SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) July 9, 1996
Northern States Power Company
(Exact name of registrant as specified in its charter)
Minnesota
(State or other jurisdiction of incorporation)
1-3034 41-0448030
(Commission File Number) (IRS Employer Identification No.)
414 Nicollet Mall, Mpls, MN 55401
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 612-330-5500
(Former name or former address, if changed since last report)
Item 5. Other Events
Attached as Exhibit 99.01 are the audited consolidated financial
statements of NRG Energy, Inc. and its subsidiaries for the year
ended December 31, 1995 and the related management's discussion
and analysis.
Item 7. Financial Statements and Exhibits
(c) EXHIBITS
Exhibit
No. Description
23.01 Consent of Independent Accountants
99.01 Excerpts from NRG Energy, Inc. 1995
Annual Report to Shareholder:
Management's Discussion and
Analysis
Report of Independent Accountants
Consolidated Balance Sheet
Consolidated Statement of Income
Consolidated Statement of Cash
Flows
Consolidated Statement of
Stockholder's Equity
Notes to Consolidated Financial
Statements
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned hereunto duly authorized.
Northern States Power Company
(a Minnesota Corporation)
By /s/
Roger D. Sandeen
Vice President, Controller
and Chief Information Officer
Dated: July 9, 1996
EXHIBIT INDEX
Method of Exhibit
Filing No. Description
DT 23.01 Consent of Independent Accountants
DT 99.01 Excerpts from NRG Energy, Inc. 1995
Annual Report to Shareholder:
Management's Discussion and
Analysis
Report of Independent Accountants
Consolidated Balance Sheet
Consolidated Statement of Income
Consolidated Statement of Cash
Flows
Consolidated Statement of
Stockholder's Equity
Notes to Consolidated Financial
Statements
DT = Filed electronically with direct transmission of this Form
8-K.
Exhibit 23.01
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the
Registration Statement No. 333-00415 on Form S-3 (relating to
the Northern States Power Company Dividend Reinvestment and
Stock Purchase Plan), Registration Statement No. 2-61264 on Form
S-8 (relating to the Northern States Power Company Employee
Stock Ownership Plan), Registration Statement No. 33-38700 on
Form S-8 (relating to the Northern States Power Company
Executive Long-Term Incentive Award Stock Plan), and
Registration Statement No. 33-63243 on Form S-3 (relating to the
Northern States Power Company $300,000,000 Principal Amount of
First Mortgage Bonds) of our report on the consolidated
financial statements of NRG Energy, Inc. and its subsidiaries
dated April 11, 1996 appearing in this Form 8-K.
/s/
PRICE WATERHOUSE LLP
Minneapolis, Minnesota
July 9, 1996
Exhibit 99.01
NRG Energy, Inc. 1995 Annual Report to Shareholders
Management's Discussion and Analysis
NRG Energy, Inc. and Subsidiaries
General
NRG is one of the leading participants in the independent (i.e.,
non-utility) 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 cogeneration facilities, thermal energy
production and transmission facilities and resource recovery
facilities. The power generation facilities in which NRG has
interests have total design capacity of 3,282 megawatts (MW), of
which NRG has operational responsibility for 1,809 MW and net
ownership or leasehold interests in 1,001 MW. In addition, NRG
has substantial interests in district heating and cooling
systems and steam generation and transmission operations with
total thermal energy generation capacity of 3,100 million
British thermal units (mmbtus) per hour (911 megawatts
thermal-equivalent (Mwt)), resource recovery operations, and
coal mines with estimated reserves of approximately 789 million
metric tons of lignite (brown coal) in Germany.
NRG has interests in 15 power generation facilities worldwide.
Of these facilities, six are located in the United States (62 MW
net ownership), four are located in Germany (267 MW net
ownership and leasehold interests, of which 100 MW currently is
under construction) and one is located in each of Australia (630
MW net ownership), Czech Republic (5 MW net ownership), Colombia
(10 MW net ownership), Jamaica (7 MW net ownership) and Honduras
(6 MW net ownership). Five of NRG's domestic power generation
facilities (in which NRG has net ownership of approximately 33
MW) currently are not in operation, pending negotiation of new
power purchase agreements or the sale of such facilities, as a
result of buy-outs of their power purchase agreements (or a
standstill agreement pending a buy-out) executed with a power
purchaser. Through its wholly-owned subsidiary NEO Corporation,
NRG also has interest in 16 small hydroelectric and landfill
gas-fired power generation facilities located in the United
States with total design capacity of 31 MW, of which NRG has net
ownership of 14 MW. NRG owns interests in three district heating
and cooling systems, located in Minneapolis, San Francisco and
Pittsburgh, that provide steam for heating and chilled water for
cooling. NRG also owns or operates two steam transmission
facilities and two resource recovery facilities, all located in
Minnesota.
