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) May 30, 1997
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, 1996
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. 1996
Annual Report to Shareholder:
Management's Discussion and Analysis
Consolidated Statements of Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholder's Equity
Notes to Consolidated Financial Statements
Report of Independent Accountants
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)
/s/
By
Roger D. Sandeen
Vice President and Controller
Dated: May 30, 1997
EXHIBIT INDEX
Method of Exhibit
Filing No. Description
DT 23.01 Consent of Independent Accountants
DT 99.01 Excerpts from NRG Energy, Inc. 1996
Annual Report to Shareholder:
Management's Discussion and Analysis
Consolidated Statements of Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholder's
Equity
Notes to Consolidated Financial Statements
Report of Independent Accountants
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 8, 1997
appearing in this Form 8-K.
/s/
PRICE WATERHOUSE LLP
Minneapolis, Minnesota
May 30, 1997
Exhibit 99.01
NRG Energy, Inc. 1996 Annual Report to Shareholder
Management's Discussion and Analysis
NRG Energy, Inc.
Discussion of Business and Trends, Demands and Commitments within the Industry
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 4,453
megawatts (mw), of which NRG has operational responsibility for 2,005 mw and
net ownership or leasehold interests in 1,353 mw. In addition, NRG has
substantial interests in district energy and cooling systems and steam
generation and transmission operations. For the year ended December 31, 1996,
NRG's thermal businesses had a steam capacity of approximately 3,260 million
British thermal units (mmbtus). Also in 1996, NRG's refuse-derived fuel (RDF)
plants processed more than 808,000 tons of municipal solid waste into
approximately 635,000 tons of RDF.
Operating Businesses - International
In 1994, NRG, through a wholly-owned foreign subsidiary, agreed to acquire a
33% interest in the coal mining, power generation and associated operations
of Mitteldeutsche Braunkohlengesellschaft mbh (MIBRAG), located south of
Leipzig, Germany. MIBRAG is a German corporation formed by the German
government to hold two open-cast brown coal (lignite) mining operations, a
lease on an additional mine, the associated mining rights and rights to future
mining reserves, two small industrial power plants and a circulating fluidized
bed power plant, a district heating system and coal briquetting and dust
production facilities. The coal mines have estimated reserves of approximately
789 million metric tons of lignite. Under the acquisition agreement, Morrison
Knudsen Corporation and PowerGen plc also each acquired a 33% interest in
MIBRAG, while the German government retained 1%. The investor partners began
operating MIBRAG effective January 1, 1994, and the legal closing occurred
August 11, 1994. In December 1996, each of the investor parties purchased one
third of the remaining 1% interest held by the German government.
In 1993, NRG, through a wholly-owned foreign subsidiary, acquired a 50%
interest in a German corporation, Saale Energie GmbH (Saale). Saale owns a 400
mw share (41.1% interest) of a 960 mw power plant located in Schkopau,
Germany, which is near Leipzig. PowerGen plc of the United Kingdom acquired
the remaining 50% interest in Saale. Saale was formed to acquire a 41.1%
interest in the power plant. VEBA Kraftwerke Ruhr AG of Gelsenkirchen, Germany
owns the remaining 58.9% interest and operates the plant. The plant is fired
by brown coal (lignite) mined by MIBRAG under a long-term contract. Saale has
a long-term power sales agreement for its 400 mw share of the Schkopau
facility with VEAG of Berlin, Germany, the company that controls the
high-voltage transmission of electricity in the former East Germany. The first
425 mw unit of the plant began operation in January, 1996, and the second unit
came on line in July, 1996. The 110 mw turbine began commercial operations in
February 1996.
In June 1993, NRG, together with the International Finance Corporation (an
affiliate of the World Bank), CMS Energy Corporation (the parent company of
Consumers Power Company) and Corporation Andina de Fomento (CAF) formed the
Scudder Latin American Trust for Independent Power (the Trust). The Trust was
established to invest in the development of new power plants and privatization
of existing power plants in Latin America and the Caribbean. The Trust
retained Scudder Stevens & Clark, Inc. as its investment manager and commenced
investment development efforts in September 1993. In June 1995, the Trust was
liquidated and assets were transferred to two new trusts: Scudder Latin
American Power 1-P LDC and Scudder Latin American Power 1-C LDC, together
referred to as Scudder, to permit the efficient allocation of foreign source
income. Each of the four investors has committed to invest $25 million during
the period 1994-1998. Scudder holds investments in four power generation
facilities in Latin America and one in the Caribbean. As of December 31, 1996,
NRG has invested $11.0 million in Scudder for project interests in generation
facilities ranging from 4% to 9%. NRG has committed the balance of the $25
million to projects in Peru and Colombia. These funds will be drawn down
during 1997 and 1998.
In 1994, NRG, through wholly-owned foreign subsidiaries, acquired a 37.5%
interest in the Gladstone Power Station, a 1,680 mw coal-fired plant located
in Gladstone, Queensland, Australia, from the Queensland Electricity
Commission. Other members of the unincorporated joint venture, including
Comalco Aluminum Limited (Comalco), of Australia, acquired the remaining
interest. A large portion of the electricity generated by the station is sold
to Comalco for use in its Boyne Island aluminum smelter, pursuant to long-term
power purchase agreements. NRG, through an Australian subsidiary, operates the
Gladstone plant.
In 1994, NRG signed a joint development agreement with Advanced Combustion
Technologies, Inc. (ACT) with respect to the acquisition, upgrading, expansion
and development of Energy Center Kladno (Kladno) in Kladno, Czech Republic.
