-----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, WBuRVUJ+JDZUcuTnNE9xv3We5q1DFZq4ciYjrq56Ryh22ZOTO7K0YDqHZhntOzGL TyL/zGqGNZyARSyXwMoukg== 0000795185-97-000002.txt : 19970328 0000795185-97-000002.hdr.sgml : 19970328 ACCESSION NUMBER: 0000795185-97-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970327 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NRG GENERATING U S INC CENTRAL INDEX KEY: 0000795185 STANDARD INDUSTRIAL CLASSIFICATION: COGENERATION SERVICES & SMALL POWER PRODUCERS [4991] IRS NUMBER: 592076187 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09208 FILM NUMBER: 97565291 BUSINESS ADDRESS: STREET 1: 1221 NICOLLET MALL CITY: MINNEAPOLIS STATE: MN ZIP: 55403 BUSINESS PHONE: 6123735300 MAIL ADDRESS: STREET 1: 1221 NICOLLET MALL CITY: MINNEAPOLIS STATE: MN ZIP: 55403 FORMER COMPANY: FORMER CONFORMED NAME: O BRIEN ENVIRONMENTAL ENERGY INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: OBRIEN ENERGY SYSTEMS INC DATE OF NAME CHANGE: 19910804 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ___________ FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended X TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from June 30, 1996 to December 31, 1996. Commission File Number: 1-9208 NRG GENERATING (U.S.) INC. (Exact name of registrant as specified in its charter) Delaware 59-2076187 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 1221 Nicollet Mall, Suite 610, Minneapolis, Minnesota 55403 (612) 373-8834 (Address of principal executive offices) (Zip Code) (Telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share 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, and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. As of March 20, 1997, there were outstanding 6,440,514 shares of Common Stock. Based on the last sales price at which such stock was sold on that date, the approximate aggregate market value of such shares held by non-affiliates was $35,637,000. Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 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 Documents Incorporated By Reference The information required for the following items is incorporated by reference to the 1997 Definitive Proxy Statement of NRG Generating (U.S.) Inc.: Item 10 - Directors and Executive Officers of the Registrant Item 11 - Executive Compensation Item 12 - Security Ownership of Certain Beneficial Owners and Management Item 13 - Certain Relationships and Related Transactions Table of Contents Page Number Part I Item 1. Business 2 Item 2. Properties 17 Item 3. Legal Proceedings 18 Item 4. Submission of Matters to a Vote of Security Holders 19 Part II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 20 Item 6. Selected Financial Data 21 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 22 Item 8. Financial Statements and Supplementary Data 31 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 31 Part III Item 10. Directors and Executive Officers of the Registrant 32 Item 11. Executive Compensation 32 Item 12. Security Ownership of Certain Beneficial Owners and Management 32 Item 13. Certain Relationships and Related Transactions 32 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 33 1 PART I ITEM 1. BUSINESS. General NRG Generating (U.S.) Inc. (referred to herein with its consolidated subsidiaries as "NRGG" or 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; (b) The 122 MW E.I. du Pont Parlin Project (the "Parlin Project"), located in Parlin, New Jersey, began operations in June 1991; and (c) The 22 MW Philadelphia Cogeneration Project (the "Philadelphia Project"), located in Philadelphia, Pennsylvania, began operations in May 1993. The Company also owns a one-third interest in the Grays Ferry Cogeneration Partnership (the "Grays Ferry Partnership"), which owns a 150 MW cogeneration project (the "Grays Ferry Project"), located in Philadelphia, Pennsylvania. The Grays Ferry Project is currently under construction with commercial operation currently expected to occur in December 1997. The Company also is currently evaluating a number of prospective projects for the purpose of determining whether to submit a bid. The Company was incorporated in Florida in 1981 and subsequently merged with a Delaware corporation in 1984. Prior to the merger, the Company was part of a group of several affiliated companies which had served the power generation market since 1915. Emergence from Bankruptcy; NRG Energy Investment Formerly known as O'Brien Environmental Energy, Inc. ("O'Brien"), the Company changed its name to NRG Generating (U.S.) Inc. in connection with its emergence from bankruptcy on April 30, 1996, under a plan of reorganization (the "Plan") approved by the U.S. Bankruptcy Court for the District of New Jersey (the "Bankruptcy Court"). O'Brien had filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code on September 28, 1994 in order to preserve its business relationships, maintain its operational strength and assets, restructure its debt and utilize its assets consistent with the interests of all of its creditors and shareholders. 2 In connection with the consummation of the Plan, NRG Energy, Inc. ("NRG Energy") advanced $71,240,000 under loan agreements with the Company and purchased new Common Stock of the Company for aggregate consideration of $21,178,000. NRG Energy also purchased certain subsidiaries of the Company for $7,500,000 and funded a cash distribution to the O'Brien stockholders aggregating $7,500,000. As a result of consummation of the Plan, NRG Energy now holds approximately 41.86% of the Common Stock of the Company. NRG Energy's financial backing of the Plan enabled the Company to provide for full and immediate payment of all undisputed pre-petition claims as well as a provision for post- petition interest. In addition, pursuant to the Plan, NRG Energy and the Company entered into a Co-Investment Agreement (the "Co- Investment Agreement"), pursuant to which NRG Energy has agreed to offer to the Company ownership interests in certain power projects which are initially developed by NRG Energy or with respect to which NRG Energy has entered into a binding acquisition agreement with a third party. Recent Developments Nasdaq SmallCap Market Listing On March 4, 1997, The Nasdaq Stock Market, Inc. approved the listing of the Company's Common Stock on the Nasdaq SmallCap Market. Trading in NRGG's Common Stock on this market began on March 10, 1997. There can be no assurance, however, that an active trading market will develop or continue for the Company's Common Stock as a result of this listing. See "Item 5. Market for Registrant's Common Equity and Related Stockholder Matters." Change in Operations and Maintenance Responsibility Power Operations, Inc., a new wholly-owned subsidiary of the Company, assumed operations and maintenance responsibilities for the Newark facility and the Parlin facility, in each case replacing the former operator, on November 8, 1996, and December 31, 1996, respectively. The Company believes that such changes will have no material financial impact on the operations of these facilities or on the Company's financial condition or results of operations. On January 1, 1997, Power Operations, Inc. was sold by the Company to NRG Energy. The terms of this transaction were approved by the Independent Directors Committee of the Company's Board of Directors as required by the Company's Bylaws. Risk Factors History of Losses The Company incurred income in the amount of $6,423,000 for the six month fiscal year ended December 31, 1996. However, due in part to costs associated with its bankruptcy proceeding, the Company incurred losses in the amounts of $17,713,000 and $40,919,000 for the fiscal years ended June 30, 1996, and June 30, 1995, respectively. These losses have had a material adverse effect on the Company's liquidity and financial position and may continue to adversely affect the Company's liquidity and results of operations in future periods by, among other things, rendering it more difficult for the Company to raise capital or otherwise to conduct project development activities. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." 3 Capital Requirements The Company's business is capital intensive. The long-term growth of the Company, which involves the development and acquisition of additional power generation projects, will require the Company to seek substantial funds through various forms of financing. While the Company is provided with certain rights under the Co-Investment Agreement which may enable it to finance the acquisition of ownership interests in certain projects which may be offered by NRG Energy, there can be no assurance that the terms on which such financing may be made available will be satisfactory to the Company, and no financing will be made available under the Co-Investment Agreement for the development or acquisition of projects which are not offered to the Company pursuant to the terms of such agreement. There can be no assurance that the Company will be able to arrange the financing needed for these additional projects. If the Company is unable to secure such financing, or if the terms of such financing as may be available under the Co-Investment Agreement are not satisfactory to the Company, its business could be materially adversely affected. See "Business - Project Development Activities." Energy Price Fluctuations and Fuel Supply 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 PPA 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. The Company anticipates that this change in the PPAs will reduce its historical volatility in gross margins by eliminating the Company's exposure to fluctuations in the price of natural gas which must be paid by its Newark and Parlin Projects. However, because energy revenues as well as the cost of energy revenues will decline under the amended PPAs, the Company anticipates that its operating gross margins, over time, will remain similar to historical results, and there can be no assurance that any of the foregoing steps will improve or maintain gross profit margins in the future. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Costs and Expenses." Project Development Risks The development of cogeneration projects often requires many months or years to complete and involves a high degree of risk that any particular project will not be completed. Among the principal elements involved in developing projects are the selection of a site, obtaining commitments from others to purchase electrical power and steam, negotiating fuel supply arrangements, obtaining environmental and other governmental permits and approvals, arranging project financing and turnkey construction. These objectives often are achieved independently of one another, and success in achieving one objective does not necessarily result in success in achieving others. During the period that the Company was in bankruptcy, project development 4 efforts virtually ceased. Since emerging from bankruptcy these efforts have resumed, in part as a result of the Co-Investment Agreement. There can be no assurance, however, that the Company will be able to obtain satisfactory project agreements, construction contracts, necessary licenses and permits or satisfactory financing commitments or that any of the projects discussed in this report or which otherwise might be pursued will ultimately be completed. If a project is not completed the Company may not generate any revenue from the project and may not otherwise be able to recover its investment in the project, each of which could have a material adverse effect on the Company. See "Business - Project Development Activities." Competition Many organizations, including equipment manufacturers and subsidiaries of utilities and contractors, as well as other organizations similar to the Company, have entered the market for the development, ownership and operation of cogeneration projects. Many of these companies have substantially greater resources and/or access to the capital required to fund such activities than the Company. In addition, obtaining power contracts with utilities has become more competitive with the increased use of competitive bidding procedures and the advent of deregulation in the electric utility market. This increased competition may make it more difficult for the Company to secure future projects, may increase project development costs and may reduce the Company's operating margins on any future projects. Any such developments could have a material adverse effect on the Company's results of operations and financial condition. See "Business - Independent Power Market Overview." Proposed Restructuring of the Electric Utility Industry The U.S. Congress is considering legislation to repeal the Public Utility Regulatory Policies Act of 1978 ("PURPA") entirely, or at least to repeal the obligation of utilities to purchase from qualifying facilities thereunder ("QFs"). There is strong support for grandfathering existing QF contracts if such legislation is enacted, and also support for requiring utilities to conduct competitive bidding for new electric generation if the PURPA purchase obligation is eliminated. Since the Company benefits from PURPA, the Company's business could be adversely affected by a significant change in PURPA. See "Business - Independent Power Market Overview," and "Business - Regulation." Various bills have also proposed repeal of the Public Utility Holding Company Act of 1935 ("PUHCA"). Repeal of PUHCA would allow both independent power producers and vertically integrated utilities to acquire retail utilities in the U.S. that are geographically widespread, as opposed to the current limitations of PUHCA which require that retail electric systems be capable of physical integration. Also, registered holding companies would be free to acquire non-utility businesses, which they may not do now, with certain limited exceptions. With the repeal of PURPA or PUHCA, competition for independent power generators from vertically integrated utilities would likely increase. While the Company does not believe that any such repeal would necessarily have a material adverse effect on its financial position or results of operations, the long term effect on the Company of any such repeal cannot be predicted. See "Business - Regulation." 5 In addition, the Federal Energy Regulatory Commission ("FERC"), many state public utility commissions ("PUCs") and Congress are currently studying and beginning preliminary implementation of proposals to restructure the electric utility industry in the U.S. to permit consumers to choose their utility supplier in a competitive electric energy market. The FERC issued rules in 1996 to require utilities to offer wholesale customers and suppliers open access on their transmission lines on a comparable basis to the utilities' own use of the lines. Virtually all investor-owned utilities have already filed "open access tariffs for wholesale transmission." The utilities contend that they should recover from departing customers their fixed costs that will be "stranded" by the ability of their wholesale customers (and perhaps eventually, their retail customers) to choose new electric power suppliers. These include the costs utilities are required to pay under many QF contracts which the utilities view as excessive when compared with current market prices. Many utilities are therefore seeking ways to lower these contract prices or rescind the contracts altogether, out of concern that their shareholders will be required to bear all or part of such "stranded" costs. Some utilities have engaged in litigation against QFs to achieve these ends. In addition, future U.S. electric rates may be deregulated in a restructured U.S. electric utility industry, and increased competition may result in lower rates and less profit for U.S. electricity sellers. Falling electricity prices and uncertainty as to the future structure of the industry are inhibiting U.S. utilities from entering into long-term power purchase contracts. While the Company does not believe that any such restructuring necessarily would have a material adverse effect on its financial position or results of operations, the long term effect of any such restructuring on the Company cannot be predicted at this time. See "Business - Regulation." Risks Associated with Foreign Operations The Company's foreign operations (consisting primarily of its equipment sales and rental operations) are subject to the risks inherent in doing business in foreign countries, including changes in currency exchange rates, currency restrictions, political changes and expropriation. Although it is impossible to predict the likelihood of such occurrences or their effect on the Company, the Company believes these risks to be mitigated by the facts that the Company's foreign activities historically have not been concentrated in any single country and have been conducted largely in Europe, which the Company believes to be subject to fewer of such risks than other regions. In addition, the Company attempts to secure payment for export sales with commercial letters of credit or other secured means. See "Business - Products and Services - Equipment Sales, Rentals and Services Segment." Risks Associated with Forward-Looking Statements This Form 10-K, including the information incorporated by reference herein, contains various forward-looking statements and information that are based on the Company's beliefs and assumptions, as well as information currently available to the Company. Without limiting the generality of the foregoing, the words "believe," "anticipate," "estimate," "expect" and similar expressions, when used in this Form 10-K, are intended to identify forward-looking statements. All forward-looking statements and information in this Form 10-K are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and are intended to be covered by the safe harbors created thereby. Investors are cautioned that all forward-looking statements involve risks and uncertainties including, without limitation, the factors set forth under the caption "Risk 6 Factors" in this Form 10-K. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore there can be no assurance that the forward-looking statements included in this Form 10-K will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved. Independent Power Market Overview The independent power market (the market for power generated by companies other than traditional utilities) has evolved and is expected by the Company to continue to expand as a result of the growing need for new and replacement power capacity by electric utilities and industrial customers. Historically, regulated utilities in the United States have been the only producers of electric power intended primarily for sale to third parties. The increase in oil prices during the late 1970s and the increasing cost of constructing and financing large coal-fired or nuclear generating facilities along with the enactment of PURPA created a favorable regulatory environment and favorable market conditions for the development of energy projects by companies other than electric utilities. The basic policy judgment behind the encouragement of the development of cogeneration facilities is that the United States' dependence on oil and natural gas resources should be reduced and that the very high incremental costs of large centralized power production facilities should be avoided. However, economic considerations remain the central issue affecting a decision to install a cogeneration project. PURPA provides significant incentives to developers of "qualifying facilities" within the meaning of PURPA. It designates certain small power production (those utilizing renewable fuels and having a capacity of less than 80 MW) and certain cogeneration facilities as qualifying facilities eligible for various benefits under federal law, including exemption from many of the regulatory requirements applicable to electric utilities. In accordance with PURPA, the Company's projects with one exception are exempt, and its proposed projects, are intended to be exempt, from rate, financial and similar regulation as a utility as long as they meet the requirements of a qualifying facility. These projects also benefit from regulations that require public utilities to purchase power generated by qualifying projects at the utilities' "avoided cost" (determined in accordance with a formula which varies from state to state but which is generally calculated based upon what the cost to the utility would be to generate the power itself or to purchase it from another source). Power purchase contracts generally must be approved by state public utility commissions. Since the Company benefits from PURPA, the Company's business could be adversely affected by a significant change in PURPA and could otherwise be materially impacted by decisions of federal, state and local legislative, judicial and regulatory bodies. See "Business - Regulation." Many organizations, including equipment manufacturers and subsidiaries of utilities and contractors, as well as other organizations similar to the Company, have entered the market for the ownership and operation of cogeneration projects. Many of these companies have substantially greater resources and/or access to the capital required to fund such activities than the Company. In addition, obtaining power contracts with utilities has become more competitive with 7 the increased use of competitive bidding procedures and the advent of deregulation in the electric utility market. This increased competition may make it more difficult for the Company to secure future projects, may increase project development costs and may reduce the Company's operating margins on any future projects. Any such developments could have a material adverse effect on the Company's results of operations and financial condition. See "Business - Competition." Project Development Activities General The Company, together with its subsidiaries and affiliates, develops, owns and operates cogeneration projects which produce electricity and thermal energy for sale under long-term contracts with industrial and commercial users and public utilities. Under its Co-Investment Agreement with NRG Energy, the Company also may acquire ownership interests in certain power projects initially developed by NRG Energy or to which NRG Energy has entered into a binding acquisition agreement with a third party. Potential project structures include (but are not limited to) sole ownership, general partnerships, limited partnerships, sale leaseback arrangements and other forms of joint venture or debt arrangements. The Company sells the electricity produced by its projects pursuant to long-term contracts either on a "wholesale basis" to local public utilities or on a "retail basis" to specific industrial and commercial users. Presently, most of the electricity produced by the Company's projects in operation is sold on a wholesale basis. The mix of future energy sales may differ based upon future economic conditions and other circumstances. The Company also may develop standby/peak shaving projects such as its Philadelphia Project, which utilize the Company's power generation equipment as a back-up source of electricity for large customers. These projects are intended to fill a need between large electrical users and the requirements of local utilities. The availability of an alternative energy source allows these customers to benefit from significantly discounted interruptible energy tariffs. The standby/peak shaving generators typically will be required to provide a limited amount of electricity during peak periods. Co-Investment Agreement with NRG Energy Pursuant to the Plan, NRG Energy and the Company entered into a Co-Investment Agreement pursuant to which NRG Energy has agreed to offer to the Company ownership interests in certain power projects which are initially developed by NRG Energy or with respect to which NRG Energy has entered into a binding acquisition agreement with a third party. If any eligible project reaches certain contract milestones (which include the execution of a binding PPA and fuel supply agreement and the completion of a feasibility and engineering study) by April 30, 2003, NRG Energy has agreed to offer to sell to the Company all of NRG Energy's ownership interest in such project. Eligible projects include, with certain limited exceptions, any proposed or existing electric power plant within the United States NRG Energy initially develops or in which NRG Energy proposes to acquire an ownership interest. NRG Energy is obligated under the Co-Investment Agreement to offer to the Company, during the three year period ending on April 30, 8 1999, projects with an aggregate equity value of at least $60,000,000 or a minimum of 150 net MW. To facilitate the Company's ability to acquire ownership interests which may be offered pursuant to the Co-Investment Agreement, NRG Energy has agreed to finance the Company's purchase of such ownership interests on commercially competitive terms to the extent funds are unavailable to the Company on comparable terms from other sources. Any such financing provided by NRG Energy under the terms of the Co-Investment Agreement is required to be recourse to the Company and secured by a lien on the ownership interest acquired. Such financing also is required to be repaid from the net proceeds received by the Company from offerings of equity or debt securities of the Company (when market conditions permit such offerings to be made on favorable terms) after taking into account the working capital and other cash requirements of the Company as determined by its Board of Directors. Grays Ferry Project The Company has executed a partnership agreement with an affiliate of PECO Energy Company and an affiliate of Trigen Energy Corporation to jointly develop and own this 150 MW project. The partnership has executed a 25-year agreement with the Trigen-Philadelphia Thermal Energy Corporation for the sale of steam and a 20-year agreement for the sale of electric output with PECO Energy Company, in addition to numerous other project documents. The project is under construction and is expected to be in commercial operation in December 1997. However, the Company believes that the project is subject to normal construction and completion risks, and no assurance can be made that commercial operation will occur in December 1997. Any failure of the Grays Ferry Project to achieve commercial operation by December 1997 could have a material adverse effect on the Company. See Note 8 of the Consolidated Financial Statements. Other Potential Projects The Company from time to time identifies and considers potential opportunities to develop additional projects as well as to acquire projects in operation or under development and owned by third parties. As of the date of this report, the Company is not party to any definitive agreements with respect to any such potential projects, and no assurances can be made with respect to the likelihood of entering into any such agreements with respect to any such potential projects. As a project developer, the Company is responsible for the evaluation, design, installation and operation of a project. The Company also assumes the responsibility for evaluating project alternatives; obtaining financing, insurance, all necessary licenses, permits and certifications; conducting contract negotiations with local utilities and arranging turnkey construction. In connection with obtaining financing, the Company may negotiate for credit support facilities with equipment suppliers, turnkey construction firms and financial institutions. The Company anticipates that in the ordinary course of its business it will investigate and/or pursue opportunities with respect to various potential projects which will not be completed. Moreover, in certain instances the Company may not generate any revenue from such 9 projects and may not be able to recover its investment in such projects, each of which could have a material adverse effect on the Company. Products and Services During the six month fiscal year ended December 31, 1996, the Company operated principally in two industry segments: (i) energy - the development and ownership of cogeneration projects, the development, ownership and operation of standby/peak shaving projects through wholly-owned subsidiaries and limited partnerships; and (ii) equipment sales, rentals and service - the selling and renting of power generating, cogenerating and standby/peak shaving equipment and services. See Note 25 of the Consolidated Financial Statements of the Company for financial information with respect to industry segments. Energy Segment Overview Set forth below are descriptions of the Company's three projects in operation as of December 31, 1996. Each of these projects is currently producing revenues through the sale of energy under long-term contracts. In connection with the obtaining of financing for its three cogeneration projects in operation, the Company has obtained business interruption insurance and performance guarantees by the operators of its cogeneration projects. These arrangements are negotiated and secured prior to commencement of operations of a project. Taken as a whole, these arrangements reduce the risks associated with any past and future equipment problems or unscheduled plant shutdowns. For example, in the event of an unscheduled breakdown, the Company generally is entitled, pursuant to its business interruption insurance policy, to the net profit which it is prevented from earning from the particular project, including all charges and expenses which continue during the period of interruption, less the applicable deductible amounts. There can be no assurance that such insurance or guarantees will sufficiently mitigate the risk of unforeseen contingencies.
