<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
___________
(Mark one)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED MARCH 31, 1998
OR
_ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO
Commission File Number 1-9208
NRG GENERATING (U.S.) INC.
(Exact name of Registrant as Specified in Charter)
Delaware 59-2076187
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
___________
1221 Nicollet Mall, Suite 610
Minneapolis, Minnesota 55403-2445
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 373-8834
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. X Yes No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12, 13 or
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
X Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the
issuer's classes of common stock as of the latest practicable
date: 6,836,769 shares of Common Stock, $0.01 par value per
share, as of May 11, 1998.
<PAGE>
NRG GENERATING (U.S.) INC.
FORM 10-Q
March 31, 1998
INDEX
Page
Part I - Financial Information:
Item 1. Financial Statements 3
Consolidated Balance Sheets -
March 31, 1998 and December 31, 1997 3
Consolidated Statements of Operations -
Three months ended March 31, 1998 and March 31, 1997 4
Consolidated Statements of Cash Flows -
Three months ended March 31, 1998 and March 31, 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II - Other Information
Item 1. Legal Proceedings 15
Item 3. Defaults Upon Senior Securities 16
Item 6. Exhibits and Reports on Form 8-K 17
Signature 18
Index to Exhibits 19
2
<PAGE>
PART 1
FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
NRG GENERATING (U.S.) INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
ASSETS
March 31, December 31,
1998 1997
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................... $ 4,979 $ 3,444
Restricted cash and cash equivalents......................... 8,634 8,527
Accounts receivable, net..................................... 11,401 11,099
Receivables from related parties............................. 65 87
Notes receivable, current.................................... 1 27
Inventories.................................................. 2,131 2,134
Other current assets......................................... 696 1,022
Total current assets....................................... 27,907 26,340
Property, plant and equipment, net............................. 125,908 127,574
Property under construction.................................... 71,274 46,247
Project development costs...................................... 129 129
Investments in equity affiliates............................... 14,394 13,381
Deferred financing costs, net.................................. 5,518 5,643
Deferred tax assets, net....................................... 7,996 7,996
Other assets................................................... 557 584
Total assets............................................... $ 253,683 $ 227,894
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Current portion of loans and payables due NRG Energy, Inc.... $ 1,966 $ 2,864
Current portion of nonrecourse long-term debt................ 8,796 8,525
Current portion of recourse long-term debt................... 455 495
Short-term borrowings........................................ 1,793 1,313
Accounts payable............................................. 23,270 20,582
Prepetition liabilities...................................... 780 775
Other current liabilities.................................... 2,678 3,083
Total current liabilities.................................. 39,738 37,637
Loans due NRG Energy, Inc...................................... 4,439 4,439
Nonrecourse long-term debt..................................... 186,000 165,020
Recourse long-term debt........................................ 25,000 25,000
Total liabilities.......................................... 255,177 232,096
Stockholders' equity (deficit):
Preferred stock, par value $.01, 20,000,000 shares
authorized; none issued or outstanding..................... - -
New common stock, par value $.01, 50,000,000 shares
authorized, 6,871,069 shares issued,
6,836,769 shares outstanding as of
March 31, 1998 and December 31, 1997, respectively......... 68 68
Additional paid-in capital................................... 65,715 65,715
Accumulated deficit.......................................... (66,919) (69,592)
Accumulated other comprehensive income (loss)................ (358) (393)
Total stockholders' equity (deficit)....................... (1,494) (4,202)
Total liabilities and stockholders' equity (deficit)....... $ 253,683 $ 227,894
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
NRG GENERATING (U.S.) INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1998 1997
<S> <C> <C>
REVENUES:
Energy revenues................................ $ 11,283 $ 12,391
Equipment sales and services................... 5,471 4,606
Rental revenues................................ 875 460
17,629 17,457
COST OF REVENUES:
Cost of energy revenues........................ 3,513 3,160
Cost of equipment sales and services........... 4,739 3,899
Cost of rental revenues........................ 650 383
8,902 7,442
Gross profit................................. 8,727 10,015
Selling, general and
administrative expenses........................ 2,107 2,253
Income from operations....................... 6,620 7,762
Interest and other income....................... 218 162
Equity in earnings of affiliates................ 1,007 39
Interest and debt expense....................... (3,553) (3,537)
Income before income taxes................... 4,292 4,426
Provision for income taxes...................... 1,619 339
Net income................................... $ 2,673 $ 4,087
Basic earnings per share........................ $ 0.39 $ 0.63
Diluted earnings per share...................... $ 0.38 $ 0.62
Weighted average shares outstanding (Basic)..... 6,837 6,441
Weighted average shares outstanding (Diluted)... 7,010 6,624
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
NRG GENERATING (U.S.) INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1998 1997
<S> <C> <C>
Cash Flows from Operating Activities:
Net income................................................... $ 2,673 $ 4,087
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............................ 2,106 1,973
Equity in earnings of affiliates......................... (1,007) (39)
Gain on disposition of property and equipment............ (67) -