NRG intends to continue its record of growth through a
combination of acquisitions 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 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
addition, to the extent that the replacement of aging power
generating capacity or growth in demand creates the need for new
power generation facilities in the United States, NRG intends to
pursue opportunities to participate in the development of such
facilities. In the international market, NRG plans to continue
to capitalize on opportunities created by the privatization of
existing government-owned power generating capacity. In
addition, due to the significant existing requirement for new
power generating capacity in the international market, NRG
intends to engage in the development of international greenfield
projects.
NRG accounts for investments where ownership is 50% or less, and
where there is no effective and legal control, using the equity
method of accounting. Under the equity method, NRG's investment
in an entity is recorded at cost and is adjusted to recognize
NRG's proportionate share of all earnings or losses of the
entity. Distributions received reduce the carrying amount of
NRG's investment in the entity. In the income statement, NRG
records its proportionate share of net income or losses
attributable to project investments as equity in earnings of
unconsolidated affiliates.
The costs of developing a project are expensed until the project
meets the major milestones of (1) a signed power purchase
agreement or the equivalent and (2) approval by the Board of
Directors of NRG. At December 31, 1995, $4.2 million was
recorded as capitalized project costs related to projects
remaining in development.
NRG's operating revenues from wholly-owned operations have been
derived primarily from the production and transmission of
thermal energy (steam and chilled water) and from the operation
of resource recovery facilities that process municipal solid
waste into refuse-derived fuel. Operating revenues from
wholly-owned operations also include fees earned in providing
management and engineering services to a number of operating
entities. In addition, operating revenues include equity in
earnings of unconsolidated affiliates accounted for under the
equity method.
Results of operations
For the year ended December 31, 1995, NRG had net income of
$31.2 million on operating revenues of $87.8 million, compared
to net income of $29.5 million on operating revenues of $91.1
million in 1994.
NRG's operating revenues from wholly-owned operations for the
year ended December 31, 1995 were $64.2 million, essentially
unchanged from $64.0 million in the prior year. Revenues from
wholly-owned operations consist primarily of revenue from
district heating and cooling (38%), resource recovery activities
(36%), and other thermal projects (23%).
Equity in earnings of unconsolidated affiliates was $23.6
million, a decrease of $3.5 million or 13% compared to 1994.
Equity in earnings of $21.8 million for the MIBRAG mining and
power generation project located in Germany increased $2.4
million due primarily to increased power and coal sales. Equity
in earnings of the Gladstone Power Station located in Australia
was $11.5 million, an improvement of $3.7 million, due to the
inclusion of a full year's earnings in 1995 compared to only
nine months in the prior year. Offsetting these increases was a
decrease of $6.1 million to $2.0 million in equity in earnings
from the San Joaquin Valley cogeneration facilities in 1995
because of the shutdown of the facilities at the end of February
1995 and the termination of the power purchase agreements with
Pacific Gas and Electric (PG&E). NRG's investment in the
Sunnyside waste coal facility acquired in late 1994 experienced
initial operating problems, a six-week shutdown for major
repairs and refurbishment, and a reduction in project revenues
due to lower than anticipated avoided costs of the power
purchaser, PacifiCorp, resulting in a loss of $2.7 million in
1995 equity in earnings. Finally, equity in earnings in 1995
reflects an investment write-down of $5.0 million related to the
Scoria enhanced coal project, while equity in earnings in 1994
includes write-downs of $3.5 million related to Scoria and $1.5
million related to the proposed Louisiana Energy Services
uranium enrichment facility.
Cost of operations of wholly-owned operations were $32.5
million, a decrease of $2.3 million or 6.7%, due primarily to
lower resource recovery landfill charges and reduced district
heating fuel costs.
General, administrative and development costs were $34.6 million
in 1995, an increase of $14.7 million, or 73.3% compared to the
prior year. Business development expenses made up approximately
$8.8 million of this increase. The balance of the increase was
attributable to establishing and maintaining NRG's foreign
offices and domestic support functions. In 1995, NRG
aggressively expanded staff and activity in seeking new
projects. Project development activity was redirected and
expanded in 1995 as NRG completed its initial investments in the
MIBRAG, Gladstone and Schkopau projects in 1994. During 1994,
some development costs were capitalized to these projects until
financial close was achieved. Conversely, during 1995, NRG
expensed the costs of pursuing a number of projects requiring
the payment of significant upfront fees and expenses, including
an investment opportunity that required expenditure of
significant legal fees to submit a competing plan of
reorganization in the O'Brien bankruptcy court proceeding. Most
of these costs were expensed because the projects did not meet
NRG's requirements for capitalization.
Other income (expense) in 1995 included a one-time pre-tax gain
of $29.9 million related to the settlement and termination of
the San Joaquin Valley power purchase agreements with PG&E. In
1994, NRG and its partner in the Michigan Cogeneration Partners
Limited Partnership agreed to terminate a power sales contract
with Consumers Power Company. The contract related to a 65 MW
cogeneration facility being developed in Michigan. Due to the
agreement to terminate the contract, NRG recorded a one-time
pre-tax gain of $9.7 million in 1994.
Other income, net increased $3.5 million in 1995 due primarily
to additional interest income from project notes receivable and
short-term investments.