Name and Location Rated Approximate Date of Power Company's Of Project Capacity(1) Capital Cost Operation Purchaser Lender Interest (in MWs) (in thousands) Cogeneration Parlin 122.0 $97,000 June 1991 Jersey Central Credit 100% Power & Light Suisse(3) Company Newark 52.0 52,000 November 1990 Jersey Central Credit 100% Power & Light Suisse(3) Company Standby/Peak Shaving Philadelphia 22.0 12,000 May 1993 Philadelphia (2) 83% Municipal Authority _____ ________ 196.0 $161,000
_____________________ (1) See discussion of each particular project which follows for current contract production, which may be less than the stated rated capacity. 10 (2) This project is financed by various lenders through equipment credit facilities. (3) See Note 12 of the Consolidated Financial Statements. Cogeneration Cogeneration involves the sequential production of two or more forms of usable energy (e.g. electricity and thermal energy) using a single fuel source, thereby substantially increasing fuel efficiency. The key elements of a cogeneration project are permit applications, contracts for sales of electricity and thermal energy, contracts or arrangements for fuel supply, and project financing and construction. The Company attempts to design and develop its projects so that they qualify for the benefits of PURPA, which exempts qualifying projects from rate, financial and similar utility regulation and requires public utilities to purchase power generated by these projects. Electricity may be sold to utilities and end users of electrical power, including large industrial facilities. Thermal energy from cogeneration plants may be sold to commercial enterprises and other institutions. Large industrial users of thermal energy include plants in the chemical processing, food processing, pharmaceutical and paper industries. The Company has developed and currently owns two cogeneration projects, the Newark and Parlin Projects. Natural gas for these projects is provided by JCP&L as a part of its obligations under the terms of its PPAs with NRG Generating (Newark) Cogeneration Inc. ("NRGG Newark") and NRG Generating (Parlin) Cogeneration Inc. ("NRGG Parlin"), respectively, as renegotiated effective April 30, 1996. Previously, the Company bore the risk of fluctuating natural gas prices. Power Operations, Inc., a wholly-owned subsidiary of the Company which was sold to NRG Energy on January 1, 1997, assumed the operations and maintenance responsibilities for the Newark and Parlin facilities under long-term contracts on November 8, 1996 and December 31, 1996, respectively. The Newark and Parlin Projects previously had been operated and maintained under agreement with a subsidiary of Stewart & Stevenson, Inc. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." Newark Project. This 52 MW project, which commenced operation in November 1990, is 100%-owned by NRGG Newark, a wholly-owned subsidiary of the Company. The Newark Project is designed to operate continuously and to provide up to 75,000 lbs./hr. of steam to a recycled paper boxboard manufacturing plant owned by Newark Boxboard Company, a subsidiary of the Newark Group Industries, Inc., and 52 MW of electricity to JCP&L, each under agreements extending into the year 2015. See Note 12 of the Company's Consolidated Financial Statements for a discussion of this project's refinancing. For the six month fiscal year ended December 31, 1996, this project accounted for approximately $9,590,000 in gross revenues, representing approximately 23% of the Company's gross revenues. Parlin Project. This 122 MW project, which commenced operation in June 1991, is 100%-owned by NRGG Parlin, a wholly- owned subsidiary of the Company. The Parlin Project provides up to 120,000 lbs./hr. of steam to a manufacturing plant in Parlin, New Jersey owned by E.I. du Pont de Nemours and Company ("E.I. du Pont"), under an agreement extending until 2021. In addition, the project sells 41 MW of base electric power and up to 73 MW of dispatchable power to JCP&L, under an agreement with an initial term until 2011. Finally, the 11 project sells up to 9 MW of power to NRG Parlin, Inc. ("NPI"), a wholly-owned subsidiary of NRG Energy. NPI resells this power at retail to E.I. du Pont under an agreement extending until 2021. See Note 12 of the Company's Consolidated Financial Statements for a discussion of this project's refinancing. For the six month fiscal year ended December 31, 1996, this project accounted for approximately $10,327,000 in gross revenues, representing approximately 26% of the Company's gross revenues. Standby/Peak Shaving Standby/peak shaving projects utilize the Company's power generation equipment as a back-up source of electricity for large electrical demand customers. The availability of an alternative energy source allows these customers to benefit from significantly discounted interruptible energy tariffs. The standby/peak shaving generators typically will be required to provide a specified amount of electricity during peak periods. Philadelphia Project. This 22 MW project, owned by O'Brien (Philadelphia) Cogeneration, Inc. ("OPC"), commenced operations in May 1993. The Company owns an 83% interest in OPC, with the remaining 17% interest owned by an unrelated private investor. See Note 27 of the Consolidated Financial Statements. Pursuant to a 20-year energy service agreement, the Philadelphia Municipal Authority (the "Authority") has the right to be supplied with 20 MW of electricity from the project at any time on one hour's notice. In addition, the project is required to use excess digester gas collected at the Authority's northeast and southwest Philadelphia plants to generate up to an approximate 2 MW of electricity which is delivered to the Authority pursuant to a 10- year power generation agreement. In October 1998, the Authority's rate structure with its electrical utility is due to be renegotiated. The outcome of these negotiations could adversely affect the project. The Company's Board of Directors has authorized Wexford Management LLC ("Wexford") to arrange a sale of the Company's interest in the Philadelphia Project, if satisfactory terms can be obtained, pursuant to a Liquidating Asset Management Agreement entered into in connection with the consummation of the Plan. Equipment Sales, Rentals and Services Segment 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 that operate in the United Kingdom under the common name of Puma ("Puma"). O'Brien Energy Services Company A significant portion of the Company's equipment rental business is attributable to the operations of OES. The Company rents power generation and cogeneration equipment to the construction, industrial, military, transportation, mining, utility and entertainment markets. In addition to its rental business, OES sells (i) equipment manufactured by others to turnkey 12 contractors in connection with the construction of the Company's projects, (ii) equipment purchased by it for projects unrelated to those being developed by the Company, and (iii) equipment purchased and reconditioned by it. Finally, OES provides related services including the design, assembly, repair and maintenance of permanent or standby power generation equipment. On a national level, the Company competes with a number of other companies; in addition, there are numerous local competitors in each of the geographic areas in which the Company operates. The Company competes on the basis of experience, service, price and depth of its rental fleet. Puma Puma designs and assembles diesel and natural gas fueled power generation systems ranging in size from 5 kilowatts to 5 MW. These products are engineered and sold for use in prime power base load applications as well as for standby or main failure emergency situations. Major markets for these products include commercial buildings, governmental institutions such as schools, hospitals and public facilities, industrial manufacturing or production plants, shipyards, the entertainment industry and offshore drilling operations. The Company exports many of its products primarily through established distributors and dealers in local areas for delivery to markets such as the Far East, including Hong Kong and mainland China, together with the Middle East and South America. Puma also designs and manufactures custom electrical control and distribution subsystems. These include medium voltage cubicle switchboards, main distribution systems, control instrumentation panels and packaged substations. This equipment receives and distributes power through a building, ship or other self-contained structure. The revenues and operations of the Company's foreign operations in the United Kingdom disclosed below are attributable solely to the equipment sales and services segment of the Company's business. The revenues from such operations accounted for in excess of 50% of that particular segment's revenue in the six month fiscal year ended December 31, 1996.
December 31, June 30, June 30, June 30, 1996 1996 1995 1994 (In Thousands) Revenues: United States $ 27,937 $ 82,917 $ 89,332 $ 93,090 United Kingdom 11,979 13,630 12,915 13,499 $ 39,916 $ 96,547 $ 102,247 $ 106,589 Net Income (Loss): United States $ 6,087 $ (17,591) $ (40,905) $ (14,570) United Kingdom 336 (122) (14) (1,931) $ 6,423 $ (17,713) $ (40,919 $ (16,501) Identifiable Assets: United States $ 164,631 $ 169,657 $ 179,793 $ 230,343 United Kingdom 8,993 8,505 9,955 7,473 $ 173,624 $ 178,162 $ 189,748 $ 237,816
13 Regulation In connection with the development and operation of its projects, the Company is substantially affected by federal, state and local energy and environmental laws and regulations. The enactment in 1978 of PURPA and the adoption of regulations thereunder by the FERC provided incentives for the development of small power production facilities (those utilizing renewable fuels and having a capacity of less than 80 MW) and cogeneration facilities (collectively referred to as "qualifying facilities" or "QFs"). Electric utilities are required to purchase power from such facilities at rates based on the incremental cost of electrical energy (so called "avoided cost"). Under regulations adopted by the FERC and upheld by the United States Supreme Court, such rates are based upon "the incremental cost to an electric utility of electrical energy or capacity or both which, but for the purchase from the qualifying facility or qualifying facilities, such utility would generate itself or purchase from another source." Historically, and as it affects the Company's sales of power from qualifying facilities, avoided cost is generally a function of the purchasing utility's otherwise applicable cost of fuel required to generate electricity and its cost of capital required to construct a power plant to supply such capacity. With the exception of the Parlin Project and parts of the Philadelphia Project, all of the Company's existing electric generating facilities are qualifying small power production facilities or qualifying cogeneration facilities, as these terms are defined in PURPA. Pursuant to authority granted to FERC under PURPA, FERC has promulgated regulations which at present generally exempt qualifying facilities from the Federal Power Act, PUHCA and state laws on electric utility regulation. In order to qualify for the benefits provided by PURPA, the Company's QFs must meet certain size, efficiency, fuel and ownership requirements. For its major cogeneration projects, the Company's practice has been to obtain an order from FERC confirming the qualification of its facilities. However, the standards for qualification and the regulations described above are subject to amendment. If the regulations were to be amended, the Company cannot predict the effect of any such amendment on the extent of regulation to which the Company may thereby become subject. In the event that one of the Company's cogeneration facilities failed to meet the requirements of being a "qualifying facility" after relying on that status, the Company would be materially adversely affected. See "Business - Risk Factors - Proposed Restructuring of the Electric Utility Industry." The Company renegotiated the PPA for the Parlin Project during 1996. As permitted under the terms of its renegotiated agreements, NRGG Parlin filed rates with the FERC as a public utility under the Federal Power Act. Previously, the Parlin Project had been certified as a QF by FERC. However, the effect of the rate filing by NRGG Parlin was to relinquish its claim to QF status. FERC has approved the rates filed by NRGG Parlin effective April 30, 1996, and given certain other approvals to NRGG Parlin in connection with the consummation of the Plan. Among other things, NRGG Parlin has received a determination from FERC that it is an exempt wholesale generator ("EWG"). It is thus exempt from all provisions of the PUHCA, and the 14 ownership of NRGG Parlin by the Company does not subject the Company to regulation under PUHCA. The Company is also subject to the Powerplant and Industrial Fuel Use Act of 1978 ("FUA"), which generally limits the ability of power producers to burn natural gas in new baseload generation facilities unless such facilities also have the capability to use coal or any other alternate fuel as a primary energy source. All of the Company's existing projects have either received permanent exemption from the FUA or otherwise complied with its provisions. Environmental Regulations In addition to the regulations described above, the Company's projects must comply with applicable federal, state and local environmental regulations, including those related to water and air quality. These laws and regulations in many cases require a lengthy and complex process of obtaining licenses, permits and approvals from federal, state and local agencies. The environmental regulations under which the Company's projects operate are subject to amendment. The Company cannot predict what effect compliance with such amendments may have on the Company's business or operations. Compliance could require modification of a project and thereby increase its costs, extend its completion date or otherwise adversely affect a project. The environmental regulations likely to have the greatest impact on the Company's business and operations are air quality regulations under the Clean Air Act. All of NRGG's operating plants perform at levels better than current federal performance standards mandated for such plants under the Clean Air Act. Based on the current trend of environmental regulation, the Company believes that this area of regulation in the U.S. will become more strict. In November 1990, Congress passed the Clean Air Act Amendments of 1990 ("the 1990 Amendments"). The Environmental Protection Agency ("EPA") is still in the process of implementing the requirements mandated by the 1990 Amendments. In addition, EPA and the States are in the process of revising existing requirements under the Clean Air Act to make them more stringent. The 1990 Amendments require EPA to establish technology- based emission standards for hazardous air pollutants. "Electric utility steam generating units" that are greater than 25 MW are excluded from regulation while EPA conducts a study of hazardous air pollutant emissions from these units to determine whether such regulation is "appropriate and necessary." This study is currently underway, and in 1996 EPA submitted an interim report to Congress. If, in the final report EPA finds that such regulations are necessary, the Company may be required to meet additional pollution control requirements. EPA plans to issue hazardous air pollutant regulations for combustion sources not included within the scope of EPA's electric utility study, including internal combustion engines, by November 2000. These regulations may also require the Company to meet additional control requirements. The Company's business and operations may also be impacted by changes to existing regulations under the Clean Air Act. For example, EPA and the states are in the process of developing more stringent emission limitations to control ground-level ozone. EPA and a number 15 of states have established the Ozone Transport Assessment Group ("OTAG"), composed of federal, state and local air regulatory officials from the 37 eastern-most states to review the need for additional NOx emission reduction requirements to address ozone transport and ozone nonattainment under the current federal ambient ozone standard. The OTAG process could result in new NOx emission standards being required by EPA and/or the states. If more stringent NOx standards are adopted by EPA and/or certain states, NRGG could be required to install additional NOx emission control technology at some of its facilities. In addition, EPA has proposed to revise the current National Ambient Air Quality Standards for ground-level ozone and particulate matter to make them more stringent. EPA plans to finalize these rules this summer. If EPA decides to make these standards more stringent, additional control technology requirements may be imposed on existing NRGG plants. The Company does not believe that the effect of any such additional requirements, if implemented, will have a material adverse effect on its financial condition or results of operations. In the spring of 1996, the Company discovered numerous minor and unintentional permit infractions of certain air emission limits for its Newark and Parlin facilities which occurred over a period of time as a result of an operational error. Upon discovering such infractions, the Company promptly notified the New Jersey Department of Environmental Protection ("NJDEP") and took measures to correct the operational error and prevent its recurrence. The cumulative effect of the excess emissions on a "pounds per hour" basis was small. In June 1996, the Company met with representatives of NJDEP to discuss the permit violations and submitted a report to NJDEP concerning the violations. At this time, NJDEP has not indicated that it will assess any penalty and has not required any other action as a result of such violations. The Company considers the matter resolved and believes that no further actions are required. All projects in operation and under development are believed to be operating in substantial compliance with or designed to meet currently applicable environmental requirements. To date, compliance with these environmental regulations has not had a material effect on the Company's earnings nor has it required the Company to expend significant capital expenditures. Competition Many organizations, including equipment manufacturers and subsidiaries of utilities and contractors, as well as other organizations similar to the Company, have entered the cogeneration market. Many of these organizations have substantially greater resources than the Company. In addition, obtaining power contracts with utilities has become more competitive with the increased use of competitive bidding procedures and the movement towards deregulation of electricity energy market. This increased competition may make it more difficult for the Company to secure future projects, may increase project development costs and may reduce the Company's operating margins. Even though many of its potential competitors have substantially greater resources than the Company, the Company believes that its experience, particularly if combined with a strategic alliance with a third party with regard to larger projects, will enable it to compete effectively. 16 Principal Customer The Company derived 46%, 62%, 65% and 53% of its revenues in the six months ended December 31, 1996, and the fiscal years ended June 30, 1996, 1995 and 1994, respectively, from JCP&L as a result of the operation of the Newark and Parlin facilities. Employees As of December 31, 1996, the Company had approximately 120 full-time employees. Patents The Company and its subsidiaries do not own any patents or trademarks. Backlog At December 31, 1996, the Company's total production backlog was $1,176,000. ITEM 2. PROPERTIES. The Company's corporate headquarters are located in Minneapolis, Minnesota. The Company leases office and warehouse space until April 30, 1997 from Christiana River Holdings, Ltd., an entity owned by Frank L. O'Brien III, the former CEO of O'Brien. Rental expense for the six month fiscal year ended December 31, 1996 was approximately $98,000. In September 1993, Puma purchased its executive offices and its principal manufacturing facility located in Ash, Canterbury, Kent, United Kingdom from III Enterprises, Limited, an entity owned by Frank L. O'Brien III, for approximately $800,000. See Note 23 of the Consolidated Financial Statements. The headquarters of OES are located on approximately four acres in Wilmington, Delaware. The premises are owned, subject to a mortgage, in fee simple and include an approximately 55,000 square foot building. In addition, OES owns, subject to a mortgage, office and warehouse space in Houston, Texas, on approximately two acres of land. OES leases space for similar purposes in each of Bakersfield and Benicia, California. The office and warehouse space in Texas and in the California locations range from approximately 5,000 to 10,000 square feet. The Company leases property on the site of its cogeneration facilities from the commercial user of thermal energy for a nominal fee. The term of the lease equals or exceeds that of each respective thermal supply agreement. The Company believes that the leased premises are suitable and adequate for the Company's projects. 17 ITEM 3. LEGAL PROCEEDINGS. The Company or a subsidiary is party to the following legal proceedings: 1. Calpine Corporation v. NRG Generating (Parlin) Cogeneration Inc., Superior Court of Essex County, New Jersey, Civil Action File No. ESX-L-6905-96, filed June 19, 1996. This is a dispute over the purchase of certain accounts receivables allegedly owed by the Company. 2. Stevens, et al. v. O'Brien Environmental Energy, Inc., et al., United States District Court for the Eastern District of Pennsylvania, Civil Action No. 94-cv-4577, filed July 27, 1994. This action was filed by certain purchasers of the Class A Common Stock of the Company's predecessor during the class period who allege various violations of the Federal securities laws. The Plaintiffs claim that certain material misrepresentations and nondisclosures concerning the Company's financial conditions and prospects allegedly caused the price of the Common Stock to be artificially inflated during the class period. 3. Blackman and Frantz v. O'Brien, United States District Court, Eastern District of Pennsylvania, Civil Action No. 94- cv-5686, filed October 25, 1995. This action was filed by purchasers of O'Brien debentures during the class period. The Plaintiffs object to treatment of the class under the Bankruptcy Plan. This matter has been consolidated with the Stevens class action case described in paragraph number 2 above. 4. GEC Alsthom, International, Inc. v. O'Brien Energy Services Co., Stewart & Stevenson Operations, Inc., and ABC Company (fictitious), Superior Court of Essex County, New Jersey, Civil Action File No. L-7389-95, filed June 16, 1995. This action arises out of the purchase of materials and services from a vendor to make repairs in connection with a fire which occurred at the Company's Newark turbine generator facility on December 25, 1992. The Plaintiff claims that the Company has failed to meet monetary obligations aggregating approximately $155,000 under the alleged agreement, and the Company has filed counter-claims alleging that the Plaintiff failed to properly install certain equipment which led to failures at the turbine generator facility. 5. In re: O'Brien Environmental Energy, Case No. 94-26723, U.S. Bankruptcy Court for the District of New Jersey, filed September 29, 1994. The Company's exposure with respect to its bankruptcy case is limited. The Company believes that such limited exposure would probably be immaterial to its operating results. The Company is subject from time to time to various other claims that arise in the normal course of business, and the Company believes that 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. 18 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. At the Annual Meeting of Stockholders of the Company held on November 21, 1996 (the "Meeting"), the following directors were elected, each of whom will serve until the 1997 annual meeting of stockholders and until his successor is elected and qualified: Nominee Affirmative Negative Votes Votes Abstentions David H. Peterson 5,903,104 - 6,853 Leonard A. Bluhm 5,903,104 - 6,853 Lawrence I. Littman 5,903,101 - 6,856 Craig A. Mataczynski 5,903,104 - 6,853 Spyros S. Skouras, Jr. 5,902,378 - 7,579 Charles Thayer 5,903,104 - 6,853 Ronald J. Will 5,902,352 - 7,605 In addition, the following proposals were approved at the Meeting: Approval of the Company's 1996 Stock Option Plan authorizing the Company to grant options to purchase up to 500,000 shares of the Company's Common Stock to members of the Board of Directors, officers and key employees of the Company or its subsidiaries. Affirmative Negative Votes Votes Abstentions 3,923,233 80,735 14,160 Ratification of the selection of Price Waterhouse LLP as the Company's independent public accountants. Affirmative Negative Votes Votes Abstentions 5,900,782 2,911 6,264 19 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. From July 1, 1996, through December 31, 1996, the Company's Common Stock was not listed on an exchange or on the Nasdaq Stock Market but traded from time to time on the pink sheets and on the OTC Bulletin Board. According to the NASDAQ News Service, the range of high and low selling prices during such period was $4.75 to $12.00. Such prices may have reflected inter-dealer prices, without retail mark-ups, mark downs or commissions, and may not necessarily represent actual transactions. As of March 13, 1997, the Company had approximately 600 holders of record of its Common Stock, not including beneficial owners whose shares are held by banks, brokers and nominees. The Company presently intends to retain all earnings for the operation and expansion of its business and does not anticipate paying cash dividends on its Common Stock in the foreseeable future. Any future determination as to the payment of dividends on the common stock will depend upon future earnings, results of operations, capital requirements, the financial condition of the Company and any other factors the Board of Directors of the Company may consider. The Company's principal operating subsidiaries NRGG Newark and NRGG Parlin, are parties to a Credit Agreement which prohibits the payment of dividends by such subsidiaries to the Company, provided that such dividend payments may be made out of funds available after the payment of various costs and expenses set forth in the Credit Agreement (including without limitation operating costs, various debt service payments and the funding of various accounts required to be maintained pursuant to the Credit Agreement) if certain conditions set forth in the Credit Agreement are satisfied, including without limitation the maintenance of a debt service coverage ratio set forth in the Credit Agreement, the absence of any default or event of default under the Credit Agreement, and the satisfaction of certain conditions relating to the composition of the Board of Directors of the Company. 20 ITEM 6. SELECTED FINANCIAL DATA. The consolidated selected financial data as of and for each of the periods indicated have been derived from the audited financial statements of the Company. This data should be read in conjunction with, and is qualified in its entirety by reference to, the related financial statements and notes included elsewhere in this Report.
