-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CKZyktnIsaz8AWhCP2ONsDVo4vPbCpyiBLPL0r8ugzRruP9tNz06QuNm+E6Mch8+ O6yCKh2w/RpJOIw2mWY21A== 0000072903-96-000010.txt : 19960710 0000072903-96-000010.hdr.sgml : 19960710 ACCESSION NUMBER: 0000072903-96-000010 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960709 ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19960709 SROS: CSX SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTHERN STATES POWER CO /MN/ CENTRAL INDEX KEY: 0000072903 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 410448030 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-03034 FILM NUMBER: 96592293 BUSINESS ADDRESS: STREET 1: 414 NICOLLET MALL 4TH FL CITY: MINNEAPOLIS STATE: MN ZIP: 55401 BUSINESS PHONE: 6123305500 MAIL ADDRESS: STREET 1: 414 NICOLLET MALL STREET 2: 4TH FLOOR CITY: MINNEAPOLIS STATE: MN ZIP: 55401 8-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) July 9, 1996 Northern States Power Company (Exact name of registrant as specified in its charter) Minnesota (State or other jurisdiction of incorporation) 1-3034 41-0448030 (Commission File Number) (IRS Employer Identification No.) 414 Nicollet Mall, Mpls, MN 55401 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 612-330-5500 (Former name or former address, if changed since last report) Item 5. Other Events Attached as Exhibit 99.01 are the audited consolidated financial statements of NRG Energy, Inc. and its subsidiaries for the year ended December 31, 1995 and the related management's discussion and analysis. Item 7. Financial Statements and Exhibits (c) EXHIBITS Exhibit No. Description 23.01 Consent of Independent Accountants 99.01 Excerpts from NRG Energy, Inc. 1995 Annual Report to Shareholder: Management's Discussion and Analysis Report of Independent Accountants Consolidated Balance Sheet Consolidated Statement of Income Consolidated Statement of Cash Flows Consolidated Statement of Stockholder's Equity Notes to Consolidated Financial Statements SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Northern States Power Company (a Minnesota Corporation) By /s/ Roger D. Sandeen Vice President, Controller and Chief Information Officer Dated: July 9, 1996 EXHIBIT INDEX Method of Exhibit Filing No. Description DT 23.01 Consent of Independent Accountants DT 99.01 Excerpts from NRG Energy, Inc. 1995 Annual Report to Shareholder: Management's Discussion and Analysis Report of Independent Accountants Consolidated Balance Sheet Consolidated Statement of Income Consolidated Statement of Cash Flows Consolidated Statement of Stockholder's Equity Notes to Consolidated Financial Statements DT = Filed electronically with direct transmission of this Form 8-K. EX-23 2 Exhibit 23.01 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement No. 333-00415 on Form S-3 (relating to the Northern States Power Company Dividend Reinvestment and Stock Purchase Plan), Registration Statement No. 2-61264 on Form S-8 (relating to the Northern States Power Company Employee Stock Ownership Plan), Registration Statement No. 33-38700 on Form S-8 (relating to the Northern States Power Company Executive Long-Term Incentive Award Stock Plan), and Registration Statement No. 33-63243 on Form S-3 (relating to the Northern States Power Company $300,000,000 Principal Amount of First Mortgage Bonds) of our report on the consolidated financial statements of NRG Energy, Inc. and its subsidiaries dated April 11, 1996 appearing in this Form 8-K. /s/ PRICE WATERHOUSE LLP Minneapolis, Minnesota July 9, 1996 EX-99 3 Exhibit 99.01 NRG Energy, Inc. 1995 Annual Report to Shareholders Management's Discussion and Analysis NRG Energy, Inc. and Subsidiaries General NRG is one of the leading participants in the independent (i.e., non-utility) power generation industry. Established in 1989 and wholly-owned by Northern States Power Company (NSP), NRG is principally engaged in the acquisition, development and operation of, and ownership of interests in, independent power production and cogeneration facilities, thermal energy production and transmission facilities and resource recovery facilities. The power generation facilities in which NRG has interests have total design capacity of 3,282 megawatts (MW), of which NRG has operational responsibility for 1,809 MW and net ownership or leasehold interests in 1,001 MW. In addition, NRG has substantial interests in district heating and cooling systems and steam generation and transmission operations with total thermal energy generation capacity of 3,100 million British thermal units (mmbtus) per hour (911 megawatts thermal-equivalent (Mwt)), resource recovery operations, and coal mines with estimated reserves of approximately 789 million metric tons of lignite (brown coal) in Germany. NRG has interests in 15 power generation facilities worldwide. Of these facilities, six are located in the United States (62 MW net ownership), four are located in Germany (267 MW net ownership and leasehold interests, of which 100 MW currently is under construction) and one is located in each of Australia (630 MW net ownership), Czech Republic (5 MW net ownership), Colombia (10 MW net ownership), Jamaica (7 MW net ownership) and Honduras (6 MW net ownership). Five of NRG's domestic power generation facilities (in which NRG has net ownership of approximately 33 MW) currently are not in operation, pending negotiation of new power purchase agreements or the sale of such facilities, as a result of buy-outs of their power purchase agreements (or a standstill agreement pending a buy-out) executed with a power purchaser. Through its wholly-owned subsidiary NEO Corporation, NRG also has interest in 16 small hydroelectric and landfill gas-fired power generation facilities located in the United States with total design capacity of 31 MW, of which NRG has net ownership of 14 MW. NRG owns interests in three district heating and cooling systems, located in Minneapolis, San Francisco and Pittsburgh, that provide steam for heating and chilled water for cooling. NRG also owns or operates two steam transmission facilities and two resource recovery facilities, all located in Minnesota. NRG intends to continue its record of growth through a combination of acquisitions and greenfield development of power generation and thermal energy production and transmission facilities and related assets in the United States and abroad. In the United States, NRG's near term focus will be on the acquisition of existing power generation capacity and thermal energy production and transmission facilities, particularly in situations in which its expertise can be applied to improve the operating and financial performance of the facilities. In addition, to the extent that the replacement of aging power generating capacity or growth in demand creates the need for new power generation facilities in the United States, NRG intends to pursue opportunities to participate in the