Other, net............................................... 29 594
Changes in operating assets and liabilities:
Accounts receivable, net............................... (302) (560)
Inventories............................................ 3 178
Receivables from related parties....................... 22 86
Other assets........................................... 325 626
Accounts payable and other current liabilities......... (1,303) 37
Net cash provided by operating activities............ 2,479 6,982
Cash Flows from Investing Activities:
Capital expenditures......................................... (25,314) (291)
Proceeds from disposition of property and equipment.......... 71 175
Project development costs.................................... - (15)
Collections on notes receivable.............................. 26 277
Deposits into restricted cash accounts, net.................. (102) (2,065)
Net cash used in investing activities................ (25,319) (1,919)
Cash Flows from Financing Activities:
Proceeds from long-term debt................................. 23,387 -
Repayments of long-term debt................................. (2,176) (2,715)
Net proceeds (repayments) of short-term borrowings........... 3,168 (266)
Payments of prepetition liabilities.......................... - (408)
Deferred financing costs..................................... (4) -
Net cash provided by (used) in financing activities.. 24,375 (3,389)
Net increase in cash and cash equivalents..................... 1,535 1,674
Cash and cash equivalents, beginning of period................ 3,444 3,187
Cash and cash equivalents, end of period...................... $ 4,979 $ 4,861
Supplemental disclosure of cash flow information:
Interest paid.............................................. $ 3,327 $ 3,537
Income taxes paid.......................................... 347 389
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
NRG GENERATING (U.S.) INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 1998
(Dollars in thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NRG Generating (U.S.) Inc. (the "Company") and its subsidiaries
develop and own cogeneration projects which produce electricity and
thermal energy for sale to industrial and commercial users and public
utilities. In addition, the Company, through its subsidiaries, sells and
rents power generation, cogeneration and standby/peak shaving equipment
and services.
Basis of Presentation
The consolidated financial statements include the accounts of all
majority-owned subsidiaries and all significant intercompany accounts and
transactions have been eliminated. Investments in companies,
partnerships and projects that are more than 20% but less than majority-
owned are accounted for by the equity method.
The accompanying unaudited consolidated financial statements and
notes should be read in conjunction with the Company's Report on Form 10-
K for the year ended December 31, 1997. In the opinion of management,
the consolidated financial statements reflect all adjustments necessary
for a fair presentation of the interim periods presented. Results of
operations for an interim period may not give a true indication of
results for the year.
Reclassifications
Certain reclassifications have been made to conform prior year's
data to the current presentation. These reclassifications had no impact
on previously reported net income or stockholders' deficit.
Net Earnings Per Share
Basic earnings per share includes no dilution and is computed by
dividing net income available to common stockholders by the weighted
average shares outstanding. Diluted earnings per share is computed by
dividing net income by the weighted average shares of common stock and
dilutive common stock equivalents outstanding. The Company's dilutive
common stock equivalents result from stock options and are computed using
the treasury stock method.
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1998 March 31, 1997
Income Shares Income Shares
(Numerator) (Denominator) EPS (Numerator) (Denominator) EPS
<S> <C> <C> <C> <C> <C> <C>
Net income:
Basic EPS $ 2,673 6,837 $ 0.39 $ 4,087 6,441 $ 0.63
Effect of dilutive
stock options - 173 - 183
Diluted EPS $ 2,673 7,010 $ 0.38 $ 4,087 6,624 $ 0.62
</TABLE>
6
<PAGE>
2. LOANS DUE NRG ENERGY, INC.
Of the March 31, 1998 loan balance of $4,439 due to NRG Energy,
Inc. ("NRG Energy"), $2,539 has a maturity date of April 30, 2001 and
$1,900 has a maturity date of July 1, 2005.
3. COMPREHENSIVE INCOME
During the three months ended March 31, 1998, the Company adopted
the provisions of Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income." Total comprehensive income for the
quarter ended March 31, 1998 and 1997 was $2,315 and $4,016,
respectively. The difference between total comprehensive income and net
income for the above periods was due to foreign currency translation
adjustments.
4. LITIGATION
The Company's wholly-owned subsidiary through which it owns a one-
third interest in the Grays Ferry Cogeneration Partnership (the "Grays
Ferry Partnership"), filed suit as one of three Plaintiffs (including the
Grays Ferry Partnership) in an action brought against PECO Energy Company
("PECO") on March 9, 1998, in the United States District Court for the
Eastern District of Pennsylvania, for PECO's refusal to pay the
partnership the electricity rates set forth in the power purchase
agreements. On March 19, 1998, the federal district court dismissed the
federal lawsuit for lack of subject matter jurisdiction. On March 27,
1998, the Plaintiffs filed a motion for reconsideration and leave to file
an amended complaint. On April 13, 1998 the federal district court judge
denied the Plaintiffs' motion. The Plaintiffs thereafter filed a new
lawsuit in state court in Pennsylvania seeking, among other things, to
enjoin PECO from terminating its power purchase agreements with the
partnership and to compel PECO to pay the electricity rates set forth in
the agreements. On May 5, 1998, the Grays Ferry Partnership obtained a
preliminary injunction enjoining PECO from terminating the power purchase
agreements and ordering PECO to comply with the terms of the power
purchase agreements pending the outcome of the litigation. The Court of
Common Pleas in Philadelphia also ordered PECO to abide by all of the
terms and conditions of the power purchase agreements and pay the rates
set forth in the agreements. The Plaintiffs were required to post a
bond in the amount of $50 in connection with the preliminary injunction.