Six Months (Dollars in thousands, Ended (except per share amounts) December 31, Year Ended June 30 1996(3) 1996 1995 1994 1993 1992 Statements of Operations Data: Revenues: Energy $ 21,669 $ 66,623 $ 74,455 $ 62,647 $ 65,136 $ 71,638 Equipment sales and services 15,607 25,344 19,639 24,304 18,955 21,854 Rental 1,062 1,895 2,362 5,372 3,636 3,191 Related parties - - - - 515 378 Development fees and other 1,578 2,685 5,791 14,266 9,450 3,054 Total 39,916 96,547 102,247 106,589 97,692 100,115 Cost of revenues 21,987 71,753 72,164 84,174 71,750 66,996 Gross profit 17,929 24,794 30,083 22,415 25,942 33,119 Provision for loss on equipment - - 21,640 6,250 - - Selling, general and administrative expenses 6,149 12,792 20,320 19,680 21,872 13,133 Income (loss) from operations 11,780 12,002 (11,877) (3,515) 4,070 19,986 Involuntary conversion gain - - - 6,066 - - Interest and other income 413 569 2,587 874 993 1,204 Interest and debt expense (7,681) (18,646) (20,583) (18,013) (15,696) (17,340) Reorganization costs - (12,101) (8,366) - - - Income (loss) before income taxes and cumulative effect of a change in accounting principle 4,512 (18,176) (38,239) (14,588) (10,633) 3,850 Provision for (benefit from) income taxes (268) (463) 2,680 1,913 3,078 2,438 Income (loss) before extraordinary item 4,780 (17,713) (40,919) (16,501) (13,711) 1,412 Extraordinary item, net of income taxes 1,643 - - - - - Net income (loss) $ 6,423 $ (17,713) $ (40,919) $ (16,501) $ (13,711) $ 1,412 Net income (loss) per share(1) $ 1.00 $ (4.24) $ (11.02) $ (4.45) $ (3.70) $ 0.43 Weighted average shares outstanding 6,454 4,182 3,712 3,712 3,701 3,280 1996 1996 1995 1994 1993 1992 Balance Sheet Data: Working capital (deficiency) $ 2,491 $ (6,211) $(184,589)(2)$(125,683) $ (11,119) $ 816 Property, plant and equipment, net 132,203 134,694 151,130 176,514 194,217 195,677 Total assets 173,624 178,162 189,748 237,816 262,529 259,054 Nonrecourse long-term debt, net 150,311 66,789 3,405 7,073 28,012 20,003 Convertible senior subordinated debentures - - - - 49,174 49,174 Nonrecourse project financing, net - - - 60,310 97,140 107,898 Stockholders' equity (deficit) (30,513) (37,573) (40,758) 136 15,675 29,405 (1) Net income (loss) per share has been restated for all periods presented to reflect the common shares issued under the terms of the Plan. (2) At June 30, 1995, nonrecourse project financing, net excludes $60,310 of amounts with long-term repayment terms. This amount was included in current liabilities (thereby included in working capital deficiency) due to default under the debt agreement. (3) Effective July 1, 1996, the Company changed its year end from June 30 to December 31.
21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. All amounts set forth in this Item 7 are in thousands. The Company, formerly known as O'Brien Environmental Energy, Inc., directly and through its subsidiaries develops and owns 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. On April 30, 1996, O'Brien emerged from bankruptcy. The Plan approved on January 18, 1996 by the Bankruptcy Court awarded NRG Energy the right to acquire a 41.86% equity interest in the Company and generally provided for full and immediate payment of all undisputed prepetition liabilities and included a provision for post-petition interest. O'Brien was renamed on the April 30, 1996 closing date to NRG Generating (U.S.) Inc. On April 30, 1996, NRG Energy funded approximately $107,418 in accordance with the Plan and acquired a 41.86% equity interest in the Company. All common shares of O'Brien were canceled and replaced by a new issue of common stock of NRGG. Net income (loss) per share has been restated for all periods presented to reflect the new common shares issued under the terms of the Plan. Additionally, under the terms of the Plan, NRG Energy acquired the stock of ten wholly-owned subsidiaries from the Company on the closing date which included all of the Company's landfill gas projects (those operating and those in development), the general partner holding a 3% equity interest in the Artesia Cogeneration partnership and a standby power project. The Company believes that the sale of these subsidiaries will not have a material adverse effect on its results of operations in future years. The Company currently owns and operates two cogeneration facilities (the Newark and Parlin Projects) with an electric generating capacity of 174 MW and two standby/peak shaving facilities (together comprising the Philadelphia Project) with a capacity of 22 MW in which the Company has an 83% interest. On April 30, 1996, the amended PPAs with JCP&L, the primary customer of the Newark and Parlin Projects, became effective. Although energy revenues as well as the cost of energy revenues decreased under the amended PPAs, the Company believes that operating gross profit margins will remain similar to historical results. However, margin fluctuations attributable to periodic swings in fuel costs have been eliminated. Equipment sales, rentals and services is the Company's demand-side management business through which the Company provides standby power equipment and services to customers for a fee. The Company is also a one-third partner in a 150 MW cogeneration facility currently under construction. 22 Both the Newark and Parlin Projects were previously certified as QFs by the FERC under PURPA. The effect of QF status is generally to exempt a project's owners from relevant provisions of the Federal Power Act, PUHCA, and state utility- type regulation. However, as permitted under the terms of its renegotiated PPAs, NRGG 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 NRGG Parlin's claim to QF status. The FERC has approved NRGG Parlin's rates effective April 30, 1996, and given certain other approvals to Parlin in conjunction with the bankruptcy reorganization. In addition, the FERC has determined Parlin to be an EWG. As an EWG, NRGG Parlin is exempt from PUHCA, and the ownership of NRGG Parlin by the Company does not subject the Company to regulation under PUHCA. Finally, as a seller of power exclusively at wholesale, NRGG Parlin is not generally subject to state regulation and, in any case, the Company believes that NRGG Parlin complies with all applicable requirements of state utility law. Power Operations, Inc., a new wholly-owned subsidiary of the Company, assumed operations and maintenance responsibilities for the Newark facility and the Parlin facility, in each case replacing the former operator, on November 8, 1996, and December 31, 1996, respectively. The Company believes that such changes will have no material financial impact on the operations of these facilities or on the Company's financial condition or results of operations. On January 1, 1997, Power Operations, Inc. was sold by the Company to NRG Energy. The terms of this transaction were approved by the Independent Directors Committee of the Company's Board of Directors as required by the Company's Bylaws. The Company entered into a Liquidating Asset Management Agreement on April 30, 1996 with Wexford, a co-sponsor of the Plan, which, in accordance with the Plan, retains Wexford as manager, operator and liquidator of the Liquidating Assets of the Company pursuant to the terms and conditions of the agreement. The Board of Directors and officers of the Company have the right to direct and control which assets will be liquidated and the extent of management services required for each Liquidating Asset. The Liquidating Assets identified in the agreement consist of (a) the Company's engine generator sales, service and rental business, (b) the Philadelphia Project, (c) unused equipment and (d) American Hydrotherm ("American Hydrotherm") and two related companies. The Board of Directors authorized Wexford to liquidate the Philadelphia Project, American Hydrotherm and two related companies and the unused equipment. In December 1996, the Company sold American Hydrotherm and two related companies to the management of American Hydrotherm. Wexford has received compensation in accordance with the terms of the agreement (see Note 23 to the Consolidated Financial Statements). No decision has been made regarding the possible liquidation of the engine generator business. Management does not expect the disposition of these businesses to have a material effect on the Company's financial position or results of operation. The Company has adopted a change in its fiscal year to a calendar year effective on December 31, 1996. 23 Results of Operations for the Six Months Ended December 31, 1996 and the Years Ended June 30, 1996, 1995 and 1994 Revenues Energy revenues for the six months ended December 31, 1996 and the years ended June 30, 1996, 1995 and 1994 were $21,669, $66,623, $74,455 and $62,647, respectively. Energy revenues primarily reflect billings associated with the Newark and Parlin Projects and the Philadelphia Project. The decrease in energy revenues for the six months ended December 31, 1996 as compared to fiscal year 1996 was primarily due to only six months of revenues reported in the period ended December 31, 1996 and to the amended PPAs affecting both the Newark and Parlin Projects. The decrease in energy revenues in 1996 from 1995 was primarily attributable to a voluntary curtailment of operations at Parlin and to the negative impact of unit fuel cost fluctuations on the energy rate calculation under the Parlin Project's previous PPA. Additionally, a portion of the decrease is attributable to the amended PPAs affecting both the Newark and Parlin Projects for the final two months of fiscal 1996. Revenues recognized by NRGG Parlin for the six months ended December 31, 1996 and the years ended June 30, 1996, 1995 and 1994 were $10,327, $34,867, $40,784 and $37,910, respectively. NRGG Parlin revenues decreased for the six months ended December 31, 1996 as compared to fiscal year 1996 primarily due to only six months of revenues reported in the period ended December 31, 1996 and to the amended PPA. NRGG Parlin initiated a voluntary curtailment of electric output beginning in the first quarter and extending into the second quarter of fiscal 1996, during off-peak hours, to maintain the correct ratio of thermal to electric production after E.I. du Pont, the steam host, significantly decreased its steam demand by moving a business segment overseas. Additionally, NRGG Parlin's fiscal 1996 revenues were affected by a decrease in the energy rate under the previous PPA adjusted quarterly based on, in part, the average cost of fuel over the preceding year. A mild 1995 winter resulted in unusually low natural gas costs which, after a five quarter lag, lowered the energy rate received during fiscal 1996. NRGG Parlin revenues also decreased in fiscal 1996 by approximately $2,680 from the amended PPA implemented on April 30, 1996. Fiscal 1994 NRGG Parlin revenues were negatively impacted by a gas turbine being shut down for unscheduled repairs for approximately three months during the year. Revenues recognized at NRGG Newark for the six months ended December 31, 1996 and the years ended June 30, 1996, 1995 and 1994 were $9,259, $26,820, $28,908 and $23,082, respectively. NRGG Newark revenues decreased for the six months ended December 31, 1996 as compared to fiscal year 1996 primarily due to only six months of revenues reported in the period ended December 31, 1996 and to the amended PPA. The increase in revenues in 1995 from 1994 was attributable primarily to a full year of operations in fiscal 1995 as compared to a partial year of operations in fiscal 1994. The Newark Project resumed partial operations in August 1993 and full operations in October 1993 after completing reconstruction resulting from damage incurred in a December 1992 fire. 24 Equipment sales and services revenues for the six months ended December 31, 1996 and the years ended June 30, 1996, 1995 and 1994 were $15,607, $25,344, $19,639 and $ 24,304, respectively, which principally reflect the operations of OES, Puma and American Hydrotherm. Revenues decreased for the six months ended December 31, 1996 as compared to fiscal year 1996 primarily due to only six months of revenues reported in the period ended December 31, 1996, offset in part by the inclusion of nine months of revenues in the period from the operations of Puma. Puma adopted a change in its fiscal year end of March 31 to a calendar year effective on December 31, 1996. Management attributes the increase in fiscal 1996 to a volume increase resulting from successful marketing efforts as well as to an improvement in the U.S. economy. The Company also believes that its bankruptcy filing in September 1994 had some negative impact in fiscal 1995 revenues because of customer uncertainty. OES equipment sales and services revenues for the six months ended December 31, 1996 and the years ended June 30, 1996, 1995 and 1994 were $1,575, $5,232, $3,575 and $7,789, respectively. Fiscal 1994 revenue levels were generated from backlog orders transferred from O'Brien Power Systems, Inc., a company controlled by a relative of the former CEO of the Company, in order to expand OES's domestic business in the design and assembly of generator sets and switchgear. OES was unable to replenish this transferred backlog until late in the 1995 fiscal year. Rental revenues for the six months ended December 31, 1996 and the years ended June 30, 1996, 1995 and 1994 were $1,062, $1,895, $2,362 and $5,372, respectively. In November 1993, the Company sold the Philadelphia Project to an unrelated private investor and subsequently reacquired it in August 1994. Rental fluctuations are primarily attributable to rental revenues recognized during the period the project was owned by the private investor. The Company continued to own and lease the equipment and facilities to the private investor during the period between November 1993 and August 1994. Development fees and other revenues for the six months ended December 31, 1996 and the years ended June 30, 1996, 1995 and 1994 were $1,578, $2,685, $5,791 and $14,266, respectively. The decrease in revenues in 1996 from 1995 was attributable primarily to the Company selling its rights to develop a standby electric project for $1,763, the expiration of a purchase option whereby, the Company retained $775 in forfeited escrow deposits and to higher gas sales to the Artesia Cogeneration partnership in 1995. The decrease in revenues from 1994 to 1995 was attributable primarily to the sale of the Company's contractual rights to develop certain coalbed methane reserves for $5,121 and to the sale of rights to develop a standby electric project for approximately $5,000 in 1994. Costs and Expenses Cost of energy revenues for the six months ended December 31, 1996 and the years ended June 30, 1996, 1995 and 1994 were $7,229, $45,663, $46,694 and $49,961, respectively. Cost of energy revenues decreased for the six months ended December 31, 1996 as compared to fiscal year 1996 primarily due to only six months of costs reported in the period ended December 31, 1996 and the result of the amended PPAs in which JCP&L began assuming the cost of fuel for the 25 Newark and Parlin facilities. Fiscal 1996 and 1994 included more severe winters than 1995 resulting in significantly higher natural gas unit rates in these years. Cost of energy revenues also includes a temporary period of natural gas curtailment in the winters of fiscal 1996 and 1994 requiring the Newark and Parlin Projects to operate using a more expensive alternative fuel. Cost of equipment sales and services for the six months ended December 31, 1996 and the years ended June 30, 1996, 1995 and 1994 were $12,365, $22,153, $17,622 and $21,890, respectively. Cost of equipment sales and services for the six months ended December 31, 1996 include nine months of costs from the operations of Puma. The fluctuations in cost of equipment sales and services between fiscal years 1996, 1995 and 1994 primarily correlate to the fiscal changes in sales volume in the Company's equipment sales, rental and service businesses. Cost of rental revenues services for the six months ended December 31, 1996 and the years ended June 30, 1996, 1995 and 1994 were $834, $1,406, $2,357 and $2,730, respectively. Cost of rental revenues decreased for the six months ended December 31, 1996 as compared to fiscal year 1996 primarily due to only six months of costs reported in the period ended December 31, 1996. The decrease in cost of equipment rentals between fiscal years 1996, 1995 and 1994 is attributable to the reacquisition of the Philadelphia Project from an unrelated private investor. The Company sold the project in November 1993 and reacquired it in August 1994 but continued to own and lease the equipment and facilities to the private investor during this period. Cost of development fees and other for the six months ended December 31, 1996 and the years ended June 30, 1996, 1995 and 1994 were $1,559, $2,531, $5,491 and $9,593, respectively. These costs consist principally of costs associated with the sale of various projects either under development or in operation. The Company's gross margins were $17,929 (44.9% of sales), $24,794 (25.7% of sales), $30,083 (29.4% of sales) and $22,415 (21.0% of sales) for the six months ended December 31, 1996 and for the years ended June 30, 1996, 1995 and 1994, respectively. The fluctuations are primarily attributable to the energy segment which, as discussed above, were due to fluctuations in the recovery of fuel costs through energy revenues under the Newark and Parlin Project PPAs in effect until April 30, 1996. Provision for Loss on Equipment Held for Sale and Write Down of Plant and Equipment The Company began actively seeking buyers for specific energy equipment consisting primarily of gas and steam turbines not currently being used in an operating project nor critical to the completion of any projects in development. The value of these assets sold in a secondary market is less than if incorporated into an internally developed operating project. Accordingly, the Company recorded a non-cash charge of $6,250 against earnings to write down the carrying value of these assets to an estimated resale value for the year ended June 30, 1994 and recorded an additional writedown in fiscal 1995 of $5,655 to reflect the Company's intent to accelerate the disposal of this equipment. 