

110,768
====================
</TABLE>

The second loan contract was closed to partially finance the limited partner
capital contribution of the new investors in MI. The redemption period is 13
years. In 1996, the loan was fully called up by MIBRAG. In 1998, DM 4,700
were redeemed, so that the balance as of December 31, 1998 amounts to DM
75,700.

27
<PAGE> 30
[DELOITTE & TOUCHE LETTERHEAD]

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DM)

The interest rates are as follows:

Amount Interest rate (%) Fixed until

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

<S> <C> <C>
60,419 6.67 2005
8,682 6.82 2005
3,928 6.26 2005
2,671 6.76 2005

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

75,700
==============================
</TABLE>

The interest rates after 2005 will be adjusted to the market rate at that
time.

Interest expense for the three loans amounted to DM 23.8 million, DM
17.4 million and DM 14.1 million in 1998, 1997, and 1996, respectively.

To b)

In 1997 and 1998, loan contracts were closed with four credit institutions to
finance the investments in the Schleenhain mine, especially the construction of
the blending yard and environmental measures for the conveyor belts. In 1998 DM
120,000 were called up at the following conditions:

Credit institutions Date of Date of Amount interest redemption period
contract payment rate
- ------------------------------- -------------- --------------- ---------- ------------- --------------------

<S> <C> <C> <C> <C> <C>
- - Landeskreditbank Baden-
Wuerttemberg, Karlsruhe Dec.16,1997 Sep.30,1998 50,000 5.31 % until Dec. 2009
- - Bayerische Landesbank
Girozentrale, Munich Nov.17,1997 June 10,1998 50,000 5.40 % until Dec. 2009
- - Deutsche Bank AG, Zeitz Sep.16,1998 Oct.15,1998 10,000 4.75 % until Dec. 2009
- - Deutsche Ausgleichsbank,
Bonn Aug.17,1998 Sep.17,1998 10,000 4.25 % until March 2008

</TABLE>

28
<PAGE> 31
[DELOITTE & TOUCHE LETTERHEAD]

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DM)

To c)

The loans for home construction were granted by the Deutsche Bank AG and the
Nord LB for relocation-related home construction purposes in Hohenmoelsen.

The increase in trade payables (TDM 9.001) mainly results from the invoices for
investments in the Schleenhain mine.

The other liabilities refer to:

Dec.31, 1998 Dec.31, 1997

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

<S> <C> <C>
Usage reimbursement for the mining rights 16,367 19,848
Wages and salaries 7,450 8,388
Tax lease 6,050 8,036
Social security contributions 5,321 5,783
Tax authorities 2,542 2,603
Others 2,766 2,486
--------------------- ---------------------

40,496 47,144
==================== ====================
</TABLE>

The payables due to the tax lease model relate to the equity commission and
management fees.

29
<PAGE> 32
[DELOITTE & TOUCHE LETTERHEAD]

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DM)

NOTE R MATURITY PERIODS OF LIABILITIES

The maturity periods of liabilities are as follows:

Liabilities Trade Payables Other Total
to payables to payables
banks *) partici-
pations
------------ ------------ ---------- ------------ ---------------

<S> <C> <C> <C> <C> <C>
Balance as of Dec. 31, 1997 345,277 42,499 1,984 47,142 436,802
thereof: maturity period
- up to 1 year 21,345 38,325 1,984 39,157 100,811
- 1-5 years 98,178 4,174 - 4,355 106,707
- more than 5 years 225,754 - - 3,630 228,384

Balance as of Dec. 31, 1998 445,957 51,501 2,843 40,143 540,444
thereof: maturity period
- up to 1 year 23,736 47,476 2,843 33,717 107,772
- 1-5 years 119,293 4,025 - 3,401 126,719
- more than 5 years 302,928 - - 3,025 305,953
</TABLE>

*) Liabilities to banks are fully secured by mortgages

NOTE S COMMITMENTS AND CONTINGENCIES
At December 31,
---------------------------------------------
1998 1997
--------------------- -------------------
<S> <C> <C>
Guarantees for indebtedness of others 38,668 61,946
Other contractualobligations 178,200 304,300
</TABLE>

The other contractual obligations refer to long terminvestment projects in the
mines Profen and Schleenhain.