NRG, ACT, and Nations Energy, a subsidiary of Tucson Electric, jointly
acquired a 53.0% interest in Kladno, which owns and operates an existing
coal-fired power and thermal energy generation facility. The facility supplies
28 mw of electrical energy to an industrial complex and the local electric
distribution company, and 150 mw thermal-equivalent steam and heated water to
a district heating system and thermal energy to an industrial complex. Kladno
also owns certain ancillary utility assets. 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
with up to 250 mw of coal-fired generation and 88 mw of gas-fired generation
depending on the ongoing analysis of the alternatives. The new facility would
supply hot water steam to the district heating system and sell electricity to
STE, the principal regional electric distribution company in Kladno.
In March 1996, a joint venture between NRG and Transfield Holdings Pty., Ltd.
(Transfield) an Australian facilities contractor, signed an 18-year power
purchase agreement and an acquisition agreement with the Queensland
Transmission and Supply Corporation for the acquisition and refurbishment of
the 189 mw coal-fired power generation facility in Collinsville, Queensland,
Australia. NRG owns a 50% interest and will operate the facility in
conjunction with Transfield. Transfield is performing the facility
refurbishment and environmental remediation under a fixed price turn-key
contract. Refurbishment is expected to be completed in March 1998.
On December 19, 1996, NRG and Nordic Power Invest AB (NPI), a wholly-owned
subsidiary of Vattenfall AB in Sweden, purchased, through a public tender
offer, 96.6% (4,060,732 shares) of the common stock of Bolivian Power Company
Limited (COBEE) (NYSE:BLP) for $43 per share through Tosli Investment BV, the
holding company jointly owned by NRG (64%) and NPI (36%). COBEE is the second
largest generator of electricity in Bolivia with 162 mw of capacity, comprised
of 145 mw of hydro capacity and a 17 mw gas-fired peaking unit. Bolivian Power
is incorporated in Canada, with its local office in LaPaz, Bolivia. COBEE is
in process of expanding its hydroelectric facilities in Zongo Valley by 56 mw.
Upon completion of this expansion in 1998, the Company's total generating
capacity will be 218 mw. Currently, Tosli ownership is divided between
Vattenfall (40%) and NRG (60%), however, it is NRG's intent to reduce its
holding to 50% or less.
On February 6, 1997, NRG signed a subscription agreement with Energy
Developments Limited (EDL) to acquire up to 20% of EDL's common stock, and an
additional 15% of preference shares at a $2.20 per share. EDL, an Australian
company, is the largest generator of power from coal seam methane in the world
and is engaged exclusively in independent power generation from landfill gas,
coal seam methane, and natural gas (including latest technology combined cycle
projects). The company currently operates over 200 mw of generation capacity
across five states and territories of Australia and has commenced the
development of new projects in the United Kingdom, Asia and New Zealand. The
current equity megawatt ownership held by EDL is approximately 170 mw. EDL is
a publicly traded company listed on the Australian Stock Exchange. On February
11, 1997, NRG made an initial purchase of 7.2% (4.5 million shares) of common
stock for A$9.9 million (U.S. $7.9 million).
Operating Businesses - Domestic
NRG operates two refuse-derived fuel (RDF) processing plants and an ash
disposal site in Minnesota, and also owns one of the plants. NRG receives a
fee to manage the other RDF plant, which is owned by NSP, under an operation
and maintenance agreement approved by the Minnesota Public Utilities
Commission. In 1996, the RDF plants processed more than 808,000 tons of
municipal solid waste into approximately 635,000 tons of RDF which was burned
at two NSP power plants and at a power plant owned by United Power
Association.
NRG participates in the ownership or management of several thermal energy
businesses which are managed as a group. NRG owns and operates the Minneapolis
Energy Center (MEC), a downtown Minneapolis district heating and cooling
system which utilizes steam and chilled water generating facilities to heat
and cool buildings for more than 100 customers. MEC's primary assets include
a main plant, with 800,000 lbs/hour of steam capacity and 22,000 tons of
chilled water capacity, four satellite plants, two standby plants, six miles
of steam lines and two miles of chilled water distribution lines. MEC also
owns and operates a base load steam production facility with 150,000 lbs/hour
capacity, which serves the Fairview Riverside Hospital and Health Care
Services complex and Augsburg College under a 25-year steam supply agreement.
NRG also owns a 48.9% limited partnership interest, and a 0.5% general
partnership interest in each partnership holding the operating assets of the
district heating and cooling systems in Pittsburgh and San Francisco. 1996
steam sales volume of the San Francisco thermal system was approximately 623
million pounds. The San Francisco thermal system provides service to more than
200 buildings.
In 1996, The Pittsburgh thermal system provided annual steam sales volume of
349 million pounds and chilled water sales volume of 21 million tons to 24
customers. In addition, NRG owns and operates three steam lines in Minnesota
that provide steam from NSP's power plants to the Waldorf Corporation, the
Andersen Corporation and the Minnesota Correctional Facility in Stillwater.
Another NRG wholly-owned subsidiary, NEO Corporation (NEO), was formed in 1993
to develop small power generation facilities in the United States. NEO owns
a 50% interest in Minnesota Methane LLC. Minnesota Methane LLC is developing
small scale landfill gas facilities utilizing methane gas. In 1996, NEO and
Minnesota Methane LLC also acquired six landfill gas projects as part of the
acquisition of NRGG, as discussed later in this section. Of the projects
acquired, four were operating facilities and two were projects under
development and construction. In 1994, NEO acquired a 50% interest in
Northbrook Energy LLC, an independent power producer with 21 mw of
hydroelectric facilities throughout the United States. In 1996, Northbrook
Energy LLC acquired seven additional hydroelectric plants totaling 15.5 mw
from Duke Power Company.