On May 8, 1998, PECO filed a notice of appeal and a motion to stay the
preliminary injunction order. On May 13, 1998, the Grays Ferry Partner-
ship filed an emergency petition for contempt to compel PECO to pay the
amounts due and owing under the power purchase agreements. The Grays
Ferry Partnership is vigorously pursuing the litigation and expects
to achieve a favorable result. No provision for loss has been recorded.
For additional information see "Part I - Financial Information -
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources;" "Part II -
Other Information - Item 1. Legal Proceedings;" and "Part II - Other
Information - Item 3. Defaults Upon Senior Securities."
7
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information contained in this Item 2 updates, and should be
read in conjunction with, the information set forth in Part II, Item 7,
of the Company's Report on Form 10-K for the year ended December 31,
1997. Capitalized terms used in this Item 2 which are not defined herein
have the meaning ascribed to such terms in the Notes to the Company's
financial statements included in Part I, Item 1 of this Report on Form
10-Q. All dollar amounts (except per share amounts) set forth in this
Report are in thousands.
Except for the historical information contained in this Report, the
matters reflected or discussed in this Report which relate to the
Company's beliefs, expectations, plans, future estimates and the like are
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Such forward-looking statements are
not guarantees of future performance and are subject to risks,
uncertainties and other factors that may cause the actual results,
performance or achievements of the Company to differ materially from
historical results or from any results expressed or implied by such
forward-looking statements. Such factors include, without limitation,
uncertainties inherent in predicting the outcome of litigation and other
factors discussed in this report and the Company's Report on Form 10-K
for the year ended December 31, 1997 entitled "Item 1. Business - Risk
Factors." Many of such factors are beyond the Company's ability to
control or predict, and readers are cautioned not to put undue reliance
on such forward-looking statements. The Company disclaims any obligation
to update or review any forward-looking statements contained in this
Report or in any statement referencing this Report, whether as a result
of new information, future events or otherwise.
General
The Company is engaged primarily in the business of developing,
owning and operating cogeneration projects which produce electricity and
thermal energy for sale under long-term contracts with industrial and
commercial users and public utilities. In addition to its energy
business, the Company sells and rents power generation and cogeneration
equipment through subsidiaries located in the United States and the
United Kingdom.
In its role as a developer and owner of energy projects, the
Company has developed the following projects in which it currently has an
ownership interest:
(a) The 52 megawatt ("MW") Newark Boxboard Project (the
"Newark Project"), located in Newark, New Jersey, began
operations in November 1990, and is owned by the Company's
wholly-owned subsidiary NRG Generating (Newark) Cogeneration
Inc. ("Newark");
(b) The 122 MW E.I. du Pont de Nemours Parlin Project (the
"Parlin Project"), located in Parlin, New Jersey, began
operations in June 1991, and is owned by the Company's wholly-
owned subsidiary NRG Generating (Parlin) Cogeneration Inc.
("Parlin");
8
<PAGE>
(c) The 22 MW Philadelphia Cogeneration Project (the
"Philadelphia PWD Project"), located in Philadelphia,
Pennsylvania, began operations in May 1993, and is owned by an
83%-owned subsidiary of the Company; and
(d) The 150 MW Grays Ferry Project, located in Philadelphia,
Pennsylvania, began operations in January 1998. The Company
owns a one-third interest in the Grays Ferry Partnership, which
owns the Grays Ferry Project.
In December 1997, the Company acquired from NRG Energy a 117 MW
steam and electricity cogeneration project located in Morris, Illinois
(the "Morris Project"). The Morris Project is currently under
construction with commercial operation currently expected to occur during
the fourth quarter of 1998.
The Company's power purchase agreements ("PPAs") with utilities
have typically contained, and may in the future contain, price provisions
which in part are linked to the utilities' cost of generating
electricity. In addition, the Company's fuel supply prices, with respect
to future projects, may be fixed in some cases or may be linked to
fluctuations in energy prices. These circumstances can result in high
volatility in gross margins and reduced operating income, either of which
could have a material adverse effect on the Company's financial position
or results of operations. Effective April 30, 1996, the Company
renegotiated its PPAs with Jersey Central Power and Light Company
("JCP&L"), the primary electricity purchaser from its Newark and Parlin
Projects. Under the new PPAs, JCP&L is responsible for all natural gas
supply and delivery. Management believes that this change in these PPAs
has reduced its historical volatility in gross margins on revenues from
such projects by eliminating the Company's exposure to fluctuations in
the price of natural gas that must be paid by its Newark and Parlin
Projects.