The provision for income taxes in 1995 represented an effective
tax rate of 22.0%, compared to 7.7% in 1994. The increase in the
effective tax rate was the result of a greater portion of NRG's
income being derived from United States sources in 1995,
primarily as a result of the $29.9 million pre-tax gain on the
disposition of the San Joaquin power purchase agreements.
Because of NRG's intent to reinvest earnings of foreign
operations offshore, no provision was recorded for income taxes
that would be due upon repatriation.
Liquidity and capital resources
Net cash flow from operating activities was $9.1 million in
1995. Principal components of cash flow from operating
activities were net income of $31.2 million, depreciation and
amortization of $8.3 million and changes in working capital
items of $9.0 million. Non-cash adjustments that reduced cash
flow from operating activities consisted primarily of $21.3
million of undistributed equity in operating earnings of
unconsolidated affiliates and $14.4 million of undistributed
equity in gain from the San Joaquin project termination
settlement. Cash used by investing activities included $25.8
million in equity investments in projects, $35.4 million in
loans to projects, and $11.0 million of capital expenditures
related to wholly-owned operations. Cash flow from financing
activities included a $55.0 million equity contribution from
NSP.
Operating activities produced net cash flow of $12.4 million in
1994. Net income as adjusted for depreciation and amortization
provided cash inflows. Adjustments that reduced cash flows
consisted primarily of $18.5 million from undistributed equity
in operating earnings of unconsolidated affiliates and $6.1
million of cash used by working capital components. Cash used
by investing activities included $102.1 million in equity
investments in new and existing projects and $4.4 million in
project loans. NRG also provided $13.8 million of restricted
cash deposits to collateralize foreign currency hedging
activities and letters of credit issued in connection with
competitive bids. Capital expenditures by wholly-owned
operations used $5.8 million of cash. Cash flow from financing
activities included a $103.9 million investment from NSP.
Historically, the projects in which NRG invests have been funded
partially by debt at the project level and by equity cash
infusions. Cash for equity investing has been provided by NSP
equity contributions and, to a lesser extent, cash flow from
internal operations. Project financing at the project level is
substantially non-recourse to NRG and its other project
subsidiaries. As of December 31, 1995, NRG's consolidated
financial statements contained long-term debt (including current
maturities) of $90.0 million. This included $79.3 million of
non-recourse project-related debt for the acquisition of the
Minneapolis Energy Center district heating and cooling facility,
$8.9 million related to the acquisition of the Newport resource
recovery facility, and $1.8 million related to the acquisition
of NRG's 50% interest in the Sunnyside waste coal facility.
Annual maturities of long-term debt range from $3.3 million to
$4.0 million in the five-year period ending December 31, 2000.
NRG's long-range forecast projects capital expenditure and
project investment requirements of $450 million to $500 million
for the 1996-2000 time period. These requirements are expected
to be met with the proceeds from issuances of debt, equity
contributions from NSP and internal cash generation.
Dividends and management fees to NRG and its subsidiaries from
partnerships in which NRG invests are subject to restrictions in
some cases.
On January 31, 1996, NRG issued $125 million of 7.625% unsecured
Senior Notes maturing in 2006 to support equity requirements for
projects currently under way and in development. The Senior
Notes were assigned ratings of Baa3 by Moody's Investors Service
and BBB- by Standard & Poor's.
NRG is contractually committed to additional equity investments
in the Schkopau German energy project. Such commitments are for
approximately DM 33 million in 1996. The 1996 commitment would
be approximately $23 million, based on exchange rates in effect
at December 31, 1995. In addition, NRG is contractually
committed to additional equity investments of $17 million in the
Scudder Latin American Trust for Independent Power Energy
Projects as of December 31, 1995.
NRG is in the final stages of purchasing a 42% interest in
O'Brien Environmental Energy, Inc. from bankruptcy. See Note 13
of Notes to Consolidated Financial Statements for a further
discussion of the O'Brien transaction and its possible liquidity
requirements.
Impact of inflation, interest rates, exchange rates and energy
prices
NRG attempts, whenever practicable, to hedge certain aspects of
its project investments against the effects of inflation and
fluctuations in interest rates and energy prices. To date, NRG
has generally structured the energy payments in its power
purchase agreements to adjust with the same price indices as
contained in its contracts with the fuel suppliers for the
corresponding projects. In some cases, a portion of revenues is
associated with operation and maintenance and is indexed to
adjust with inflation.
NRG enters into forward foreign currency exchange contracts with
counterparties to hedge exposure to currency fluctuations and to
protect the economic value in U.S. dollars of NRG's equity
investments and retained earnings denominated in foreign
currencies. See Note 12 of Notes to Consolidated Financial
Statements for a further discussion of NRG's foreign currency
hedging activities.
Report of Independent Accountants
NRG Energy, Inc. and Subsidiaries
To the Board of Directors
and Stockholder of NRG Energy, Inc.
In our opinion, the accompanying balance sheet 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, 1995, and the results of their
operations and their cash flows for the year 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 audit. We conducted our audit 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 statements
presentation. We believe that our audit provides a reasonable
basis for the opinion expressed above. The consolidated
financial statements of the Company and its subsidiaries for the
year ended December 31, 1994 were audited by other independent
accountants whose report dated March 24, 1995 expressed an
unqualified opinion on those statements.