30
<PAGE> 33
[DELOITTE & TOUCHE LETTERHEAD]

MITTELDEUTSCHE BRAUNKOHLENGESELLSCHAFT MBH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DM)

MIBRAG leases office equipment and railway-carriages, expiring at various dates.
Rental and lease expenses amounted to DM 1,666, DM 2,502 and DM 2,355 in the
years ended December 31, 1998, 1997 and 1996, respectively. The future minimum
lease payments under operating leases are as follows: 1999: DM 442; 2000: DM
252; 2001: DM 252, 2002: DM 252, and no obligations thereafter.

NOTE T RELATED PARTY TRANSACTIONS

Between MIBRAG and two subsidiaries of the common parent companies NRG Energy
Inc., Morrison-Knudsen Corp. and PowerGen plc., agreements for consulting and
management services were closed in respect to the mining operations and the
refinement facilities.

These contracts determine certain consultancy services to be provided by the two
subsidiaries Morrison-Knudsen Deutschland GmbH (MKD) and Saale Energie Services
GmbH (SES) to MIBRAG or its subsidiaries.

MIBRAG is obliged to determine and pay the cost-related remuneration for these
services. Expenditures for MIBRAG were as DM 19,583, DM 20,225 and DM 26,290 for
1998, 1997 and 1996, respectively.

NOTE U SETTLEMENT AGREEMENT

MIBRAG B.V., MIBRAG mbH and BvS, as the former shareholder of the MIBRAG AG,
entered into a settlement agreement which resulted in the payment of DM 15,942
by BvS to MIBRAG mbH for the undercapitalization of one of the power plants,
which was included in the split-up to MIBRAG on December 31, 1993. The
undercapitalization claim was raised by MIBRAG B.V. as the purchaser of the
shares in MIBRAG mbH, because a loan for power plant financing was called up
early in 1993, not in accordance with the loan contract.

The settlement of the claim by MIBRAG B.V. to BvS was accounted for as a 1996
capital contribution from MIBRAG B.V. to MIBRAG mbH, which resulted in an
increase in the additional paid-in capital by DM 15.942 million.

<PAGE> 1
EXHIBIT 99.4

EL SEGUNDO POWER, LLC

FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998
TOGETHER WITH AUDITORS' REPORT

<PAGE> 2

[ARTHUR ANDERSEN LLP LETTERHEAD]

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Members of El Segundo Power, LLC:

We have audited the accompanying balance sheet of El Segundo Power, LLC (a
Delaware limited liability company) as of December 31, 1998, and the related
statements of operations, members' equity and cash flows for the period from
inception of operations (April 4, 1998) to December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of El Segundo Power, LLC as of
December 31, 1998, and the results of its operations and its cash flows for the
period from inception of operations (April 4, 1998) to December 31, 1998, in
conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Houston, Texas
March 5, 1999

<PAGE> 3

EL SEGUNDO POWER, LLC

BALANCE SHEET--DECEMBER 31, 1998

ASSETS

CURRENT ASSETS:
<S> <C>
Cash and cash equivalents $ 20,462,176
Accounts receivable-
Trade 63,628,915
Affiliates 290,691
Less- Contingent revenues receivable (Note 6) (36,181,906)
---------------

Accounts receivable, net 27,737,700

Inventory 1,716,510
Prepaid expenses 285,771
---------------
Total current assets 50,202,157
---------------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land 13,635,181
Plant and equipment 66,581,059
Accumulated depreciation (5,688,434)
---------------

Property, plant and equipment, net 74,527,806

GOODWILL 25,297,846
---------------
Total assets $ 150,027,809
===============

LIABILITIES AND MEMBERS' EQUITY

CURRENT LIABILITIES:
Accounts payable-
Trade $ 3,584,097
Affiliates 1,253,102
Accrued liabilities 13,477,575
Contingent revenues collected (Note 6) 24,950,797
Overhaul and maintenance reserves 2,868,032
---------------

Total current liabilities 46,133,603

COMMITMENTS AND CONTINGENCIES (Note 7)

MEMBERS' EQUITY 103,894,206
---------------
Total liabilities and members' equity $ 150,027,809
===============
</TABLE>

The accompanying notes are an integral part of these financial statements.