In 1994, through a wholly-owned subsidiary, NRG purchased a 50% ownership
interest in Sunnyside Cogeneration Associates, which owns and operates a
58 mw waste coal plant in Utah. The plant is currently being operated by a
partnership that is 50% owned by an NRG affiliate. Changes in the economic
performance of the Sunnyside project have caused NRG to examine a number of
project enhancement options with the current bondholders, as well as the terms
of the existing power purchase agreement. The negotiations are intended to
improve the project's performance. Although the discussions will impact future
project performance, they have not reached a stage where the impact can be
reasonably estimated.
NRG, through wholly-owned subsidiaries, owns 50% of the Jackson Valley Energy
partnership, which owns and operates a 16 mw cogeneration power plant near
Sacramento, California. The plant had a long-term power sales agreement with
Pacific Gas & Electric (PG&E) through 2014. On April 1, 1995, Jackson Valley
Energy Partners reached an agreement with PG&E regarding the idling of the
Jackson Valley plant. Under this agreement, which is similar to the San
Joaquin Valley Energy Partnerships agreement, discussed later, the plant will
remain idle until May 1, 1997, and will then restart and sell power to PG&E
under a new long-term agreement.
In April 1996, NRG purchased, through bankruptcy proceedings, a 41.86%
interest in O'Brien Environmental Energy, Inc. (O'Brien). O'Brien has been
renamed NRG Generating (U.S.) Inc. (NRGG). The former shareholders of O'Brien
own the remaining NRGG shares, traded under the ticker symbol NRGG. NRGG is
the 100% owner of power cogeneration facilities in Newark and Parlin, New
Jersey. These two facilities have an aggregate operating capacity of 174 mw.
NRGG also owns 83% of a 22 mw cogeneration facility in Philadelphia,
Pennsylvania. NRGG also has a 33.3% interest in the Grays Ferry project, a 150
mw facility currently under construction in Philadelphia, Pennsylvania that
is scheduled to commence operations in December 1997. In addition to an equity
interest in NRGG, NRG acquired certain landfill gas projects which were
transferred to its subsidiary, NEO, and in the purchase made loans to NRGG and
entered into project commitments. (See Note 13 of Notes to Consolidated
Financial Statements for further discussion of NRG's capital commitments
related to NRGG.)
New Business Development
On November 14, 1996, NRG, together with its partners, Ansaldo Energia SpA
(Ansaldo), Italy, and P.T. Kiana Metra Tujuhdua, Indonesia, signed a power
contract with PT Perusahaan Listrik Negara (PLN), the state-owned Indonesian
electric company, to build, own and operate a 400 mw coal-fired power station
in Cilegon, West Java, Indonesia. NRG will have a 45% equity interest in the
project. NRG will operate and maintain the power plant for the 30-year life
of the project. Construction of the new power plant is due to begin in
mid-1997 and is anticipated to be fully operational by the year 2000. Ansaldo
will have responsibility for construction. The coal-fired power plant will
sell its entire output to the local Java-Bali grid under a 30-year power
purchase agreement.
On December 20, 1996, representatives of the Estonian Government, the
state-owned Eesti Energia (EE), and NRG signed a Development and Cooperation
Agreement creating the start of an extensive joint project. The agreement
defines the terms under which the joint project is to establish a plan to
develop and restructure the Estonian power plants. According to the
Development and Cooperation Agreement, the joint project of NRG and Eesti
Energia will be completed by July 1, 1997. The scope of the joint project will
be established by several documents, the most important of which is the
business plan of the joint venture between NRG and EE. The business plan will
include an analysis of the technical and economic potential of the power
plants and an estimation of the production capacity necessary for meeting the
energy needs of Estonia, as well as the financial terms of the joint project.
After the joint venture is created, NRG intends to invest up to $250 million
($50 million in equity and $200 million of project level financing) into
refurbishment of the Estonian generation plants.
NRG, together with two other parties, has filed a plan with the Federal
Bankruptcy Court, Baton Rouge, Louisiana, to acquire the fossil generating
assets of Cajun Electric Power Cooperative (Cajun) of Baton Rouge, Louisiana
for approximately $1.1 billion. The Court has also received two other bids for
Cajun's assets. All three bids will be voted upon by Cajun's creditors, with
the final decision subject to confirmation by the Court. NRG expects the bid
review and confirmation process to conclude in 1997. Under the plan filed with
the court, NRG would hold a 30% equity interest in Cajun.
On September 29, 1996, a new wholly-owned subsidiary of NRG purchased, at a
substantial discount, the senior debt of Mid-Continent Power Company of Pryor,
Oklahoma. Mid-Continent Power Company supported the transaction and views
NRG's acquisition of its senior debt as a first step toward what it hopes will
be a successful restructuring of the company.
NRG reached agreement with Indeck Energy Services (Europe) to take a 50%
interest in the Enfield Energy Centre, a 350 mw power project located in the
North London borough of Enfield. The power station is planned to begin
commercial operations in the latter half of 1999 and will be jointly developed
by NRG and Indeck Services of Chicago, Illinois and its European subsidiary.
The merchant power station will sell its output to the U.K. grid.
NRG is pursuing several energy-related investment opportunities and continues
to evaluate other opportunities as they arise. (See Note 13 of Notes to
Consolidated Financial Statements for further discussion of NRG's capital
commitments.)
Projects With Nonrecurring Earnings Effects
NRG, through wholly-owned subsidiaries, owns 45% of the SJVEP, which own four
power plants located near Fresno, California with a total capacity of 43 mw.
The plants previously operated under long-term Standard Offer 4 (SO4) power
sales contracts with PG&E which are due to expire in 2017. In early 1995, PG&E
reached basis agreements with SJVEP to acquire the SO4 contracts. All
regulatory approvals for the agreements were received in the second quarter
of 1995. The negotiated agreements resulted in cost savings for PG&E customers
as well as economic benefits for SJVEP. Under the terms of the agreements,
PG&E has been released from its contractual obligation to purchase power
generated by SJVEP. Proceeds received from PG&E under the agreements were used
to repay SJVEP debt obligations and recover investments in the facilities.