/s/
Price Waterhouse LLP
Minneapolis, Minnesota
April 11, 1996
Consolidated Balance Sheets
NRG Energy, Inc. and Subsidiaries
Assets
December 31
(Thousands of Dollars) 1995 1994
Current assets
Cash and cash equivalents $7,039 $17,507
Restricted cash 9,773 13,817
Accounts receivable-
trade, less allowance
for doubtful accounts
of $103 and $185 10,474 11,576
Accounts receivable-
affiliates 3,499 610
Income taxes receivable - 2,442
Current portion of notes
receivable 8,058 3,115
Inventory 1,811 1,704
Prepayments and other
current assets 1,744 1,173
Total current assets 42,398 51,944
Property, plant and equipment, at original cost
In service 170, 253 163,438
Under construction 5,914 2,289
176,167 165,727
Less accumulated
depreciation (64,248) (58,093)
Net property, plant
and equipment 111,919 107,634
Other assets
Investments in projects 221,129 164,863
Capitalized project
costs 4,185 3,030
Notes receivable, less
current portion 32,389 3,687
Intangible assets, net
of accumulated
amortization of $4,127
and $2,549 41,996 44,798
Debt issuance costs,
net of accumulated
amortization of $189
and $148 573 614
Total other assets 300,272 216,992
Total assets $454,589 $376,570
Liabilities and Stockholder's Equity
Current liabilities
Current portion of
long-term debt $3,762 $3,306
Accounts payable-trade 6,208 5,199
Accounts payable-
affiliates - 3,037
Accrued income taxes 7,366 -
Accrued property and
sales taxes 1,895 2,291
Accrued salaries, benefits
and related costs 5,178 2,751
Other current liabilities 3,587 11,021
Total current liabilities 27,996 27,605
Long-term debt, less
current portion 86,272 90,033
Deferred revenues 7,726 8,811
Deferred income taxes 9,166 11,519
Deferred investment
tax credits 2,069 2,324
Deferred compensation 1,596 1,556
Total liabilities 134,825 141,848
Stockholder's equity
Common stock; $1 par value;
1,000 shares authorized;
1,000 shares issued
and outstanding 1 1
Additional paid-in
capital 271,013 216,013
Retained earnings 46,323 15,122
Currency translation
adjustments 2,427 3,586
Total stockholder's
equity 319,764 234,722
Total liabilities and
stockholder's equity $454,589 $376,570
See notes to consolidated financial statements.
Consolidated Statements of Income
NRG Energy, Inc. and Subsidiaries
Year Ended December 31
(Thousands of Dollars) 1995 1994
Operating revenues
Revenues of wholly-owned
operations $64,180 $63,970
Equity in operating
earnings of unconsolidated
affiliates 23,639 27,155
Total operating revenues 87,819 91,125
Operating costs and expenses
Cost of operations of
wholly-owned operations 32,535 34,861
Depreciation and
amortization 8,283 8,675
General, administrative
and development 34,647 19,993
Total operating costs
and expenses 75,465 63,529
Operating income 12,354 27,596
Other income (expense)
Equity in gain on project
termination settlements 29,850 9,685
Other income, net 4,896 1,411
Interest expense (7,089) (6,682)
Total other income
(expense) 27,657 4,414
Income before income
taxes 40,011 32,010
Income taxes 8,810 2,472
Net income $31,201 $29,538
See notes to consolidated financial statements.
Consolidated Statements of Cash Flows
NRG Energy, Inc. and Subsidiaries
Year Ended December 31
(Thousands of Dollars) 1995 1994
Cash flows from operating activities:
Net income $31,201 $29,538
Adjustments to reconcile net
income to net cash provided
(used) by operating activities:
Undistributed equity in operating
earnings of unconsolidated
affiliates (21,315) (18,511)
Depreciation and amortization 8,283 8,675
Deferred income taxes and
investment tax credits (2,608) (523)
Cash provided (used) by changes
in certain working capital
items 8,993 (6,138)
Cash used by changes in
other assets and liabilities (1,004) (615)
Undistributed equity in gain
from project termination
settlement (14,430) -
Net cash provided by
operating activities 9,120 12,426
Cash flows from investing activities:
Investments in projects (25,776) (102,119)
Loans to projects (35,411) (4,415)
Capital expenditures (11,036) (5,750)
(Increase) decrease in
restricted cash 4,044 (13,817)
Other, net (3,104) 2,255
Net cash used by investing
activities (71,283) (123,846)
Cash Flows from Financing Activities:
Capital contributions from
parent 55,000 103,885
Dividends and other
distributions paid to parent - (9)
Proceeds from issuance of
long-term debt - 2,375
Principal payments on
long-term debt (3,305) (2,487)
Net cash provided by
financing activities 51,695 103,764
Net decrease in cash and
cash equivalents (10,468) (7,656)
Cash and cash equivalents
at beginning of year 17,507 25,163
Cash and cash equivalents
at end of year $7,039 $17,507
Supplemental disclosures of cash flow information:
Interest paid (net of amount
capitalized) $6,536 $6,808
Income taxes paid (benefits
received), net 1,447 (1,939)
See notes to consolidated financial statements.