development of such facilities. In the international market, NRG plans to continue to capitalize on opportunities created by the privatization of existing government-owned power generating capacity. In addition, due to the significant existing requirement for new power generating capacity in the international market, NRG intends to engage in the development of international greenfield projects. NRG accounts for investments where ownership is 50% or less, and where there is no effective and legal control, using the equity method of accounting. Under the equity method, NRG's investment in an entity is recorded at cost and is adjusted to recognize NRG's proportionate share of all earnings or losses of the entity. Distributions received reduce the carrying amount of NRG's investment in the entity. In the income statement, NRG records its proportionate share of net income or losses attributable to project investments as equity in earnings of unconsolidated affiliates. The costs of developing a project are expensed until the project meets the major milestones of (1) a signed power purchase agreement or the equivalent and (2) approval by the Board of Directors of NRG. At December 31, 1995, $4.2 million was recorded as capitalized project costs related to projects remaining in development. NRG's operating revenues from wholly-owned operations have been derived primarily from the production and transmission of thermal energy (steam and chilled water) and from the operation of resource recovery facilities that process municipal solid waste into refuse-derived fuel. Operating revenues from wholly-owned operations also include fees earned in providing management and engineering services to a number of operating entities. In addition, operating revenues include equity in earnings of unconsolidated affiliates accounted for under the equity method. Results of operations For the year ended December 31, 1995, NRG had net income of $31.2 million on operating revenues of $87.8 million, compared to net income of $29.5 million on operating revenues of $91.1 million in 1994. NRG's operating revenues from wholly-owned operations for the year ended December 31, 1995 were $64.2 million, essentially unchanged from $64.0 million in the prior year. Revenues from wholly-owned operations consist primarily of revenue from district heating and cooling (38%), resource recovery activities (36%), and other thermal projects (23%). Equity in earnings of unconsolidated affiliates was $23.6 million, a decrease of $3.5 million or 13% compared to 1994. Equity in earnings of $21.8 million for the MIBRAG mining and power generation project located in Germany increased $2.4 million due primarily to increased power and coal sales. Equity in earnings of the Gladstone Power Station located in Australia was $11.5 million, an improvement of $3.7 million, due to the inclusion of a full year's earnings in 1995 compared to only nine months in the prior year. Offsetting these increases was a decrease of $6.1 million to $2.0 million in equity in earnings from the San Joaquin Valley cogeneration facilities in 1995 because of the shutdown of the facilities at the end of February 1995 and the termination of the power purchase agreements with Pacific Gas and Electric (PG&E). NRG's investment in the Sunnyside waste coal facility acquired in late 1994 experienced initial operating problems, a six-week shutdown for major repairs and refurbishment, and a reduction in project revenues due to lower than anticipated avoided costs of the power purchaser, PacifiCorp, resulting in a loss of $2.7 million in 1995 equity in earnings. Finally, equity in earnings in 1995 reflects an investment write-down of $5.0 million related to the Scoria enhanced coal project, while equity in earnings in 1994 includes write-downs of $3.5 million related to Scoria and $1.5 million related to the proposed Louisiana Energy Services uranium enrichment facility. Cost of operations of wholly-owned operations were $32.5 million, a decrease of $2.3 million or 6.7%, due primarily to lower resource recovery landfill charges and reduced district heating fuel costs. General, administrative and development costs were $34.6 million in 1995, an increase of $14.7 million, or 73.3% compared to the prior year. Business development expenses made up approximately $8.8 million of this increase. The balance of the increase was attributable to establishing and maintaining NRG's foreign offices and domestic support functions. In 1995, NRG aggressively expanded staff and activity in seeking new projects. Project development activity was redirected and expanded in 1995 as NRG completed its initial investments in the MIBRAG, Gladstone and Schkopau projects in 1994. During 1994, some development costs were capitalized to these projects until financial close was achieved. Conversely, during 1995, NRG expensed the costs of pursuing a number of projects requiring the payment of significant upfront fees and expenses, including an investment opportunity that required expenditure of significant legal fees to submit a competing plan of reorganization in the O'Brien bankruptcy court proceeding. Most of these costs were expensed because the projects did not meet NRG's requirements for capitalization. Other income (expense) in 1995 included a one-time pre-tax gain of $29.9 million related to the settlement and termination of the San Joaquin Valley power purchase agreements with PG&E. In 1994, NRG and its partner in the Michigan Cogeneration Partners Limited Partnership agreed to terminate a power sales contract with Consumers Power Company. The contract related to a 65 MW cogeneration facility being developed in Michigan. Due to the agreement to terminate the contract, NRG recorded a one-time pre-tax gain of $9.7 million in 1994. Other income, net increased $3.5 million in 1995 due primarily to additional interest income from project notes receivable and short-term investments. The provision for income taxes in 1995 represented an effective tax rate of 22.0%, compared to 7.7% in 1994. The increase in the effective tax rate was the result of a greater portion of NRG's income being derived from United States sources in 1995, primarily as a result of the $29.9 million pre-tax gain on the disposition of the San Joaquin power purchase agreements. Because of NRG's intent to reinvest earnings of foreign operations offshore, no provision was recorded for income taxes that would be due upon repatriation. Liquidity and capital resources Net cash flow from operating activities was $9.1 million in 1995. Principal components of cash flow from operating activities were net income of $31.2 million, depreciation and amortization of $8.3 million and changes in working capital items of $9.0 million. Non-cash adjustments that reduced cash flow from operating activities consisted primarily of $21.3 million of undistributed equity in operating earnings of unconsolidated