SJVEP continues to own and maintain the facilities and to evaluate
opportunities to market power. NRG's share of the pre-tax gain realized by
SJVEP from this transaction, and recorded in June 1995, was approximately $30
million. Settlement distributions of approximately $14 million and $16 million
were paid to NRG from SJVEP in 1995 and 1996, respectively.
In January 1992, NRG's subsidiary, Scoria Incorporated, and Western Syncoal
Co., a subsidiary of Montana Power Co., completed construction of a
demonstration coal conversion plant designed to improve the heating value of
Montana coal by removing moisture, sulfur and ash. The plant, located in
Montana, began commercial operation in August 1993. NRG's net capitalized
investment in the Scoria coal project was written down by $3.5 million in
1994, $5 million in 1995 and $1.5 million in 1996 to reflect reductions in the
expected future operating cash flows from the project. NRG has no remaining
book investment in the Scoria project and is evaluating operating options.
Results of Operations
For the year ended December 31, 1996, NRG had net income of $20.0 million on
operating revenues of $104.5 million, compared to net income of $31.2 million
on operating revenues of $87.8 million in 1995. NRG's operating revenues from
wholly-owned operations for the year ended December 31, 1996, were $71.6
million, an increase of $7.5 million over the prior year. The increase is
primarily attributable to continued expansion of NEO's methane gas business
and increased revenues from the Minneapolis Energy Center. For the year ended
December 31, 1996, revenues from wholly-owned operations consisted primarily
of revenue from district heating and cooling (39%), other thermal projects
(22%), resource recovery activities (34%) and NEO (5%).
Equity in earnings of unconsolidated affiliates, excluding gains on project
termination settlements, was $32.8 million and $23.6 million for the years
ended December 31, 1996 and 1995 respectively. New revenue sources from the
Schkopau and NRG Generating (U.S.) Inc. projects provided equity earnings of
$6.4 million and $2.3 million, respectively. Additionally, Scudder Latin
American Power 1-P LDC and 1-C LDC provided $1.5 million of increased equity
earnings in 1996 as compared to 1995. These were offset by an expected
decrease in equity earnings of $9.2 million for the MIBRAG mining and power
generation project, primarily due to expected decreases in coal and briquette
sales. Equity in earnings of the Gladstone Power Station located in Australia
was $10.8 million in 1996, down slightly from 1995 earnings of $11.2 million.
Equity in earnings in 1996 and 1995 related to the Scoria enhanced coal
project reflect an investment write-down of $1.5 million and $5.0 million
respectively. On December 31, 1996, NRG's investment balance in the Scoria
project was reduced to zero.
Cost of wholly-owned operations was $36.6 million in 1996, an increase of $4.1
million or 12.6% compared to 1995, due primarily to increased fuel costs. Cost
of operations as a percentage of revenues from wholly-owned operations
remained constant at 51% for 1996 and 1995.
General, administrative and development costs were $39.2 million in 1996, as
compared to $34.7 million in 1995, an increase of $4.5 million, or 12.9%. The
majority of the increase was due to additional general and administrative
expenses incurred in the growth and development of NEO totaling $5.8 million,
in contrast with $1.8 million for the prior year. Business development
expenses for the year ended December 31, 1996, totaled $19.4 million, as
compared with $17.6 million for the same period in 1995. 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. NRG continues to aggressively seek new
projects which fit into the company's overall strategic plan.
Other income net increased $4.6 million in 1996 due primarily to additional
interest income earned from investing the proceeds of the $125 million bond
offering completed in January 1996.
The effective tax rate (benefit) for year ended December 31, 1996 was (39.3%),
as compared to 22.0% for the same period ended December 31, 1995. The decrease
in the effective tax rate was due to a change in NRG's income sources, with
more earnings derived from U.S. operations in 1995, primarily 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 due upon repatriation.
Liquidity and Capital Resources
Net cash flow from operating activities was $4.1 million in 1996. Principal
components of cash flow from operating activities were net income of $20.0
million, depreciation and amortization of $8.4 million and changes in working
capital of ($4.3) million. Non-cash adjustments that reduced cash flow from
operating activities consisted primarily of $17.8 million of undistributed
equity in operating earnings of unconsolidated affiliates. Cash used by
investing activities included $140.6 million in equity investments in
projects, $36.6 million in loans to projects, and $24.6 million in capital
expenditures related to wholly-owned operations. Additionally, cash flows from
investing activities in 1996 included $15.7 million of cash distributed from
SJVEP related to the project termination settlement. The project termination
resulted in a gain of $29.9 million in 1995, at which time NRG received a
$14.2 million distribution. All other cash distributions from the project are
included in operating cash flow, while the distributions from project
termination are included as cash flow from investing activities. Cash flow
from financing activities included an $80 million equity contribution from NSP
for the purchase of COBEE. Cash proceeds from the January 1996 bond offering
totaled $122.7 million after $2.3 million in financing costs, which NRG is
capitalizing and amortizing over the life of the 10-year bonds.
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, 1996, NRG's consolidated financial statements contained
long-term debt (excluding current maturities) of $207.3 million as compared
to $86.3 million in 1995, an increase of $121 million. The increase is
due to the January 31, 1996, issuance of $125 million of 7.625% unsecured
Senior Notes maturing in 2006 to support equity requirements for projects
acquired and in development. The Senior Notes were assigned ratings
of BBB- by S&P's Rating Group and Baa3 by Moody's. Annual maturities of
long-term debt range from $4.0 million to $4.2 million in the five-year period
ending December 31, 2001. These bond ratings were reaffirmed in January 1997.
NRG project commitments require investment of approximately $201 million for
the 1997-2001 time period. These requirements are expected to be met with
proceeds from the issuance 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.