<PAGE> 4

EL SEGUNDO POWER, LLC

STATEMENT OF OPERATIONS

FOR THE PERIOD FROM INCEPTION OF OPERATIONS

(APRIL 4, 1998) TO DECEMBER 31, 1998

REVENUES:
<S> <C>
Nonaffiliate $ 167,437,528
Affiliate 3,589,012
---------------
171,026,540
Less- Contingent revenues (Note 6) (61,132,703)
---------------

Net revenues 109,893,837

OPERATING COSTS (49,383,188)
---------------
Operating margin 60,510,649

DEPRECIATION AND AMORTIZATION (7,630,896)

GENERAL AND ADMINISTRATIVE EXPENSES (615,592)
---------------
Income from operations 52,264,161

INTEREST EXPENSE (68,476)

INTEREST INCOME 571,851
---------------
NET INCOME $ 52,767,536
===============
</TABLE>

The accompanying notes are integral part of these financial statements.

<PAGE> 5

EL SEGUNDO POWER, LLC

STATEMENT OF MEMBERS' EQUITY

FOR THE PERIOD FROM INCEPTION OF OPERATIONS

(APRIL 4, 1998) TO DECEMBER 31, 1998

Total
NRG Members'
El Segundo, Inc. El Segundo, Inc. Equity
---------------- ---------------- ------

<S> <C> <C> <C>
BALANCE, April 4, 1998 $ - $ - $ -
Contributions 44,163,335 44,163,335 88,326,670
Members' share of net income 26,383,768 26,383,768 52,767,536
Distributions (18,600,000) (18,600,000) (37,200,000)
------------- ------------- --------------

BALANCE, December 31, 1998 $ 51,947,103 $ 51,947,103 $ 103,894,206
============= ============= ==============

</TABLE>

The accompanying notes are an integral part of these financial statements.

<PAGE> 6

EL SEGUNDO POWER, LLC

STATEMENT OF CASH FLOWS

FOR THE PERIOD FROM INCEPTION OF OPERATIONS

(APRIL 4, 1998) TO DECEMBER 31, 1998

CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C>
Net income $ 52,767,536
Adjustments to reconcile net income to net cash provided by operating activities-
Depreciation and amortization 7,630,896
Changes in assets and liabilities that provided (used) cash-
Receivables (27,737,700)
Inventory (2,050)
Prepaid expenses (198,171)
Payables 3,227,686
Accrued liabilities (5,870,750)
Contingent revenues collected 24,950,797
Overhaul and maintenance reserves 2,868,032
--------------

Net cash provided by operating activities 57,636,276
--------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisition (88,300,770)
--------------
Net cash used in investing activities (88,300,770)
--------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings 5,390,000
Repayments of short-term borrowings (5,390,000)
Contributions by members 88,326,670
Distributions to members (37,200,000)
--------------

Net cash provided by financing activities 51,126,670
--------------

NET INCREASE IN CASH AND CASH EQUIVALENTS 20,462,176

CASH AND CASH EQUIVALENTS, beginning of period -
--------------

CASH AND CASH EQUIVALENTS, end of period $ 20,462,176
==============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 68,476
==============

</TABLE>

The accompanying notes are an integral part of these financial statements.

<PAGE> 7

EL SEGUNDO POWER, LLC

NOTES TO FINANCIAL STATEMENTS

1. DEVELOPMENT OF COMPANY:

El Segundo Power, LLC (El Segundo or the Company) (a Delaware limited liability
company) was formed on November 25, 1997, for the purpose of acquiring,
operating and owning a power generation facility in El Segundo, California (the
Facility). In addition, in November 1997, the Company entered into an agreement
with Southern California Edison Company (SCE) to acquire the Facility for
$88,300,770, including transaction costs. The purchase was effective April 4,
1998, for accounting purposes. The Facility is a 1,020-megawatt rated facility
consisting of four units: two units rated at 175 megawatts each and two units
rated at 335 megawatts each. The Facility operates as a "merchant" facility,
selling energy, capacity, ancillary services and replacement reserves to the
newly deregulated California wholesale electric market. In addition, the
Facility holds a must-run agreement (MRA) assumed from SCE. Certain generation
owners were required to enter into a MRA as a part of the deregulation process
in order to mitigate regional market power and ensure system reliability. MRAs
require such owners to provide energy, capacity, ancillary services and
replacement reserves when requested by the California Independent System
Operator (ISO), within contractual limitations.