26 The Company engaged an independent valuation expert to appraise its property, plant and equipment in connection with the bankruptcy proceedings and the Plan. Accordingly, the Company recorded a non-cash charge against earnings in fiscal 1995 of $15,985 to write down the carrying value of its property, plant and equipment to a lower appraised value. Selling, General and Administrative Expenses Selling, general and administrative expenses ("SG&A") for the six months ended December 31, 1996 and the years ended June 30, 1996, 1995 and 1994 were $6,149, $12,792, $20,320 and $19,680, respectively. Fiscal 1996 includes a $3,100 cost incurred to terminate the interest rate swap agreement in connection with the Parlin nonrecourse project debt refinancing. Fiscal 1996 SG&A expenses benefited from lower payroll and related tax costs as well as reduced insurance expenses by approximately $2,347 as compared to fiscal 1995. Since filing for bankruptcy in September 1994, the Company has attempted to reduce its SG&A expenses. Fiscal 1995 SG&A includes project development costs totaling $4,418 based upon the anticipated implementation of the Plan and $1,888 in unamortized goodwill primarily associated with the value assigned to an acquired subsidiary's patented waste heat recovery technology deemed not realizable. In January 1994, the Company ceased operations at one of its United Kingdom subsidiaries which was in the business of manufacturing low voltage switchgear. Fiscal 1994 SG&A includes pretax losses associated with this United Kingdom subsidiary of approximately $1,200 which includes $319 of costs associated with the closure of the business. Involuntary Conversion Gain In fiscal 1994, the Company recognized an involuntary conversion gain of $6,066 from the property settlement with the insurance carrier resulting from the December 25, 1992 fire at the Newark facility. The gain represents the amount by which the insurance proceeds (replacement cost) exceeded the net book value of the equipment lost in the fire. Interest and Other Income Other income for the six months ended December 31, 1996 and the years ended June 30, 1996, 1995 and 1994 were $413, $569, $2,587 and $874, respectively. Other income for the six months ended December 31, 1996 was positively impacted by interest income earned on escrow account balances established in connection with the recourse financing on the Newark and Parlin facilities. Fiscal 1995 other income includes $1,180 recognized in connection with the original construction of the Philadelphia Project. Reorganization Costs Reorganization costs represent all costs incurred after filing bankruptcy that relate to the Company's reorganization and restructuring efforts. Reorganization costs for the years ended 27 June 30, 1996 and 1995 were $12,101 and $8,366, respectively. These costs consist primarily of professional and administrative fees and expenses as well as a fiscal 1995 expense of $3,387 incurred to adjust the carrying value of the subordinated debentures to the amount approved by the Bankruptcy Court as an allowed claim. Interest and Debt Expense Interest and debt expense for the six months ended December 31, 1996 and the years ended June 30, 1996, 1995 and 1994 were $7,681, $18,646, $20,583 and $18,013, respectively. Interest and debt expense decreased for the six months ended December 31, 1996 as compared to fiscal year 1996 primarily due to only six months of expenses reported in the period ended December 31, 1996 and to the refinancing of the Newark and Parlin Projects. Fiscal 1996 and 1995 interest and debt expense includes post-petition interest on prepetition liabilities of $6,487 and $6,194, respectively. Fiscal 1996 also includes $1,098 in interest costs associated with loans provided by NRG Energy and $1,433 of deferred financing costs attributable to the nonrecourse debt relating to the Newark and Parlin Projects which were refinanced during the year (see Liquidity and Capital Resources). Fiscal 1995 interest and debt expense includes $1,050 paid to the unrelated private investor to extend the Company's reacquisition option period for the Philadelphia Project to August 1994. Extraordinary Item In the six month period ended December 31, 1996, the Company negotiated a buyout of a subsidiary's capital lease obligation. The lender agreed to accept a $1,100 payment in full satisfaction of the lease. The transaction resulted in an extraordinary gain of $1,643 (net of $124 of state income taxes). Income Taxes For the six months ended December 31, 1996 and the year ended June 30, 1996, the Company realized an overall income tax benefit of $268 and $463, respectively. For the fiscal years ended June 30, 1995 and June 30, 1994, the provision for income taxes was $2,680 and $1,913, respectively. The benefit for the six months ended December 31, 1996 is derived from the Company's ability to reduce its current and deferred tax liabilities by using net operating loss carryforwards and existing deductible temporary differences to offset current taxable income and future reversals of taxable temporary differences. The benefit for the fiscal year ended June 30, 1996 was attributable to the utilization of state net operating loss carryforwards as well as a decrease in the deferred tax liability primarily attributable to a change in temporary differences resulting from the landfill gas equipment sold to NRG on April 30, 1996. The 1995 and 1994 tax provisions, consisting primarily of deferred taxes relating to property and equipment, results from the uncertainty of realizing the benefits of the tax loss carryforwards in future years against them. Additionally, most professional fees incurred during the bankruptcy period included in reorganization costs are treated as capital expenditures and are not deductible for income tax purposes (see Note 24 to the Consolidated Financial Statements). 28 Liquidity and Capital Resources On April 30, 1996, NRG Energy funded $107,418 in accordance with the Plan. The Company received $99,918 of which $71,240 was advanced under the terms of three loan agreements between the Company and NRG Energy; $21,178 represented the purchase of new common stock of NRGG and $7,500 was designated as the proceeds for the sale of ten wholly-owned subsidiaries sold to NRG Energy. In addition, NRG Energy transferred $7,500 directly to the Company's stock transfer agent representing a cash distribution by NRG Energy to the O'Brien common stockholders. In May 1996, the Company's wholly-owned subsidiaries NRGG Newark and NRGG Parlin entered into a Credit Agreement with a new lender (the "Credit Agreement"). The Credit Agreement established provisions for a $155,000 fifteen-year loan 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 NRGG Newark and NRGG 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. Concurrent with the Credit Agreement, NRGG Newark and NRGG 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 the 50% portion of the principal amount outstanding at 6.9% plus the margin. On May 23 1996, NRGG Newark borrowed $60,000 in the form of a six-month term loan under the terms of the Credit Agreement, pending the availability of the remaining total loan commitment. On July 11, 1996, the remaining $95,000 loan commitment was borrowed and combined with the $60,000 into a $155,000, fifteen year new term loan. The Company used the proceeds of the new term loan to repay certain preexisting obligations of the Company including $87,291 of indebtedness to NRG Energy. NRG Energy provided the Company with loans during fiscal 1996 of which $101,679 was outstanding at June 30, 1996. At December 31, 1996, loans of $14,388 remain outstanding to NRG Energy. NRG Energy has provided additional loan commitments to the Company. A $10,000 loan agreement negotiated between NRG Energy and NRGG Schuylkill Cogeneration, Inc. (formerly known as O'Brien (Schuylkill) Cogeneration, Inc.) ("NSC"), a wholly-owned subsidiary, provides funding, if needed, for an NSC capital contribution obligation to the Grays Ferry Partnership. NSC owns a one-third partnership interest in the Grays Ferry Project currently under construction. In March 1996, the partnership entered into a credit agreement with Chase Manhattan Bank N.A. to finance the project. The credit agreement obligates a $10,000 capital contribution from each of the projects' three partners prior to the commercial operation of the facility, which is anticipated to occur by the end of 1997. In addition, there remains $13,615 in available borrowings under the terms of one of the Plan loan agreements to provide funding for any bankruptcy obligation shortfalls. Except for the historical information contained within this Management's Discussion and Analysis of Financial Condition and Results of Operations, the accompanying consolidated financial statements, and the Notes to Consolidated Financial Statements, the matters reflected or discussed in this report which relate to the Company's beliefs, expectations, plans, future 29 estimates and the like are forward-looking statements that involve risks and uncertainties including but not limited to: business conditions and growth in the general economy; regulatory and other legal developments affecting the markets in which the Company operates and changes in environmental laws; volatility in gross margins caused by seasonal factors that cannot be controlled by the Company; competitive factors, such as price pressures and other factors which may make it more difficult for the Company to secure future projects and may increase project development costs and/or reduce operating margins; the success of the Company's business partners, including its energy customers and fuel suppliers; the successful completion of the Grays Ferry Project and the various other factors discussed in this report, including without limitation those discussed under "Item 1. Business - Risk Factors." Such factors may cause the Company's actual results to differ materially from those discussed herein and in forward-looking statements made herein. 30 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The following Consolidated Financial Statements of the Company and its subsidiaries and independent auditors' report thereon are included as pages F-1 through F-31 immediately following the signature page of this Annual Report on Form 10-K, and is incorporated herein by reference: Report of Independent Accountants F-1 Financial Statements: Consolidated Balance Sheets as of December 31, 1996, June 30, 1996 and 1995 F-2 Consolidated Statements of Operations for the six months ended December 31, 1996 and the years ended June 30, 1996, 1995 and 1994 F-3 Consolidated Statements of Stockholders' Equity for the six months ended December 31, 1996 and the years ended June 30, 1996, 1995 and 1994 F-4 Consolidated Statements of Cash Flows for the six months ended December 31, 1996 and the years ended June 30, 1996, 1995 and 1994 F-5 Notes to Consolidated Financial Statements F-6 through F-30 Report of Independent Accountants for fiscal year 1994 F-31 All other supplementary financial information has been omitted because of the absence of the conditions under which it is required. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Previously reported in NRG Generating (U.S.) Inc.'s Current Report on Form 8-K dated April 30, 1996, and as amended May 20, 1996. 31 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required for this item is incorporated by reference to the Company's 1997 Definitive Proxy Statement which the Company will file with the Securities and Exchange Commission no later than 120 days subsequent to December 31, 1996. ITEM 11. EXECUTIVE COMPENSATION. The information required for this item is incorporated by reference to the Company's 1997 Definitive Proxy Statement which the Company will file with the Securities and Exchange Commission no later than 120 days subsequent to December 31, 1996. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required for this item is incorporated by reference to the Company's 1997 Definitive Proxy Statement which the Company will file with the Securities and Exchange Commission no later than 120 days subsequent to December 31, 1996. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required for this item is incorporated by reference to the Company's 1997 Definitive Proxy Statement which the Company will file with the Securities and Exchange Commission no later than 120 days subsequent to December 31, 1996. 32 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) Documents filed as part of this report. 1. Financial Statements The following consolidated financial statements of the Company and its Subsidiaries and report of independent auditors thereon are included as Pages F-1 through F-31 immediately following the signature page of this Annual Report on Form 10-K. Index to Consolidated Financial Statements Report of Independent Accountants Consolidated Balance Sheets as of December 31, 1996 and June 30, 1996 and 1995 Consolidated Statements of Operations for the six months ended December 31, 1996 and for the years ended June 30, 1996, 1995 and 1994 Consolidated Statements of Stockholders' Equity for the six months ended December 31, 1996 and for the years ended June 30, 1996, 1995 and 1994 Consolidated Statements of Cash Flows for the six months ended December 31, 1996 and for the years ended June 30, 1996, 1995 and 1994 Notes to Consolidated Financial Statements Report of Independent Accountants for fiscal year 1994 2. Financial Statement Schedules All schedules are omitted because of the absence of the conditions under which they are required or because the required information is included in the financial statements or notes thereto. 33 3. Exhibits The "Index to Exhibits" following the Consolidated Financial Statements of the Company and its subsidiaries is incorporated herein by reference. Certain documents related to the projects and other matters, some of which are listed in the Index to Exhibits, will be filed by amendment as soon aspracticable. (b) Reports on Form 8-K The following reports on Form 8-K were filed during the last quarter of the calendar year ended December 31, 1996: 1. Current Report on Form 8-K dated December 13, 1996 reporting information under Item 5. 34 Signature In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NRG GENERATING (U.S.) INC. /s/ Timothy P. Hunstad By: Timothy P. Hunstad Title: Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: Signature Title Date /s/ Leonard A. Bluhm Chairman of the March 26, 1997 By: Leonard A. Bluhm Board of Directors and Chief Executive Officer /s/ Timothy P. Hunstad Vice President and March 26, 1997 By: Timothy P. Hunstad Chief Financial Officer /s/ Lawrence I. Littman Director March 26, 1997 By: Lawrence I. Littman /s/ Craig A. Mataczynski Director March 26, 1997 By: Craig A. Mataczynski /s/ David H. Peterson Director March 26, 1997 By: David H. Peterson /s/ Spyros S. Skouras, Jr. Director March 26, 1997 By: Spyros S. Skouras, Jr. /s/ Charles J. Thayer Director March 26, 1997 By: Charles J. Thayer /s/ Ronald J. Will Director March 26, 1997 By: Ronald J. Will 35 NRG Generating (U.S.) Inc. Consolidated Financial Statements December 31, 1996 Report of Independent Accountants To the Stockholders and Board of Directors of NRG Generating (U.S.) Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of NRG Generating (U.S.) Inc. (formerly known as O'Brien Environmental Energy, Inc.), and its subsidiaries at December 31, 1996, and June 30, 1996 and 1995, and the results of their operations and their cash flows for the six months ended December 31, 1996 and the twelve months ended June 30, 1996 and 1995 in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. The consolidated financial statements of NRG Generating (U.S.) Inc., for the twelve months ended June 30, 1994 were audited by other independent accountants whose report dated October 7, 1994 expressed an unqualified opinion on those statements and included an explanatory paragraph expressing substantial doubt about the Company's ability to continue as a going concern. That report also disclosed the voluntary petition filed by the Company for reorganization under Chapter 11 of the Federal Bankruptcy Code in the United States Bankruptcy Court on September 28, 1994. As discussed in Note 1 to the consolidated financial statements, on April 30, 1996, O'Brien Environmental Energy, Inc. was reorganized pursuant to a plan of reorganization submitted by NRG Energy, Inc., the O'Brien Official Committee of Equity Security Holders and Wexford Management Corp., and approved by the Bankruptcy Court for the District of New Jersey on January 18, 1996. As part of the reorganization, NRG Energy, Inc. acquired an approximate 42% equity interest in the reorganized company, renamed NRG Generating (U.S.) Inc. Price Waterhouse LLP Minneapolis, Minnesota March 13, 1997 F-1 NRG Generating (U.S.) Inc. Consolidated Balance Sheets
(Dollars in thousands) December 31, June 30, June 30, 1996 1996 1995 Assets Current assets: Cash and cash equivalents $ 3,187 $ 5,022 $ 4,083 Restricted cash and cash equivalents 8,174 8,719 3,563 Accounts receivable, net 11,920 11,627 12,357 Receivables from related parties 186 461 684 Notes receivable, current 1,119 1,029 853 Inventories 2,897 2,995 3,610 Other current assets 992 1,721 2,176 Total current assets 28,475 31,574 27,326 Property, plant and equipment, net 132,203 134,694 151,130 Equipment held for sale 2,628 2,678 3,228 Project development costs 346 253 1,080 Notes receivable, noncurrent 83 86 1,078 Investments in equity affiliates 3,653 3,449 3,483 Deferred financing costs, net 5,530 4,630 1,530 Other assets 706 798 893 Total assets $173,624 $178,162 $189,748 Liabilities and Stockholders' Equity (Deficit) Current liabilities: Accounts payable $ 6,131 $ 8,708 $ 9,546 Current portion of loans and payables due NRG Energy, Inc. 1,256 4,750 - Current portion of nonrecourse long- term debt 10,820 7,115 8,751 Nonrecourse project financing - - 85,320 Accrued interest payable 1,104 5,895 7,655 Prepetition liabilities 1,433 1,735 87,743 Short-term borrowings 2,388 1,793 1,600 Other current liabilities 2,852 7,789 11,300 Total current liabilities 25,984 37,785 211,915 Loans due NRG Energy, Inc., net of current portion 14,388 96,929 - Nonrecourse long-term debt, net of current portion 150,311 66,789 3,405 Deferred income taxes 13,404 14,182 15,086 Other liabilities 50 50 100 Total liabilities 204,137 215,735 230,506 Stockholders' equity: 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, 6,474,814 shares issued, 6,440,514 and 6,422,014 shares outstanding, respectively 64 64 - Class A common stock, par value $.01, one vote per share, 40,000,000 shares authorized, 13,055,597 issued, 12,965,397 outstanding in 1995 - - 130 Class B common stock, par value $.01, ten votes per share, 10,000,000 shares authorized, 4,070,770 issued, 3,905,770 outstanding in 1995 - - 39 Additional paid-in capital 62,719 62,515 41,353 Accumulated deficit (92,944) (99,367) (81,654) Other (352) (785) (626) Total stockholders' equity (deficit) (30,513) (37,573) (40,758) Total liabilities and stockholders' equity (deficit) $173,624 $178,162 $189,748
The accompanying notes are an integral part of these financial statements. F-2 NRG Generating (U.S.) Inc. Consolidated Statements of Operations
(Dollars in thousands, except per share amounts) Six Months Ended Twelve Months Ended December 31, June 30, June 30, June 30, 1996 1996 1995 1994 Energy revenues $21,669 $66,623 $74,455 $62,647 Equipment sales and services 15,607 25,344 19,639 24,304 Rental revenues 1,062 1,895 2,362 5,372 Development fees and other 1,578 2,685 5,791 14,266 39,916 96,547 102,247 106,589 Cost of energy revenues 7,229 45,663 46,694 49,961 Cost of equipment sales and services 12,365 22,153 17,622 21,890 Cost of rental revenues 834 1,406 2,357 2,730 Cost of development fees and other 1,559 2,531 5,491 9,593 21,987 71,753 72,164 84,174 Gross profit 17,929 24,794 30,083 22,415 Provision for loss on equipment - - 21,640 6,250 Selling, general and administrative expenses 6,149 12,792 20,320 19,680 Income (loss) from operations 11,780 12,002 (11,877) (3,515) Involuntary conversion gain - - - 6,066 Interest and other income 413 569 2,587 874 Reorganization costs - (12,101) (8,366) - Interest and debt expense (7,681) (18,646) (20,583) (18,013) Income (loss) before income taxes 4,512 (18,176) (38,239) (14,588) Provision for income taxes (benefit) (268) (463) 2,680 1,913 Income (loss) before extraordinary item 4,780 (17,713) 40,919) (16,501) Extraordinary item, net of income taxes 1,643 - - - Net income (loss) $ 6,423 $(17,713)$(40,919)$(16,501) Net income (loss) per common share: Income (loss) before extraordinary item $ 0.75 $ (4.24)$ (11.02)$ (4.45) Extraordinary item 0.25 - - - Net income (loss) per common share $ 1.00 $ (4.24)$ (11.02)$ (4.45) Weighted average shares outstanding 6,454 4,182 3,712 3,712
The accompanying notes are an integral part of these financial statements. F-3 NRG Generating (U.S.) Inc. Consolidated Statements of Stockholders' Equity
(Dollars in thousands) Class A Class B Additional Total Common Common Common Preferred Paid-in Accumulated Stockholders' Stock Stock Stock Stock Capital Deficit Other Equity Balance, June 30, 1993 $ 130 $ 39 $ $ $40,053 $(23,932) $ (615) $ 15,675 Currency translation adjustment (36) (36) Excess of purchase price over predecessor cost of facilities acquired (302) (302) Stock warrants issued 1,300 1,300 Net loss (16,501) (16,501) Balance, June 30, 1994 130 39 41,353 (40,735) (651) 136 Currency translation adjustment 25 25 Net loss (40,919) (40,919) Balance, June 30, 1995 130 39 41,353 (81,654) (626) (40,758) NRG plan of reorganization: Purchase of common stock by NRG 27 21,151 21,178 Exchange class A and B common stock for new common shares, retire treasury shares (130) (39) 37 68 64 - Issue preferred shares to Wexford 49 4,908 4,957 Redemption of preferred shares (49) (4,908) (4,957) Preferred dividends (57) (57) Currency translation adjustment (223) (223) Net loss (17,713) (17,713) Balance, June 30, 1996 - - 64 - 62,515 (99,367) (785) (37,573) Payment received on treasury stock resulting from reorganization 105 105 Issue restricted stock 99 99 Currency translation adjustment 433 433 Net income 6,423 6,423 Balance, December 31, 1996 $ - $ - $ 64 $ - $62,719 $(92,944) $ (352) $(30,513)