affiliates and $14.4 million of undistributed equity in gain from the San Joaquin project termination settlement. Cash used by investing activities included $25.8 million in equity investments in projects, $35.4 million in loans to projects, and $11.0 million of capital expenditures related to wholly-owned operations. Cash flow from financing activities included a $55.0 million equity contribution from NSP. Operating activities produced net cash flow of $12.4 million in 1994. Net income as adjusted for depreciation and amortization provided cash inflows. Adjustments that reduced cash flows consisted primarily of $18.5 million from undistributed equity in operating earnings of unconsolidated affiliates and $6.1 million of cash used by working capital components. Cash used by investing activities included $102.1 million in equity investments in new and existing projects and $4.4 million in project loans. NRG also provided $13.8 million of restricted cash deposits to collateralize foreign currency hedging activities and letters of credit issued in connection with competitive bids. Capital expenditures by wholly-owned operations used $5.8 million of cash. Cash flow from financing activities included a $103.9 million investment from NSP. Historically, the projects in which NRG invests have been funded partially by debt at the project level and by equity cash infusions. Cash for equity investing has been provided by NSP equity contributions and, to a lesser extent, cash flow from internal operations. Project financing at the project level is substantially non-recourse to NRG and its other project subsidiaries. As of December 31, 1995, NRG's consolidated financial statements contained long-term debt (including current maturities) of $90.0 million. This included $79.3 million of non-recourse project-related debt for the acquisition of the Minneapolis Energy Center district heating and cooling facility, $8.9 million related to the acquisition of the Newport resource recovery facility, and $1.8 million related to the acquisition of NRG's 50% interest in the Sunnyside waste coal facility. Annual maturities of long-term debt range from $3.3 million to $4.0 million in the five-year period ending December 31, 2000. NRG's long-range forecast projects capital expenditure and project investment requirements of $450 million to $500 million for the 1996-2000 time period. These requirements are expected to be met with the proceeds from issuances of debt, equity contributions from NSP and internal cash generation. Dividends and management fees to NRG and its subsidiaries from partnerships in which NRG invests are subject to restrictions in some cases. On January 31, 1996, NRG issued $125 million of 7.625% unsecured Senior Notes maturing in 2006 to support equity requirements for projects currently under way and in development. The Senior Notes were assigned ratings of Baa3 by Moody's Investors Service and BBB- by Standard & Poor's. NRG is contractually committed to additional equity investments in the Schkopau German energy project. Such commitments are for approximately DM 33 million in 1996. The 1996 commitment would be approximately $23 million, based on exchange rates in effect at December 31, 1995. In addition, NRG is contractually committed to additional equity investments of $17 million in the Scudder Latin American Trust for Independent Power Energy Projects as of December 31, 1995. NRG is in the final stages of purchasing a 42% interest in O'Brien Environmental Energy, Inc. from bankruptcy. See Note 13 of Notes to Consolidated Financial Statements for a further discussion of the O'Brien transaction and its possible liquidity requirements. Impact of inflation, interest rates, exchange rates and energy prices NRG attempts, whenever practicable, to hedge certain aspects of its project investments against the effects of inflation and fluctuations in interest rates and energy prices. To date, NRG has generally structured the energy payments in its power purchase agreements to adjust with the same price indices as contained in its contracts with the fuel suppliers for the corresponding projects. In some cases, a portion of revenues is associated with operation and maintenance and is indexed to adjust with inflation. NRG enters into forward foreign currency exchange contracts with counterparties to hedge exposure to currency fluctuations and to protect the economic value in U.S. dollars of NRG's equity investments and retained earnings denominated in foreign currencies. See Note 12 of Notes to Consolidated Financial Statements for a further discussion of NRG's foreign currency hedging activities. Report of Independent Accountants NRG Energy, Inc. and Subsidiaries To the Board of Directors and Stockholder of NRG Energy, Inc. In our opinion, the accompanying balance sheet and the related consolidated statements of income, of stockholder's equity, and of cash flows present fairly, in all material respects, the financial position of NRG Energy, Inc. (a wholly-owned subsidiary of Northern States Power Company) and its subsidiaries at December 31, 1995, and the results of their operations and their cash flows for the year in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statements presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. The consolidated financial statements of the Company and its subsidiaries for the year ended December 31, 1994 were audited by other independent accountants whose report dated March 24, 1995 expressed an unqualified opinion on those statements. /s/ Price Waterhouse LLP Minneapolis, Minnesota April 11, 1996 Consolidated Balance Sheets NRG Energy, Inc. and Subsidiaries Assets December 31 (Thousands of Dollars) 1995 1994 Current assets Cash and cash equivalents $7,039 $17,507 Restricted cash 9,773 13,817 Accounts receivable- trade, less allowance for doubtful accounts of $103 and $185 10,474 11,576 Accounts receivable- affiliates 3,499 610 Income taxes receivable - 2,442 Current portion of notes receivable 8,058 3,115 Inventory 1,811 1,704 Prepayments and other current assets 1,744 1,173 Total current assets 42,398 51,944 Property, plant and equipment, at original cost In service 170, 253 163,438 Under construction 5,914 2,289 176,167 165,727 Less accumulated depreciation (64,248) (58,093) Net property, plant and equipment 111,919 107,634 Other assets Investments in projects 221,129 164,863 Capitalized project costs 4,185 3,030 Notes receivable, less current portion 32,389 3,687 Intangible assets, net of accumulated amortization of $4,127 and $2,549 41,996 44,798 Debt issuance costs, net of accumulated amortization of $189 and $148 573 614 Total other assets 300,272 216,992 Total assets $454,589 $376,570 Liabilities and Stockholder's Equity Current liabilities Current portion of long-term debt $3,762 $3,306 Accounts payable-trade 6,208 5,199 Accounts payable- affiliates - 3,037 Accrued income taxes 7,366 - Accrued property and sales taxes 1,895 2,291 Accrued salaries, benefits and related costs 5,178 2,751 Other current liabilities 3,587 11,021 Total current liabilities 27,996 27,605 Long-term debt, less current portion 86,272 90,033 Deferred revenues 7,726 8,811 Deferred income taxes 9,166 11,519 Deferred investment tax credits 2,069 2,324 Deferred compensation 1,596 1,556 Total liabilities 134,825 141,848 Stockholder's equity Common stock; $1 par value; 1,000 shares authorized; 1,000 shares issued and outstanding 1 1 Additional paid-in capital 271,013 216,013 Retained earnings 46,323 15,122 Currency translation adjustments 2,427 3,586 Total stockholder's equity 319,764 234,722 Total liabilities and stockholder's equity $454,589 $376,570 See notes to consolidated financial statements. Consolidated Statements of Income NRG Energy, Inc. and Subsidiaries Year Ended December 31 (Thousands of Dollars) 1995 1994 Operating revenues Revenues of wholly-owned operations $64,180 $63,970 Equity in operating earnings of unconsolidated affiliates 23,639 27,155 Total operating revenues 87,819 91,125 Operating costs and expenses Cost of operations of wholly-owned operations 32,535 34,861 Depreciation and amortization 8,283 8,675 General, administrative and development 34,647 19,993 Total operating costs and expenses 75,465 63,529 Operating income 12,354 27,596 Other income (expense) Equity in gain on project termination settlements 29,850 9,685 Other income, net 4,896 1,411 Interest expense (7,089) (6,682) Total other income (expense) 27,657 4,414 Income before income taxes 40,011 32,010 Income taxes 8,810 2,472 Net income $31,201 $29,538 See notes to consolidated financial statements. Consolidated Statements of Cash Flows NRG Energy, Inc. and Subsidiaries Year Ended December 31 (Thousands of Dollars) 1995 1994 Cash flows from operating activities: Net income $31,201 $29,538 Adjustments to reconcile net income to net cash provided (used) by operating activities: Undistributed equity in operating earnings of unconsolidated affiliates (21,315) (18,511) Depreciation and amortization 8,283 8,675 Deferred income taxes and investment tax credits (2,608) (523) Cash provided (used) by changes in certain working capital items 8,993 (6,138) Cash used by changes in other assets and liabilities (1,004) (615) Undistributed equity in gain from project termination settlement (14,430) - Net cash provided by operating activities 9,120 12,426 Cash flows from investing activities: Investments in projects (25,776) (102,119) Loans to projects (35,411) (4,415) Capital expenditures (11,036) (5,750) (Increase) decrease in restricted cash 4,044 (13,817) Other, net (3,104) 2,255 Net cash used by investing activities (71,283) (123,846) Cash Flows from Financing Activities: Capital contributions from parent 55,000 103,885 Dividends and other distributions paid to parent - (9) Proceeds from issuance of long-term debt - 2,375 Principal payments on long-term debt (3,305) (2,487) Net cash provided by financing activities 51,695 103,764 Net decrease in cash and cash equivalents (10,468) (7,656) Cash and cash equivalents at beginning of year 17,507 25,163 Cash and cash equivalents at end of year $7,039 $17,507 Supplemental disclosures of cash flow information: Interest paid (net of amount capitalized) $6,536 $6,808 Income taxes paid (benefits received), net 1,447 (1,939) See notes to consolidated financial statements. Consolidated Statements of Stockholder's Equity NRG Energy, Inc. and Subsidiaries Total Additional Retained Currency stock- Common paid-in earnings translation holder's stock capital (deficit) adjustments equity (Thousands of Dollars) Balances at December 31, 1993 $1 $112,128 $(14,407) $- $97,722 Net income 29,538 29,538 Dividends and other distributions to parent (9) (9) Capital contributions from parent 103,885 103,885 Currency translation adjustments 3,586 3,586 Balances at December 31, 1994 1 216,013 15,122 3,586 234,722 Net income 31,201 31,201 Capital contributions from parent 55,000 55,000 Cumulative currency translation adjustments (1,159) (1,159) Balances at December 31, 1995 $1 $271,013 $46,323 $2,427 $319,764 See notes to consolidated financial statements. Notes to Consolidated Financial Statements NRG Energy, Inc. and Subsidiaries Note 1 - Organization NRG Energy, Inc. (the Company), a Delaware Corporation, was incorporated on May 29, 1992, as a wholly-owned subsidiary of Northern States Power Company (NSP). Beginning in 1989, the Company was doing business through its predecessor companies, NRG Energy, Inc. and NRG Group, Inc., Minnesota corporations which were merged into the Company subsequent to its incorporation. The Company and its subsidiaries and affiliates develop, build, acquire, own and operate nonregulated energy-related businesses. Note 2 - Summary of significant accounting policies Principles of consolidation and basis of presentation The consolidated financial statements include the accounts of the Company and its subsidiaries (referred to collectively herein as NRG). All significant intercompany transactions and balances have been eliminated in consolidation. As discussed in Note 5, NRG has investments in partnerships, joint ventures and projects for which the equity method of accounting is applied. Earnings from equity in international investments are recorded net of foreign income taxes. Cash equivalents Cash equivalents include highly liquid investments (primarily commercial paper) with a remaining maturity of three months or less at the time of purchase. Restricted cash Restricted cash consists primarily of cash collateral required in connection with foreign currency hedging activities (see Note 12) and cash collateral for letters of credit issued in relation to project development activities. Inventory Inventory is valued at the lower of average cost or market and consists principally of spare parts and raw materials used to generate steam. Property, plant and equipment Property, plant and equipment are capitalized at original cost. Significant additions or improvements extending asset lives are capitalized, while repairs and maintenance are charged to expense as incurred. Depreciation is computed using the straight-line method over the following estimated useful lives: Facilities and improvements 20-45 years Machinery and equipment 7-30 years Office furnishings and equipment 3-5 years Capitalized interest Interest incurred on funds borrowed to finance projects expected to require more than three months to complete is capitalized. Capitalization of interest is discontinued when the project is completed and considered operational. Capitalized interest is amortized using the straight line method over the useful life of the related project. Capitalized interest was $253,000 and $45,000 in 1995 and 1994, respectively. Development costs and capitalized project costs These costs include professional services, dedicated employee