Both the Newark and Parlin Projects were previously certified as
qualifying facilities ("QFs") by the Federal Energy Regulatory Commission
("FERC") under the Public Utility Regulatory Policies Act of 1978
("PURPA"). The effect of QF status is generally to exempt a project's
owners from relevant provisions of the Federal Power Act, the Public
Utility Holding Company Act of 1935 ("PUHCA"), and state utility-type
regulation. However, as permitted under the terms of its renegotiated
PPAs, Parlin has chosen to file rates with FERC as a public utility under
the Federal Power Act. The effect of this filing was to relinquish the
Parlin Project's claim to QF status. The FERC approved Parlin's rates
effective April 30, 1996 and has determined Parlin to be an exempt
wholesale generator ("EWG"). As an EWG, Parlin is exempt from PUHCA, and
the ownership of Parlin by the Company does not subject the Company to
regulation under PUHCA. Finally, as a seller of power exclusively at
wholesale, Parlin is not generally subject to state regulation and, in
any case, management believes that Parlin complies with all applicable
requirements of state utility law.
In addition to the energy business, the Company sells and rents
power generation and cogeneration equipment and provides related
services. The Company operates its equipment sales, rentals and services
business principally through two subsidiaries. In the United States, the
equipment sales, rentals and services business operates under the name of
O'Brien Energy Services Company ("OES"). NRG Generating Limited, a
wholly-owned United Kingdom subsidiary, is the holding company for a
number of subsidiaries
9
<PAGE>
that operate in the United Kingdom under the common name of Puma
("Puma"). The Company has determined that OES and Puma are not a part of
its strategic plan for the future, and the Company is currently pursuing
several avenues for the disposition of these businesses. The disposition
of these businesses is not expected to have a material impact on the
Company's financial position.
Net Income and Earnings Per Share
Pre-tax earnings for the 1998 first quarter were $4,292 compared to
$4,426 in the prior year comparable quarter. Net income for the 1998
first quarter was $2,673, or diluted earnings per share of $0.38,
compared to first quarter 1997 net income of $4,087, or diluted earnings
per share of $0.62. The decrease in net income is primarily due to lower
income tax expense in 1997 as a result of recognition of net operating
loss carryforwards. During the 1997 fourth quarter, the Company reduced
the valuation allowance established for net operating loss carryforwards
and other deferred tax assets, resulting in recognition in earnings of
most remaining net operating loss carryforwards. Consequently, beginning
with the 1998 first quarter, income taxes are generally charged against
pre-tax earnings without any reduction for net operating loss
carryforwards that continue to be used to reduce income taxes currently
payable. Prior to the 1997 fourth quarter, net operating loss
carryforwards were recognized as a reduction of income tax expense based
on pre-tax earnings reported for the period. The decrease in diluted
earnings per share is due to the higher effective income tax rate and an
increase in the weighted average shares outstanding. Weighted average
shares outstanding increased primarily due to the conversion by NRG
Energy in October 1997 of $3,000 of borrowings to the Company into
396,255 shares of the Company's common stock.
On a pro forma basis, 1997 first quarter net income would have been
$2,662, or diluted earnings per share of $0.40, assuming the same
effective tax rate as in the 1998 first quarter.
Revenues
Energy revenues for the first quarter 1998 of $11,283 decreased
from first quarter 1997 revenues of $12,391. Energy revenues primarily
reflect billings associated with the Newark and Parlin Projects and the
Company's Philadelphia PWD Project. The decrease in energy revenues was
primarily attributable to seasonal capacity revenues recognized in the
first quarter 1997.
Revenues recognized at Parlin and Newark were $5,386 and $4,845 for
the first quarter 1998 and $6,289 and $5,094 for the first quarter 1997,
respectively. The decreases were primarily due to a milder winter in the
first quarter 1998 as compared to the comparable period in 1997 and to
seasonal capacity revenues recognized in the first quarter 1997.
Energy revenues from the Company's Philadelphia PWD Project for the
first quarter 1998 of $1,052 increased slightly from first quarter 1997
revenues of $1,008.
Equipment sales and services revenues for the first quarter 1998 of
$5,471 increased from first quarter 1997 revenues of $4,606. The revenue
increase is primarily attributable to higher sales volume.
10
<PAGE>
OES equipment sales and services revenues for the first quarter
1998 of $2,248 increased from first quarter 1997 revenues of $1,288. The
increase is primarily due to higher sales volume. Puma equipment sales
and services revenues for the first quarter 1998 of $3,223 decreased from
first quarter 1997 revenues of $3,318. The decrease was primarily due to
the unfavorable impact of foreign currency rates in some of Puma's Asian
markets.
Rental revenues for the first quarter 1998 of $875 increased from
first quarter 1997 revenues of $460. The increase was due primarily to
higher sales volume due to the ice storms in the northeastern United
States and Canada.
Costs and Expenses
Cost of energy revenues for the first quarter 1998 of $3,513
increased from first quarter 1997 costs of $3,160. The increase was
primarily the result of depreciation costs associated with equipment
capitalized at the Newark and Parlin facilities in periods subsequent
to the first quarter of 1997.