The accompanying notes are an integral part of these financial statements. F-4 NRG Generating (U.S.) Inc. Consolidated Statements of Cash Flows (Dollars in thousands) Six Months Ended Twelve Months Ended December 31, June 30, June 30, June 30, 1996 1996 1995 1994 Cash flows from operating activities: Net income (loss) $ 6,423 $(17,713) $(40,919) $(16,501) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Extraordinary item, net of income taxes (1,643) - - - Depreciation and amortization 4,670 7,961 9,003 10,550 Amortization of goodwill - - 1,987 98 Amortization of debt discount and deferred financing costs 199 1,480 3,882 1,752 Deferred tax expense (benefit) (778) (904) 2,278 1,913 Project development costs expensed - 180 4,418 539 Provision for loss on equipment held for sale - - 5,655 6,250 Provision for equipment appraisal writedown - - 15,985 - Involuntary conversion gain - - - (6,066) Reserve for uncollectible note receivable - - 3,121 - Bankruptcy professional fees accrued - 432 4,415 - Other, net (70) (216) 709 1,527 Changes in operating assets and liabilities: Accounts receivable (1,011) 730 (257) 294 Inventories (13) 615 (369) 805 Receivables from related parties 275 223 (51) 542 Accounts payable and other current liabilities (6,677) (838) (4,994) (2,892) Accrued interest payable (4,677) (1,760) 6,633 - Net cash (used in) provided by operating activities (3,302) (9,810) 11,496 (1,189) Cash flows from investing activities: Capital expenditures (1,222) (299) (744) (2,496) Proceeds from sale of property and equipment 104 - - - Proceeds from sale of subsidiaries - 7,500 - - Capital expenditures and costs to repair Newark Plant - - - (21,041) Insurance proceeds for Newark Plant - - - 27,000 Project development costs (93) (1,484) (358) (529) Proceeds from the sale of projects, net of notes receivable - - 1,762 2,000 Collections on notes receivable 10 816 824 1,784 Divestitures of businesses, net of cash given (120) - - - Withdrawals from (deposits into) restricted cash accounts - net 545 (5,156) 1,032 470 Other, net - 227 (676) 622 Net cash (used in) provided by investing activities (776) 1,604 1,840 7,810 Cash flows from financing activities: Proceeds from NRG loans - 128,078 - - Proceeds from long-term debt 95,000 60,226 5,711 15,622 Repayments of NRG loans (86,035) (26,398) - - Repayments of long-term debt (6,098) (92,816) (18,061) (21,660) NRG capital contribution - 21,178 - - Net proceeds (repayments) of short- term borrowings 595 193 (785) 187 Payments on prepetition liabilities (302) (71,723) (1,799) - Deferred financing costs (1,121) (4,579) - - Payment received on treasury stock resulting from reorganization 105 - - - Issuance of restricted stock 99 - - - Redemption of preferred shares - (4,957) - - Preferred dividends paid - (57) - - Other, net - - - (302) Net cash provided by (used in) financing activities 2,243 9,145 (14,934) (6,153) Net (decrease) increase in cash and cash equivalents (1,835) 939 (1,598) 468 Cash and cash equivalents at beginning of year 5,022 4,083 5,681 5,213 Cash and cash equivalents at end of year $ 3,187 $ 5,022 $ 4,083 $ 5,681 Supplemental disclosure of cash flow information: Interest paid during the year $12,472 $ 18,926 $ 11,869 $ 13,027 The accompanying notes are an integral part of these financial statements. F-5 NRG Generating (U.S.) Inc. Notes to Consolidated Financial Statements (Dollars in thousands) 1. Business - Liquidity, Capital Resources and Emergence from Bankruptcy NRG Generating (U.S.) Inc. ("NRGG" or 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. On April 30, 1996, O'Brien Environmental Energy, Inc. ("OEE"), the formerly named parent company, emerged from bankruptcy. The Plan, approved on January 18, 1996 by the U.S. Bankruptcy Court for the District of New Jersey (the "Court"), awarded NRG Energy the rights to acquire a 41.86% equity interest in the Company and generally provided for full and immediate payment of all undisputed prepetition liabilities and included a provision for post-petition interest. The Company was renamed on the April 30, 1996 closing date to NRG Generating (U.S.) Inc. OEE filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code with the Court on September 28, 1994 to pursue financial restructuring efforts under the protection afforded by the U.S. bankruptcy laws. The decision to seek Chapter 11 relief was based on the conclusion that action had to be taken to preserve its business relationships, restructure its debt and maintain the operational strength and assets of the Company. The Company continued its normal operations as Debtor-in-Possession during the bankruptcy period but could not engage in transactions outside the ordinary course of business without approval of the Court. Under the Chapter 11 bankruptcy proceedings, all parent company liabilities and claims which existed as of the September 28, 1994 filing date were stayed. The Company segregated and reclassified these liabilities and claims on its balance sheet as prepetition liabilities. Subsequently, the Company received approval from the Court to make payments on certain prepetition obligations including employee wages and expense reports and was also directed to make periodic adequate protection payments on specific secured debt obligations during the bankruptcy period. Management concluded that the maximum return to creditors and shareholders could only be accomplished through the sale of an equity interest in the Company or of substantially all of its assets to a third party. After extensive solicitation efforts, two separate third party plans of reorganization were submitted to the Court. On November 17, 1995, the Company distributed a Master Disclosure Statement urging that creditors and equity security holders vote to accept its plan of reorganization. On January 18, 1996, the Court confirmed the Plan submitted by NRG Energy, the O'Brien Official Committee of Equity Security Holders and Wexford Management LLC ("Wexford"). According to the Plan, NRG would acquire approximately 42% equity interest in the reorganized company. On April 30, 1996, NRG funded approximately $107,418 in accordance with the Plan and acquired a 41.86% equity interest in the Company. NRGG received $99,918 of which $71,240 was advanced under the terms of the three loans agreements between the Company and NRG Energy; $21,178 represented the purchase of new common stock of NRGG and $7,500 was designated as proceeds for the sale of ten wholly-owned subsidiaries sold to NRG Energy. In addition, NRG Energy transferred $7,500 directly to the Company's stock transfer agent representing a cash distribution by NRG Energy to the OEE common stockholders. The funds were disbursed according to the Plan's F-6 NRG Generating (U.S.) Inc. Notes to Consolidated Financial Statements (Dollars in thousands) terms which generally provided for full payment (or cure/reinstatement) of all undisputed prepetition liabilities including the payment of post-petition interest on most prepetition obligations. Additionally, disbursements were made to certain creditors of subsidiary companies whose obligations were not included in prepetition liabilities and for professional fees incurred during the bankruptcy proceedings. Certain other bankruptcy claims filed with the Court remain in dispute. An escrow fund has been established to fully reserve for the remaining disputed claims submitted to the Court. Any remaining funds resulting from the Court disallowing any disputed claims will be disbursed pro rata to all allowed non-reinstated creditor claimholders as additional post-petition interest. The Company entered into a Liquidating Asset Management Agreement on April 30, 1996 with Wexford, which, in accordance with the Plan, retains Wexford as the manager, operator and liquidator of the Liquidating Assets of the Company pursuant to the terms and conditions of the agreement. The Board of Directors and the Officers have the right to direct and control which assets will be liquidated and the extent of management services required for each Liquidating Asset. The Liquidating Assets identified in the agreement consist of (a) the Company's engine generator sales, service and rental business, (b) the Philadelphia Water Department project, (c) unused equipment, and (d) American Hydrotherm Corporation and two related companies. The Board of Directors has authorized Wexford to liquidate the Philadelphia Water Department project and American Hydrotherm Corporation and its two related companies. American Hydrotherm Corporation and its two related companies were sold to subsidiary management in December 1996. The Board of Directors has authorized management to liquidate the unused equipment. Wexford has received compensation per the agreement for the sale of unused equipment. No decision has been made regarding the possible liquidation of the engine generator business. Management does not expect the disposals of these businesses to have a material effect on the Company's financial position or results of operations. 2. Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements include the accounts of all majority-owned subsidiaries of the Company. All significant intercompany investments, accounts and transactions have been eliminated. The investments in and the operating results of companies in which the Company has an ownership of 50% or less are included in the financial statements on the basis of the equity method of accounting. Effective July 1, 1996, the Company changed its year end from June 30 to December 31. The following are summarized comparative results for the six months ended December 31, 1996 and 1995. Due to the reorganization the comparisons are not meaningful. F-7 NRG Generating (U.S.) Inc. Notes to Consolidated Financial Statements (Dollars in thousands) Unaudited Six Months Six Months Ended Ended December 31, December 31, 1996 1995 Revenue $39,916 $50,901 Gross profit 17,929 16,652 Income tax provision (benefit) (268) 25 Income (loss) before extraordinary item 4,780 (1,075) Extraordinary item 1,643 - Net income (loss) 6,423 (1,075) Net income (loss) per common share: Net income (loss) before extraordinary item 0.75 (0.29) Extraordinary item 0.25 - Net income (loss) per common share 1.00 (0.29) The years ended June 30, 1996, 1995 and 1994 are sometimes referred to in these Notes to Consolidated Financial Statements as fiscal 1996, 1995 and 1994. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Reorganization Costs Expenses incurred after filing bankruptcy related to the Company's reorganization and restructuring efforts have been presented separately in the statement of operations as reorganization costs. Revenue Recognition Energy revenues from cogeneration projects are recognized as billed over the term of the contract. Profits and losses from sales and rental of power generation equipment, including sales to projects in which the Company retains less than a 100% interest are recognized as the equipment is sold or over the term of the rental. Development fee revenue is recognized on a cost recovery basis as cash is received (without future lending provisions) or as equity interest in the partnership increases, whereby revenues are recognized subsequent to the recovery of all project development costs. Inventories Inventories, consisting principally of power generation equipment and related parts held for sale, are valued at the lower of cost (determined primarily by the specific identification method) or market. F-8 NRG Generating (U.S.) Inc. Notes to Consolidated Financial Statements (Dollars in thousands) Property, Plant and Equipment Property, plant and equipment is stated at the lower of cost or appraised fair market value and depreciated using the straight- line method over the estimated useful lives of the assets which range from five to thirty years. Amortization on equipment acquired under capital leases is recognized on a straight line basis over the shorter of the estimated asset life or lease term. Depreciation on equipment held for future projects is not provided until the equipment is placed in service. For income tax purposes, the Company uses a combination of accelerated and straight-line depreciation methods. Cost of maintenance and repairs is charged to expense as incurred. Betterments and improvements are capitalized. Upon retirement or other disposition of items of plant and equipment, cost of items and related accumulated depreciation are removed from the accounts and any gain or loss is included in the results of operations. Equipment Held for Sale Equipment held for sale consists of power generation equipment not currently being used in an operating project and is valued at the lower of cost or estimated net realizable value. Project Development Costs Project development costs consist of fees, licenses and permits, site testing, bids and other charges, including salary and interest charges incurred by the Company in developing projects. For wholly-owned projects, project development costs are transferred to property, plant and equipment upon commencement of construction and depreciated over the contract term when operations begin. For projects structured as partnerships, these project development costs may be recovered through development cost reimbursements from the partnership or third parties or may be transferred to an investment in the partnership. It is the Company's policy to expense these costs in any period in which management determines the costs to be unrecoverable. Deferred Financing Costs Financing costs are deferred and amortized on a straight-line basis over the term of the related financing. Nonrecourse Long-term Debt Recourse long-term debt consists of collateralized long-term debt for which repayment is a general obligation of the Company exclusive of any debt subject to the bankruptcy proceedings. Nonrecourse project financing consists of long-term debt for which repayment obligations are limited to specific project subsidiaries. Income Taxes The provision for income taxes has been calculated using the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the future tax F-9 NRG Generating (U.S.) Inc. Notes to Consolidated Financial Statements (Dollars in thousands) consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes payable or paid for the current year and the change in deferred taxes during the year. Deferred taxes result from differences between the tax and financial bases of the Company's assets and liabilities and are adjusted for any changes in the tax rates and laws. Valuation allowances are recorded when it is more likely than not that a tax benefit will not be realized. Interest Rate Swap Agreement The Company entered into interest rate swap agreements to reduce the impact of changes in interest rates on certain of its variable rate nonrecourse debt. The differentials paid or received under such agreements are accrued and are recorded as increments or decrements to interest and debt expense. Net Income (Loss) Per Share Net income (loss) per share is calculated by dividing net income (loss) by the weighted average number of shares of common stock and common stock equivalents outstanding during each period. Common stock equivalents result from dilutive stock options and restricted stocks computed using the treasury stock method. All periods have been restated to reflect the common shares issued under the terms of the Plan (see Note 14). Foreign Currency Accounting The financial statements of foreign subsidiaries have been translated in accordance with Statement of Financial Accounting Standards No. 52, whereby assets and liabilities are translated at year-end rates of exchange and statements of operations are translated at the average rates of exchange for the year. Currency translation adjustments are accumulated in the other component of stockholders' equity until the entity is substantially sold or liquidated. Transaction gains and losses associated with foreign activities are included in net income (loss). Cash and Cash Equivalents For purposes of the consolidated statements of cash flows, the Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents. Concentration of Credit Risk The Company primarily sells electricity and steam to public utilities and corporations on the east coast of the United States under long-term agreements. Also, the Company services, sells and rents equipment to various entities worldwide. The Company performs on-going credit evaluations of its customers and generally does not require collateral. The Company maintains reserves for potential credit losses and such losses have been within management's expectations. The Company invests its excess cash in deposits with financial institutions. These securities typically mature within ninety days and, therefore, bear minimal risk. The Company has not experienced any losses on these deposits. F-10 NRG Generating (U.S.) Inc. Notes to Consolidated Financial Statements (Dollars in thousands) Reclassification Certain reclassifications have been made to conform prior years data to the current presentation. 3. Restricted Cash and Cash Equivalents The Company has classified certain cash and cash equivalents that are not fully available for use in its operations as restricted. At December 31, 1996, restricted cash and cash equivalents relate primarily to debt service reserve accounts required by the nonrecourse project debt for O'Brien (Newark) Cogeneration, Inc. ("Newark") and O'Brien (Parlin) Cogeneration, Inc. ("Parlin") which were refinanced in 1996 (see Note 12). At June 30, 1996, restricted cash and cash equivalents relate primarily to debt service reserve accounts required by the nonrecourse project debt refinancing for Newark and Parlin and to escrow accounts established on April 30, 1996, pursuant to the Plan, relating to various administrative, priority and unsecured claims which remain in dispute or are subject to final resolution by the Court. Restricted cash and cash equivalents at June 30, 1995 relate primarily to debt service reserve accounts required by the nonrecourse project debt for Newark and Parlin. Additionally, restricted cash and cash equivalents at December 31, 1996 and June 30, 1996 and 1995 include compensating balances maintained by the Company at a financial institution in connection with a line of credit extended to its United Kingdom subsidiaries (see Note 10). Restricted cash and cash equivalents consist of the following: December 31, June 30, June 30, 1996 1996 1995 NRGG bankruptcy escrow accounts $2,388 $8,490 $ - O'Brien (Newark) Cogeneration, Inc. 2,050 - 3,129 O'Brien (Parlin) Cogeneration, Inc. 3,736 - 101 United Kingdom subsidiaries - 229 241 Other - - 92 Total $8,174 $8,719 $3,563 4. Property, Plant and Equipment Property, plant and equipment consists of the following: December 31, June 30, June 30, 1996 1996 1995 Equipment related to energy revenues $155,802 $154,578 $171,520 Rental equipment 15,233 15,166 15,330 Furniture and fixtures 759 898 1,694 Land, buildings and improvements 1,538 1,972 2,424 Other equipment 44 378 469 Total $173,376 $172,992 $191,437 Accumulated depreciation and amortization 41,173 38,298 40,307 Total $132,203 $134,694 $151,130 F-11 NRG Generating (U.S.) Inc. Notes to Consolidated Financial Statements (Dollars in thousands) Depreciation expense was $3,626, $7,858, $8,892 and $9,717 in the six months ended December 31, 1996, and fiscal 1996, 1995 and 1994, respectively. The Company recorded a charge of $15,985 in fiscal 1995 to reduce the carrying amount of property, plant and equipment to a lower appraised fair market value. Equipment related to energy revenues includes the property and equipment of the Newark and Parlin cogeneration plants, the Philadelphia Water Department standby project and, until sold on April 30, 1996, the biogas projects (see Note 23). The Newark project consists of a 52 MW cogeneration power plant in Newark, New Jersey which commenced operations in November 1990 and is supplying electricity and steam pursuant to 25-year supply contracts. The Parlin project consists of a 122 MW cogeneration power plant in Parlin, New Jersey which commenced operations on June 26, 1991 and is supplying up to 114 MW of electricity pursuant to a 20 year electric supply contract and steam pursuant to a 30-year supply contract. 5. Equipment Held for Sale As part of the Company's efforts to improve both short-term and long-term liquidity, it is seeking buyers for specific energy equipment not currently being used in an operating project nor critical to the completion of any projects in development. These assets, consisting mainly of gas and steam turbines, are being held for sale in order to raise cash. The value of these assets sold in a secondary market is less than if they were incorporated into an internally developed operating project. Accordingly, the Company recorded a noncash charge of $6,250 in fiscal 1994 to adjust the carrying value of these assets to estimated resale value, based upon appraisals made by the Company. In fiscal 1995, the Company recorded an additional charge of $5,655 based upon an independent appraisal to further reduce the carrying value to reflect the Company's intent to accelerate the disposal of this equipment. 6. Notes Receivable Notes receivable consist of the following: December 31, June 30, June 30, 1996 1996 1995 Notes receivable, non-interest bearing, final installment of $800 due in June 1997 (a) $ 754 $ 754 $1,465 Other (b) 448 361 466 Total 1,202 1,115 1,931 Less current portion 1,119 1,029 853 Total noncurrent $ 83 $ 86 $1,078 F-12 NRG Generating (U.S.) Inc. Notes to Consolidated Financial Statements (Dollars in thousands) (a) Note receivable associated with the termination of a power purchase contract. The note is collateralized by an irrevocable letter of credit. At December 31, 1996, face value and discount were $800 and $46, respectively, assuming an interest rate of 5.95%. (b) Notes receivable associated primarily with a direct finance lease relating to power generation equipment. 