salaries, permits, and other costs which are incurred incidental to a particular project. Such costs are expensed as incurred until a sales agreement or letter of intent is signed, after which time they are capitalized. When project operations begin, previously capitalized project costs are reclassified to investments in projects and amortized on a straight-line basis over the lesser of the life of the project's related assets or revenue contract period. Debt issuance costs Costs to issue long-term debt have been capitalized and are being amortized over the terms of the related debt. Intangibles Intangibles consist principally of service agreements and the excess of the cost of investment in subsidiaries over the underlying fair value of the net assets acquired and are being amortized using the straight-line method over 30 years. Intangibles also include patents which are being amortized using the straight-line method over 17 years. The Company periodically evaluates the recovery of goodwill and other intangibles based on an analysis of estimated undiscounted future cash flows. Income taxes The Company is included in the consolidated tax returns of NSP. NRG calculates its income tax provision on a separate return basis under a tax sharing agreement with NSP as discussed in Note 9. Current federal and state income taxes are payable to or receivable from NSP. NRG records income taxes using the liability method. Income taxes are deferred on all temporary differences between pretax financial and taxable income and between the book and tax bases of assets and liabilities. Deferred taxes are recorded using the tax rates scheduled by law to be in effect when the temporary differences reverse. Investment tax credits are deferred and amortized over the estimated lives of the related property. NRG's policy for income taxes related to international operations is discussed in Note 9. Revenue recognition Under fixed-price contracts, revenues are recognized as deliveries of products or services are made. Revenues and related costs under cost reimbursable contract provisions are recorded as costs are incurred. Anticipated future losses on contracts are charged against income when identified. Deferred revenues relate to a 1988 legal settlement with a major thermal customer. Settlement proceeds were deferred when received and are reflected in operating income on a straight-line basis over the life of the related steam contract which expires in 2001. Foreign currency translation The local currencies are generally the functional currency of NRG's foreign operations. Foreign currency denominated assets and liabilities are translated at end-of-period rates of exchange. The resulting currency translation adjustments are accumulated and reported as a separate component of stockholder's equity. Income, expense, and cash flows are translated at weighted-average rates of exchange for the period. Exchange gains and losses that result from foreign currency transactions (e.g., converting cash distributions made in one currency to another currency) are included in the results of operations as a component of equity in earnings of unconsolidated affiliates. Through December 31, 1995, NRG has not experienced any material translation gains or losses from foreign currency transactions that have occurred since the respective foreign investment dates. Derivative financial instruments NRG's policy is to hedge foreign currency denominated investments as they are made to preserve their U.S. dollar value, where appropriate hedging vehicles are available. NRG has entered into currency hedging transactions through the use of forward foreign currency exchange agreements. Gains and losses on these agreements offset the effect of foreign currency exchange rate fluctuations on the valuation of the investments underlying the hedges. Hedging gains and losses, net of income tax effects, are reported with other currency translation adjustments as a separate component of stockholder's equity. The Company is not hedging currency translation adjustments related to future operating results. NRG does not speculate in foreign currencies. None of these derivative financial instruments are reflected in NRG's balance sheet. Use of estimates In recording transactions and balances resulting from business operations, NRG uses estimates based on the best information available. Estimates are used for such items as plant depreciable lives, tax provisions, uncollectible accounts and actuarially determined benefit costs. As better information becomes available (or actual amounts are determinable), the recorded estimates are revised. Consequently, operating results can be affected by revisions to prior accounting estimates. Reclassifications Certain reclassifications have been made to the 1994 financial statements to conform to the 1995 presentation. These reclassifications had no effect on net income or stockholder's equity as previously reported. Note 3 - Business acquisitions Through its subsidiaries, NRG purchased equity interests during 1994 in three significant international projects, two in Germany and one in Australia. One of the investments is a 33% interest in Mitteldeutsche Braunkohlengesellschaft mbh (MIBRAG), a German corporation. MIBRAG was formed by the German government to operate mines, electric power plants and other energy-related facilities. The other German investment is a 50% interest in Saale Energie GmbH (Saale), also a German corporation. Saale owns a 400-megawatt share of a 900-megawatt power plant currently under construction near Schkopau, Germany. The Australian investment is a 37.5% interest (held by NRG subsidiaries Sunshine State Power BV and Sunshine State Power (No. 2) BV) in a joint venture that acquired a 1,680 megawatt coal-fired power plant in Gladstone, Queensland, Australia, which is operated by an NRG subsidiary. The total acquisition investments in these three projects through December 31, 1995, including capitalized development costs, was approximately $103 million. Earnings from equity interests in these NRG international projects acquired in 1994 contributed $32.3 and $25.6 million to NRG's 1995 and 1994 earnings, respectively. Note 4 - Property, plant and equipment The major classes of property, plant and equipment at December 31 were as follows: (Thousands of dollars) 1995 1994 Facilities and equipment, including construction work in progress of $5,914 and $2,289 $163,099 $153,221 Land and improvements 10,397 10,397 Office furnishings and equipment 2,671 2,109 Total property, plant and equipment 176,167 165,727 Accumulated depreciation (64,248) (58,093) Net property, plant and equipment $111,919 $107,634 Note 5 - Investments accounted for by the equity method NRG has investments in various international and domestic energy projects. The equity method of accounting is applied to such investments in affiliates, which include joint ventures and