Cost of equipment sales and services for the first quarter 1998 of
$4,739 increased from first quarter 1997 costs of $3,899. The increase
was primarily due to increased costs associated with higher sales volume
at OES.
Cost of rental revenues for the first quarter 1998 of $650
increased from first quarter 1997 costs of $383. The increase was pri-
marily due to increased sales volume due to the ice storms in the north-
eastern United States and Canada.
The Company's gross profit for the first quarter 1998 of $8,727
(49.5% of sales) decreased from the first quarter 1997 gross profit of
$10,015 (57.4% of sales). The gross profit decrease is primarily
attributable to energy segment seasonal capacity revenues recognized in
the first quarter of 1997 and to lower gross margin equipment sales in
the first quarter 1998.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") for the first
quarter 1998 of $2,107 decreased from first quarter 1997 SG&A expenses of
$2,253. The reduction is primarily due to lower bad debts and lower
insurance costs, offset in part by increased legal expenses.
Interest and Other Income
Interest and other income for the first quarter 1998 of $218
increased from first quarter 1997 interest and other income of $162. The
increase was primarily attributable to a gain on the disposal of
equipment in the quarter ended March 31, 1998.
11
<PAGE>
Equity in Earnings of Affiliates
Equity in earnings of affiliates for the first quarter 1998 of
$1,007 increased from first quarter 1997 equity in earnings of affiliates
of $39. The increase was primarily due to the earnings of the Grays
Ferry Project which commenced operations in January 1998 and accounted
for approximately $986 of the Company's equity in earnings of affiliates
for the first quarter of 1998. The earnings of the Grays Ferry Project
reflect the contract price of electricity under the terms of the power
purchase agreements. The electric power purchaser from the Grays Ferry
Project has asserted that such power purchase agreements are not
effective and that the power purchaser is not obligated to pay the rates
set forth in the agreements, and the Company and the Grays Ferry
Partnership are in litigation with the power purchaser over that issue.
The Grays Ferry Partnership is vigorously pursuing this litigation and
expects to achieve a favorable result. For additional information see
"Part I - Financial Information - Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" and "Part II - Other Information - Item 1. Legal
Proceedings."
Interest and Debt Expense
Interest and debt expense for the first quarter 1998 of $3,553
increased from first quarter 1997 interest and debt expense of $3,537.
Income Taxes
The income tax provision for the quarter ended March 31, 1998 is
based on the effective tax rate expected to be applicable for the full
year. During the 1997 fourth quarter, the Company reduced the valuation
allowance established for tax benefits attributable to net operating loss
carryforwards and other deferred tax assets, resulting in recognition of
most remaining operating loss carryforwards in 1997 fourth quarter earn-
ings. Consequently, beginning with the 1998 first quarter, income taxes
are generally charged against pre-tax earnings without any reduction for
operating loss carryforwards that continue to be used to reduce income
taxes currently payable. Prior to the 1997 fourth quarter, net operating
losses were recognized as a reduction of income tax expense based on pre-
tax income reported for the period.
Liquidity and Capital Resources
In May 1996, the Company's wholly-owned subsidiaries Newark and
Parlin entered into a Credit Agreement (the "Credit Agreement") which
established provisions for a $155,000 fifteen-year loan (of which
$141,321 was outstanding at March 31, 1998) and a $5,000 five-year debt
service reserve line of credit. The interest rate on the outstanding
principal is variable based on, at the option of Newark and Parlin, LIBOR
plus a 1.125% margin or a defined base rate plus a 0.375% margin, with
nominal margin increases in the sixth and eleventh year. For any
quarterly period where the debt service coverage ratio is in excess of
1.4:1, both margins are reduced by 0.125%. Concurrent with the Credit
Agreement, Newark and Parlin entered into an interest rate swap agreement
with respect to 50% of the principal amount outstanding under the Credit
Agreement. This interest rate swap agreement fixes the interest rate on
such principal amount ($70,661 at March 31, 1998) at 6.9% plus the
margin.
12
<PAGE>
NRGG Schuylkill Cogeneration, Inc. ("NSC"), a wholly-owned
subsidiary of the Company, owns a one-third partnership interest in the
Grays Ferry Project. In March 1996, the Grays Ferry Partnership entered
into a credit agreement with The Chase Manhattan Bank N.A. to finance the
project. The credit agreement obligated each of the project's three
partners to make a $10,000 capital contribution prior to the commercial
operation of the facility. The Company made its required capital
contribution in 1997.
NRG Energy entered into a loan commitment to provide NSC the
funding, if needed, for the NSC capital contribution obligation to the
Grays Ferry Partnership. Prior to March 31, 1998, NSC had borrowed
$10,000 from NRG Energy under this loan agreement, of which $1,900
remained outstanding to NRG Energy at March 31, 1998, and contributed the
proceeds to the Grays Ferry Partnership as part of the above-referenced
capital contribution. In connection with this loan commitment for the
Grays Ferry Project, the Company granted NRG Energy the right to convert
$3,000 of borrowings under the commitment into 396,255 shares of common
stock of the Company. In October 1997, NRG Energy exercised such
conversion right in full.