Consolidated Statements of Stockholder's Equity
NRG Energy, Inc. and Subsidiaries
Total
Additional Retained Currency stock-
Common paid-in earnings translation holder's
stock capital (deficit) adjustments equity
(Thousands of Dollars)
Balances at December
31, 1993 $1 $112,128 $(14,407) $- $97,722
Net income 29,538 29,538
Dividends and other
distributions to
parent (9) (9)
Capital contributions
from parent 103,885 103,885
Currency translation
adjustments 3,586 3,586
Balances at December
31, 1994 1 216,013 15,122 3,586 234,722
Net income 31,201 31,201
Capital contributions
from parent 55,000 55,000
Cumulative currency
translation
adjustments (1,159) (1,159)
Balances at December
31, 1995 $1 $271,013 $46,323 $2,427 $319,764
See notes to consolidated financial statements.
Notes to Consolidated Financial Statements
NRG Energy, Inc. and Subsidiaries
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 nonregulated
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 required
in connection with foreign currency hedging activities (see Note
12) and cash collateral for letters of credit issued in relation
to project development activities.
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:
Facilities and improvements 20-45 years
Machinery and equipment 7-30 years
Office furnishings and equipment 3-5 years
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 $253,000 and
$45,000 in 1995 and 1994, 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, after
which time they are capitalized. When project operations begin,
previously capitalized project costs are reclassified to
investments 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 service agreements and 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 30 years.
Intangibles also include patents which are being amortized using
the straight-line method over 17 years. The Company periodically
evaluates the recovery of goodwill and other intangibles based
on an analysis of estimated undiscounted future cash flows.
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.
Deferred revenues relate to a 1988 legal settlement with a major
thermal customer. Settlement proceeds were deferred when
received and are reflected in operating income on a
straight-line basis over the life of the related steam contract
which expires in 2001.
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 translation 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.
Exchange gains and losses that result from foreign currency
transactions (e.g., converting cash distributions made in one
currency to another currency) are included in the results of
operations as a component of equity in earnings of
unconsolidated affiliates. Through December 31, 1995, NRG has
not experienced any material translation gains or losses from
foreign currency transactions that have occurred since the
respective foreign investment dates.
Derivative financial instruments
NRG's policy is to hedge foreign currency denominated
investments as they are made to preserve their U.S. dollar
value, where appropriate hedging vehicles are available. NRG has
entered into currency hedging transactions through the use of
forward foreign currency exchange agreements. Gains and losses
on these agreements offset the effect of foreign currency
exchange rate fluctuations on the valuation of the investments
underlying the hedges. Hedging gains and losses, net of income
tax effects, are reported with other currency translation
adjustments as a separate component of stockholder's equity. The
Company is not hedging currency translation adjustments related
to future operating results. NRG does not speculate in foreign
currencies. None of these derivative financial instruments are
reflected in NRG's balance sheet.
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 1994 financial
statements to conform to the 1995 presentation. These
reclassifications had no effect on net income or stockholder's
equity as previously reported.
Note 3 - Business acquisitions
Through its subsidiaries, NRG purchased equity interests during
1994 in three significant international projects, two in Germany
and one in Australia. One of the investments is a 33% interest
in Mitteldeutsche Braunkohlengesellschaft mbh (MIBRAG), a German
corporation. MIBRAG was formed by the German government to
operate mines, electric power plants and other energy-related
facilities. The other German investment is a 50% interest in
Saale Energie GmbH (Saale), also a German corporation. Saale
owns a 400-megawatt share of a 900-megawatt power plant
currently under construction near Schkopau, Germany. The
Australian investment is a 37.5% interest (held by NRG
subsidiaries Sunshine State Power BV and Sunshine State Power
(No. 2) BV) in a joint venture that acquired a 1,680 megawatt
coal-fired power plant in Gladstone, Queensland, Australia,
which is operated by an NRG subsidiary. The total acquisition
investments in these three projects through December 31, 1995,
including capitalized development costs, was approximately $103
million. Earnings from equity interests in these NRG
international projects acquired in 1994 contributed $32.3 and
$25.6 million to NRG's 1995 and 1994 earnings, respectively.
Note 4 - Property, plant and equipment
The major classes of property, plant and equipment at December
31 were as follows:
(Thousands of dollars) 1995 1994
Facilities and equipment,
including construction work
in progress of $5,914
and $2,289 $163,099 $153,221
Land and improvements 10,397 10,397
Office furnishings and
equipment 2,671 2,109
Total property, plant
and equipment 176,167 165,727
Accumulated depreciation (64,248) (58,093)
Net property, plant and
equipment $111,919 $107,634
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 in the net income
or losses of international projects is reflected as equity in
earnings of unconsolidated affiliates.