partnerships, because the ownership structure prevents NRG from exercising a controlling influence over operating and financial policies of the projects. Under this method, equity in pretax income or losses of domestic partnerships and in the net income or losses of international projects is reflected as equity in earnings of unconsolidated affiliates. A summary of NRG's significant equity-method investments which were in operation at December 31, 1995 is as follows: Geographic Economic Purchased area interest or placed in service Name Various Independent U.S.A. 45%-50% July 1991 Power Production Dec. 1994 Facilities Rosebud Syncoal U.S.A. 50% Aug. 1993 Partnership MIBRAG Mining Europe 33.3% Jan. 1994 and Power Generation Gladstone Power Australia 37.5% March 1994 Station Schkopau Power Europe 20.6% Under Station Construction Scudder Latin Latin 25% June 1993 American Trust America for Independent Power Energy Projects Summarized financial information for investments in unconsolidated affiliates accounted for under the equity method as of and for the year ended December 31, is as follows: (Thousands of dollars) 1995 1994 Operating revenues $776,612 $731,308 Costs and expenses 615,696 604,428 Net income $160,916 $126,880 Current assets $757,124 $452,651 Noncurrent assets 2,557,992 1,787,089 Total assets $3,315,116 $2,239,740 Current liabilities $290,805 $159,840 Noncurrent liabilities 2,236,919 1,757,057 Equity 787,392 322,843 Total liabilities and equity $3,315,116 $2,239,740 NRG's share of equity $221,129 $164,863 NRG's share of income 23,639 27,155 In June 1995, after receiving final regulatory approvals, a power sales contract between a California energy project, in which NRG is a 45% investor, and an unaffiliated utility company was terminated. A pretax gain of $29.9 million was recognized by NRG for its share of the termination settlement. In 1994, a Michigan cogeneration project, in which NRG was a 50% investor, received payment from an unaffiliated utility company as compensation for the termination of an energy purchase agreement. A pretax gain of $9.7 million was recognized by NRG for its share of the contract termination settlement, net of project investment costs. The Company recorded pretax charges of $5.0 million in 1995 and $5.0 million in 1994 to write down the carrying value of certain energy projects. The charges were determined based on estimated discounted future cash flows, and are recorded in equity in earnings of unconsolidated affiliates. Note 6 - Related party transactions Operating agreements NRG has two agreements with NSP for the purchase of thermal energy. Under the terms of the agreements, NSP charges NRG for certain incremental costs (fuel, labor, plant maintenance, and auxiliary power) incurred by NSP to produce the thermal energy. NRG paid NSP $3.7 million in 1995 and $6.6 million in 1994 under these agreements. NRG has a renewable 10-year agreement with NSP, expiring on December 31, 2001, whereby NSP agrees to purchase refuse-derived fuel for use in certain of its boilers and NRG agrees to pay NSP a burn incentive. NRG has an agreement expiring in 2006 to sell wood by-product obtained from a thermal customer to NSP for use as fuel. Under these agreements, NRG received $1.9 million and $1.7 million from NSP, and paid $2.3 million and $2.2 million to NSP in 1995 and 1994, respectively. Administrative services and other costs NRG and NSP have entered into an agreement to provide for the reimbursement of actual administrative services provided to each other, an allocation of NSP administrative costs and a working capital fee. Service provided by NSP to NRG are principally cash management, legal, accounting, employee relations and engineering. In addition, NRG employees participate in certain employee benefit plans of NSP as discussed in Note 10. During 1995 and 1994, NRG paid NSP $6.8 million and $6.2 million, respectively, as reimbursement under this agreement. Note 7 - Notes receivable Notes receivable consist primarily of fixed and variable rate notes secured by equity interests in partnerships and joint ventures. The weighted average interest rate on the notes was 7.8% at December 31, 1995 and 11.2% at December 31, 1994. Note 8 - Long-term debt Long-term debt consists of the following at December 31: (Thousands of dollars) 1995 1994 NRG Energy Center, Inc. Senior Secured Notes Series due June 15, 2013, 7.31% $79,326 $81,498 Note payable to NSP, due December 1, 1995-2006 5.40%-6.75% 8,958 9,466 NRG Sunnyside, Inc. note payable, due December 31, 1997 10.00% 1,750 2,375 90,034 93,339 Less current maturities (3,762) (3,306) Total $86,272 $90,033 The NRG Energy Center, Inc. notes are secured principally by long-term assets of the Minneapolis Energy Center (MEC). In accordance with the terms of the note agreements, MEC is required to maintain compliance with certain financial covenants primarily related to incurring debt, disposing of MEC assets, and affiliate transactions. MEC was in compliance with these covenants at December 31, 1995. The note payable to NSP relates to long-term debt assumed by the Company in connection with the transfer of ownership of an RDF processing plant by NSP to the Company in 1993. The NRG Sunnyside, Inc. note payable was issued in connection with the purchase of an equity interest in a waste-coal project in 1994. Annual maturities of long-term debt for the years ending after December 31, 1995 are as follows: (Thousands of dollars) 1996 $3,762 1997 3,979 1998 3,335 1999 3,581 2000 3,841 Thereafter 71,536 Total $90,034 The Company has revolving-credit agreements which allow for borrowings which may not exceed $6.0 million. At December 31, 1995 and 1994, there were no borrowings under the credit agreements. Note 9 - Income taxes NRG and its parent, NSP, have entered into a federal and state income tax sharing agreement relative to the filing of consolidated federal and state income tax returns. The agreement provides, among other things, that (1) if NRG, along with its subsidiaries, is in a taxable income position, NRG will be currently charged with an amount equivalent to its federal and state income tax computed as if the group had actually filed separate federal and state returns, and (2) if NRG, along with its subsidiaries, is in a tax loss position, NRG will be currently reimbursed to the extent its combined losses are utilized in a consolidated return, and (3) if NRG, along with its subsidiaries, generates tax credits, NRG will be currently reimbursed to the extent its tax credits are utilized in a consolidated return. The provision for income taxes consists of the following: (Thousands of dollars) 1995 1994 Current Federal $9,965 $1,694 State 3,268 737 Foreign 233 219 13,466 2,650 Deferred Federal (1,592) 1,280 State (1,012) 369 (2,604) 1,649 Tax credits recognized (2,052) (1,827) Total income tax expense $8,810 $2,472 The components of the net deferred income