7. Project Development Costs During fiscal 1996, 1995 and 1994, the Company determined that certain project development costs should be expensed. The resulting charges, net of any recoveries, of $180, $4,418 and $539, respectively, are included in selling, general and administrative expenses in the accompanying consolidated statements of operations. The fiscal 1995 charge included costs of a project determined to be unrecoverable based upon the anticipated implementation of the Plan. 8. Investments in Equity Affiliates Investment in equity affiliates consist of the following: December 31, June 30, June 30, 1996 1996 1995 Grays Ferry (33% owned) $2,659 $2,778 $2,504 Artesia (3% owned) - - 337 PoweRent Limited (50% owned) 994 671 642 Total $3,653 $3,449 $3,483 Grays Ferry In October 1991, NRGG (Schuylkill) Cogeneration, Inc. ("NSC"), a wholly-owned subsidiary, executed a partnership agreement with Adwin Equipment Company ("Adwin"), a wholly-owned subsidiary of PECO Energy, for the purpose of developing, constructing, owning, maintaining and operating a 150 MW natural gas and oil fired cogeneration facility to produce steam and electricity in Philadelphia. The project, currently under construction, consists of the installation and operation of an auxiliary boiler and steam turbine and the installation and operation of a gas turbine and heat recovery steam generator along with related equipment. In March 1996, Trigen (Schuylkill) Cogeneration, an unrelated party, was admitted to the partnership. NSC and Adwin each received a $1,000 admittance fee. Net operating profits and losses will be allocated to the partners based upon the terms and provisions as stated in the partnership agreement. Also in March 1996, the partnership entered into a credit agreement with Chase Manhattan Bank N.A. to finance the construction and equipment for the facility. Pursuant to the credit agreement, the three partners will each contribute $10,000 of additional capital to the partnership to be funded after all construction loan proceeds have been utilized or at such time as is required by the lender. Additionally, the stock of NSC was pledged as collateral for the loan. In March 1996, NRG Energy and NSC entered into a $10,000 loan agreement to provide a source of funding for the NSC capital contribution obligation to the partnership. No amounts have yet been contributed to the partnership or borrowed under this loan agreement. F-13 NRG Generating (U.S.) Inc. Notes to Consolidated Financial Statements (Dollars in thousands) PoweRent Limited PoweRent Limited, an entity in which a subsidiary of the Company owns a 50% interest, is a United Kingdom company that sells and rents power generation equipment. The remaining 50% of PoweRent is owned by an officer of a wholly-owned United Kingdom subsidiary. The Company's investment in equity affiliates has been accounted for using the equity method. 9. Deferred Financing Costs Deferred financing costs relate primarily to the cost of refinancing the nonrecourse debt and consist of the following: December 31, June 30, June 30, 1996 1996 1995 Deferred financing costs $5,940 $4,810 $2,767 Accumulated amortization 410 180 1,237 Total $5,530 $4,630 $1,530 Amortization expense, included in interest and debt expense, amounted to $199 for the six month period ended December 31, 1996. In addition, deferred financing costs of $31, associated with a capital lease obligation, were written off as a result of a negotiated buyout of the capital lease obligation (see Note 16). Amortization expense, included in interest and debt expense, in fiscal year ending June 30, 1996 was $1,480 which includes a charge of $1,043 to expense unamortized deferred financing costs attributable to the nonrecourse project debt which was refinanced in 1996 (see Note 12). Amortization expense amounted to $570 and $452 in the fiscal years ended June 30, 1995 and 1994, respectively, which is included in interest and debt expense. Additionally, the Company charged $3,387 of deferred financing costs to reorganization costs in fiscal 1995 to adjust the carrying amount of the parent's prepetition subordinated debentures to the amount approved by the Court as an allowed claim. 10. Short-Term Borrowings As of December 31, 1996, and June 30, 1996 and 1995, short-term borrowings consist primarily of foreign lines of credit payable to financial institutions bearing interest at foreign (U.K.) short-term rates. 11. Prepetition Liabilities All liabilities which remain subject to the bankruptcy proceedings have been classified on the balance sheet as prepetition liabilities. Prepetition liabilities are stated at amounts expected to be approved F-14 NRG Generating (U.S.) Inc. Notes to Consolidated Financial Statements (Dollars in thousands) by the Court as allowed claims and consist of the following: December 31, June 30, June 30, 1996 1996 1995 Subordinated debentures $ - $ - $49,174 Nonrecourse debt (see Note 12) - - 30,368 Prepetition accrued interest - 11 5,634 Accounts payable and accrued expenses 1,433 1,724 2,567 Total $1,433 $1,735 $87,743 Generally, all undisputed prepetition liabilities approved by the Court as allowed claims were fully funded (or cured/reinstated) and paid with post-petition interest on the closing date. However, certain proofs of claims filed with the Court remain in dispute. An escrow fund was established to fully reserve for these disputed claims. Any remaining funds resulting from the Court disallowing any of these disputed claims will be disbursed pro rata to all allowed non-reinstated creditor claimholders as additional post-petition interest. Additionally, prepetition liabilities of approximately $4,957 consisting primarily of subordinated debentures owned by Wexford were satisfied by the issuance of preferred shares in the reorganized company. These shares were subsequently redeemed in May 1996. The subordinated debentures carried interest rates ranging from 7% to 11% up to the date of filing for bankruptcy on September 28, 1994. 12. Nonrecourse Long-Term Debt On May 17, 1996, the Company's wholly-owned subsidiaries, Newark and Parlin entered into a Credit Agreement (the "Credit Agreement") with a new lender. The Credit Agreement established provisions for a $155,000 fifteen-year loan and a $5,000 five- year debt service reserve line of credit. The interest rate on the outstanding principal is variable based on, at Newark and Parlin's option, LIBOR plus a 1.125% margin or a defined base rate plus a 0.375% margin. Nominal margin increases for both the LIBOR and the defined base rate will occur in year six and eleven of the Credit Agreement. 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 50% of the principal amount outstanding at 6.9% plus the margin. On May 23, 1996, Newark borrowed $60,000 in the form of a temporary six-month term loan under the terms of the Credit Agreement. The proceeds were used primarily to repay certain preexisting obligations of the Company. Also effective May 23, 1996, NRG Energy guaranteed payment of pre-existing liabilities of Newark and Parlin up to $5,000. The guarantee amount of $5,000 will be reduced as certain defined milestones are reached and eliminated no later than May 23, 2001. On July 11, 1996, an additional $95,000 was borrowed pursuant to the Credit Agreement, combined with Newark's $60,000 six month- term loan and converted into a $155,000 fifteen-year term loan (the "Term Loan") which is a joint and several liability of Newark and Parlin. The Term Loan will be amortized as specified under the terms of the Credit Agreement. Proceeds of the $95,000 borrowing were used to repay $53,388 advanced by NRG Energy on June 28, 1996 in connection with the refinancing of certain nonrecourse debt of Parlin and $33,903 of outstanding indebtedness to NRG Energy. The remaining balance was used for various obligations of the Company as well as funding F-15 NRG Generating (U.S.) Inc. Notes to Consolidated Financial Statements (Dollars in thousands) certain restricted cash reserve accounts required to be maintained by Newark and Parlin under the terms of the Credit Agreement. Also, effective July 11, 1996, the Company guaranteed repayment of up to $25,000 of the Term Loan and payment of all income and franchise taxes of Newark and Parlin as they come due. Collateral for the Term Loan includes a perfected first security interest on all assets of Newark and Parlin and a pledge of all capital stock of Newark and Parlin. Upon the parent company filing a petition for bankruptcy, all debt subject to compromise was reclassified to prepetition liabilities (see Note 11). On April 30, 1996, certain notes payable were cured and reinstated. Subsequently, an amount of $8,898 was reclassified back to long-term nonrecourse debt from prepetition liabilities. Nonrecourse long-term debt at June 30, 1995 consisted of only post-petition financing and all subsidiary long-term nonrecourse debt which was not part of the bankruptcy proceedings. Nonrecourse long-term debt consists of the following: December 31, June 30, June 30, 1996 1996 1995 Notes payable, due in monthly installments of principal plus interest at rates ranging from 8.3% to 13.48% maturing on various dates through March 2002 $ 8,610 $ 8,995 $4,739 Capital lease obligations, due in monthly installments at rates up to 13.48%, maturing at various dates through December 2000, collateralized by certain energy and rental equipment having a net book value of $4,840 at December 31, 1996 1,474 4,909 7,417 Credit Agreement financing 151,047 60,000 - Total 161,131 73,904 12,156 Less amounts classified as current (a) 10,820 7,115 8,751 Total noncurrent recourse debt $150,311 $66,789 $3,405 a)As a result of defaults under certain of a subsidiary company's loan agreements, the Company reclassified $4,374 out of a long-term classification at June 30, 1995 for a total of $8,751 of its nonrecourse debt as a current liability. Of this amount, approximately $2,383 was triggered by non- payment and the remainder, $1,991, was reclassified because of the Chapter 11 bankruptcy filing on September 28, 1994. Scheduled maturities of nonrecourse long-term debt and capital lease obligations for the next five years and thereafter are as follows: Year Ending December 31, Long-Term Debt Capital Leases 1997 $ 9,687 $1,133 1998 10,813 466 1999 11,069 - 2000 9,805 - 2001 11,735 - Thereafter 106,548 - Interest component on capital leases - (125) Total $159,657 $1,474 F-16 NRG Generating (U.S.) Inc. Notes to Consolidated Financial Statements (Dollars in thousands) The Company incurred interest charges, exclusive of interest on nonrecourse project financing and the loans due to NRG Energy, of $7,042, $8,351, $9,925 and $9,802 in the six month period ended December 31, 1996, and fiscal years ended 1996, 1995 and 1994, respectively. Of these amounts $403 was capitalized in fiscal 1994. No amounts were capitalized in the six month period ended December 31, 1996 or fiscal 1996 or 1995. Nonrecourse project financing, which was refinanced in fiscal 1996, consisted of the following at June 30, 1995: Newark project (a) $25,010 Parlin project (b) 60,310 Total 85,320 Less current portion 85,320 Total noncurrent $ - Nonrecourse project financing agreements contained various restrictive covenants consisting of the maintenance of positive working capital, limitation on the payment of dividends or other distributions to the Company and a restriction on additional borrowings by the project subsidiaries. At June 30, 1995, nonrecourse project financing was classified as current because the Newark and Parlin projects were in default of the covenant requiring the maintenance of positive working capital. (a) The Newark project financing was an obligation of Newark, a wholly-owned subsidiary of the Company. Project financing was converted from a nonrecourse construction loan to a nonrecourse 12-year term loan in October 1990. On June 6, 1995, Newark executed a Settlement and Restructuring Agreement which allowed monthly predetermined cash distributions to the parent company, accelerated the maturity date to January 1997, provided for escalating interest rate margin increases throughout the remaining term of the loan and obligated that Newark's monthly excess cash be applied as additional principal payments on the term loan. Previously, the term loan provided for a variable interest rate tied to either LIBOR or the prime rate. During fiscal 1996, 1995 and 1994, $1,753, $2,065 and $1,693, respectively, of interest costs were incurred pursuant to the term loan. On May 23, 1996, the Company used the $60,000 under the Credit Agreement, among other things, to refinance the Newark nonrecourse project finance debt. (b) The Parlin financing was an obligation of Parlin, a wholly-owned subsidiary of the Company. Project financing was converted from a nonrecourse construction loan to a nonrecourse 12-year term loan in December 1990. Through the use of an interest rate swap agreement, a portion of the term loan had a fixed interest rate of approximately 11% per annum. The balance of the loan had a variable interest rate tied to LIBOR. During fiscal 1996, 1995 and 1994, $5,730, $6,470 and $6,633, respectively, of interest costs were incurred pursuant to the term loan. These interest costs include $1,642, $2,050 and $3,253 for fiscal 1996, 1995 and 1994, respectively, of costs associated with the interest rate swap agreement. On June 28, 1996, the outstanding Parlin nonrecourse project financing debt was refinanced and a $3,100 breakage fee was paid to terminate the interest rate swap agreement. On July 11, 1996, the Company used the $95,000 under the Credit Agreement, among other things, to repay NRG Energy for the funds advanced on June 28, 1996 (see Note 13). F-17 NRG Generating (U.S.) Inc. Notes to Consolidated Financial Statements (Dollars in thousands) 13. Loans due NRG Energy, Inc. In accordance with the Plan, the Company and NRG Energy entered into various loan agreements. At December 31, 1996, the loan balance due to NRG Energy is $14,388 with a maturity date of April 30, 2001. Interest expense in the six month period ended December 31, 1996 includes $648 attributable to the loans due NRG Energy. 14. Stockholders' Equity Preferred stock The Company's Certificate of Incorporation authorizes the issuance of an aggregate of 20,000,000 shares of Preferred Stock, par value $.01 per share in series. The Board of Directors is authorized to fix the voting rights, designations, powers, preferences, qualifications, limitations or restrictions of any such series and to fix the number of shares constituting such series. On April 30, 1996, the Board of Directors authorized the designation of 50,000 shares as a Series A 13.5% cumulative preferred stock, par value $.01. The Company issued 49,574 shares to Wexford in satisfaction of $4,957 of prepetition unsecured claims allowed by the Court. The preferred shares were reacquired by the Company in May 1996 for $4,957 and paid $57 in dividends. Common stock On April 30, 1996, the outstanding Class A and Class B common shares of the Company were canceled and became exchangeable for a new single issue of common stock ("Common Stock"). The Company authorized 50,000,000 shares, par value $.01. The Company issued 6,474,814 common shares of which 2,710,357 (41.86%) were purchased by NRG Energy and the remaining 3,764,457 shares (58.14%) became issuable to the existing shareholders of the Company. Holders of the Company's Class A and Class B shares also became entitled to receive an aggregate $7,500 (approximately $.44 cents per Class A and Class B common share) from NRG Energy upon submission of the Class A and Class B common shares to the transfer agent for exchange. Except for voting and conversion privileges, shares of Class A and Class B common stock were identical. O'Brien Energy Services Company ("OES"), a wholly-owned subsidiary, owned 75,000 shares of Class A common stock and 165,000 shares of Class B common stock at the date of its acquisition by the Company. On April 30, 1996, these shares were converted into 52,800 shares of Common Stock. On October 8, 1996, the Company reacquired 18,500 shares of the Common Stock held by OES and issued such shares for aggregate proceeds of $99 to certain members of Company management and the board of directors. At December 31, 1996, there remains 34,300 shares held by OES. Outstanding shares at December 31, 1996, June 30, 1996 and June 30, 1995 exclude the stock owned by OES. F-18 NRG Generating (U.S.) Inc. Notes to Consolidated Financial Statements (Dollars in thousands) Stock options Under the 1996 Stock Option Plan adopted in October 1996 (the "Stock Option Plan"), the Compensation Committee of the Company's Board of Directors may award either nonqualified stock options ("NQSOs") or incentive stock options ("ISOs") to officers, directors and key employees of the Company who occupy responsible managerial, professional or advisory positions and who have the capability of making a substantial contribution to the success of the Company. Nonemployee directors may only receive NQSOs under the Stock Option Plan. The Company has reserved 500,000 shares of Common Stock for issuance pursuant to awards under the Stock Option Plan. During the six months ended December 31, 1996, the Company granted 399,000 stock options at an exercise price range of $5.4375 to $6.575 per share. No stock options have been exercised as of December 31, 1996. The exercise price for the stock options granted under the Stock Option Plan may not be less than the fair market value of a share of the underlying Common Stock on the date the option is granted and must be paid in cash unless the Compensation Committee permits payment in shares of the Company's stock. An option will generally expire ten years after the date it is granted and will ordinarily become exercisable as to one third of the shares subject to the option on each of the three succeeding anniversaries of the grant. The Compensation Committee may modify the exercisability of an option at its discretion. If an award under the Stock Option Plan expires or terminates without being exercised in full or is forfeited, the shares subject thereto are generally available for new awards. The Company has elected to recognize compensation cost for its stock-based compensation plan in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Generally, no compensation expense is recognized for stock options with exercise prices equal to the market value of the underlying stock at the date of grant. Pro forma amounts of net income and net income per share reflecting compensation cost determined based on the fair value at the date of grant consistent with the method of Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation," have not been presented because the amounts are not material. Following a "change of control" all options granted under the Stock Option Plan will become immediately exercisable. Other The other component of stockholders' equity includes the cumulative foreign currency translation adjustment of ($352), ($785), and ($562) at December 31, 1996, June 30, 1996 and June 30, 1995, respectively, and treasury stock of ($64) at June 30, 1995. Treasury stock at June 30, 1995 is recorded at cost and consisted of 15,200 shares of Class A common stock which were retired on April 30, 1996. F-19 NRG Generating (U.S.) Inc. Notes to Consolidated Financial Statements (Dollars in thousands) 15. Common Stock Option Right Granted to NRG Energy In connection with NRG Energy's assistance with the Grays Ferry project (see Note 8), the Company granted NRG Energy the right, approved by the Court in March 1996, to convert a portion of borrowings under the $10,000 loan agreement to Common Stock of the Company. The option right provides that NRG Energy can convert $3,000 of borrowings under the loan agreement for Common Stock which would equal 396,301 common shares issued as of April 30, 1996. No amounts have been borrowed under the loan agreement. 16. Extraordinary Item During the six month period ended December 31, 1996, the Company negotiated a buyout of a subsidiary's capital lease obligation. The lender agreed to accept a $1,100 payment in full satisfaction of the lease. The transaction resulted in an extraordinary gain of $1,643 (net of $124 of state income taxes). 17. Business Interruption Insurance Claims Energy revenues for fiscal 1995 and 1994 include $1,035 and $1,706 received under net business interruption insurance claims associated with the Newark and Parlin cogeneration plants. 18. Amortization of Cost in Excess of Net Assets Acquired Amortization of cost in excess of net assets acquired amounted to $1,987 and $98 in fiscal 1995 and 1994, respectively. Included in fiscal 1995 amortization is $1,888 which related primarily to the unamortized value assigned to an acquired subsidiary's heat recovery technology which management deemed not realizable. 