A summary of NRG's significant equity-method investments which
were in operation at December 31, 1995 is as follows:
Geographic Economic Purchased
area interest or placed
in service
Name
Various Independent U.S.A. 45%-50% July 1991
Power Production Dec. 1994
Facilities
Rosebud Syncoal U.S.A. 50% Aug. 1993
Partnership
MIBRAG Mining Europe 33.3% Jan. 1994
and Power
Generation
Gladstone Power Australia 37.5% March 1994
Station
Schkopau Power Europe 20.6% Under
Station Construction
Scudder Latin Latin 25% June 1993
American Trust America
for Independent
Power Energy Projects
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:
(Thousands of dollars) 1995 1994
Operating revenues $776,612 $731,308
Costs and expenses 615,696 604,428
Net income $160,916 $126,880
Current assets $757,124 $452,651
Noncurrent assets 2,557,992 1,787,089
Total assets $3,315,116 $2,239,740
Current liabilities $290,805 $159,840
Noncurrent liabilities 2,236,919 1,757,057
Equity 787,392 322,843
Total liabilities
and equity $3,315,116 $2,239,740
NRG's share of equity $221,129 $164,863
NRG's share of income 23,639 27,155
In June 1995, after receiving final regulatory approvals, a
power sales contract between a California energy project, in
which NRG is a 45% investor, and an unaffiliated utility company
was terminated. A pretax gain of $29.9 million was recognized by
NRG for its share of the termination settlement. In 1994, a
Michigan cogeneration project, in which NRG was a 50% investor,
received payment from an unaffiliated utility company as
compensation for the termination of an energy purchase
agreement. A pretax gain of $9.7 million was recognized by NRG
for its share of the contract termination settlement, net of
project investment costs.
The Company recorded pretax charges of $5.0 million in 1995 and
$5.0 million in 1994 to write down the carrying value of certain
energy projects. The charges were determined based on estimated
discounted future cash flows, and are recorded in equity in
earnings of unconsolidated affiliates.
Note 6 - Related party transactions
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 incremental costs (fuel, labor, plant maintenance, and
auxiliary power) incurred by NSP to produce the thermal energy.
NRG paid NSP $3.7 million in 1995 and $6.6 million in 1994 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. NRG has an agreement expiring in 2006 to sell
wood by-product obtained from a thermal customer to NSP for use
as fuel. Under these agreements, NRG received $1.9 million and
$1.7 million from NSP, and paid $2.3 million and $2.2 million to
NSP in 1995 and 1994, respectively.
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. Service provided by NSP to NRG are principally cash
management, legal, accounting, employee relations and
engineering. In addition, NRG employees participate in certain
employee benefit plans of NSP as discussed in Note 10. During
1995 and 1994, NRG paid NSP $6.8 million and $6.2 million,
respectively, as reimbursement under this agreement.
Note 7 - Notes receivable
Notes receivable consist primarily of fixed and variable rate
notes secured by equity interests in partnerships and joint
ventures. The weighted average interest rate on the notes was
7.8% at December 31, 1995 and 11.2% at December 31, 1994.
Note 8 - Long-term debt
Long-term debt consists of the following at December 31:
(Thousands of dollars) 1995 1994
NRG Energy Center, Inc.
Senior Secured Notes
Series due June 15,
2013, 7.31% $79,326 $81,498
Note payable to NSP,
due December 1,
1995-2006 5.40%-6.75% 8,958 9,466
NRG Sunnyside, Inc.
note payable, due
December 31, 1997
10.00% 1,750 2,375
90,034 93,339
Less current maturities (3,762) (3,306)
Total $86,272 $90,033
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 agreements, 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, 1995.
The note payable to NSP relates to long-term debt assumed by the
Company in connection with the transfer of ownership of an RDF
processing plant by NSP to the Company in 1993.
The NRG Sunnyside, Inc. note payable was issued in connection
with the purchase of an equity interest in a waste-coal project
in 1994.
Annual maturities of long-term debt for the years ending after
December 31, 1995 are as follows:
(Thousands of dollars)
1996 $3,762
1997 3,979
1998 3,335
1999 3,581
2000 3,841
Thereafter 71,536
Total $90,034
The Company has revolving-credit agreements which allow for
borrowings which may not exceed $6.0 million. At December 31,
1995 and 1994, there were no borrowings under the credit
agreements.
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.
The provision for income taxes consists of the following:
(Thousands of dollars) 1995 1994
Current
Federal $9,965 $1,694
State 3,268 737
Foreign 233 219
13,466 2,650
Deferred
Federal (1,592) 1,280
State (1,012) 369
(2,604) 1,649
Tax credits recognized (2,052) (1,827)
Total income tax expense $8,810 $2,472
The components of the net deferred income tax liability at
December 31 were:
(Thousands of dollars) 1995 1994
Deferred tax liabilities
Differences between book
and tax bases of property $16,364 $13,269
Investments in projects 1,226 6,168
Goodwill 444 256
Other 112 930
Total deferred tax liabilities 18,146 20,623
Deferred tax assets
Deferred revenue 3,099 3,645
Development costs - 2,047
Deferred investment tax credits 856 978
Deferred compensation, accrued
vacation and other reserves 1,412 992
Steam capacity rights 1,109 1,175
Other 2,504 267
Total deferred tax assets 8,980 9,104
Net deferred tax liability $9,166 $11,519
Actual income tax expense recorded differs from the statutory
federal income tax rate of 35% due to state income taxes,
varying tax treatment of foreign income and expenses and tax
credits recognized.