tax liability at December 31 were: (Thousands of dollars) 1995 1994 Deferred tax liabilities Differences between book and tax bases of property $16,364 $13,269 Investments in projects 1,226 6,168 Goodwill 444 256 Other 112 930 Total deferred tax liabilities 18,146 20,623 Deferred tax assets Deferred revenue 3,099 3,645 Development costs - 2,047 Deferred investment tax credits 856 978 Deferred compensation, accrued vacation and other reserves 1,412 992 Steam capacity rights 1,109 1,175 Other 2,504 267 Total deferred tax assets 8,980 9,104 Net deferred tax liability $9,166 $11,519 Actual income tax expense recorded differs from the statutory federal income tax rate of 35% due to state income taxes, varying tax treatment of foreign income and expenses and tax credits recognized. Income before income taxes includes net foreign equity income of $32.3 million and $25.6 million in 1995 and 1994, respectively. NRG's management intends to reinvest the earnings of foreign operations indefinitely. Accordingly, U.S. income taxes and foreign withholding taxes have not been provided on the earnings of foreign subsidiary companies. The cumulative amount of undistributed earnings of foreign subsidiaries upon which no U.S. income taxes or foreign withholding taxes have been provided is approximately $57.9 million at December 31, 1995. The additional U.S. income tax and foreign withholding tax on the unremitted foreign earnings, if repatriated, would be offset in whole or in part by foreign tax credits. Thus, it is impracticable to estimate the amount of tax that might be payable. Note 10 - Benefit plans and other postretirement benefits Pension benefits NRG participates in NSP's noncontributory, defined benefit pension plan that covers substantially all employees. Benefits are based on a combination of years of service, the employee's highest average pay for 48 consecutive months, and Social Security benefits. Net annual periodic pension cost includes the following components: (Thousands of dollars) 1995 1994 Service cost-benefits earned during the period $688 $654 Interest cost on projected benefit obligation 525 354 Actual return on assets (1,542) (58) Net amortization and deferral 1,147 (262) Net periodic pension cost $818 $688 NRG's funding policy is to contribute to NSP the full actuarial pension cost accrued, less future tax benefits to be realized from such costs. Plan assets consist principally of common stock of public companies, corporate bonds and U.S. government securities. The funded status of the pension plan in which NRG employees participate is as follows at December 31: NSP Plan-1995 (Thousands of dollars) Total NRG Portion Actuarial present value of benefit obligation Vested $686,403 $3,050 Nonvested 155,177 1,520 Accumulated benefit obligation $841,580 $4,570 Projected benefit obligation $1,039,981 $8,828 Plan assets at fair value 1,456,530 6,657 Plan assets (in excess of) less than projected benefit obligation (416,549) 2,171 Unrecognized prior service cost (20,805) (91) Unrecognized net actuarial gain (loss) 452,699 (1,388) Unrecognized net transitional asset 615 - Net pension liability recorded $15,960 $692 NSP Plan-1994 (Thousands of dollars) Total NRG Portion Actuarial present value of benefit obligation Vested $571,254 $563 Nonvested 120,420 1,016 Accumulated benefit obligation $691,674 $1,579 Projected benefit obligation $836,957 $4,228 Plan assets at fair value 1,165,584 5,170 Plan assets in excess of projected benefit obligation (328,627) (942) Unrecognized prior service cost (21,538) (96) Unrecognized net actuarial gain 370,289 1,038 Unrecognized net transitional asset 691 - Net pension liability recorded $20,815 $- The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation was 7% in 1995 and 8% in 1994. The rate of increase in future compensation levels used in determining the actuarial present value of the projected obligation was 5% in 1995 and 1994. The assumed long-term rate of return on assets used for cost determinations was 8% for 1995 and 1994. Changes in actuarial assumptions decreased 1995 pension costs by $395,000 and are expected to increase 1996 costs by $291,000. Postretirement health care NRG participates in NSP's contributory health and welfare benefit plan that provides health care and death benefits to substantially all employees after their retirement. The plan is intended to provide for sharing of costs of retiree health care between NRG and retirees. For employees retiring after January 1, 1994, a six-year cost-sharing strategy was implemented with retirees paying 15% of the total cost of health care in 1994, increasing to a total of 40% in 1999. Postretirement health care benefits for NRG are determined and recorded under the provisions of SFAS No. 106, -Employers' Accounting for Postretirement Benefits Other Than Pensions.' SFAS No. 106 requires the actuarially determined obligation for postretirement health care and death benefits to be fully accrued by the date employees attain full eligibility for such benefits, which is generally when they reach retirement age. In conjunction with the adoption of SFAS No. 106 in 1993, NRG elected to amortize on a straight-line basis over 20 years the unrecognized accumulated postretirement benefit obligation (APBO) of $1.4 million for current and future retirees. Plan assets as of December 31, 1995 consisted of investments in equity mutual funds and cash equivalents. NRG's funding policy is to contribute to NSP benefits actually paid under the plan. The following table sets forth the funded status of the health care plan in which NRG employees participate at December 31: NSP Plan-1995 (Thousands of dollars) Total NRG Portion APBO Retirees $145,800 $67 Fully eligible plan participants 24,400 518 Other active plan participants 116,800 2,239 Total APBO 287,000 2,824 Plan assets at fair value 11,600 - APBO in excess of plan assets 275,400 2,824 Unrecognized net actuarial loss (40,400) (510) Unrecognized net transition obligation (183,200) (1,203) Net benefit obligation recorded $51,800 $1,111 NSP Plan-1994 (Thousands of dollars) Total NRG Portion APBO Retirees $132,200 $34 Fully eligible plan participants 21,500 359 Other active plan participants 79,400 1,319 Total APBO 233,100 1,712 Plan assets at fair value 8,000 - APBO in excess of plan assets 225,100 1,712 Unrecognized net actuarial gain 2,300 265 Unrecognized net transition obligation (194,000) (1,273) Net benefit obligation recorded $33,400 $704 The assumed health care cost trend rates used in measuring the APBO at December 31, 1995 and 1994, respectively, were 10.4% and 11.0% for those under age 65, and 7.3% and 7.5% for those over age 65. The assumed cost trends are expected to decrease each year until they reach 5.5% for both age groups in the year 2004, after which they are assumed to remain constant. A one percent increase in the assumed health care cost trend rate for each year would