19. Amendment to Newark and Parlin Power Purchase Agreement Effective April 30, 1996, the Company renegotiated its PPA with 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. The Company anticipates that this change in the PPAs will reduce its historical volatility in gross margins by eliminating the Company's risk to fluctuations in the price of natural gas which must be paid by its Newark and Parlin Projects. However, because energy revenues as well as the cost of energy revenues declined under the amended PPAs, the Company anticipates that its operating gross margins, over time, will remain similar to historical results. Additionally, Parlin relinquished its claim to qualifying facility status and filed rates as a public utility under the Federal Power Act. However, Parlin has been determined to be an exempt wholesale generator (EWG). The Parlin project has also changed from a full base load operation to a partial base load/partial dispatchable project. F-20 NRG Generating (U.S.) Inc. Notes to Consolidated Financial Statements (Dollars in thousands) 20. Development Fees and Other In September 1994, the Company sold its rights to develop a 14 MW standby electric facility project for $1,762. In June 1994, the Company sold its rights to develop a standby/peak shaving project for a $5,000 cash payment. This sale was recorded in development fees and other income. The costs associated with the development rights were insignificant. In August 1993, the Company entered into an arrangement with an unrelated third party joint venture to sell substantially all proved and unproved coalbed methane gas properties for $6,500. The Company received $2,000 in cash and a production payment note receivable of $4,500. In addition, the Company agreed to contribute up to $800 to complete non-producing wells into commercial wells. The Company discounted the production payment note in fiscal 1994 to an estimated net realizable value. Fiscal 1994 development fees and other includes $5,121 of revenues recognized in connection with this sale. In May 1994, the joint venture filed a complaint with the American Arbitration Association. The Company subsequently counterclaimed. On March 31, 1995, a settlement agreement was executed with the joint venture to resolve all disputes in which the Company accepted responsibility for $1,166 in cost reimbursement toward completion on non-producing wells with interest at prime plus 5%. The joint venture accepted an assignment of any and all payments due the Company on the note receivable in satisfaction of the obligation until the sums withheld satisfy the obligation plus all accrued interest. Until the obligation is satisfied, the Company has no rights to the net revenues, as defined, nor can the note receivable be sold, pledged or assigned. The joint venture is not entitled to look to the Company for the payment of any cost obligations. Only after recoupment of the chargeback obligation, will payment on the note receivable be paid from a percentage of net revenues, as defined, from the coalbed methane properties until the earlier of (1) the note is paid in full or (2) 10 years. At June 30, 1995, the Company reduced the carrying value of the note by the cost obligation and fully reserved the balance. 21. Involuntary Conversion Gain On December 25, 1992, a fire disabled the Newark cogeneration plant. The damage to the plant caused by the fire has been repaired. The plant returned to partial operations in August 1993 and resumed full operation in October 1993. The Company received $36,000 from its insurance carrier which covered a substantial majority of the Company's cost of repair and loss of net profits due to business interruption. Additionally, the Company recognized an involuntary conversion gain of $6,066 in fiscal 1994. 22. Disclosures about Fair Value of Financial Instruments At December 31, 1996 and June 30, 1996, the carrying amounts and fair values of the Company's financial instruments are as follows: F-21 NRG Generating (U.S.) Inc. Notes to Consolidated Financial Statements (Dollars in thousands) December 31, 1996 June 30, 1996 Carrying Fair Carrying Fair Amount Value Amount Value Assets: Cash and cash equivalents $ 3,187 $ 3,187 $ 5,022 $ 5,022 Restricted cash and cash equivalents 8,174 8,174 8,719 8,719 Notes receivable 1,202 1,202 1,115 1,115 Liabilities: Short-term borrowings 2,388 2,388 1,793 1,793 Nonrecourse long-term debt 161,131 161,131 73,904 73,904 Prepetition liabilities 1,433 1,433 1,735 1,735 Loans and payables due NRG Energy, Inc. 15,644 15,644 101,679 101,679 Interest rate swap - 1,439 - - The carrying amounts of cash and equivalents, restricted cash and cash equivalents and notes receivable approximates the fair value of those instruments due to their short maturity. The fair value of short-term and long-term debt and amounts due NRG Energy are based on interest rates available to the Company for issuance of similar debt with similar remaining maturities. The fair value of prepetition liabilities is stated at the value of the amount expected to be approved by the Court as allowed claims. Under the terms of the Plan primarily all allowed claims and post- petition interest will be paid in full. The fair value of the interest rate swap generally reflects the estimated amount that the Company would pay to terminate the interest rate swap agreement at the reporting date. Fair value estimates are made at a specific point in time based on relevant market information about the financial instruments. The estimated fair values of financial instruments presented are not necessarily indicative of the amounts the Company might realize in actual market transactions. 23. Transactions with Related Parties NRG Energy provided the Company with a total of $128,078 in loans during fiscal 1996 in addition to funding a capital contribution of $21,178. The December 31, 1996 loan balance is $14,388 with a maturity date of April 30, 2001. Interest expense for the six months ended December 31, 1996, and for fiscal year ended June 30, 1996 is $648 and $1,098, respectively. Selling, general and administrative expenses include $608 and $129 for reimbursement of services provided by NRG Energy to the Company for the six months ended December 31, 1996 and for the fiscal year ended June 30, 1996 under the terms of a management services agreement. On November 8, 1996, Power Operations, Inc., a new wholly-owned subsidiary of the Company, assumed the operations and maintenance of the Newark facility, replacing Stewart and Stevenson Operations, Inc. On December 31, 1996, Power Operations, Inc. assumed the operations and maintenance of the Parlin facility, replacing Stewart and Stevenson Operations, Inc. On January 1, 1997, Power Operations, Inc. was sold by the Company to NRG Energy. The terms of this transaction were approved by the Independent Directors Committee of the Company's Board of Directors as required by the Company's Bylaws. The Company believes that such changes will have no material financial impact on the operations of these facilities or on the Company's financial condition or results of operations. F-22 NRG Generating (U.S.) Inc. Notes to Consolidated Financial Statements (Dollars in thousands) Under the terms of the Plan, on April 30, 1996, NRG Energy purchased the stock of 10 wholly-owned subsidiaries from the Company for $7,500. The companies sold (collectively "the Subsidiaries") were O'Brien Biogas I (SKB), O'Brien Biogas Inc. VI, O'Brien Biogas (Mazzaro) Inc., O'Brien Biogas (Corona) Inc., O'Brien Biogas Inc. IV, O'Brien Biogas (Hackensack) Inc., O'Brien Biogas Inc. III (Atochem), O'Brien Biogas VII, O'Brien Cogen Inc. II (Artesia) and O'Brien Standby Power Energy, Inc. Wexford was issued 49,574 shares of NRGG 13.5% cumulative Series A preferred stock on April 30, 1996 in satisfaction of $4,957 in prepetition liabilities approved by the Court as allowed claims. In May 1996, the Company reacquired the preferred shares for $4,957 and paid $57 in dividends. Additionally, the Company paid Wexford a $200 administrative fee approved by the Court. Wexford has an agreement with the Company to sell the Company's Liquidating Assets (see Note 1). In the six month period ended December 31, 1996, the Company paid Wexford $281 under the Liquidating Asset Management Agreement. The Company leased office space until May 10, 1996 from Pennsport Partnership, a Pennsylvania partnership in which the former Chief Executive Officer and former Principal Stockholder ("FCEO") of the Company has a 50% ownership interest. Rental expense for fiscal 1996, 1995 and 1994 was $152, $242 and $289, respectively. The Company also leases office space until April 30, 1997 from Christiana River Holdings, Ltd., an entity owned by the FCEO. Rental expense was $55 for the six month period ended December 31, 1996 and $150 for each fiscal year ended 1996, 1995 and 1994. In the six months ended December 31, 1996, the Company recognized $43 of revenue by selling equipment and related services to PoweRent. In fiscal 1996, the Company recognized $1,039 of revenue by selling equipment and related services to PoweRent. The cost of the equipment and related service was $940. The Company was charged commissions by O'Brien Power Systems, Inc. of $647 in fiscal 1994 in connection with equipment sales and services provided to third parties. In September 1993, NRG Generating Limited ("Puma"), a wholly- owned subsidiary located in the United Kingdom, purchased its executive offices and its principal facility located in Kent from III Enterprises Limited, an entity owned by the FCEO of the Company, for approximately $800. The Company estimated a fair value of these facilities at approximately $1,100. However, predecessor cost of $498 was used to capitalize the assets purchased and the excess of the purchase price over III Enterprises Limited's historical net book value was reflected as an increase in the accumulated deficit. Prior to September 1993, Puma leased the facility from III Enterprises Limited with rental expense amounting to $66 in fiscal 1994. At June 30, 1995, the Company had notes receivable totaling $238 from a former officer of the Company. The notes were unsecured with interest at 8.25% per annum. At June 30, 1995, the Company established a reserve for the notes and accrued interest to reflect a court approved stipulation agreement between the Official Committee of Unsecured Creditors (the "Committee") and the former officer whereby, in consideration of the notes, the former officer agreed to withdraw his claim against the Company and assist the Committee with its prosecution of objections to certain identified disputed claims in the bankruptcy proceedings. F-23 NRG Generating (U.S.) Inc. Notes to Consolidated Financial Statements (Dollars in thousands) 24. Income Taxes Income (loss) before income taxes and extraordinary consists of the following: Six Months Ended Twelve Months Ended December 31, June 30, June 30, June 30, 1996 1996 1995 1994 United States $ 4,195 $(18,054) $(38,225) $(12,657) Foreign 317 (122) (14) (1,931) Total $ 4,512 $(18,176) $(38,239) $(14,588) The income tax provision (benefit) consists of: Current income taxes: Federal $ 803 $ - $ - $ - State 570 792 402 - Subtotal 1,373 792 402 - Deferred income taxes: Federal (2,292) (493) 912 - State 651 (762) 1,366 - Subtotal (1,641) (1,255) 2,278 1,913 Income tax provision (benefit) excluding extraordinary item $ (268) $ (463) $ 2,680 $ 1,913 Deferred income taxes arise from temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. The components of the net deferred tax liabilities are as follows: December 31, June 30, June 30, 1996 1996 1995 Deferred income tax liabilities: Property, plant & equipment $(18,445) $(18,109) $(20,022) Total deferred tax liabilities (18,445) (18,109) (20,022) Deferred income tax assets: Net operating loss carryforwards 26,502 28,219 25,241 Alternative minimum tax credits 183 84 84 Investment tax credits 1,622 1,622 1,622 Miscellaneous 5,571 5,521 6,848 Valuation allowance (28,837) (31,519) (28,859) Total deferred tax assets 5,041 3,927 4,936 Net deferred income tax liabilities $(13,404) $(14,182) $(15,086) F-24 NRG Generating (U.S.) Inc. Notes to Consolidated Financial Statements (Dollars in thousands) The decrease in the valuation allowance from June 30, 1996 to December 31, 1996 is due primarily to the utilization of net operating loss carryforwards and existing deductible temporary differences against current year taxable income and the future reversals of existing taxable temporary differences. The difference between tax expense (benefit) calculated at the U.S. federal statutory tax rate and the recorded tax expense (benefit) on income from continuing operations (exclusive of the December 31, 1996 extraordinary item) is reconciled below: Six Months Ended Twelve Months Ended December 31, June 30, June 30, June 30, 1996 1996 1995 1994 Income tax (benefit) on the amount of Federal statutory rate $ 1,534 $(6,180) $(13,001) $(4,959) State income taxes (benefit) 806 252 (286) 387 Current benefit of state operating loss carryforwards (655) (232) - - Operating income tax losses with no current tax benefit (federal & state) - 3,204 2,272 5,759 Other increase (decrease) in valuation allowance (1,630) (544) 6,233 - Excess liabilities - - 4,000 - Reorganization costs - 2,636 1,712 - Other (323) 401 1,750 726 Total income tax provision (benefit) $ (268) $ (463) $ 2,680 $ 1,913 At December 31, 1996, the Company has federal net operating loss carryforwards available to offset future regular taxable income and investment tax credit carryforwards available to offset future regular or alternative minimum federal income taxes payable. These carryforwards expire as follows: Net Operating Loss Investment Tax December 31, Carryforwards Credit Carryforwards 1997 $ - $ - 1998 - 57 1999 - 138 2000 - 255 2001 - 240 2002 3,553 409 2003 1,725 82 2004 5,010 174 2005 13,327 52 2006 4,607 215 2007 15,741 - 2008 10,715 - 2009 6,414 - 2010 8,117 - Total $69,209 $1,622 F-25 NRG Generating (U.S.) Inc. Notes to Consolidated Financial Statements (Dollars in thousands) The Company has $44,289 of state and local net operating loss carryforwards available to offset future state and local taxable income. These carryforwards will expire starting in 1997 and will continue to expire through 2010. The Company also has unused net operating loss carryforwards for United Kingdom income tax purposes of approximately $1,480. For United Kingdom tax purposes these losses can be carried forward and can be used to offset future taxable income. Based upon the weight of available negative evidence, it is more likely than not that the deferred tax assets will not all be realized. Accordingly, the Company has established a partial valuation allowance against the federal and state loss and tax credit carryforwards and a full valuation allowance against the United Kingdom loss carryforwards. The net operating loss carryforwards for alternative minimum tax purposes are approximately $33,677 at December 31, 1996. Under the Plan, approved on January 18, 1996 by the Court, NRG Energy acquired a 41.86% equity interest in the Company. This acquisition, along with other shifts in shareholders' stock holdings, amounted to more than a 50% change in ownership in the Company over a three year period. Under the general net operating loss and tax credit carryover rules, the utilization of the losses and tax credits would be limited. However, the Internal Revenue Code provides an exception to the general rules for loss corporations that undergo an ownership change by reason of certain bankruptcy proceedings. The Company believes it qualifies for the bankruptcy exception and its net operating loss and tax credit carryforwards are not subject to the change of ownership limitations. The bankruptcy exception rules also provide that if a subsequent ownership change should occur within the two years following the bankruptcy protected change, the benefits of the bankruptcy exception will be lost and the Company's net operating loss and tax credit carryforwards will be effectively eliminated. 25. Segment Information and Major Customers The Company operates principally in two industry segments. The energy segment consists of the development and ownership of cogeneration and standby/peak shaving projects. The equipment sales, rental and services segment consists of the selling and renting of power generation, cogeneration and standby/peak shaving equipment and services. Information with respect to these segments of the business is as follows: Six Months Ended Twelve Months Ended December 31, June 30, June 30, June 30, 1996 1996 1995 1994 Revenues: Energy $ 23,247 $ 69,308 $ 80,246 $ 76,913 Equipment sales, rental and services 16,669 27,239 22,001 29,676 Total $ 39,916 $ 96,547 $102,247 $106,589 Identifiable assets: Energy $141,890 $142,390 $164,243 $180,329 Equipment, sales, rental and services 16,170 21,342 22,866 47,329 Corporate assets 15,564 14,430 2,639 10,158 Total $173,624 $178,162 $189,748 $237,816 F-26 NRG Generating (U.S.) Inc. Notes to Consolidated Financial Statements (Dollars in thousands) Six Months Ended Twelve Months Ended December 31, June 30, June 30, June 30, 1996 1996 1995 1994 Operating income (loss): Energy $ 12,136 $ 16,785 $ 19,642 $ 10,280 Equipment sales, rental and services 1,018 (754) (20,265) (4,874) General corporate expenses (1,374) (4,029) (11,254) (8,921) Total $ 11,780 $ 12,002 $(11,877) $ (3,515) Depreciation and amortization expense: Energy $ 3,686 $ 7,123 $ 7,259 $ 7,345 Equipment sales, rental and services 481 756 1,494 2,171 Not allocable 503 82 250 1,486 Total $ 4,670 $ 7,961 $ 9,003 $ 11,002 Revenue by segment consists of sales to unaffiliated customers; intersegment sales are not significant. For the purpose of this presentation, development and other fees are considered revenues of the energy segment. Selling, general and administrative expenses have been allocated to the individual segments on the basis of segment revenues and geographical location. Identifiable assets by segment are those assets that are used in the operations of each segment. Corporate assets are those not used in the operations of a specific segment and consist primarily of cash, notes receivable and deferred financing costs. Information with respect to the Company's geographical areas of business is as follows: Six Months Ended Twelve Months Ended December 31, June 30, June 30, June 30, 1996 1996 1995 1994 Revenues: United States $ 27,937 $ 82,917 $ 89,332 $ 93,090 United Kingdom 11,979 13,630 12,915 13,499 Total $ 39,916 $ 96,547 $102,247 $106,589 Net income (loss): United States $ 6,087 $(17,591) $(40,905) $(14,570) United Kingdom 336 (122) (14) (1,931) Total $ 6,423 $(17,713) $(40,919) $(16,501) Identifiable assets: United States $164,631 $169,657 $179,793 $230,343 United Kingdom 8,993 8,505 9,955 7,473 Total $173,624 $178,162 $189,748 $237,816 Revenues from one energy customer accounted for 46%, 62%, 65% and 53% for the six month period ended December 31, 1996, and for fiscal years 1996, 1995 and 1994, respectively. F-27 NRG Generating (U.S.) Inc. Notes to Consolidated Financial Statements (Dollars in thousands) 26. Operating Leases The Company leases equipment and primarily conducts its operations in leased facilities which expire on various dates through the year 2000. Under the terms of most of the lease agreements, the Company is required to pay taxes, insurance, maintenance and other operating costs of the facilities. The total minimum annual lease payments under non-cancelable operating lease agreements are as follows: Year Ending December 31, 1997 $ 181 1998 114 1999 26 2000 1 Total $ 322 Total rental expense under various operating leases was approximately $504, $804, $1,300, and $1,308 in the six month period ended December 31, 1996, and the fiscal years 1996, 1995 and 1994, respectively. 