Income before income taxes includes net foreign equity income of
$32.3 million and $25.6 million in 1995 and 1994, 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 $57.9 million at December 31, 1995.
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.
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. Net annual periodic pension cost includes the
following components:
(Thousands of dollars) 1995 1994
Service cost-benefits
earned during the period $688 $654
Interest cost on projected
benefit obligation 525 354
Actual return on assets (1,542) (58)
Net amortization and deferral 1,147 (262)
Net periodic pension cost $818 $688
NRG's funding policy is to contribute to NSP the full actuarial
pension cost accrued, less future tax benefits to be realized
from such costs. 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:
NSP Plan-1995
(Thousands of dollars) Total NRG Portion
Actuarial present value
of benefit obligation
Vested $686,403 $3,050
Nonvested 155,177 1,520
Accumulated benefit
obligation $841,580 $4,570
Projected benefit obligation $1,039,981 $8,828
Plan assets at fair value 1,456,530 6,657
Plan assets (in excess of)
less than projected benefit
obligation (416,549) 2,171
Unrecognized prior service cost (20,805) (91)
Unrecognized net actuarial
gain (loss) 452,699 (1,388)
Unrecognized net transitional
asset 615 -
Net pension liability
recorded $15,960 $692
NSP Plan-1994
(Thousands of dollars) Total NRG Portion
Actuarial present value of
benefit obligation
Vested $571,254 $563
Nonvested 120,420 1,016
Accumulated benefit
obligation $691,674 $1,579
Projected benefit obligation $836,957 $4,228
Plan assets at fair value 1,165,584 5,170
Plan assets in excess of
projected benefit obligation (328,627) (942)
Unrecognized prior service cost (21,538) (96)
Unrecognized net actuarial gain 370,289 1,038
Unrecognized net transitional
asset 691 -
Net pension liability
recorded $20,815 $-
The weighted average discount rate used in determining the
actuarial present value of the projected benefit obligation was
7% in 1995 and 8% in 1994. The rate of increase in future
compensation levels used in determining the actuarial present
value of the projected obligation was 5% in 1995 and 1994. The
assumed long-term rate of return on assets used for cost
determinations was 8% for 1995 and 1994. Changes in actuarial
assumptions decreased 1995 pension costs by $395,000 and are
expected to increase 1996 costs by $291,000.
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 is
intended to provide for sharing of costs of retiree health care
between NRG and retirees. For employees retiring after January
1, 1994, a six-year cost-sharing strategy was implemented with
retirees paying 15% of the total cost of health care in 1994,
increasing to a total of 40% in 1999.
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. In
conjunction with the adoption of SFAS No. 106 in 1993, NRG
elected to amortize on a straight-line basis over 20 years the
unrecognized accumulated postretirement benefit obligation
(APBO) of $1.4 million for current and future retirees. Plan
assets as of December 31, 1995 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.
The following table sets forth the funded status of the health
care plan in which NRG employees participate at December 31:
NSP Plan-1995
(Thousands of dollars) Total NRG Portion
APBO
Retirees $145,800 $67
Fully eligible plan
participants 24,400 518
Other active plan
participants 116,800 2,239
Total APBO 287,000 2,824
Plan assets at fair value 11,600 -
APBO in excess of plan assets 275,400 2,824
Unrecognized net actuarial loss (40,400) (510)
Unrecognized net transition
obligation (183,200) (1,203)
Net benefit obligation
recorded $51,800 $1,111
NSP Plan-1994
(Thousands of dollars) Total NRG Portion
APBO
Retirees $132,200 $34
Fully eligible plan
participants 21,500 359
Other active plan
participants 79,400 1,319
Total APBO 233,100 1,712
Plan assets at fair value 8,000 -
APBO in excess of plan assets 225,100 1,712
Unrecognized net actuarial gain 2,300 265
Unrecognized net transition
obligation (194,000) (1,273)
Net benefit obligation
recorded $33,400 $704
The assumed health care cost trend rates used in measuring the
APBO at December 31, 1995 and 1994, respectively, were 10.4% and
11.0% for those under age 65, and 7.3% and 7.5% for those over
age 65. The assumed cost trends are expected to decrease each
year until they reach 5.5% 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 for each
year would increase the APBO by approximately 15% as of December
31, 1995. Service and interest cost components of the net
periodic postretirement cost would increase by approximately 17%
with a similar one percent increase in the assumed health care
cost trend rate. The assumed discount rate used in determining
the APBO was 7% for December 31, 1995 and 8% for December 31,
1994, compounded annually. The assumed long-term rate of return
on assets used for cost determinations under SFAS No. 106 was 8%
for 1995 and 1994. Changes in actuarial assumptions had an
immaterial impact on 1995 costs and are not expected to
materially impact 1996 costs.