As of December 31, 1996, NRG was committed to additional equity investments
of approximately $37 million in 1997 and approximately $201 million for 1997-
2001 for various international power generation projects. In addition, in
1996, NRG provided a $10 million loan commitment to a wholly-owned subsidiary
of NRG Generating (U.S.) Inc. (NRGG), an unconsolidated affiliate of NRG, in
order for the NRGG subsidiary to fund its capital contribution to Grays Ferry,
a cogeneration project, currently under construction. No funds have been
disbursed as of December 31, 1996. However, NRG expects to fund this loan in
1997. Also in 1996, NRG executed an agreement whereby NRG is obligated to
provide NRGG power generation investment opportunities in the United States
over a three-year period. These projects, over the three-year term, must have
an aggregate equity value of at least $60 million or a minimum of 150 net mw.
In addition, NRG has committed to finance NRGG's investment in the projects
to the extent funds are not available to NRGG on comparable terms from other
sources. (See Note 13 of Notes to Consolidated Financial Statements for
further discussion of NRG's commitments.)
Impact of Inflation, Interest Rates, Exchange Rates and Energy Prices
NRG attempts, whenever practicable, to hedge certain aspects of its
international project investments against the effects of inflation and
fluctuations in interest rates and energy prices. To date, NRG has generally
structured the energy payments of 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 currency. (See Note 12 of Notes to
Consolidated Financial Statements for a further discussion of NRG's foreign
currency hedging activities.)
Consolidated Statements of Income
NRG Energy, Inc.
Year ended December 31
(Thousands of Dollars) 1996 1995
Operating Revenues
Revenues from wholly-owned operations $71,649 $64,180
Equity in operating earnings of
unconsolidated affiliates 32,815 23,639
Total operating revenues 104,464 87,819
Operating Costs and Expenses
Cost of wholly-owned operations 36,562 32,535
Depreciation and amortization 8,378 8,283
General, administrative and
development expenses 39,248 34,647
Total operating costs and expenses 84,188 75,465
Operating Income 20,276 12,354
Other Income (Expense)
Equity in gain from project
termination settlements - 29,850
Other income, net 9,477 4,896
Interest expense (15,430) (7,089)
Total other income (expense) (5,953) 27,657
Income Before Income Taxes 14,323 40,011
Income (Benefit) Taxes (5,655) 8,810
Net Income $19,978 $31,201
See notes to consolidated financial statements.
Consolidated Balance Sheets
NRG Energy, Inc.
ASSETS
Year ended December 31
(Thousands of Dollars) 1996 1995
Current Assets
Cash and cash equivalents $12,438 $7,039
Restricted cash 17,688 9,773
Accounts receivable-trade,
less allowance for doubtful
accounts of $143 and $103 12,061 9,333
Accounts receivable-affiliates 6,708 4,640
Current portion of notes
receivable-affiliates 3,601 5,267
Current portion of notes receivable 5,985 2,791
Inventory 2,312 1,811
Prepayments and other current assets 4,644 1,744
Total current assets 65,437 42,398
Property, Plant and Equipment, at Original Cost
In service 176,072 170,253
Under construction 24,683 5,914
200,755 176,167
Less accumulated depreciation (71,106) (64,248)
Net property, plant and equipment 129,649 111,919
Other Assets
Investments in projects 365,749 221,129
Capitalized project costs 9,267 4,185
Notes receivable, less current
portion-affiliates 58,169 32,389
Notes receivable, less
current portion 9,309 -
Intangible assets, net of
accumulated amortization of
$5,647 and $4,127 40,476 41,996
Debt issuance costs, net of
accumulated amortization of
$338 and $189 2,753 573
Total other assets 485,723 300,272
Total Assets $680,809 $454,589
See notes to consolidated financial statements.
LIABILITIES AND STOCKHOLDER'S EQUITY
Year ended December 31
(Thousands of Dollars) 1996 1995
Current Liabilities
Current portion of long-term debt $ 4,848 $ 3,762
Accounts payable-trade 4,443 6,208
Note payable-affiliates 3,867 1,185
Accrued income taxes 1,930 7,366
Accrued property and sales taxes 2,159 1,895
Accrued salaries, benefits and
related costs 6,559 5,178
Accrued interest 4,726 824
Other current liabilities 4,424 1,578
Total current liabilities 32,956 27,996
Long-term Debt, Less Current Portion 207,293 86,272
Deferred Revenues 6,340 7,726
Deferred Income Taxes 8,606 9,166
Deferred Investment Tax Credits 1,853 2,069
Deferred Compensation 1,847 1,596
Total liabilities 258,895 134,825
Stockholder's Equity
Common stock; $1 par value;
1,000 shares authorized;
1,000 shares issued and
outstanding 1 1
Additional paid-in capital 351,013 271,013
Retained earnings 66,301 46,323
Currency translation adjustments 4,599 2,427
Total Stockholder's Equity 421,914 319,764
Total Liabilities and Stockholder's Equity $680,809 $454,589
See notes to consolidated financial statements.
Consolidated Statements of Cash Flows
NRG Energy, Inc.