The acquisition was accounted for under the purchase method of accounting.
Accordingly, the purchase cost of $88,300,770, net of working capital, was
allocated to the assets acquired and liabilities assumed based on their
estimated fair values as of April 4, 1998. The purchase price allocation as
presented herein is considered preliminary and is dependent upon subsequent
asset sales, if any, and the ultimate resolution of certain pending legal and
other contingencies existing at the time of the acquisition.

The Company allocated cash paid for the acquisition as follows:

<TABLE>
<S> <C>
Assets acquired-
Current assets and other $ 1,802,060
Noncurrent assets 107,456,548
Liabilities assumed (20,957,838)
--------------
Cash paid $ 88,300,770
==============

</TABLE>

The Company is owned equally by two members. The Company's profits and losses
are allocated to the members using established ratios as defined in the Limited
Liability Agreement.

The sharing ratios are summarized as follows:

<TABLE>
<S> <C>
Members-
El Segundo, Inc. 50%
NRG El Segundo Inc. 50
---
Total 100%
===

</TABLE>

<PAGE> 8

-2-

2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES:

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.

Revenue Recognition

Revenues from the sale of energy, capacity, ancillary services and replacement
reserves are recorded based upon output delivered and/or service provided
multiplied by contract terms where applicable and/or market pricing.
Revenues identified as contingent are fully reserved, as discussed in Note 6.

Federal Income Taxes

The Company is not a taxable entity for federal income tax purposes.
Accordingly, there is no provision for income taxes in the accompanying
financial statements.

Plant and Equipment

Plant and equipment costs are being depreciated on a straight-line basis over an
estimated useful life of 15 years for the two units each rated at 335 megawatts
and three years for the two units each rated at 175 megawatts.

Goodwill

Goodwill represents the excess purchase cost over the estimated fair value of
the assets acquired and liabilities assumed and is being amortized on a
straight-line basis over pro rated three-year and 15-year estimated useful lives
based on the useful life of the related plant and equipment.

Overhaul and Maintenance Reserves

The Company records a reserve for maintenance costs expected to be incurred that
are not covered by the operations and maintenance agreement (see Note 4). Other
maintenance and repair costs are charged to expense as incurred.

Environmental Costs

Environmental costs relating to current operations are expensed. Liabilities are
recorded when environmental assessment indicates that remedial efforts are
probable and the costs can be reasonably estimated.

Risk Management Activities

The Company periodically enters into financial instrument contracts to hedge
purchase and sale commitments and fuel requirements of natural gas and
electricity in order to minimize the risk of market fluctuations. Gains and
losses from hedging transactions are recognized in income and are reflected as
cash flows from operating activities in the periods in which the underlying
commodity being hedged is sold or purchased. If necessary correlation to the
commodity being hedged ceases to exist, the gain or loss

<PAGE> 9

-3-

associated with such contract(s) is no longer deferred and begins to be
recognized in income in the period correlation is lost, to the extent of the
underlying gain or loss on the commodity being hedged. At December 31, 1998, the
Company had no open risk management contracts outstanding.

Use of Estimates in
Financial Statement Preparation

The preparation of financial statements in conformity with generally accepted
accounting principles requires estimates and assumptions that affect the
reported amounts of assets and liabilities as well as certain disclosures. The
Company's financial statements include amounts that are based on management's
best estimates and judgments. Actual results could differ from those estimates.

Fair Value of Financial Instruments

The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable and debt instruments. The
carrying amounts of cash and cash equivalents, accounts receivable and accounts
payable are representative of their respective fair values due to the short-term
maturity of these instruments.

New Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
will be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. The key criterion for hedge accounting is that
the hedging relationship must be highly effective in achieving offsetting
changes in fair value or cash flows. SFAS No. 133 is effective for all fiscal
years beginning after June 15, 1999. Management does not anticipate that the
adoption of SFAS No. 133 will have a material impact on the Company's financial
position or results of operations.

3. RELATED PARTIES:

The Company has contracted with affiliates of El Segundo, Inc., to provide
management services, as described below. Total costs and management fees
associated with these services, excluding accrued fees related to the contingent
revenues (see Note 6), were approximately $3,102,000 in 1998.

The Company contracted with Dynegy Power Management Services, Inc., formerly
known as Destec Management Services, Inc., an affiliate of El Segundo, Inc., to
manage the Administrative Services Management Agreement which provides
administrative services such as business management and accounting to the
Company. Fees for such services are subject to Executive Committee approval if
the amounts exceed a certain percentage of the applicable annual approved
budget. The Executive Committee consists of two representatives from each
Company member.

The Company contracted with Electric Clearinghouse, Inc., an affiliate of El
Segundo, Inc., to provide all power scheduling, power marketing and trading and
risk management for the Company under the Energy Management Agreement (EMA).

The Company contracted with Dynegy Marketing and Trade, formerly known as
Natural Gas Clearinghouse, an affiliate of El Segundo, Inc., to provide all
scheduling and marketing of fuel supply for the Company under the EMA.

<PAGE> 10

-4-

The Company has also contracted with NRG El Segundo Operations Inc. (NRG), an
affiliate of NRG El Segundo Inc., to manage the Operations and Management
Services Agreement (OMSA). These services consist primarily of overseeing the
operations and maintenance efforts of SCE (see SCE O&M Agreement in Note 4). SCE
will operate the Company's facility for two years; after that time, the OMSA
will be renegotiated and NRG will take over operations of the Facility. Fees for
such services are subject to Executive Committee approval if the amounts exceed
a certain percentage of the applicable annual approved budget. Fees associated
with this service totaled approximately $286,000 in 1998.

4. SCE OPERATION AND
MAINTENANCE AGREEMENT:

As part of the acquisition, the Company was required to enter into an operation
and maintenance agreement with SCE (the SCE O&M Agreement) for a period of two
years. The SCE O&M Agreement is a cost-plus agreement based on SCE's estimate of
the direct and indirect service costs for operating and maintaining the Facility
and the Facility's site. Charges related to such services of approximately
$7,740,000 in 1998 were included in operating costs in the accompanying
statement of operations.

5. DEBT:

On May 18, 1998, the Company entered into a $6,200,000 loan agreement (the Loan
Agreement) to provide working capital loans on an as-needed basis. The Loan
Agreement is between the Company and affiliates of the Company's members.
Advances under this loan are split evenly from each member's affiliate. The
interest rate used on outstanding loan balances is based upon a three-month
LIBOR rate. No amounts were outstanding under the Loan Agreement at December 31,
1998. During the year, the Company borrowed and repaid approximately $5,390,000.
The Company incurred interest expense on these borrowings of approximately
$68,000 in 1998.

6. CONTINGENT REVENUES:

During 1998, the first year of deregulation of the state of California power
industry, the Company accrued certain amounts related to contingent revenues.
Such amounts relate to items that are subject to contract interpretations,
compliance with processes and filed market disputes. The Company is actively
pursuing resolution and/or collection of these amounts, which totaled
approximately $61,133,000 in 1998, and has reserved all such revenues as
contingent, as reflected in the accompanying balance sheet and statement of
operations. Contingent revenues receivable in the accompanying balance sheet are
reflected net of all accrued management fees, while contingent revenues
collected represent cash received related to such contingent items. Management
believes that all recorded amounts related to contingent items are accruable
based on contractual interpretations and compliance with processes and, upon any
final resolution and/or collection of these amounts, such revenues will be
recognized in earnings.

7. COMMITMENTS AND CONTINGENCIES:

The Company is involved in disputes arising in the ordinary course of business.
Management does not believe the outcome of such disputes will have a material
adverse effect on the Company's financial position or results of operations.