increase the APBO by approximately 15% as of December 31, 1995. Service and interest cost components of the net periodic postretirement cost would increase by approximately 17% with a similar one percent increase in the assumed health care cost trend rate. The assumed discount rate used in determining the APBO was 7% for December 31, 1995 and 8% for December 31, 1994, compounded annually. The assumed long-term rate of return on assets used for cost determinations under SFAS No. 106 was 8% for 1995 and 1994. Changes in actuarial assumptions had an immaterial impact on 1995 costs and are not expected to materially impact 1996 costs. The net annual periodic postretirement benefit cost recorded for 1995 and 1994 consists of the following components: (Thousands of dollars) 1995 1994 Service cost-benefits earned during the year $171 $140 Interest cost on APBO 171 126 Amortization of transition obligation 70 70 Net periodic postretirement health care cost $412 $336 Note 11 - Sales to significant customers NRG and the Ramsey/Washington Resource Recovery Project have a service agreement for waste disposal which expires in 2006. Approximately 23.1% in 1995 and 24.9% in 1994 of the Company's operating revenues were recognized under this contract. In addition, sales to one thermal customer amounted to 10.9% of operating revenues in 1995 and 11.7% of operating revenues in 1994. Note 12 - Financial instruments The estimated December 31 fair values of NRG's recorded financial instruments are as follows: 1995 1994 (Thousands Carrying Fair Carrying Fair of dollars) Amount Value Amount Value Cash and cash equivalents $7,039 $7,039 $17,507 $17,507 Restricted cash 9,773 9,773 13,817 13,817 Notes receivable, including current portion 40,447 40,447 6,802 6,802 Long-term debt, including current portion 90,034 91,682 93,339 82,694 For cash, cash equivalents and restricted cash, the carrying amount approximates fair value because of the short-term maturity of those instruments. The fair value of notes receivable is based on expected future cash flows discounted at market interest rates. The fair value of long-term debt is estimated based on the quoted market prices for the same or similar issues. NRG has entered into six forward foreign currency exchange contracts with counterparties to hedge exposure to currency fluctuations to the extent permissible by hedge accounting requirements. Pursuant to these contracts, transactions have been executed that are designed to protect the economic value in U.S. dollars of NRG's equity investments and retained earnings, denominated in Australian dollars and German deutsche marks (DM). NRG's forward foreign currency exchange contracts, in the notional amount of $119 million, hedge approximately $123 million of foreign currency denominated assets, and in the notional amount of $47 million, hedge approximately $64 million of foreign currency denominated retained earnings at December 31, 1995. Because the effects of both currency translation adjustments to foreign investments and currency hedge instrument gains and losses are recorded on a net basis in stockholder's equity (not earnings), the impact of significant changes in currency exchange rates on these items would have an immaterial effect on NRG's financial condition and results of operations. The contracts required cash collateral balances of $5.9 million at December 31, 1995, which are reflected as restricted cash on NRG's balance sheet. The contracts terminate in 1998 through 2005 and require foreign currency interest payments by either party during each year of the contract. If the contracts had been terminated at December 31, 1995, $5.2 million would have been payable by NRG for currency exchange rate changes to date. Management believes NRG's exposure to credit risk due to non-performance by the counterparties to its forward exchange contracts is not significant, based on the investment grade rating of the counterparties. Note 13 - Commitments and contingencies Operating lease commitments The Company leases certain of its facilities and equipment under operating leases, some of which include escalation clauses, expiring on various dates through 2010. Rental expense under these operating leases was $796,000 in 1995 and $784,000 in 1994. Future minimum lease commitments under these leases for the years ending after December 31, 1995 are as follows: (Thousands of dollars) 1996 $470 1997 239 1998 69 1999 63 2000 63 Thereafter 577 Total $1,481 Capital commitments NRG is contractually committed to additional equity investments in an existing German energy project. Such commitments are for approximately DM 33 million in 1996. The 1996 commitment would be approximately $23 million, based on exchange rates in effect at December 31, 1995. In addition, NRG is contractually committed to additional equity investments of $17 million in the Scudder Latin American Trust for Independent Power Energy Projects as of December 31, 1995. NRG is in the final stages of purchasing a 42% interest in O'Brien Environmental Energy, Inc. (O'Brien) from bankruptcy. In connection with its bid for O'Brien, on January 3, 1996, NRG obtained a $100 million letter of credit from a bank, which is secured by a pledge of various NRG assets. NRG delivered a letter of credit to O'Brien on January 18, 1996, to secure its obligations to complete its proposed investment in O'Brien. In January 1996, the United States Bankruptcy Court for the District of New Jersey confirmed the Chapter 11 Plan of Reorganization for O'Brien proposed by NRG and other interested parties. O'Brien has interests in eight domestic operating power generation facilities with aggregate capacity of approximately 230 megawatts, and in one 150-megawatt facility in the contract stage of development. As a result of the purchase, approximately $107 million would be made available to O'Brien's creditors by NRG. At least $81 million of the total made available to the creditors would be provided by NRG as follows: (i) a $28 million equity investment by NRG for its 42% interest in O'Brien; (ii) a $7.5 million investment by NRG for all of O'Brien's interest in certain biogas projects; and (iii) a $45 million unsecured loan from NRG to O'Brien. NRG currently is negotiating with an unaffiliated lender to refinance O'Brien's Newark Boxboard project in the amount of $56 million, of which approximately $26 million would be applied for distribution to O'Brien's creditors in reduction of NRG's approximately $107 million obligation. If this financing is not obtained concurrently with the closing of the O'Brien transaction, NRG would be obligated to make a $26 million loan to O'Brien after its reorganization. Note 14 - Subsequent event In January 1996, NRG issued $125 million of 7.625% unsecured senior notes maturing in 2006 to support equity requirements for projects currently under way and in development. -----END PRIVACY-ENHANCED MESSAGE-----