The net annual periodic postretirement benefit cost recorded for
1995 and 1994 consists of the following components:
(Thousands of dollars) 1995 1994
Service cost-benefits
earned during the year $171 $140
Interest cost on APBO 171 126
Amortization of transition
obligation 70 70
Net periodic postretirement
health care cost $412 $336
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 23.1% in 1995 and 24.9% in 1994 of the Company's
operating revenues were recognized under this contract. In
addition, sales to one thermal customer amounted to 10.9% of
operating revenues in 1995 and 11.7% of operating revenues in
1994.
Note 12 - Financial instruments
The estimated December 31 fair values of NRG's recorded
financial instruments are as follows:
1995 1994
(Thousands Carrying Fair Carrying Fair
of dollars) Amount Value Amount Value
Cash and cash
equivalents $7,039 $7,039 $17,507 $17,507
Restricted cash 9,773 9,773 13,817 13,817
Notes receivable,
including current
portion 40,447 40,447 6,802 6,802
Long-term debt,
including current
portion 90,034 91,682 93,339 82,694
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.
NRG has entered into six forward foreign currency exchange
contracts with counterparties to hedge exposure to currency
fluctuations to the extent permissible by hedge accounting
requirements. Pursuant to these contracts, transactions have
been executed that are designed to protect the economic value in
U.S. dollars of NRG's equity investments and retained earnings,
denominated in Australian dollars and German deutsche marks
(DM). NRG's forward foreign currency exchange contracts, in the
notional amount of $119 million, hedge approximately $123
million of foreign currency denominated assets, and in the
notional amount of $47 million, hedge approximately $64 million
of foreign currency denominated retained earnings at December
31, 1995. Because the effects of both currency translation
adjustments to foreign investments and currency hedge instrument
gains and losses are recorded on a net basis in stockholder's
equity (not earnings), the impact of significant changes in
currency exchange rates on these items would have an immaterial
effect on NRG's financial condition and results of operations.
The contracts required cash collateral balances of $5.9 million
at December 31, 1995, which are reflected as restricted cash on
NRG's balance sheet. The contracts terminate in 1998 through
2005 and require foreign currency interest payments by either
party during each year of the contract. If the contracts had
been terminated at December 31, 1995, $5.2 million would have
been payable by NRG for currency exchange rate changes to date.
Management believes NRG's exposure to credit risk due to
non-performance by the counterparties to its forward exchange
contracts is not significant, based on the investment grade
rating of the counterparties.
Note 13 - Commitments and contingencies
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 $796,000 in 1995 and $784,000 in
1994. Future minimum lease commitments under these leases for
the years ending after December 31, 1995 are as follows:
(Thousands of dollars)
1996 $470
1997 239
1998 69
1999 63
2000 63
Thereafter 577
Total $1,481
Capital commitments
NRG is contractually committed to additional equity investments
in an existing German energy project. Such commitments are for
approximately DM 33 million in 1996. The 1996 commitment would
be approximately $23 million, based on exchange rates in effect
at December 31, 1995. In addition, NRG is contractually
committed to additional equity investments of $17 million in the
Scudder Latin American Trust for Independent Power Energy
Projects as of December 31, 1995.
NRG is in the final stages of purchasing a 42% interest in
O'Brien Environmental Energy, Inc. (O'Brien) from bankruptcy. In
connection with its bid for O'Brien, on January 3, 1996, NRG
obtained a $100 million letter of credit from a bank, which is
secured by a pledge of various NRG assets. NRG delivered a
letter of credit to O'Brien on January 18, 1996, to secure its
obligations to complete its proposed investment in O'Brien. In
January 1996, the United States Bankruptcy Court for the
District of New Jersey confirmed the Chapter 11 Plan of
Reorganization for O'Brien proposed by NRG and other interested
parties.
O'Brien has interests in eight domestic operating power
generation facilities with aggregate capacity of approximately
230 megawatts, and in one 150-megawatt facility in the contract
stage of development. As a result of the purchase, approximately
$107 million would be made available to O'Brien's creditors by
NRG. At least $81 million of the total made available to the
creditors would be provided by NRG as follows: (i) a $28 million
equity investment by NRG for its 42% interest in O'Brien; (ii)
a $7.5 million investment by NRG for all of O'Brien's interest
in certain biogas projects; and (iii) a $45 million unsecured
loan from NRG to O'Brien. NRG currently is negotiating with an
unaffiliated lender to refinance O'Brien's Newark Boxboard
project in the amount of $56 million, of which approximately $26
million would be applied for distribution to O'Brien's creditors
in reduction of NRG's approximately $107 million obligation. If
this financing is not obtained concurrently with the closing of
the O'Brien transaction, NRG would be obligated to make a $26
million loan to O'Brien after its reorganization.
Note 14 - Subsequent event
In January 1996, NRG issued $125 million of 7.625% unsecured
senior notes maturing in 2006 to support equity requirements for
projects currently under way and in development.