Year ended December 31
(Thousands of Dollars) 1996 1995
Cash Flows from Operating Activities
Net income $ 19,978 $ 31,201
Adjustments to reconcile net income
to net cash provided (used) by
operating activities
Undistributed equity in operating
earnings of unconsolidated affiliates (17,827) (20,074)
Depreciation and amortization 8,378 8,283
Deferred income taxes and investment
tax credits (776) (2,608)
Cash (used) provided by changes in
certain working capital items (4,323) 8,993
Cash (used) by changes in other
assets and liabilities (1,284) (1,004)
Equity in gain from project termination
settlement - (29,850)
Net Cash Provided (Used) by Operating
Activities 4,146 (5,059)
Cash Flows from Investing Activities
Investments in projects (140,590) (25,776)
Loans to projects (36,617) (35,411)
Capital expenditures (24,588) (11,036)
Cash distribution from project
termination settlement 15,671 14,179
(Increase) decrease in restricted cash (7,915) 4,044
Other, net (4,486) (3,104)
Net Cash Used by Investing Activities (198,525) (57,104)
Cash Flows from financing activities
Capital contributions from parent 80,000 55,000
Proceeds from issuance of
long-term debt 122,671 -
Principal payments on long-term debt (2,893) (3,305)
Net Cash Provided by Financing Activities 199,778 51,695
Net Increase (Decrease) in Cash and
Cash Equivalents 5,399 (10,468)
Cash and Cash Equivalents at
Beginning of Year 7,039 17,507
Cash and Cash Equivalents at End of Year $12,438 $7,039
Supplemental Disclosures of Cash Flow Information
Interest paid (net of amount capitalized) $11,527 $6,536
Income taxes paid 1,164 1,447
See notes to consolidated financial statements.
Consolidated Statements of Stockholder's Equity
NRG Energy, Inc.
Currency Total
Additional Translation Stock-
(Thousands Common Paid-in Retained Adjust- holder's
of Dollars) Stock Capital Earnings ments Equity
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
Currency translation
adjustments (1,159) (1,159)
Balances at
December
31, 1995 1 271,013 46,323 2,427 319,764
Net Income 19,978 19,978
Capital contributions
from parent 80,000 80,000
Currency translation
adjustments 2,172 2,172
Balances at
December
31, 1996 $1 $351,013 $66,301 $4,599 $421,914
See notes to consolidated financial statements.
Notes to Consolidated Financial Statements
NRG Energy, Inc.
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. Principles of Consolidation
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 $364,000 and $253,000 in 1996 and 1995, 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 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 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. 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 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, 1996, 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 1995
financial statements to conform to the 1996 presentation. These
reclassifications had no effect on net income or stockholder's equity as
previously reported.
Note 3. Business Acquisitions
In March 1996, a joint venture between NRG and Transfield signed an 18-year
power purchase agreement and an agreement for the acquisition and
refurbishment of the 180 mw Collinsville coal-fired power generation facility
in Queensland, Australia. NRG would own a 50% interest and operate the
facility in conjunction with Transfield.
In April 1996, NRG, through bankruptcy proceedings, purchased a 41.86%
interest in O'Brien Environmental Energy, Inc. that has been renamed as NRG
Generating (U.S.) Inc. (NRGG). In addition to an equity interest in NRGG, NRG
acquired certain landfill gas projects in the purchase which were transferred
to NEO and a cogeneration facility.
On December 19, 1996 NRG and Nordic Power Invest AB purchased 96.6% of
Bolivian Power Company Limited. NRG's ownership is 60%, however it is NRG's
intent to reduce its holding to 50% or less.
NEO, a wholly-owned subsidiary, owns a 50% interest in Minnesota Methane LLC.
In 1996, Minnesota Methane LLC acquired a 12 mw project in West Covina,
California and acquired six projects as part of the NRGG acquisition. Of the
projects acquired, four were operating facilities and two were projects under
development and construction. In 1994, NEO acquired a 50% interest in
Northbrook Energy. In 1996, Northbrook Energy acquired seven additional
hydroelectric plants.
The total acquisition investments in these projects through December 31, 1996,
including capitalized development costs, was approximately $121.5 million.
Earnings from equity interests in these NRG projects acquired in 1996
contributed $2.7 million to NRG's 1996 earnings.
Note 4. Property, Plant and Equipment
The major classes of property, plant and equipment at December 31 were as
follows:
(Thousands of dollars) 1996 1995
Facilities and equipment,
including construction
work in progress of
$24,683 and $5,914 $187,014 $163,099
Land and improvements 10,397 10,397
Office furnishings and equipment 3,344 2,671
Total property, plant and equipment 200,755 176,167
Accumulated depreciation (71,106) (64,248)
Net property, plant and equipment $129,649 $111,919
Note 5. Investment 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 are reflected as equity in earnings of unconsolidated
affiliates.
A summary of NRG's significant equity-method investment which were in
operation at December 31, 1996 is as follows:
Purchased
Geographic Economic or Placed
Name Area Interest in Service
Various Independent USA 45%-50% July 1991-
Power Production December 1996
Facilities
Rosebud Syncoal USA 50% August 1993
Partnership
MIBRAG Mining Germany 33.3% January 1994
and Power
Generation
Gladstone Power Australia 37.5% March 1994
Station
Schkopau Power Germany 20.6% January and
Station July 1996
Scudder Latin Latin 25% June 1993
American Trust America
for Independent
Power Energy
Projects
Collinsville Electric Australia 50% March 1996
Generation
Bolivian Power Bolivia 58.0% December 1996
Company
NRG Generating USA 41.9% April 1996
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) 1996 1995
Operating revenues $886,947 $776,612
Costs and expenses 794,255 615,696
Net income $92,692 $160,916
Current assets $647,213 $757,124
Noncurrent assets 3,420,950 2,557,992
Total assets $4,068,163 $3,315,116
Current liabilities $365,905 $290,805
Noncurrent liabilities 2,732,922 2,236,919
Equity 969,336 787,392
Total liabilities and equity $4,068,163 $3,315,116
NRG's share of equity $365,749 $221,129
NRG's share of income 32,815 23,639
In June 1995, 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.
The Company recorded pretax charges of $1.5 million in 1996 and $5.0 million
in 1995 to write down the carrying value of certain energy projects.