In connection with its acquisition of the Morris Project, NRGG
Funding Inc. (a wholly-owned subsidiary of the Company) ("NRGG Funding")
assumed all of the obligations of NRG Energy to provide future equity
contributions to the project, which obligations are limited to the lesser
of 20% of the total project cost or $22,000. NRG Energy has guaranteed
to the Morris Project's lenders that NRGG Funding will make these future
equity contributions, and the Company has guaranteed to NRG Energy the
obligation of NRGG Funding to make these future equity contributions
(which guarantee is secured by a second priority lien on the Company's
interest in the Morris Project). The Company intends to arrange
financing for either NRGG Funding or itself (the terms and manner of
which have not been determined by the Company) to fund the required
future equity contributions by NRGG Funding to the Morris Project. In
addition, NRG Energy has committed in a Supplemental Loan Agreement
between the Company, NRGG Funding and NRG Energy to loan NRGG Funding and
the Company (as co-borrower) the full amount of such equity contributions
by NRGG Funding, subject to certain conditions precedent, at NRGG
Funding's option. Any such loan will be secured by a second priority
lien on all of the membership interests of the project and will be
recourse to NRGG Funding and the Company.
On December 17, 1997, the Company entered into a credit agreement
providing for a $30,000 reducing revolving credit facility with a new
lender. The facility is secured by the assets and cash flows of the
Philadelphia PWD Project as well as the distributable cash flows of the
Newark and Parlin Projects, and the Grays Ferry Partnership. On December
19, 1997 the Company borrowed $25,000 under this facility. The proceeds
were used to repay $16,949 to NRG Energy, to repay $6,551 of obligations
of the Philadelphia PWD Project and $1,500 for general corporate
purposes. The remaining $5,000 of the facility will become available
once security interests in the Philadelphia PWD Project are perfected.
As a consequence of the pending Grays Ferry Partnership litigation,
however, the Company has agreed not to draw additional funds under this
facility. The Company is unable to predict whether or when additional
funds may become available under this facility. The facility reduces by
$2,500 on the first and second anniversaries of the agreement and
repayment of the outstanding balance is due on the third anniversary of
the agreement. Interest is based, at the Company's option, on LIBOR plus
a margin ranging from 1.50% to 1.875% or the prime rate plus a
13
<PAGE>
margin ranging from 0.75% to 1.125%. The interest rate was 7.56% at
March 31, 1998. The facility provides for commitment fees of 0.375% on
the unused facility.
As previously noted, the electric power purchaser from the Grays
Ferry Project has asserted that such power purchase agreements are not
effective and that the power purchaser is not obligated to pay the rates
set forth in the agreements. The Company and the Grays Ferry Partnership
are in litigation with the power purchaser over its obligations under
such agreements. After initially refusing to pay the rates set forth in
the power purchase agreements, the power purchaser has been ordered by
the court in which the litigation is pending to comply with power
purchase agreements pending the outcome of the litigation. However, the
power purchaser has filed a notice of appeal and motion to stay the
court's order, and there can be no assurance that such order will not be
stayed or reversed on appeal. Moreover, the Grays Ferry Partnership is
in default of its principal credit agreement, and the lenders thereunder
have the ability to prevent the Grays Ferry Partnership from distributing
cash held or generated by the Grays Ferry Project. Such rights, if
exercised by such lenders, could prevent the Grays Ferry Partnership from
meeting its obligations to suppliers and others and from distributing
cash to its partners during the pendency of the litigation. Any such
actions by the Grays Ferry Partnership's lenders could materially disrupt
the Grays Ferry Partnership's relations with its suppliers and could have
other potentially material adverse effects on its operations and
profitability and on the Company. On May 13, 1998, the Grays Ferry
Partnership filed an emergency petition for contempt to compel the power
purchaser to pay the amounts due and owing under the power purchase
agreements, in accordance with a preliminary injunction entered against
the power purchaser on May 5, 1998. The Company believes the receipt by
the Grays Ferry Partnership of such payments would materially reduce the
likelihood that such lenders will cause such adverse effects to occur.
The Company believes that the Grays Ferry Partnership is likely
either to prevail in the pending litigation with its electric power
purchaser or otherwise to achieve a favorable resolution of this dispute.
However, the Company believes that if the power purchaser's position
ultimately were to be sustained, the Grays Ferry Partnership would cease
to be economically viable as currently structured and the Company's
earnings and financial position could be materially adversely affected.
In addition, the Company could incur other material costs associated with
such litigation which would not be recovered and could suffer cross-
defaults under one or more of its credit agreements. While the Company
intends to continue to pursue a rapid and favorable resolution of the
litigation with the power purchaser, there can be no assurance that such
an outcome will be obtained.
14
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings.
All dollar amounts are in thousands.