27. Minority Interest On November 12, 1993, the Company sold the capital stock of OPC and Philadelphia BioGas Supply, Inc. ("PBG"), wholly-owned subsidiaries, and issued 5.5 million warrants for Class A common stock to entities controlled by an unrelated private investor for $5,000 in cash. The warrants were exercisable at prices ranging from $4.00 to $6.00 per share and assigned a value of $1,300 which was reflected in additional paid-in capital. The primary assets of OPC and PBG consist of a 20-year energy service agreement and a digester gas supply agreement with the Philadelphia Municipal Authority. On August 5, 1994, the Company exercised its option to repurchase 83% of OPC and PBG for $5,000. The Company continued to own and rent to OPC and PBG the facilities and all related generation and associated equipment to the project during the period the project was owned by the unrelated private investor and accordingly recognized rental revenues of approximately $254 and $2,187 in fiscal 1995 and 1994, respectively. Additionally, fiscal 1995 interest expense includes $1,050 paid to the private investor to extend the Company's reacquisition option period to August 1994. The repurchase agreement obligates OPC to distribute quarterly 17% of its net earnings. These distributions totaled $125, $227 and $209 in the six month period ended December 31, 1996, and fiscal 1996 and 1995, respectively, and are recorded as interest expense in the consolidated statement of operations. The 17% minority interest retained by the private investor is represented by 100 shares of OPC series A preferred stock, $.01 par value and redeemable by the Company at its option for a price equal to 17% of the present value of the projected income stream of the project as set forth in the repurchase agreement. The private investor can also obligate the Company, upon certain events of default, to repurchase all, but not less than all, of the outstanding preferred stock at 60% of the Company's redemption price. The Company's redemption price at December 31, 1996 was approximately $2,257. There are no events of default. F-28 NRG Generating (U.S.) Inc. Notes to Consolidated Financial Statements (Dollars in thousands) The Company's Class A common stock warrants issued to the private investor were terminated on the April 30, 1996 closing date under the terms of the Plan. 28. Litigation Hawker Siddeley The Company was involved in litigation with Hawker Siddeley Power Engineering, Inc. ("Hawker"), the turnkey contractor for the Parlin (the "Parlin Action") and former Salinas projects (the "Salinas Action"). In the aggregate, Hawker's lawsuits, as amended, sought compensatory damages of $15,000 and $3,000 from the Parlin and former Salinas projects, respectively. In May 1994, Parlin, O'Brien Cogeneration Inc. II, and the Company entered into a settlement agreement with Hawker Siddeley, Power Engineering, Inc. (the "Hawker Settlement Agreement"). Under the Hawker Settlement Agreement all parties dismissed their claims related to the Parlin Action and the Company issued a $1,500 promissory note to Hawker in satisfaction of the Salinas Action. The promissory note became subject to the bankruptcy proceedings on September 28, 1994 and was subsequently paid with post- petition interest on April 30, 1996. Newark Fire Deaths During September 1993 to November 1993, three actions were filed against Newark by survivors of three employees of the independent operator of the Newark Cogeneration facility who were killed as the result of a fire which occurred at the facility in December 1992. All three actions were settled and covered in full by the Company's insurance carrier. Other Proceedings On July 27, 1994, an alleged stockholder of the Company filed suit seeking money damages in an amount allegedly sustained by the stockholder. On September 15, 1994, two alleged debenture holders filed suit seeking money damages in an amount allegedly sustained by debenture holders who purchased debentures from September 28, 1992 through April 12, 1994. The complaints name as defendants O'Brien and certain of its former officers and former directors. The complaints allege that O'Brien and the other defendants violated the Securities Exchange Act of 1934 and disseminated or were responsible for the disseminating of a series of false and misleading statements concerning the Company's business, results of operations and future prospects. The Court, by its confirmation order dated February 13, 1996, limited the rights of these claimants against the reorganized Company to the extent of any recoveries available to the Company under the insurance policies providing any insurance coverage in respect to such claims. The reorganized Company is continuing its dispute of certain prepetition claims as well as certain administrative priority claims filed with the Court. Although the Company cannot give definitive assurance regarding the ultimate resolution of the various claims described above, the Company does not presently believe the matters described above or the resolution thereof will have a material adverse impact on the Company's financial statements. F-29 NRG Generating (U.S.) Inc. Notes to Consolidated Financial Statements (Dollars in thousands) 29. Subsequent Events Sale of Power Operations, Inc. On November 8, 1996, Power Operations, Inc., a new wholly-owned subsidiary of the Company, assumed the operations and maintenance of the Newark facility, replacing the former operator. On December 31, 1996, Power Operations, Inc. assumed the operations and maintenance of the Parlin facility, replacing the former operator. On January 1, 1997, Power Operations, Inc. was sold by the Company to NRG Energy. The terms of this transaction were approved by the Independent Directors Committee of the Company's Board of Directors as required by the Company's Bylaws. The Company believes that such changes will have no material financial impact on the operations of these facilities or on the Company's financial condition or results of operations. Pakistan Development Project In February 1997, NRGG (Asia), Inc., a wholly-owned subsidiary of the Company, sold its rights to a development project in Pakistan. The Company believes that there will be no material financial impact as a result of this sale. F-30 Independent Accountants Report The Board of Directors and Stockholders NRG Generating (U.S.) Inc. We have audited the accompanying consolidated statement of operations, of stockholders' equity and of cash flows of NRG Generating (U.S.) Inc. and subsidiaries ("Company") (formerly known as O'Brien Environmental Energy, Inc.) for the year ended June 30, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated stockholders' equity of NRG Generating (U.S.) Inc. and subsidiaries as of June 30, 1994 and the consolidated results of their operations, changes in their stockholders' equity and their cash flows for the year ended June 30,1994 in conformity with generally accepted accounting principles. As discussed in Note 28 to the consolidated financial statements, the Company is a defendant in several lawsuits. The ultimate outcome of the litigations cannot presently be determined. Accordingly, no provisions for any liabilities that may result has been made in the accompanying consolidated statements for the year ended June 30, 1994. The accompanying consolidated statement of operations, of stockholders' equity, and of cash flows for the year ended June 30, 1994 have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has experienced significant operating problems and setbacks which have contributed to its losses and liquidity problems. Further, O'Brien Environmental Energy, Inc. filed a voluntary petition for reorganization under Chapter 11 of the Federal Bankruptcy Code in the United States Bankruptcy Court on September 28, 1994. These events and circumstances, including the Company's highly leveraged capital structure, raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are described in Note 1 to the consolidated financial statements. The consolidated statement of operations, of stockholders' equity, and of cash flows for the year ended June 30, 1994 do not include any adjustments that might result from the outcome of this uncertainty. COOPERS & LYBRAND L.L.P. 2400 Eleven Penn Center Philadelphia, Pennsylvania October 7, 1994 F-31 Index to Exhibits Exhibit No. Description 2.1* Composite Fourth Amended and Restated Plan of Reorganization for the Company dated January 31, 1996 and proposed by the Company, the Official Committee of Equity Security Holders, Wexford Management Corp. ("Wexford") and NRG Energy, Inc. ("NRG Energy"). 2.2 Order confirming Composite Fourth Amended and Restated Plan of Reorganization for the Company proposed by the Company, the Official Committee of Equity Security Holders, Wexford and NRG Energy dated February 13, 1996 and entered on February 22, 1996 and filed as Exhibit 2.1 to the Company's Current Report on Form 8-K dated February 13, 1996 and incorporated herein by this reference. 2.3 Amended and Restated Stock Purchase and Reorganization Agreement dated January 31, 1996 between the Company and NRG Energy filed as Exhibit 10.1 to the Company's Current Report on Form 8-K dated February 13, 1996 and incorporated herein by this reference. 2.4* Letter Agreement dated April 26, 1996 between the Company and NRG Energy amending the Stock Purchase and Reorganization Agreement. 2.5* Agreement dated April 30, 1996 relating to Purchase of the Stock of Ten Wholly Owned Subsidiaries of the Company by NRG Energy. 3.1* Amended and Restated Certificate of Incorporation of the Company. 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 Bylaws of the Company filed as Exhibit 3.2 to the Company's Current Report on Form 8-K dated April 30, 1996 and incorporated herein by this reference. 10.1* Co-Investment Agreement dated April 30, 1996 between the Company and NRG Energy. 10.2.1* Chapter 11 Financing Agreement dated August 30, 1995 between the Company and NRG Energy. 10.2.2* Letter Agreement dated February 20, 1996 between the Company and NRG Energy amending the Chapter 11 Financing Agreement. 10.2.3* Letter Agreement dated April 30, 1996 between the Company and NRG Energy further amending the Chapter 11 Financing Agreement. 10.3* Liquidating Asset Management Agreement dated April 30, 1996 between the Company and Wexford. 10.4* Management Services Agreement dated as of January 31, 1996 between the Company and NRG Energy. 10.5.1* Loan Agreement dated April 30, 1996 between the Company and NRG Energy. 10.5.2* Note dated April 30, 1996 from the Company to NRG Energy in the principal amount 36 of $45,000,000. 10.6.1* Supplemental Loan Agreement dated April 30, 1996 between NRG Energy and the Company. 10.6.2* Note dated April 30, 1996 from the Company to NRG Energy in the principal amount of $15,855,545.25. 10.7.1* NRG Newark Cogen Loan Agreement dated April 30, 1996 between NRG Energy and the Company. 10.7.2* Note dated April 30, 1996 from the Company to NRG Energy in the principal amount of $24,000,000. 10.8.1* Credit Agreement dated May 17, 1996 between NRG Generating (Newark) Cogeneration Inc. ("NRGG Newark"), NRG Generating (Parlin) Cogeneration Inc. ("NRGG Parlin"), Credit Suisse, Greenwich Funding Corporation and any Purchasing lender, as Lenders under the Credit Agreement. 10.8.2* Amendment No. 1 to the Credit Agreement dated June 28, 1996 between NRG Generating (Newark) Inc., NRG Generating (Newark) Inc. and Credit Suisse, Greenwich Funding Corporation and any Purchase Lender (as defined therein). 10.8.3* Stock Pledge Agreement dated June 28, 1996 between the Company as Pledgor and Credit Suisse. 10.8.4* Guaranty dated as of May 17, 1996 by NRG Energy, as Guarantor, to Credit Suisse, as Agent for the benefit of Credit Suisse, Greenwich Funding Corporation and any Purchasing lender, as Lenders under the Credit Agreement. 10.8.5* Guaranty dated as of June 28, 1996 by the Company as Guarantor to Credit Suisse as Agent for the benefit of Credit Suisse, Greenwich Funding Corporation and any Purchasing lender, as Lenders under the Credit Agreement. 10.8.6* Tax Indemnification Agreement dated June 28, 1996 between the Company, NRGG Newark, NRGG Parlin and Credit Suisse. 10.8.7* Assignment and Security Agreement dated June 28, 1996 between NRGG Parlin and Credit Suisse 10.8.8* Amended and Restated Leasehold Mortgage, Assignment of Leases and Rents and Security Agreement dated June 28, 1996 between NRGG Newark and Credit Suisse 10.8.9* Leasehold Mortgage, Assignment of Leases and Rents and Security Agreement dated June 28, 1996 between NRGG Parlin and Credit Suisse. 10.8.10* Interest Rate Swap Agreement dated August 2, 1996 between NRGG Newark, NRGG Parlin and Credit Suisse. 10.9.1* Loan Agreement dated March 8, 1996 between O'Brien (Schuylkill) Cogeneration Inc. and NRG Energy in connection with the Grays Ferry Partnership. 10.9.2* Option Agreement dated May 1, 1996 between O'Brien (Schuylkill) Cogeneration Inc. and NRG Energy. 10.10.1 Gas Supply Agreement dated June 30, 1992 between the Company and The 37 Philadelphia Municipal Authority (the "PMA") regarding the NE Plant (Philadelphia Project) and filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1992 and incorporated herein by this reference. 10.10.2 Gas Supply Agreement dated June 30, 1992 between the Company and the PMA regarding the SW Plant (Philadelphia Project) and filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1992 and incorporated herein by this reference. 10.10.3 Energy Service Agreement dated June 30, 1992 between the Company and the PMA regarding the NE Plant (Philadelphia Project) and filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1992 and incorporated herein by this reference. 10.10.4 Energy Service Agreement dated June 30, 1992 between the Company and the PMA regarding the SW Plant (Philadelphia Project) and filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1992 and incorporated herein by this reference. 10.10.5 Stock Purchase Agreement dated November 12, 1993 between the Company, OPC Acquisition, Inc. and BioGas Acquisition, Inc. and filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1993 and incorporated herein by this reference. 10.10.6* Loan Agreement between the Company and PECO. 10.11.1 Long Term Power Purchase Contract for Cogeneration and Small Power Production dated March 10, 1986 between the Company and Jersey Central Power and Light ("JCP&L") and filed as an exhibit to the Company's Registration Statement (File No. 33-11789) and incorporated herein by this reference. 10.11.2* Letter Agreement dated June 2, 1986 between the Company and JCP&L amending the Long Term Power Purchase Contract. 10.11.3* Second Amendment to Power Purchase Agreement dated March 1, 1988 between the Company and JCP&L. 10.11.4* Letter Agreement dated April 30, 1996 between O'Brien (Newark) Cogeneration, O'Brien (Parlin) Cogeneration and JCP&L. 10.11.5* Third Amendment to Power Purchase Agreement dated April 30, 1996 between O'Brien (Newark) Cogeneration and JCP&L. 10.12* Gas Service Agreement dated May 13, 1993 between O'Brien (Newark) Cogeneration, Inc. and Public Service Electric and Gas Company. 10.13.1* Interim Gas Service Agreement dated March 27, 1996 between JCP&L and Public Service Electric and Gas Company. 10.13.2* New Jersey Board of Public Utilities approval of Interim Gas Service Agreement. 10.14* Transmission Service and Interconnection Agreement dated November 17, 1987 between O'Brien Energy Systems, Inc. and Public Service Electric and Gas Company. 10.15.1* Steam Purchase Agreement dated October 3, 1986 between O'Brien Cogeneration IV, 38 Inc. and Newark Boxboard Co. 10.15.2* Amendment to Steam Purchase Agreement dated March 15, 1988 between O'Brien Cogeneration IV, Inc. and Newark Boxboard Co. 10.15.3* Amendment to Steam Purchase Agreement dated July 18, 1988 between O'Brien (Newark) Cogeneration, Inc. and Newark Group Industries, Inc. 10.16.1* Operating and Maintenance Agreement dated May 1, 1996 between NRGG Newark and Stewart & Stevenson Operations, Inc. 10.16.2* Letter Agreement dated May 10, 1996 between the Company and Stewart & Stevenson Operations, Inc. 10.16.3* Letter Agreement dated May 20, 1996 between NRG Generating (Newark) Cogeneration and Stewart & Stevenson Operations, Inc. 10.17.1 Agreement for Purchase and Sale of Electric Power dated October 20. 1986 between the Company and JCP&L and filed as an exhibit to the Company's Registration Statement (File No. 33-11789) and incorporated herein by this reference. 10.17.2* First Amendment to Agreement for Purchase and Sale Electric Power dated June 11, 1991 between the Company and JCP&L. 10.17.3* Amended and Restated Agreement for Purchase and Sale of Electric Power dated April 30, 1996 between O'Brien (Parlin) Cogeneration, Inc. and JCP&L. 10.17.4* Letter Agreement dated April 30, 1996 between O'Brien (Parlin) Cogeneration, Inc. and JCP&L. 10.18* Gas Service Agreement dated May 13, 1993 between O'Brien (Parlin) Cogeneration, Inc. and Public Service Electric and Gas Company. 10.19.1* Interim Gas Service Agreement dated March 27, 1996 between JCP&L and Public Service Electric and Gas Company. 10.19.2* New Jersey Board of Public Utilities approval of Interim Gas Service Agreement. 10.20.1* Steam Purchase Contract dated December 8, 1986 between the Company and E.I. du Pont de Nemours("E.I. du Pont") and Company. 10.20.2* Amendment No. 1 to Steam Purchase Contract dated January 12, 1988 between the Company and E.I. du Pont. 10.20.3* Letter Agreement dated July 25, 1988 between the Company and E.I. du Pont. 10.20.4* Amendment No. 3 to Steam Purchase Agreement dated December 12, 1988 between the Company and E.I. du Pont. 10.20.5* Amendment No. 4 to Steam Purchase Contract dated July 14, 1989 between the Company and E.I. du Pont. 10.20.6* Amendment No. 5 to Steam Purchase Contract dated February 16, 1993 between the Company and E.I. du Pont. 10.21.1* Electricity Purchase Contract dated January 18, 1988 between the Company and E.I. du Pont. 39 10.21.2* Electricity Purchase Contract dated April 30, 1996 between O'Brien (Parlin) Cogeneration Inc. and NRG Parlin Inc. 10.21.3* Assignment of Electricity Purchase Contract dated April 30, 1996 between O'Brien (Parlin) Cogeneration, Inc., NRG Parlin, Inc. and E.I. du Pont. 10.22.1* Operating & Maintenance Agreement dated May 1, 1996 between NRG Generating (Parlin) Cogeneration, Inc. and Stewart Stevenson Operations, Inc. 10.22.2* Agreement dated May 1, 1996 between the Company, NRGG Newark, NRGG Parlin and Stewart & Stevenson Operations, Inc. 10.22.3* Letter Agreement dated May 20, 1996 between NRG Generating (Parlin) Cogeneration, Inc. and Stewart & Stevenson Operations, Inc. 10.23* Amended and Restated Partnership Agreement of Grays Ferry Cogeneration Partnership ("Grays Ferry") dated March 1, 1996, between Adwin (Schuylkill) Cogeneration, Inc. ("Adwin Schuylkill"), O'Brien (Schuylkill) Cogeneration, Inc ("O'Brien Schuylkill") and Trigen- Schuylkill Cogeneration, Inc. ("Trigen-Schuylkill"). 10.24.1* Acquisition Agreement dated March 1, 1996 between Adwin Schuylkill, O'Brien Schuylkill and Trigen-Schuylkill. 10.24.2* Side Agreement dated March 1, 1996 between Adwin Schuylkill, O'Brien Schuylkill and Trigen-Schuylkill. 10.25.1* Contingent Capacity Purchase Addendum to the Agreement for Purchase of Electric Output (Phase I) dated September 17, 1993 between PECO and Grays Ferry. 10.25.2* Contingent Capacity Purchase Addendum to the Agreement for Purchase of Electric Output (Phase II) dated September 17, 1993 between PECO and Grays Ferry. 10.25.3* Amendment Agreement dated January 31, 1994 between PECO and Grays Ferry. 10.25.4* Agreement for Purchase of Electric Output (Phase I) dated July 28, 1992 between PECO Energy Company ("PECO") and Grays Ferry. 10.25.5* Agreement for Purchase of Electric Output (Phase II) dated July 28, 1992 between PECO and Grays Ferry. 10.26.1* Amended and Restated Steam Purchase Agreement dated September 17, 1993 among Philadelphia Thermal Energy Corporation ("PTEC"), Adwin Equipment Company ("Adwin"), O'Brien Environmental Energy, Inc. ("O'Brien") and Grays Ferry. 10.26.2* Amended and Restated Steam Venture Agreement dated September 17, 1993 among PTEC, Philadelphia United Power Corporation ("PUPCO"), Adwin and O'Brien. 10.27.1* Amended and Restated Project Services and Development Agreement dated September 17, 1993 by and between PUPCO and Grays Ferry 10.27.2* Consent to Assignment of Agreement dated March 1, 1996 between PUPCO, Grays Ferry Cogeneration Partnership and The Chase Manhattan Bank, N.A. 10.28* Amended and Restated Site lease, dated September 17, 1993 between PTEC and Grays Ferry. 10.29* Newark Lease. 40 10.30* Parlin Lease. 10.31.1* NRG Generating (U.S.) Inc. 1996 Stock Option Plan dated September 20, 1996 and filed as Appendix A to the Company's Proxy Statement dated October 28, 1996 and incorporated herein by reference. 10.31.2* Form of an Incentive Stock Option Agreement. 10.31.3* Form of a Nonqualified Stock Option Agreement. 10.31.4* Form of a Nonemployee Director Nonqualified Stock Option Agreement. 10.32* Employment Agreement dated April 30, 1996 between the Company and Leonard A. Bluhm. 21 List of Subsidiaries of the Registrant. 23.1 Consent of Price Waterhouse LLP. 23.2 Consent of Coopers & Lybrand LLP. 27 Financial Data Schedule. ____________ * To be filed by amendment. 41 EX-21 2 EXHIBIT 21 LIST OF SUBSIDIARIES OF REGISTRANT Exhibit 21 List of Subsidiaries of Registrant State or Other Jurisdiction Name of Subsidiary of Incorporation O'Brien Energy Services Company Delaware NRGG Parlin Supply Corporation Delaware NRGG Newark Supply Corporation Delaware NRG Generating (Newark) Cogeneration Inc. Delaware NRG Generating (Parlin) Cogeneration Inc. Delaware NRGG Schuylkill Cogeneration Inc. Delaware SDN Power, Inc. Delaware NRGG (Asia), Inc. Delaware Power Service Company Delaware O'Brien (Philadelphia) Cogeneration, Inc. Delaware O'Brien Fuels, Inc. Delaware O'Brien Mobile Power Rental Company Delaware O'Brien Power Equipment, Inc. Texas NRG Generating Ltd. United Kingdom Puma Manufacturing Ltd. United Kingdom Puma Export Finance, Ltd. United Kingdom Puma Freight Forwarding Ltd. United Kingdom Puma Far East Ltd. United Kingdom Enercol Energy Systems, Ltd. United Kingdom O'Brien Energy Europe United Kingdom 42 EX-23.1 3 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23.1 Consent of Independent Accountants We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 33-15786, No. 33-25316, and No. 33-50784) of NRG Generating (U.S.) Inc. (formerly known as O'Brien Environmental Energy, Inc.) of our report dated March 13, 1997 appearing in this Form 10-K. Price Waterhouse LLP Minneapolis, Minnesota March 24, 1997 43 EX-23.2 4 EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23.2 Consent of Independent Accountants We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 33-15786, No. 33-25316, and No. 33-50784) of NRG Generating (U.S.) Inc. (formerly known as O'Brien Environmental Energy, Inc.) of our report dated October 7, 1994, appearing in this Form 10-K. Coopers & Lybrand L.L.P. Philadelphia, Pennsylvania March 24, 1997 44 EX-27 5 ARTICLE 5 - FINANCIAL DATA SCHEDULE FOR 1996 YEAR ENDED OF NRG GENERATING (U.S.) INC.
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S FINANCIAL STATEMENTS FOR ITS YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS Dec-31-1996 Dec-31-1996 11,361 0 11,920 0 2,897 28,475 134,831 0 173,624 25,984 0 64 0 0 (30,577) 173,624 39,916 39,916 21,987 21,987 5,736 0 7,681 4,512 (268) 4,780 0 1,643 0 6,423 1.00 0.99
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