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
costs (fuel, labor, plant maintenance, and auxiliary power) incurred by NSP
to produce the thermal energy. NRG paid NSP $6.0 million in 1996 and $3.7
million in 1995 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 1997 to sell wood by-product obtained from a thermal customer to
NSP for use as fuel. Under these agreements, NRG received $1.5 million and
$1.9 million from NSP, and paid $2.2 million and $2.3 million to NSP in 1996
and 1995, 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. Services 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 1996 and 1995, NRG paid NSP $7.2 million and
$6.8 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 1996, NSP paid NRG $1.5 million 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 interest rate on
the notes ranged from 7.0% to 12.5% at December 31, 1996 and 1995.
Note 8. Long-term Debt
Long-term debt consists of the following at December 31:
(Thousands of dollars) 1996 1995
NRG Energy Center, Inc.
Senior Secured Notes
Series due June 15, 2013,
7.31% $76,986 $79,326
Note payable to NSP,
due December 1, 1995-2006
5.40%-6.75% 8,405 8,958
NRG Sunnyside, Inc. note payable,
due December 31, 1997
10.00% 1,750 1,750
NRG Energy Senior Notes,
due February 1, 2006
7.625% 125,000 -
212,141 90,034
Less current maturities (4,848) (3,762)
Total $207,293 $86,272
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, 1996.
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,
1996 are as follows:
(Thousands of dollars)
1997 $4,848
1998 3,335
1999 3,581
2000 3,841
2001 4,160
Thereafter 192,376
Total $212,141
The Company has revolving-credit agreements which allow for Letters of Credit
which may not exceed $63.9 million. There were $18.4 million and $0
outstanding letters of credit under the credit agreements at December 31, 1996
and 1995, respectively.
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) 1996 1995
Current
Federal $633 $9,965
State 253 3,268
Foreign 616 233
1,502 13,466
Deferred
Federal (3,655) (1,592)
State (1,498) (1,012)
(5,153) (2,604)
Tax credits recognized (2,004) (2,052)
Total income tax (benefit) expense $(5,655) $ 8,810
The components of the net deferred income tax liability at December 31 were:
(Thousands of dollars) 1996 1995
Deferred tax liabilities
Differences between book and
tax bases of property $16,606 $16,364
Investments in projects 2,988 1,226
Goodwill 2,974 444
Other 2,646 112
Total deferred tax liabilities 25,214 18,146
Deferred tax assets
Deferred revenue 3,043 3,099
Development costs 5,581 -
Deferred investment tax credits 766 856
Deferred compensation, accrued
vacation and other reserves 1,536 1,412
Steam capacity rights 1,043 1,109
Other 4,639 2,504
Total deferred tax assets 16,608 8,980
Net deferred tax liability $8,606 $9,166
Rate Reconciliation - At December 31, 1996 the effective income tax rate
(benefit) of (39.3)% differs from the statutory federal income tax rate of 35%
primarily due to the fact that NRG generated a domestic tax loss of $15
million for the year. For the year ended December 31, 1995 NRG had a domestic
tax gain of $9.2 million with the change between 1996 and 1995 primarily
attributable to a $29.9 million gain from the sale of a power agreement at
SJVEP, as discussed previously.
Income before income taxes includes net foreign equity income of $28 million
and $32 million in 1996 and 1995, 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 $87.3 million
at December 31, 1996. 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. Benefits Plans and Other Postretirement Benefits
Pension Benefits NRG participates in NSP's non-contributory, defined benefit
pension plan that cover 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) 1996 1995
Service cost-benefits earned
during the period $1,115 $688
Interest cost on projected
benefit obligation 1,013 525
Actual return on assets (1,983) (1,542)
Net amortization and deferral 1,258 1,147
Net periodic pension cost $1,403 $818
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, 1996:
NSP Plan-1996
NRG
(Thousands of dollars) Total Portion
Actuarial present value of
benefit obligation
Vested $660,920 $6,464
Nonvested 147,278 3,422
Accumulated benefit obligation $808,198 $9,886
Projected benefit obligation $993,821 $14,253
Plan assets at fair value 1,634,696 12,986
Plan assets (in excess of) less than
projected benefit obligation (640,875) 1,267
Unrecognized prior service cost (19,734) (86)
Unrecognized net actuarial gain (loss) 651,368 256
Unrecognized net transitional asset 539 -
Net pension (prepaid)
liability recorded $(8,702) $1,437
NSP Plan-1995
NRG
(Thousands of dollars) Total 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
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation was 7.5% in 1996 and 7% 1995. The
rate of increase in future compensation levels used in determining the
actuarial present value of the projected obligation was 5% in 1996 and 1995.
The assumed long-term rate of return on assets used for cost determinations
was 9% for 1996 and 8% for 1995. Changes in actuarial assumptions increased
1996 pension costs by $284,000 and are expected to decrease 1997 costs by
$150,000.
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, 1996, 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, 1996:
NSP Plan-1996
NRG
(Thousands of dollars) Total Portion
APBO
Retirees $144,180 $323
Fully eligible plan participants 23,438 619
Other active plan
participants 101,065 2,269
Total APBO 268,683 3,211
Plan assets at fair value 15,514 -
APBO in excess of plan assets 253,169 3,211
Unrecognized net actuarial loss (12,467) (366)
Unrecognized net transition obligation (172,480) (1,133)
Net benefit obligation recorded $68,222 $1,712
NSP Plan-1995
NRG
(Thousands of dollars) Total 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
The assumed health care cost trend rates used in measuring the APBO at
December 31, 1996 and 1995, were 9.8% and 10.4% for those under age 65, and
7.1% and 7.3% for those over age 65, respectively. 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 1% increase
in the assumed health care cost trend rate for each year would increase the
APBO by approximately 14% as of December 31, 1996. 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 7.5% for December 31, 1996 and 7% for December 31, 1995, compounded
annually. The assumed long-term rate of return on assets used for cost
determinations under SFAS No. 106 was 8% for 1996 and 1995. Changes in
actuarial assumptions had an immaterial impact on 1996 costs and are not
expected to materially impact 1997 costs.