Grays Ferry Cogeneration Partnership, Trigen-Schuylkill
Cogeneration, Inc., NRGG (Schuylkill) Cogeneration Inc. and Trigen-
Philadelphia Energy Corp. v. PECO Energy Company, Adwin (Schuylkill)
Cogeneration, Inc. and the Pennsylvania Public Utility Commission, the
United States District Court for the Eastern District of Pennsylvania,
Civil Action No. 98-CV-1243, filed March 9, 1998. On March 19, 1998, the
federal district court dismissed this lawsuit for lack of subject matter
jurisdiction. On March 27, 1998, the Plaintiffs filed a motion for
reconsideration and leave to file an amended complaint. On April 13,
1998 the federal district court judge denied the Plaintiffs' motion.
Grays Ferry Cogeneration Partnership, Trigen-Schuylkill
Cogeneration, Inc., NRGG (Schuylkill) Cogeneration Inc. and Trigen-
Philadelphia Energy Corp. v. PECO Energy Company, Adwin (Schuylkill)
Cogeneration, Inc. and the Pennsylvania Public Utility Commission, Court
of Common Pleas Philadelphia County, April Term 1998, No. 544, filed
April 9, 1998. This action arose out of PECO Energy Company's ("PECO")
notification to the Grays Ferry Cogeneration Partnership (the "Grays
Ferry Partnership") that PECO believes its power purchase agreements with
the Grays Ferry Partnership relating to the Grays Ferry Cogeneration
Project (the "Grays Ferry Project") are no longer effective and PECO's
refusal to pay the electricity rates set forth in the agreement based on
its allegations that the Pennsylvania Public Utility Commission has
denied cost recovery of the power purchase agreements in retail electric
rates. The Grays Ferry Partnership's complaint against PECO asserts
claims which include breach of contract, fraud, breach of implied
covenant of good faith, conversion, breach of fiduciary duties and
tortious interference with contract. The Plaintiffs are seeking to
enjoin PECO from terminating the power purchase agreements and to compel
PECO to pay the rates set forth therein. The Plaintiffs also are seeking
actual and punitive damages and attorneys' fees and costs. On April 22,
1998, the court allowed the Grays Ferry Partnership to file an amended
complaint to discontinue the suit against the Pennsylvania Public Utility
Commission without prejudice. On May 5, 1998, the Grays Ferry
Partnership obtained a preliminary injunction pending the outcome of the
litigation enjoining PECO from terminating the power purchase agreements
and ordering PECO to comply with the terms of the power purchase
agreements. The Court of Common Pleas in Philadelphia also ordered PECO
to abide by all of the terms and conditions of the power purchase
agreements and pay the rates set forth in the agreements. The Plaintiffs
were required to post a bond in the amount of $50 in connection with the
preliminary injunction. On May 8, 1998, PECO filed a notice of appeal
and a motion to stay the preliminary injunction order. On May 13, 1998,
the Grays Ferry Partnership filed an emergency petition for contempt to
compel PECO to pay the amounts due and owing under the power purchase
agreements.
NRG Generating (U.S.) Inc. (the "Company") is subject from time to
time to various other claims that arise in the normal course of business,
and management believes that
15
<PAGE>
the outcome of these matters (either individually or in the aggregate)
will not have a material adverse effect on the business or financial
condition of the Company.
ITEM 3. Defaults Upon Senior Securities.
All dollar amounts are in thousands.
Grays Ferry Cogeneration Partnership
NRGG Schuylkill Cogeneration, Inc., a wholly-owned subsidiary of
the Company, owns a one-third partnership interest in the Grays Ferry
Partnership which owns the Grays Ferry Project. The Grays Ferry
Partnership and The Chase Manhattan Bank N.A. ("Chase"), as Agent bank
for the Lenders (as defined therein), are parties to a Credit Agreement
dated March 1, 1996 to finance the Grays Ferry Project (the "Chase
Facility"), of which $113,000 was outstanding as of March 31, 1998.
Certain actions taken by PECO, the electric power purchaser under two
power purchase agreements with the Grays Ferry Partnership, have caused
certain defaults to occur under the Chase Facility. Such defaults have
included defaults in the obligation to make interest payments thereon of
$639 due on April 8, 1998 and $639 due on May 8, 1998, as well as certain
other defaults resulting directly or indirectly from the actions taken by
PECO. As of the date of this Report, the aggregate interest arrearage on
the Chase Facility is approximately $1,300. In addition, as of the date
of this Report, the Grays Ferry Partnership is in default of an aggregate
of approximately $177 of payments due Chase as counterparty under
interest rate swap arrangements entered into in connection with the Chase
Facility. The Grays Ferry Partnership has sufficient funds to pay such
amounts; however, Chase has declined to permit disbursements from the
Grays Ferry Partnership's bank accounts due to the actions by PECO. The
Grays Ferry Partnership believes that once PECO has paid the amounts owed
under the power purchase agreements, Chase will release the funds needed
to pay such obligations. For additional information see "Part I -
Financial Information - Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources" and "Part II - Other Information - Item 1. Legal Proceedings."
The Company
The Company, MeesPierson Capital Corp. ("MeesPierson") and certain
other Lenders (as defined therein) are parties to a Credit Agreement
dated as of December 17, 1997 which provides for a $30,000, three-year
reducing, revolving credit facility agreement (the "MeesPierson
Facility"), of which $25,000 was outstanding on March 31, 1998. The
MeesPierson Facility includes cross-default provisions that cause
defaults to occur under the MeesPierson Facility in the event certain
defaults or other adverse events occur under certain other instruments or
agreements (including financing and other project documents) to which the
Company or one or more of its subsidiaries or other entities in which it
owns an ownership interest is a party. The actions taken by PECO have
resulted in certain cross-defaults under the MeesPierson Facility. As of
the date of this Report, all such cross-defaults have been waived by
MeesPierson, as Agent under the MeesPierson Facility. For additional
information see "Part I - Financial Information - Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations
- - Liquidity and Capital Resources."
16
<PAGE>
ITEM 6 Exhibits and Reports on Form 8-K.
(a) Exhibits
The "Index to Exhibits" following the signature page is
incorporated herein by reference.
(b) Reports on Form 8-K
The following Reports on Form 8-K were filed by the registrant
during the fiscal quarter ended March 31, 1998:
1. Current Report on Form 8-K dated December 30, 1997,
reporting information under Items 2 and 7.
2. Current Report on Form 8-K dated March 9, 1998,
reporting information under Item 5.
17
<PAGE>
SIGNATURE
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.
NRG GENERATING (U.S.), INC.
Registrant
Date: May 15, 1998 By: /s/ Timothy P. Hunstad
Timothy P. Hunstad
Vice President and Chief Financial Officer
(Principal Financial Officer and Duly Authorized Officer)
18
<PAGE>
INDEX TO EXHIBITS
3.1 Amended and Restated Certificate of Incorporation of the Company
filed as Exhibit 3.1 to Amendment No. 1 to the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1996 and
incorporated herein by this reference.
3.2 Preferred Stock Certificate of Designation of the Company filed as
Exhibit 3.3 to the Company's Current Report on Form 8-K dated April
30, 1996 and incorporated herein by this reference.
3.3 Restated Bylaws of the Company filed as Exhibit 3.3 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1997 and incorporated herein by this reference.
27.1 Financial Data Schedule for the quarter ended March 31, 1998 (for
SEC filing purposes only).
27.2 Restated Financial Data Schedule for the quarters ended March 31,
1997, June 30, 1997 and September 30, 1997 (for SEC filing purposes
only).
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S FINANCIAL STATEMENTS FOR ITS FIRST QUARTER OF FISCAL YEAR
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 13,613
<SECURITIES> 0
<RECEIVABLES> 11,401
<ALLOWANCES> 0
<INVENTORY> 2,131
<CURRENT-ASSETS> 27,907
<PP&E> 125,908
<DEPRECIATION> 0
<TOTAL-ASSETS> 253,683
<CURRENT-LIABILITIES> 39,738
<BONDS> 0
0
0
<COMMON> 68
<OTHER-SE> (1,562)
<TOTAL-LIABILITY-AND-EQUITY> 253,683
<SALES> 17,629
<TOTAL-REVENUES> 17,629
<CGS> 8,902
<TOTAL-COSTS> 8,902
<OTHER-EXPENSES> 882
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,553
<INCOME-PRETAX> 4,292
<INCOME-TAX> 1,619
<INCOME-CONTINUING> 2,673
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,673
<EPS-PRIMARY> 0.39
<EPS-DILUTED> 0.38
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE REGISTRANT'S FINANCIAL STATEMENTS FOR ITS QUARTERS ENDED
MARCH 31, 1997, JUNE 30, 1997 AND SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<RESTATED>
<S> <C> <C> <C>
<PERIOD-TYPE> 9-MOS 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-END> SEP-30-1997 JUN-30-1997 MAR-31-1997
<CASH> 11,510 11,509 15,100
<SECURITIES> 0 0 0
<RECEIVABLES> 12,056 10,714 12,403
<ALLOWANCES> 0 0 0
<INVENTORY> 3,102 2,998 2,674
<CURRENT-ASSETS> 27,806 26,309 31,528
<PP&E> 128,335 129,849 132,488
<DEPRECIATION> 0 0 0
<TOTAL-ASSETS> 172,511 168,927 174,163
<CURRENT-LIABILITIES> 21,143 21,467 25,511
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 64 64 64
<OTHER-SE> (23,338) (26,041) (26,561)
<TOTAL-LIABILITY-AND-EQUITY> 172,511 168,927 174,163
<SALES> 48,401 31,512 17,457
<TOTAL-REVENUES> 48,401 31,512 17,457
<CGS> 23,922 15,616 7,442
<TOTAL-COSTS> 23,922 15,616 7,442
<OTHER-EXPENSES> 5,380 3,484 2,052
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 11,001 7,331 3,537
<INCOME-PRETAX> 8,098 5,081 4,426
<INCOME-TAX> 747 523 339
<INCOME-CONTINUING> 7,351 4,558 4,087
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 7,351 4,558 4,087
<EPS-PRIMARY> 1.14 0.71 0.63
<EPS-DILUTED> 1.11 0.69 0.62
</TABLE>