The net annual periodic postretirement benefit cost recorded for 1996 and 1995
consists of the following components:
(Thousands of dollars) 1996 1995
Service cost-benefits earned
during the year $257 $171
Interest cost on APBO 233 171
Amortization of transition obligation 70 70
Net amortization and deferral 26 -
Net periodic postretirement
health care cost $586 $412
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 years calculated share price (grant price). The Plan provides
employees with a cash payout for the units appreciation in equity units 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.
Deferred Compensation - Certain employees of NRG are eligible to participate
in a deferred compensation program. The employee can elect to defer a portion
of their compensation until retirement. Earnings on the amounts deferred are
equal to the return on the Fixed Income Option of the NSP Retirement Savings
Plan. Earnings will be compounded annually and credited monthly. Payouts begin
upon retirement with payments made over 180 equal monthly installments (or a
minimum of $500 per month until their account balance is zero.)
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 29.1% in
1996 and 32.1% in 1995 of the Company's operating revenues were recognized
under this contract. In addition, sales to one thermal customer amounted to
14.1% of operating revenues in 1996 and 15.6% of operating revenues in 1995.
Note 12. Financial Instruments
The estimated December 31 fair values of NRG's recorded financial instruments
are as follows:
1996 1995
(Thousands of Carrying Fair Carrying Fair
dollars) Amount Value Amount Value
Cash and cash
equivalents $12,438 $12,438 $7,039 $7,039
Restricted cash 17,688 17,688 9,773 9,773
Notes receivable,
including current
portion 77,064 77,064 40,447 40,447
Long-term debt,
including current
portion 212,141 200,875 90,034 91,682
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 flow 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.
Derivatives - NRG has entered into seven 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. dollar of NRG's equity investments and retained
earnings, denominated in Australian dollars and German deutsche mark(DM). As
of December 31, 1996, NRG had $132 million of foreign currency denominated
assets that were hedged by forward foreign currency exchange contracts with
a notional value of $123 million. In addition, NRG had approximately $82
million of foreign currency denominated retained earnings from foreign
projects that were hedged by forward foreign currency exchange contracts with
a notional value of $59 million. 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. In connection with the forward foreign currency
exchange contracts, cash collateral of $16 million was required at December
31, 1996, which is reflected as restricted cash on NRG's balance sheet. The
forward foreign currency exchange contracts terminate in 1998 through 2006 and
require foreign currency interest payments by either party during each year
of the contract. If the contracts had been terminated at December 31, 1996,
$13.3 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 $741,000 in 1996 and $796,000 in 1995. Future minimum lease
commitments under these leases for the years ending after December 31, 1996
are as follows:
(Thousands of dollars)
1997 $1,050
1998 936
1999 956
2000 982
2001 1,008
Thereafter 5,349
Total $10,281
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 a $44
million commitment for the additional facilities.
NRG together with its partners, signed a power contract with PT Perusahaan
Listrik Negara, the state-owned Indonesian electric company, to build, own and
operate a 400 mw coal-fired power station in Cilegon, West Java, Indonesia.
NRG has a $65 million commitment for the facility.
NRG is contractually committed to additional equity investments of $14 million
for Scudder Latin American Power 1 and $7 million to Scudder Latin American
Power II as of December 31, 1996.
NRG reached agreement to purchase a 50% equity interest in the Enfield Energy
Centre, a 350 mw power project located in the North London borough of Enfield,
England. NRG has a $62 million commitment.
NRG and Transfield signed an acquisition agreement for the acquisition and
refurbishment of the 180 mw Collinsville coal-fired power generation facility
in Queensland, Australia. NRG has a $9 million commitment.
Future capital commitments related to international projects are as follows:
(Millions of dollars)
1997 $37
1998 75
1999 52
2000 29
2001 8
Total $201
Capital Commitments-Domestic - In 1996 NRG has provided a $10 million loan
commitment to a wholly-owned subsidiary of NRG Generating (U.S.) Inc. (NRGG).
The purpose of the loan is to allow NRGG to fund it capital contribution to
a cogeneration project currently under construction. NRG anticipates funding
the loan in 1997.
Also in 1996, NRG has committed to provide NRGG power generation investment
opportunities in the United States over a period of three years. The projects
must have an aggregate, over the three year term, equity value of at least $60
million or a minimum of 150 net megawatts. In addition, NRG has committed to
finance these projects to the extent funds are not available to NRGG on
comparable terms from other sources.
Claims and Litigation - In 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 believe the outcome of such
matters would materially impact the results of operations.
Note 14. Subsequent Event
On February 6, 1997, NRG signed a subscription agreement with Energy
Developments Limited (EDL) to acquire up to 20% of common stock, and an
additional 15% of preference shares at A$2.20 per share. EDL is an Australian
company engaged exclusively in independent power generation from landfill gas,
coal seam methane and natural gas (including latest technology combined cycle
projects). EDL is the largest generator of power from coal seam methane in the
world. The company currently operates over 200 mw of generation across five
states and territories of Australia and has commenced the development of new
projects in the United Kingdom, Asia and New Zealand. The current equity
megawatt ownership held by EDL is approximately 170 mw. EDL is a publicly
traded company with its securities listed on the Australian Stock Exchange.
On February 11, 1997 NRG made an initial purchase of 7.2% (4,500 shares) of
common stock for A$9.9 million (U.S. $7.9 million).
Report of Independent Accountants
NRG Energy, Inc.
To 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, 1996 and 1995, and the results of their
operations and their cash flows for the years then ended 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/
Price Waterhouse LLP
Minneapolis, Minnesota
April 8, 1997
